Commissioner MEYER. That is a transaction with regard to which I have heard different views expressed. I am not experienced in those things and I am not qualified to pass upon them.

Senator KELLOGG. You have control now over the issuance of all securities of any subsidiary transportation line of the Pennsylvania system, have you not?

Commissioner MEYER. We probably have.

Senator KELLOGG. And that is all the control you think you ought to have, is it not?

Commissioner MEYER. With respect to authority to issue; that would cover it; yes, sir.

Senator KELLOGG. Now it is not your view that the Pennsylvania Railroad Co. should not continue to own all the stock, and take all the stock that is issued by the Pittsburgh, Fort Wayne & Chicago Co., is it?

Commissioner MEYER. No, sir; but I am not at all sure that the Pennsylvania Railroad Co. should necessarily do all the financing for all of its subsidiaries. It may be necessary to do that; I am ready to listen to arguments.

Senator KELLOGG. That is in your hands now and under your control, is it not?

Commissioner MEYER. To a certain extent, yes, sir.

Senator KELLOGG. And that is necessary to protect the public is it not?

Commissioner MEYER. I am not certain as to that, Senator. Only experience can demonstrate that.

Senator KELLOGG. Well, I should be very glad to have you give us any suggestion as to further amendment of the railroad act, giving you more power over the issuance of stock and bonds. I can not think of anything.

Commissioner MEYER. We are not hankering after more power. Senator KELLOGG. That is all I care to ask.

Senator STANLEY. Senator Kellogg, the interdiction of common directors is contained in section 8 of the Clayton Act on page 142. I think that provision will be found there.

Senator KELLOGG. I was applying it to the railroad section 10.

Senator STANLEY. I notice that under the provisions of section 8 of the act it is unlawful for the same persons to be directors in two or more corporations.

The CHAIRMAN. Section 10 is the one that applies to carriers. Senator POINDEXTER. Does section 10 in any way relate to the question of consolidation? I do not understand that it does.

Senator KELLOGG. Oh, no; but section 10 prohibits the dealing in securities or supplies, or other articles of commerce, between any two corporations where they have common directors, and manifestly it would prohibit the Pennsylvania Railroad Co. from furnishing supplies and money to its subsidiary corporations, which are part of its transportation lines, where they have common directors.

Senator STANLEY. What I am referring to is that you would have to amend the provisions of section 10 of the Clayton Act in order to reach that.

Senator KELLOGG. I do not think so.

Senator STANLEY. Section 10 assumes it is unlawful to have interlocking directors in common carriers.

Senator KELLOGG. No; it does not assume that, because the House struck that out when they enacted the Clayton Act.

Senator POINDEXTER. Would not the subsidiary be regarded as in the same status as the principal-that is, regarded as one?

Senator KELLOGG. I think it ought to be, but the way section 10 now reads it is not. When the Clayton Act was enacted the House struck out the provision prohibiting common directors of transportation lines, but provided by section 10 that there could bo no dealings in supplies, securities, or other articles of commerce between the companies having any common directors, in substance, and that applies to the subsidiary transportation lines with a continuous line of railroad like the Pennsylvania, at least it seems to, and it has been so assumed; and one of the amendments proposed is to change it as to that.

Take, for instance, the Southern Pacific. That is a continuous line of railroad, but it is made up of different parts of lines having separate corporations. Some of them are required by State law. The stock is all owned by the parent line of railroad, the same as the Pennsylvania road, and my question was to get at the point whether you thought that ought to be changed, Mr. Meyer.

Commissioner MEYER. Senator, I think I have suggested before that we have given very little attention to the Clayton Act for the reason that, as you know, it has not been in effect. We have been concerned with things that are, and as to which we are charged with the responsibility of administration.

Senator STANLEY. You spoke, Mr. Meyer, of certain recommendations made by Chairman Clark. Do you know how the commission stands with reference to this proposition?

Commissioner MEYER. The commission has not had an opportunity to discuss this at all, but I should be very glad if you have a little time to listen to Chairman Clark. I am sure he can supplement some of the things I have stated.

Senator STANLEY. As I understand you, your recommendations are to this effect, assuming that this bill will be passed, that these changes should be made?

Commissioner MEYER. I should think so; yes, sir.

Senator STANLEY. You are making no recommendations touching the passage of the bills affirmatively one way or the other?

Commissioner MEYER. I do not, because I do not feel that any of us have had sufficient opportunity to study the situation.

The CHAIRMAN. Mr. Meyer, do you think that the public, as well as the carriers, would be sufficiently protected by the regulations and prescriptions which you would make as to bids; that you would be sufficiently familiar with the needs of the carriers and the conditions under which they were to purchase, the character of the material, etc., so that you could prescribe rules and regulations that would afford proper protection?

Commissioner MEYER. We feel so, Senator; we thought so when we issued the regulations that have been issued, and experience will doubtless demonstrate what changes, if any, should be made.

The CHAIRMAN. Of course, you have had no occasion to put that in force because this act has been suspended.

Commissioner MEYER. Except with respect to corporations organized since January 12, 1918, and there have been very few returns under that.

The CHAIRMAN. We will now hear Commissioner Clark.

STATEMENT OF HON. EDGAR E. CLARK, CHAIRMAN INTERSTATE COMMERCE COMMISSION.

Commissioner CLARK. Mr. Chairman, as you know, section 10 of the Clayton Act has been from time to time postponed. There was perhaps justification for assuming it was going to be postponed again, and for that reason the commission, in the press of their duties, has not up to this time undertaken a very careful analysis of this bill. We knew nothing of these contemplated hearings until last night. We have had no opportunity to give the bill that analysis.

Senator Kellogg has suggested that the committee would like to have the mature and concrete views of the commission. Neither Mr. Meyer nor I are prepared to speak for the commission this morning, but we will be very glad to take this matter up and analyze it, and give you the concrete views of the commission within two or three days, if that is desired.

The CHAIRMAN. I think that is very important. I understand, Mr. Commissioner, that you have not been given a fair opportunity, and yet I did not know but what you might have given some consideration and study to this matter, and that your views would be helpful to us. But we do want your mature judgment

Commissioner CLARK. I think I speak the consensus of view when I say that without assuming to recite acts and alleged acts in the past which led up to the enactment of section 10 of the Clayton Act, if such things did exist, or if they now exist, they should be prohibited and prevented, and that if we go as far as to assume that the bill will not reach a single actual transaction, the moral effect of it is good, and so the principle which underlies that act, and which underlies this modification, or proposed modification of it, meets with our approval.

Section 10 of the Clayton Act, as I understand it, does not at all prohibit common directors of these companies, but it prohibits dealings between two companies that have common directors, officers, or agents in the transaction, exceeding an aggregate of $50,000 in one year, except when bids are invited, and when the related corporation or company wins in fair competition with others on the open bids.

The general thought, I think, in considering this matter, goes at once and directly to the question of the purchase of supplies and materials for use in the construction and operation of a railroad, but when we consider the changed policy that has been referred to here, underlying the transportation act, and read carefully the provisions of section 10 of the Clayton Act, we find that the two are not in harmony. The transportation act contemplates not only a cementing of the existing parent and subsidiary companies, but an expansion of those consolidations, and under that section as it now stands, as I read it, if the parent company wanted to make an expansion or an improvement chargeable to capital account of one of the subsidiaries, it would not be permitted to do that, and take the securities.

of the subsidiary in return for the money advanced for the expansion or the improvement, except when the subsidiary had gone out into the open market and invited bids for the sale of those securities, and the parent company had likewise offered bids for the purchase of them.

Now that would not work, as I see it, in harmony, or in any helpful way in carrying out the purpose and intent of the transportation act. One of the underlying principles of the transportation act is that carriers shall be permitted to earn a net return equivalent to 5 to 6 per cent, or a larger per cent perhaps in the future years, on the valuation of the property devoted to public service, and to earn that under an honest, economical and efficient management.

Now, a reasonable limitation upon the possibility of the same person acting for that corporation as the buyer and seller in a large transaction, either for materials and supplies, or in financial expansion and improvements, does not coincide with efficient, honest management. It arouses suspicion unless it is done openly and aboveboard.

Now, so far as the dealings in securities are concerned, under the transportation act the commission can supervise and regulate: the commission can say whether or not those securities shall be issued for the purpose stated. Of course, the prices might, as Mr. Meyer suggests, be affected by arrangement between the interested parties, which are in reality one, unless the limitations of this bill are reasonably close.

And to sum up in a word, and speaking my own mind, I think there ought to be a wholesome and healthy and reasonable limitation upon the possibilities of improper deals that do not contribute to the economical and efficient management, financing and operation of railroads; and on the other hand, they ought not to be so extreme as to stand in the way of carrying out the fundamentals or the principles of the transportation act.

Although I speak for nobody but myself, I think that the language which Mr. Meyer has referred to, beginning at line 22, page 3, is such that it is simply a repeal of the rest of the bill and nullifies its good effects.

I do not think I care to take up the time of the committee suggesting anything more at this time, Mr. Chairman, but if it is the desire of the committee, the commission's legislative committee and the commission itself will address themselves to this matter and will be very glad to come back in the course of three or four days and give you our concrete views and judgment, both as to the phraesology of the bill and the desirability of its enactment.

The CHAIRMAN. I think, Mr. Chairman, that that is exactly what the committee wants and I think we would like to have the views of the commission as practical men, intrusted with the execution of certain provisions of the act, to determine whether Section 10, in its judgment, is in conflict with the transportation act, and in what particular and wherein you think it ought to be changed.

Of course you can look over this bill. What the committee is more interested in at this time is in knowing what your views are as to what actual changes should be made, if any, to section 10 of the Clayton Act, and give us your reasons for them.

Possibly you may have read a speech in the Congressional Record, or it may have been called to your attention the other day, Friday,

I think, December 31, by Representative Huddleston of Alabama, containing a statement which evidently had been prepared for him, calling attention to some alleged abuses in the conduct of the affairs of railroads in purchasing or rather in the repair of their engines. Commissioner CLARK. Yes.

The CHAIRMAN. And we should be glad to have you look that over. You do not have any record of those things, do you? Commissioner CLARK. I think we have all that is there. I think that is where it came from, some way or other. Let me make that entirely clear, Mr. Chairman. Some weeks ago we received information that certain railroads had sent their locomotives to outside repair shops for overhauling and repairs, and that the expense of the repairs would be or was being substantially higher than it would be if the repairs were made in the carriers' own shops. We started an informal investigation of that and looked into it through our inspectors and in some instances through our accountants.

As to two roads—there may be one or two others but as to the two roads, we have had the accounts checked up and it seems to be established that the cost of these repairs in these outside shops has exceeded, and is exceeding, the cost if the work was done in the carriers' own shops. We have asked some of the presidents of the railroads for advices and information and any explanation they wanted to give and the replies have been in some instances that the figures are not accurate because the cost in the outside shop is simply a preliminary estimate that is subject to revision in the light of experiences and facts. Some of those contracts were let on a cost plus basis.

Others explained that the comparison is not fair because the expense in the carriers' own shops takes into account only the actual cost of materials and labor and does not include anything for depreciation of plant or overhead expense or interest on investment, while the costs in the outside shops are based on all of those factors. Others said that it has cost more but that they needed the power so badly that it was good business judgment to have the repairs made, because they were not in a position to make them in their own shops within a reasonable length of time; in other words, they had more work than they could turn out within a reasonable time in their own shops and they needed the power so badly that they felt justified in incurring the additional expense.

But, with the exception of the two roads, those figures are not complete. They are not such as I would feel justified in submitting to anybody as a basis for a conclusion, and, in so far as section 10 of the Clayton Act is concerned, it still remains to be established whether or not there were any interlocking directors or officers or agents in the transaction; if not, there would be no violation of section 10 of the Clayton Act, if it was in effect, which it was not.

But I consider those figures, while significant and illustrative, not sufficiently complete to be dependable, and I would not want to quote them at all.

The CHAIRMAN. When will you have them complete?

Commissioner CLARK. I could not say exactly, because we are going into it very comprehensively and investigating it to get the

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