Mr. AVERY. I will let that statement stand and read it in the record while I think a little more about it.

I yield back to you, Mr. Chairman.

Mr. ROBERTS. I believe the gentleman from New Jersey has one more question, Mr. Williams.

Mr. WOLVERTON. We have spoken, it seems to me, in generalities, to a certain extent, with respect to this deferral of funds. Have you made any estimate as to how much would have been available for equipment purposes if that law had been in effect last year, or the period since 1954?

Mr. WILLIAMS. Mr. Wolverton, I have not had an opportunity to make any determination.

Mr. WOLVERTON. That is the only vacancy in your statement that I saw.

Mr. WILLIAMS. Yes, sir.

Mr. WOLVERTON. Theoretically, then, we are faced with the fact that it would be a good thing, but, practically, we do not know how to do it.

I wonder if it is possible to have those figures available?

Mr. WILLIAMS. I will be happy to undertake to make such a study and later file a report with the subcommittee.

Mr. WOLVERTON. Your statisticians have done so well in what you have prepared, I would be hopeful that you could be as equally well prepared with this.

Mr. WILLIAMS. Thank you, sir. We would like to try it, sir.

Mr. ROBERTS. The gentleman from Georgia.

Mr. FLYNT. Mr. Williams, I have a question which is in two parts. Have you considered the effect of such a deferral plan for business, generally?

Mr. WILLIAMS. No, sir.

Mr. FLYNT. Could you give an offhand opinion as to whether or not it should be applied across the board?

Mr. WILLIAMS. By that, just what do you mean, sir?

Mr. FLYNT. Well, you propose here to make the same benefits available not only to railroads, but to other modes of transportation and to business, generally.

Mr. WILLIAMS. That is the proposal here; that it be made available to all forms of transportation.

Mr. FLYNT. What about to business, generally? That was, actually, my question.

Mr. WILLIAMS. On that, I could not comment.

Mr. FLYNT. You would rather not comment?

Mr. WILLIAMS. I would rather not comment on that, sir.

Mr. ROBERTS. Thank you, Mr. Williams.

Mr. WILLIAMS. Thank you, Mr. Chairman.

Mr. ROBERTS. The next witness is Mr. Ernest S. Marsh, president, the Atchison, Topeka & Santa Fe Railway system, Chicago, Ill. Mr. Marsh, you may proceed.

STATEMENT OF ERNEST S. MARSH, PRESIDENT, THE ATCHISON, TOPEKA & SANTA FE RAILWAY SYSTEM

Mr. MARSH. Mr. Chairman and gentlemen of the Transportation and Communications Subcommittee, my name is Ernest S. Marsh. I am president and chief executive officer of the Santa Fe Railway system, which operates 13,172 route-miles of railroad in 12 Midwestern, Southwestern, and Far Western States between Chicago on the east, the Gulf of Mexico in the Southwest, and the Pacific coast. I am appearing before you to testify in support of legislation which would amend the Interstate Commerce Act to provide for the establishment by common carriers of construction-reserve funds as a means of obtaining tax treatment to encourage and enable the replacement of railroad facilities and needed modernization and improvement of the railroad plant.

My interest, of course, is in maintaining an adequate and efficient transportation system to serve the commerce of the country and its national security.

There is no question about railroads being vital to that objective, both in peace and in war.

I believe it would substantially benefit the restoration to a higher level of business activity and employment if the railroads could be put on a more healthy economic basis.

I feel sure that adoption of the construction-reserve measure would make a major contribution in that direction.

The railroads' ability to replace old facilities and modernize their plant is seriously handicapped by the relatively low rate of return in the industry, the high cost of capital goods and low depreciation accruals which fall short of providing funds for mere replacements.

I shall elaborate upon the inadequacy of depreciation accruals, but first, I would like to say that the railroads are confronted with some cold and hard actualities-they are suffering from a combination of: 1. Unequal competitive opportunity with artificial diversion of traffic, plus

2. The inflationary spiral in wages, prices of materials, and taxes, with which all industries have had to contend, the railroads no less than the others.

The unrelenting pressure for higher hourly rates has brought nine rounds of wage increases to the railroad industry since World War II. In addition to these increases, there have been cost-of-living adjustments and the workweek for about 80 percent of the railroad employees was reduced from 48 to 40 hours with no reduction in takehome pay.

It is appropriate to say that increases on the railroads have just about followed the national pattern in other basic industries.

However, it is fair to say, also, that this inflationary pressure hits an industry like the railroads harder where prices are not so easily nor so readily adjustable and where labor costs take up such a large proportion of operating revenues. These pressures bear more heavily on the railroads, too, because of the high ratio of investment in physical plant and equipment and the necessity for carrying on a substantial capital expenditure program.

They are more severe on the railroads than on the others who do not have to bear the added costs for maintaining facilities comparable to the track structure of the railroads.

These increases in costs, which have already had serious effect on railroad earnings are continuing their upward spiral and the prospects are for a further substantial reduction in earnings for 1958.

To illustrate the long-time cumulative effect of the multiple problems involving unequal competitive opportunities and constantly rising costs of doing business, a comparison of the following Sante Fe figures is particularly revealing:

When revenues amounted to $267 million in 1929, the net railway operating income was $68.6 million; by 1948, the revenues had grown to $526 million, but net railway operating income remained virtually the same, at $68.7 million.

In 1957, with revenues of $610 million, about two and one-quarter times as large as 1929, the net railway operating income was actually less, at $56.3 million, even after including $9.5 million of a temporary nature by reason of amortization of certain facilities for which necessity certificates were granted.

We have had no increase in our take-home pay despite the fact that the physical volume of business just about doubled from 1929 to 1957 when measured in revenue ton-miles handled, and despite the further fact that the total money investment in road and equipment went from $1,094 million to $1,837 million, an increase of 68 percent.

You will observe that the total of our taxes went up from $20.3 million to $74 million, even though our net railway operating income declined.

Now, when it is considered that we have to provide modern equipment and facilities at 2 or 3 times the costs of the late twenties to handle an increased physical volume, the squeeze that is taking place becomes abundantly clear. It becomes clear that the railroads need more take-home pay, that is, greater earnings after taxes, to continue the replacements and additions necessary to proper handling of the business.

Rate increases based on merely absorbing higher operating costs, even if they are timely and adequate to do that, add nothing at all to the net income and the financial ability to make capital improve

ments.

Depreciation accruals, based as they are on original costs, do not come anywhere near providing the money for replacements alone. Within the last year, for the first time since 1946, the Santa Fe has done some borrowing to the extent of approximately $28 million to finance the purchase of freight cars. Whether we pay cash or borrow, the extra money for replacements and additions has to come ultimately from earnings.

Probably the most interesting feature of the comparisons between 1929, 1948, and 1957, is that, even with the increased volume, we were able to come as close as we did to the net railway operating income of 1929, in view of the terrific increases in the costs of wages, materials, and taxes.

How we were able to show even this inadequate result is somewhat of a long story, but, in a few words, it stems from doing things to help ourselves. It is reflected in the comparison which shows that

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we had 10,037 fewer employees in 1957 to handle approximately twice the physical volume.

It is reflected in the comparison of freight gross ton-miles per train-hour-a commonly accepted index of efficiency combining both the trainload and train-speed, which increased 152 percent over 1929. Briefly, these are the results of a concerted program of modernization and improvement of the physical plant with the adoption of new technologies and techniques.

Of necessity, practically everything we do is dedicated to improving our service to the public and holding down the costs of performing that service by use of modern equipment and improved methods. We are using the latest developments in electronic accounting and communications, radio, microwave, the light metals and alloys, internal combustion engines, mechanized track maintenance equipment, motorized freight handling equipment, automatic signaling systems, including the highly ingenious centralized traffic control method of train operation, and, in one form or another, practically every scientific or mechanical development of the times.

We are not perfect in this, nor are we using as much of the new technologies as we would like to use, but to the extent of our earnings and financial ability, we think we have gone as far as anyone could go in keeping abreast of the great American capacity for new inventions and new ideas.

By research and experimentation, we are constantly seeking ways to improve our service and reduce our costs. This has been an unending search over a long period of years. It continues.

The railroad to day is vastly different from the railroad of 1929 when we had no such things as centralized traffic control, diesel locomotives, air conditioned passenger cars, radio communication, mechanized maintenance and freight handling equipment, and the many other improvements in common use today.

If we were still operating at the efficiency levels of 1929, or the middle forties, for that matter, we would have an overall deficit of many millions of dollars.

This is mentioned to show that, as we march ahead with modernization and try to keep step with new equipment and methods, we can never consider the job fully completed, because what was modern yesterday may be obsolete tomorrow. The past has seen great changes in the railroad, but it takes a terrific amount of money to keep going ahead with the improvements needed to maintain the type of up-todate service that will attract revenues and translate a part of those revenues into earnings.

In the period since the end of World War II, the Santa Fe has made capital expenditures for additions and betterments in excess of $725 million.

During this same period the total of recorded depreciation was only $316 million.

Also, during this same period, there was plowed back into the property more than 54.5 percent of the earnings on the common stock.

The Santa Fe was not alone in making substantial expenditures for improvements. The industry has made capital expenditures of about $1312 billion since the end of World War II. These expenditures, however, were for the most part made under more favorable condi

tions before the deteriorating trend became so pronounced. They were helped to some degree by the authorization certificates issued between 1950 and the end of 1955, the effects of which are now running out. They were accomplished in part by a considerable amount of borrowing in new equipment.

The railroads are in no position to continue them under the conditions of today with constantly diminishing earnings and constantly rising unit costs of equipment and other capital expenditures.

A continued improvement program is not just a desirable thing; it is an essential element in a railroad's survival.

Funds for improvements come from three sources:

(1) Depreciation accruals that are allowed as a charge against earnings during the life of the various units or property;

(2) Earnings retained after payment of Federal income taxes; and

(3) Borrowing, the repayment of which must ultimately come from earnings.

Earlier I mentioned that depreciation accruals, based as they are on original costs, do not come anywhere near providing the money for replacements alone. This is not to say that the service lives converted to depreciation rates fail to represent the optimum period of time over which a particular unit of property may be made to serve.

The depreciation accruals, however, are unrealistic, as they completely disregard what should be the first essential of any business concern, that is, it should recover its full cost of merely perpetuating the business before it can be considered to have made a profit or to have a taxable income.

To the extent that depreciation accruals fail to provide money for replacements to stay in business, the profits are overstated and largely taxed away. This is tantamount to a drastic and continuing capital levy. These "false profits" are treated and taxed as real profits, but actually they must be used as one of the costs of remaining in business.

Somehow, we should be able to stop overstating taxable railroad profits and quit treating this capital consumption as taxable earnings.

The concept that the dollar sign is a stable measure of value when evidence to the contrary is so apparent on every hand leads the accountants and tax authorities into the untenable position of holding that the cost of using a facility in the year 1957 is a pro rata of the dollars spent 20 or 30 years ago.

Actually, what we are using is a portion of the real value of the facility that must be replaced at the higher costs of today.

As a specific example, during the 11 years, 1946 to 1956, inclusive, the Santa Fe purchased and constructed 24,935 new freight cars.

During that same period the Santa Fe scrapped, or otherwise disposed of, 20,176 freight cars.

Of course, there was not an effective replacement by types of cars retired, and there were differences in size and construction details in the new cars purchased since the war as compared with the old car which may have been purchased 30 years ago.

Nevertheless, new cars cost $6,800 while on the average each of the 20,176 cars retired originally cost $2,000.

Today the average freight car we are building costs a little more than $10,000.