increased somewhat, primarily as a result of rate increases. Working capital, however, has tended to decline.

In chart I, with working capital expressed as a percentage of gross revenues, a comparison is made as between Class I railroads as a whole and the Pennsylvania Railroad. It shows that in the generally prosperous period following the war an increasing dollar volume of business has had to be handled with a decreasing amount of working capital.

The improvement in our working capital from its low point in 1947 was achieved principally through the liquidation of capital assets. In the past ten years, and principally since 1948, the Pennsylvania Railroad has raised over $92 million in cash by this method. Included in the sale of assets were such properties as the Hotel Pennsylvania in New York, valuable property in downtown Pittsburgh and Philadelphia, together with other miscellaneous real estate holdings, our stock in Pennsylvania Greyhound Lines, nine water companies, and this past year the Virginia Ferry Corp., in which we had a 50 percent interest, was sold to the State of Virginia. In addition, over $38 million was raised in 1948 through the sale of bonds of our leased lines held in our treasury. This procedure is obviously cannibalistic, and can only be justified on the basis of our stringent need for money to carry on our railroad operations.

While the railroads have been handling an increased dollar volume of business with a decreasing amount of working capital, the question may rightly be posed as to whether or not this in itself is serious because there is always the possibility that any individual company, or any individual industry may have an excess of working capital.

In chart J, a comparison is made of the percentage of working capital to the volume of business done by the Pennsylvania Railroad, class I railroads, and other typical industries. It will be noted that Pennsylvania Railroad working capital amounted to only 9 percent and class I railroads 12 percent of the volume of business transacted; working capital of the oil and food products industries was almost twice that of the railroads; steel was twice that of the railroads; and building materials, tires and rubber, chemical, metals and mining, and the agricultural machinery industries were substantially beyond even these figures, ranging all the way up to 48.7 percent in the case of agricultural machinery.

It might be argued that these other industries need more working capital since they have to carry large inventories.

Mr. SPRINGER. Mr. Bevan, would you mind explaining what working capital is?

Mr. BEVAN. I will be very glad to.

Mr. SPRINGER. You certainly are taking a lot of time on this subject. Mr. BEVAN. Working capital is the difference between your current assets and current liabilities. In your current assets you put in all items which you will turn into cash within 12 months, such as accounts receivable; and in case of inventories that are going to be processed.

On current liabilities, everything that you have to pay out within 12 months is included. That is, your taxes, accounts payable, debt, and things of that sort. The difference between those two is what we call working capital. In other words, that is the amount of liquid.

assets you have over the debts that you have to meet within the next 12 months. That is what you do business with.

Mr. SPRINGER. Then, as shown from one of your charts, you are deducting those due in less than 12 months.

Mr. BEVAN. No, sir. We put into our current liabilities all debt due within a year. The reason I pointed that out was because under the Interstate Commerce Commission's accounting we do not put in debt due in one year under current liabilities, but since all other industries do that, and since we fail to see why a dollar that has to be met in debt is any different than a dollar in accounts payable, we do not think that procedure is sound, so we put debt due in 12 months in current liabilities and use that in subtracting it from our current assets, to arrive at our working capital.

Mr. SPRINGER. Thank you, Mr. Chairman.

The CHAIRMAN. You may proceed.

Mr. BEVAN. Thank you, Mr. Chairman.

The CHAIRMAN. I believe you were on page 18 of your statement. Mr. BEVAN. Thank you.

I said it might be argued that these other industries need more working capital since they have to carry large inventories, which is not true to the same extent with the railroad industry. On the other hand, it is certainly true that their inventories constitute a better current asset than our materials and supplies which are included in current assets for purposes of comparison. However, if we take out inventories in the case of other industries, and materials and supplies in the case of the railroad industry, you will notice the Pennsylvania Railroad still has the smallest working capital as a percentage of volume of business done, as shown in the next chart, and, with one exception, the class I railroads smaller than any of the other industries with which a comparison is made.

It may also be contended that the railroads should be able to get along with smaller working capital because they do not have to carry a large volume of accounts receivable, since the bulk of transportation bills are payable within 48 or 96 hours. There is one exception to this, however, and this is certainly true in the case of the Pennsylvania Railroad. Fairly substantial accounts receivable are due by various agencies of the Federal Government, and these are carried for longer periods of time.

In addition, and I will cover this later on, the debt of the railroads represents a higher percentage of their capitalization than in the case of any of the other industries shown in these charts.

Further, as we have seen from the chart on debt, the railroads have a very substantial amount of annual equipment maturities which are peculiar to this industry, and overall the debt service of the railroads is much higher than in any of the other industries with which comparisons are made.

In any event, the working capital position of the industry, and this is particularly true of the Pennsylvania Railroad, has deteriorated and it now seems clear that the situation has not been eased by what transpired in the past year. Preliminary figures indicate that the class I railroads lost about $200 million in working capital in 1956, and if we exclude materials and supplies as a current asset, they lost more than $250 million. To put it another way, the railroad industry ended

1956 with working capital of approximately $1 billion, and if we exclude materials and supplies, the figure is around $275 million.

To illustrate what this deterioration in the railroads' working capital means from the standpoint of their daily operations, the monthly payroll of the railroads, including the current wage settlement pattern, averages about $465 million. Compare this figure with the current working capital of $275 million, excluding materials and supplies since to a great extent they do not constitute a liquid asset, and you will find that working capital is equal to little more than the semimonthly payroll. As of the end of 1955, working capital, excluding materials and supplies, was equal to the payroll for about 40 days, while in 1945 it was equal to 412 months.

As far as the Pennsylvania Railroad is concerned, our working capital at the end of 1956 was $72 million, a loss of $14 million of our working capital for the year. Excluding materials and supplies, working capital of the Pennsylvania Railroad was $5 million. If you compare the latter amount with our current monthly payroll of about $47 million you will find that it is equivalent to our payroll for just about 3 days. As of the end of 1955, our working capital, excluding materials and supplies, was equivalent to about 3 weeks' payroll, and in 1945 slightly better than 212 months.

I think it is clear that the railroad industry has brought its working capital down to a very minimum, if not dangerous point. Therefore, with inadequate working capital, the railroads are now in a position where they must meet current expenses out of current receipts and in the event of decline of business, they have no alternative but to reduce expenses accordingly, because we have no cushion to go on.

In addition to inadequate working capital, there is another serious problem with which the railroads have been struggling and which is going to increase their difficulties as far ahead as we can see.

Mr. HALE. On your statement you have skipped something? Mr. BEVAN. I am on page 12 of my statement. I see you are following the long statement.

This is a condensation of that, because that will take more time than I have been allotted. I am sorry. This is hitting the high spots of that. That is about twice the length of this.

The CHAIRMAN. We have been able to follow you very closely thus far, Mr. Bevan. However, sometimes you do go off and it takes three or four pages to catch up.

Mr. BEVAN. I am sorry. At any place I do digress, if you will just tell me, I will slow up until you find it.

Mr. HALE. You took quite a big jump the last time.

Mr. BEVAN. That is on page 26, I believe, sir. I do not have that before me. I understand it is in the middle or bottom of page 26, I am told.

Mr. WOLVERTON. Mr. Chairman, I understand that the witness desires that his entire statement be made a part of this record.

The CHAIRMAN. Yes.

Mr. BEVAN. Yes, sir.

The CHAIRMAN. Permission will be given, of course, for that at the proper time.

Mr. BEVAN. The entire statement will be filed.

The notorious lack of earning power of the railroad industry has made it extremely unpopular as an outlet for capital seeking invest

ment. There are only about a handful of common stocks of railroad companies today that even to a small degree are being purchased by institutional investors. Naturally with the low earnings of the railroads and with the large number of companies that went through reorganization in the thirties, their basic credit standing has been substantially undermined.

As a practical matter today the only important vehicle to the majority of American railroads for raising new funds is through the sale of equipment trust obligations, which I just mentioned, secured by liens on new rolling stock. Equipment trust obligations mature serially over a period of years, generally speaking, 10 to 15 years, and usually the railroads put up in cash 20 percent to 25 percent of the cost of the equipment involved. These obligations also cannot be refunded so at maturity must be met out of the cash drawer. There has been a very substantial increase in these obligations in the postwar period. This is natural in view of the fact that the railroads have been forced to rely almost entirely on this method to obtain funds to purchase a vast majority of the equipment.

I might explain equipment trust obligations mature serially over a period of years, generally speaking, 10 to 15 years, as I have said, and usually the railroads put up 20 to 25 percent of the total cost, and the rest is borrowed against the equipment involved, and you have either annual or semiannual maturity payments, and you cannot refund those; as they come due you have got to meet them.

Mr. O'HARA. Mr. Chairman.

The CHAIRMAN. Mr. O'Hara.

Mr. O'HARA. What interest do you usually pay on those certificates? Mr. BEVAN. Sir, it has varied pretty widely recently. Back in 1955, we sold some equipments on a 2.79 basis. That was the average cost over the whole period for this trust. In January this year our interest cost on those was 4.32.

Mr. O'HARA. Is there any fixed charge in addition to that?

Mr. BEVAN. Yes, you have the legal fees involved, and you have the trustees' fees involved, but interest costs have gone up with the change in the money rates in the market. They have gone up very substantially. There has been a slight lull in the last two or three months.

Mr. O'HARA. Do your interest rates cover the legal expenses and fees, or is that in addition?

Mr. BEVAN. No, sir; that is just your pure interest costs. The trustees' fees, and the counsel fees are separate from that.

Mr. O'HARA. You have an estimate of what the overall cost is to the railroads, for that type of trust, do you?

Mr. BEVAN. We have not, because the legal fee is generally a onetime proposition. It would not vary that 15-year cost very much. Now, as I said, there has been a very substantial increase in these obligations in the postwar period. This is natural in view of the fact that the railroads have been forced to rely almost entirely on this method to obtain funds to purchase a vast majority of the equipment. As of January 1, 1946, the total outstanding equipment obligations in the industry were $773 million, and at the end of 1955 they were $2,537 million.

This is going to have to be increased by at least another $500 million in the next 10 years if we can sell them. This has tended to saturate

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the market and it has only been with increasing difficulty that the investment bankers purchasing equipment trust issues have been able to dispose of them. As an indication of the decreasing interest in railroad equipment obligations, as of today the industry is in effect dependent almost entirely on two investment banking groups for the sale of their equipments. Between them these two groups handle about 85 percent of all equipment trust obligations marketed.

If either of these should go out of the equipment business, we would no longer be able to sell our equipments competitively.

To further accentuate the seriousness of the situation, the size of the potential market has been materially reduced. In the past, savings banks have been one of the major outlets for equipment trust obligations. However, in the past few years a number of States, including New York and Pennsylvania, have empoyered the savings banks to buy preferred and common stocks. This fact, coupled with the fact that most savings banks have been very substantially increasing their mortgage portfolios, has resulted in a very limited demand on their part for equipment trust obligations.

On top of this, the commercial banks of the country, long-time purchasers of equipment obligations, have been hard pressed to find sufficient funds to meet loan demands, and I think you are well aware of the tightness of money at the present time. As a result, and we see no immediate prospect of relief in this connection, the commercial banks are primarily reducing their investment portfolios in order to raise funds for additional loans. Despite this liquidation, as of the beginning of this year the commercial banks of this country were in debt to the Federal Reserve to the extent of $370 million. Therefore it seems apparent that there will be a further liquidation of securities by the commercial banks. Consequently, it may be many years before they again, if ever, become an important factor in the equipment market.

In other words, the credit standing of the railroads has deteriorated, they have been more and more restricted for their source of funds to the equipment trust market, and that in turn has become saturated and from a supply standpoint the size of the market is shrinking.

Many railroad companies are extremely worried at the present time as to how they are going to be able to finance equipment purchases, not in the year 1960 or 1965, but in 1957. If it should become impossible to finance equipment purchases, obviously it will become impossible for the railroads not only to meet expanding demand but to replace equipment which is wearing out each year. If this is true, then in turn, they will be unable to provide the service necessary to industry in general and will obviously not have the ability to meet the demands in the case of war. This sounds like a bleak picture, but factually it is true, and the only possible effect is that we are hopeful that through the solution of a number of the problems cited today such a tragic eventuality will ultimately be averted.

Again to show how the popularity of the railroads from an investment standpoint has decreased and the credit of the industry eroded contrasted to other industries, Chart M shows that of the new securities issued by the railroads in the period 1948 through 1955, as compiled by the Securities and Exchange Commission, only $12 million, or twotenths of 1 percent, represented stock or equity financing. Most of this can be traced to two railroads. In 1951, the Nickel Plate raised