advise you whether in my opinion the Congress has the constitutional authority to pass an act carrying into effect the essential features thereof, I beg to express my opinion in the affirmative. As the plan has matured, I have carefully considered the several constitutional questions involved and while some of the applications involved are new, am satisfied that under established principles the necessary legislation can be constitutionally framed by Congress. Very truly, yours, B. H. INNESS BROWN. LAW OFFICES, BORDERS, WALTER & BURCHMORE, MR. S. DAVIES WARFIELD, Chicago, January 22, 1919. President National Association of Owners of Railroad Securities, Continental Building, Baltimore, Md. MY DEAR MR. WARFIELD: Replying to your letter, I beg to say that I am of the opinion that Congress has the authority under the Federal Constitution to embody the fundamentals of your plan for the return of the railroads to private ownership in legislation appropriate to carry such fundamentals into effect. Very truly, yours, LUTHER M. WALTER. (The following article was filed by S. Davies Warfield in his statement before the committee:) [National Association of Owners of Railroad Securities. Extracts from editorial in the Public Ledger, Philadelphia, Pa., Jan. 15, 1920.] CUMMINS RAILWAY BILL A CONSTRUCTIVE MEASURE-A SEVERE CRITIC OF TRANSPORTATION CORPORATIONS, HE HAS EVOLVED A SYSTEM THAT PROMISES WELL. [By William Howard Taft. Copyright, 1920, by Public Ledger Co.] The Senate bill for the restoration of the railways of this country to their owners and for their reconstruction is largely the work of Senator Cummins. He has been ably assisted in the task by Senator Kellogg. No one can read the bill and its accompanying report and the speeches of Senators Cummins and Kellogg on the bill without the conviction that it was drawn by statesmen who have given much time and study to the consideration of our railroad problem and have now made up their judgment, ripened by close observation. Senator Cummins has not been prejudiced in favor of the railroads of the country. He has been one of their severest critics. We may infer from what he says, that, theoretically, he is in favor of Government ownership; but he has yielded his views on this subject to the argument that Government ownership is impossible because of the enormous expense of its operation. Executive and judicial functions are united in the Interstate Commerce Commission to the prejudice of each. The executive function in regulating the rightful, useful, and safe operation of the railways may easily be separated from the quasi-judicial work of fixing rates, and may be better attended to by a separate board peculiarly qualified. The Cummins bill provides a new board called a transportation board, of five members, to which it assigns not only the executive duties already referred to, but also certain new duties made necessary by its constructive features. The problem which Senator Cummins has sought to solve is how uniform and reasonable rates may be fixed for the various railroads of the country so as to enable all of them to live and to prevent any of them from enjoying excessive dividends. To fix rates so low as directly to keep the dividends of certain railroads within reason would create impossible deficits for others in competition. The weaker railroads are necessary to the regions which they serve and must be maintained. If private operation is to continue, how can the matter be adjusted? Senator Cummins's method is to divide the country into rate districts in which conditions are similar, to ascertain the value of all the railroads within the district and then to fix rates at such a level that the net return for the use of the properties shall be 53 per cent on their value, with half a per cent more to be used by the railroads in nondividend-producing improvements. Any railroad earning more than this is to divide the surplus, up to 7 per cent, equally with the Government; its half a per cent to be put in a 73337-21-PT 2—11 reserve fund and the Government's half a per cent to be used to create a railway contingent fund. Should the revenue of any railroad exceed 7 per cent, one-fourth of that excess is to go into the railway reserve fund and threefourths into a Government railway contingent fund. After the reserve fund of the railroad shall have reached and is maintained at 5 per cent of the value of its capital, the division of the excess over 6 per cent between the railroad and the Government is one-third to the railroad for such uses as it chooses and two-thirds to the Government railway contingent fund. The merits of the Senate bill are that it furnishes a reasonable standard for the action of the Interstate Commerce Commission in fixing rates. It requires primarily the fixing of rates enabling the railway companies of the country to live and to pay a reasonble income on their property. With that as a fundamental rule, the rest of the problem will work itself out, because the change will restore confidence in railway properties as an investment. The deplorable phase of the present situation has been the impossibility of securing capital to make needed new construction. The 5 per cent standard of rates has been called a guaranty and has attracted criticism and objection. Shippers and certain groups of the interested public are not content to give up their fancied advantage in the present unsatisfactory system by which railroads are made to work for insufficient pay. Such a result in the end works against the shipper, because it reduces the possibility of adequate facilities and injures the whole railway service. But he can not be made to see this. Five and one-half per cent on a value fixed by the commission itself, after the fullest investigations, is not an excessive rate. On the other hand, objection comes from the successful railroad companies that this is not enough for them. They object that it is confiscation to take away from them an excess over 6 per cent and compel them to divide that excess with the Government, and therefore it is unconstitutional. The police power which may be exercised in the regulation of the rates charged by the railroads is ample for the purpose. It is not limited to any particular method by which those rates and the revenues from them shall be kept within reason. Rates may be fixed directly or they may be fixed with reference to the dividends which they bring, so that when the railroad actually receives its net revenue it becomes a trustee of the receipts until the fair return may be determined. It is only rate fixing after all. Federal incorporation of the railroads has often been proposed. One of its benefits will be the real independence of State nagging which such incorporation secures. Interstate railroads are the arterial system of the whole country, and they ought to be panoplied with the armor of Federal incorporation. The Cummins bill, of course, subjects these national railroad corporations to State taxation but imposes the same restriction as that upon State taxation of national banks, namely, that the property shall not be more heavily taxed than other property of the same kind in the State. This will help protect them. Indeed, when they become Federal corporations the burden of the 48 different State taskmasters, to which they have heretofore been subjected, will be materially less. They The changes in the present system proposed are highly constructive. are novel, but that does not prevent their being a solution of the difficulties. The attacks upon them from different quarters and adverse interests are to be expected and may confirm an unbiased favorable view. Space does not permit comparison with the Esch bill, which has passed the House. The two bills are now in conference. It will need another article to discuss their differences. (Communication from committee on public relations filed in S. Davies Warfield's statement before committee:) CONSOLIDATION OF RAILROADS. [National Association of Owners of Railroad Securities-National Railway Service Corporation. Headquarters, Baltimore, Md.] DEAR SIR: A plan for the consolidation of the railroads of the country into 20 large railroad systems, prepared at the instance of the Interstate Commerce Commission, has recently been made public. The commission has not as yet indorsed this or any particular plan, but has announced that public hearings will be held thereon. The transportation act of 1920 (Esch-Cummins Act) directs the commission to formulate a plan for the consolidation of the railroads of the country into no less than 20 or more than 35 large systems. While the plan finally adopted by the commission can not, under present laws, become effective without the assent of the security owners of the railroads, nevertheless all future consolidations of any railroads by whomsoever suggested or desired are required by the act to conform to whatever countrywide plan the commission now decides upon. It will be seen how vitally important it is that the basis for consolidations established by the commission shall be fundamentally sound from the physical, traffic, operating, and financial standpoints. The commission is directed to hold. public hearings in respect to the plans proposed. One of the requirements of the act is that all consolidations shall be based on the valuation of the properties of the respective carriers, as determined by the commission, in that the amount of the securities to be issued by each new consolidated company shall not be greater than the aggregate ascertained value of the properties of the constituent railroads. This association, in recognition of the importance-both as to the valuation to be placed on the properties and the conditions under which consolidations coming within the meaning of the act are to be attempted-appointed a board of economics and engineering, of which you have been previously advised, to make an exhaustive study of this among other problems. The proposed large consolidations will have far-reaching effect upon all railroad securities, as well as on the ability of the carriers when consolidated to render an adequate and efficient public service. If there is a time when those who own the securities of railroads should prepare to meet the questions now presented, it is when their assent is essential to effect so complete a change as is contemplated in the relation of their securities to the properties that issued them, and which may adversely affect their value. It is self-evident that an impartial analysis of any plan of consolidation or of the questions to be considered in reaching conclusions in respect to consolidations, under the terms of the act, can best be attained through an agency representing, in its broadest aspect. all classes of securities issued by all carriers rather than by any particular railroad. Such an agency is presented in the board of economics and engineering appointed by this association. To further extend the effectiveness of its work the board has been clothed with full power of independent action. Its members, in addition to their recognized qualifications for this work, were impressed with the fact that the first consideration should be the public interest, as no plan of consolidation can be effective that is not founded principally on an efficient transportation public service economically administered. The board is engaged in an exhaustive study of the subject, with a view to analyzing the plan of consolidation now before the commission, above referred to; such other plans as may be proposed either to or by the commission, and to endeavor to work out or see if there can be worked out, in the public interest, a plan from which may be obtained the results expected to be secured under the requirements of the transportation act. This association, before the committees of Congress and elsewhere, has given expression to the many difficulties, practical and legal, surrounding the questions involved in these consolidations. During the progress of the legislation leading to the transportation act the association contended that consolidations should be made permissive and not compulsory. The act does not attempt to enforce them. In pursuance of this work by the board the cooperation of the executives of the railroads of the country has been asked, both in the supplying of data necessary to a comprehensive study of the subject and in the way of any suggestions in respect thereto. It has been made plain that such study and sug gestions as the board may make will be available to any railroad they affect, and that before action is taken by the board its conclusions or suggestions will first be submitted to the railroads concerned. It is not proposed to unduly hasten so important a work. Public hearings before the commission on plans of consolidations that are not based on the intensive study that is essential to insure their practicability and effectiveness will prove disturbing in an already disturbed railroad situation. The undersigned committee. therefore, hopes that the Interstate Commerce Commission before acting in the premises will afford full opportunity for the careful and extensive investigation which the board of economics and engineering has undertaken. Your cooperation is asked in such directions as you may find it possible to assist in the work before us. The board of economics and engineering, with a competent staff, is located in offices at 60 Broadway, New York City. GEORGE E. BROCK, JOHN H. DEXTER, DARWIN P. KINGSLEY, W. W. MCCLENCH, JOHN J. PULLEYN, S. DAVIES WARFIELD, Ex-officio, Mr. WARFIELD. Mr. Chairman, the understanding was that we were to take an hour of the time, which has almost been taken up. Therefore, we will give way to Mr. Scandrett, who gave way to us. Mr. Fisher, who was expected to be heard to-day, will remain over until to-morrow, so that he and Mr. Scandrett will make their arrangements with respect to the division of time if there is no objection. The CHAIRMAN. You do not care to continue now? Mr. WARFIELD. My understanding with Mr. Scandrett was that we would give way at this time, since he gave way to us. The CHAIRMAN. I ask because I had stated to Mr. Fisher that he could be heard Thursday morning; but if he is satisfied we will hear him to-morrow. Mr. FISHER. I have arranged to stay over until to-morrow. I should be very willing to go on at this time if there was any substantial period left, but I understand the Senate convenes at 11 o'clock. The CHAIRMAN. Well, I think we may remain here until we are sent for. Mr. FISHER. I understand that Mr. Scandrett was interrupted, or, rather, gave way in the midst of his statement, and it was planned that he might resume. That is satisfactory to me; either plan is satisfactory to me. I shall be here to-morrow morning. The CHAIRMAN. We may have an opportunity to hear you to-day. Mr. Scandrett, you may resume your testimony. STATEMENT OF HON. EDGAR E. CLARK, WASHINGTON, D. C. Mr. CLARK. Mr. Chairman, for the benefit of the record, I will say that my name is Edgar E. Clark. I appear here at the request of Mr. Warfield, representing the Association of Owners of Railway Securities. I want to make it clear, to begin with, that in requesting me to appear Mr. Warfield has made no suggestion whatever as to what position I should take or as to what I should say; he simply asked me to come here and say what I think. Inasmuch as I was a member of the Interstate Commerce Commission when a good many of these cases referred to in this record were decided, and when questions of policy on the part of the commission were determined, I may in the discussion in connection with some of the commission's acts use the first person plural and say we." But I do not assume to speak at all for the Interstate Commerce Commission, except so far as I refer to matters at a time when I was a member of that commission. 66 I want to refer briefly to some elementary things, not because I doubt the familiarity of the members of the committee with those things, but as tending. as it seems to me, to clarify the record. I start with some simple but fundamental propositions. We must have transportation by railroad, and that transportation machine must, in general. be adequate for the needs of the Government in national affairs, and of business in domestic affairs. That transportation must be provided in some way by the Government. It may do it directly, or it may arrange to have it done as it has always been done in this country, by an agency which consists of private capital and private operation. It is obvious that private capital will not embark in transportation enterprises, unless there is a reasonable prospect of a fair return on the capital; a fair profit from the undertaking. We adopted in this country the principle of privately-owned railroads, and in the earlier days the Government lent support and assistance to construction of railroads in the newer parts of the country, as an encouragement to projects which probably could not at that time be carried through without government aid. It was not until 1887 that the Government decided upon a policy of exercising any regulation over the affairs of the railroads. It then adopted the original interstate commerce act, or I should say, the act to regulate commerce, which announced, of course, the general principles and asserted the power of the Government to regulate them, and that action was assailed very vigorously. OLD ACTS NOT EFFECTIVE. The act was not very effective because of lack of power on the part of the administrative tribunal, and because of the phraseology of the act under which practically all important decisions by the Interstate Commerce Commission were set aside by the courts. Every effort that the Interstate Commerce Commission made to accomplish anything in the line of administering the act as the commission interpreted it, was resisted, and the commission was generally unsuccessful in the litigation. In 1906 the Congress passed what was commonly called the Hepburn law, which gave the Interstate Commerce Commission much groader, more definite powers, and for the first time conferred upon the Interstate Commerce Commission the power to prescribe a rate. That, what I term progressive action along this line of legislation, was the subject of a great deal of criticism. The commission, in carrying out the duties imposed upon it by that act, became the storm center of most violent criticism, most of which can be summed up in the general accusation that the commission was starving the railroads to death. The commission, however, pursued the even tenor of its way, endeavoring to perform the duties that were laid upon it under the law, and regardless of this criticism, most of which the commission believed to be unwarranted and unjust. In the hearings before this committee and before the House committee leading up to the enactment of the transportation act I presented some figures which covered a series of years beginning with 1906 and 1907, the first year in which the Interstate Commission had authority to fix rates, and which showed what the effect of those rates had been. It showed the rate of return year by year upon the book investment cost of railroads. It showed that the percentage of outstanding railroad stocks upon which dividends were paid had substantially increased, and it showed that the amount of percentage of dividend had also increased. Those figures are made up from the sworn reports of the carriers officially filed with the Interstate Commerce Commmission as required by the statute, and we, therefore, felt that they were the best evidence that the accusations that we were starving the railroads to death were unwarranted and unfair. Now, the fundamental purpose of the act to regulate commerce, and all of the amendments that have been made to it, have been to terminate and prevent undue preferences to one patron and undue prejudices against another. REPEAL WOULD MEAN RESUMPTION OF PRACTICE PERMITTING FAVORITISM. The time was for many years when the rates were made on the theory of what the traffic will bear-and I do not use that expression in its offensive sense. What I mean is, that when an enterprise was formed, or an industry was opened, and the man who owned it or operated it asked for rates, the traffic manager, to whom he was required to apply for those rates, determined what rate he should have by determining what his cost of production was; what market he wanted to reach; and what competition he had to meet at that market. The traffic man determined whether or not he should meet that competition; determined whether or not he should be permitted to enter that market. If he elected to put him into that market, he would do so; if he elected not to do it, he would not do so. It is now proposed that we go back substantially to that same theory and that same practice. Senator POINDEXTER. Just explain exactly, in brief, how the proposal would go back to that custom; how would the application of these proposals lead to that result? Mr. CLARK. Well, let us assume a concrete case: There is a miller in Kansas City, Mo., served by a certain railroad that wants to enter the Kansas markets. There is a miller on the other side of the river, in Kansas City, Kans., that is served by a different carrier. If the Kansas State authorities can prescribe, without appeal and without any provision for reviewing their action, the rates from the Kansas City, Kans., mill to points in Kansas, and the traffic |