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distorted; how officials who were needed and who could be bought were bought; how newspapers that could be subsidized were subsidized; how a college professor and publicists secretly accepted money from the New Haven while masking as a representative of a great American university and as the guardians of the interests of the people; how agencies of information to the public were prostituted wherever they could be prostituted in order to carry out a scheme of private transportation monopoly imperial in its scope.


"It is inconceivable that these wrongs could have gone on without interference if the members of the board of directors had been true to the faith they owed the stockholders. A number of directors appear in many instances to have voted without knowledge and to have approved the expenditure of many millions without information. According to the testimony of some of the direetors, they merely approved what had been done by some committee or by some officer of the company. The directors' minutes reveal that it was largely a body for ratification and not authorization, as the law intended a board of directors should be. None of the directors would have been so careless in the handling of his own money as the evidence demonstrates they were in dealing with the money of other people. The directors actively or passively acquiesced in the efforts of the Mellen-Morgan-Rockefeller régime to extend the domination of this corporation over the whole transportation field in New England.

"If these directors who were faithless to their stewardship were held responsible in the courts and at the bar of public opinion for the failure to do those things they should have done, the lesson to directors who do not direct would be very salutary.

"Most of the directors of the New Haven accepted their responsibilities lightly. They failed to realize that their names gave confidence to the public and that their connection with the corporation led the public to invest. When these directors were negligent and serious losses resulted therefrom they were guilty of a grave dereliction of duty and a breach of trust that was morally wrong and criminal in its fruits.

"Directors should be made individually liable to civil and criminal laws for the manner in which they discharge their trust. A corporation can be no better or worse than those who operate it. It should be just as grave a crime to plunder stockholders or the public through a railroad corporation as it is to personally rob an individual.


'It was found in the investigation of the New Haven System that there were 336 subsidiary corporations, and the books of the New Haven road proper reflect only a small part of the actual financial transactions of the railroad. Many of these subsidiary corporations served no purpose save an evil one. They were used to cover up transactions that would not bear scrutiny, and to keep from the eyes of public officials matters that were sought to be kept secret. The commission should have the power to examine not only the books, records, papers, and correspondence of interstate carriers, but of subsidiary companies as well.


"The insuring of honesty throughout the management of the great railroads of the country is a most important question before the people to-day, and only when through exposure of wrongdoing and an awakened public conscience coupled with effective laws this result is produced, may railroading be placed upon the high level that it should occupy. The revelations in this record make it essential for the welfare of the Nation that the reckless and profligate financiering which has blighted this railroad system be ended, and until this is fully done there will be no assurance that the story of the New Haven will not be told again with the stockholders of some other railroad system as the victims."


This railway system was investigated by the Interstate Commerce Commission. The results of its investigation are to be found in the official repart of the commission, No. 6319. dated February 16, 1915, entitled "In Re Financial

Relations, Rates, and Practices of the Louisville & Nashville Railroad Co., the Nashville, Chattanooga & St. Louis Railway, and other Carriers."

This investigation was the result of a resolution of the United States Senate, prompted by complaints of the public respecting illegal acts of the above company and its subsidiaries, in which it requested the Interstate Commerce Commission to inquire into the financial affairs and capitalization of the company, its practices, and its efforts to illegally influence or control politics, legislation, and public opinion.

Because of the fact that some of the records and accounts of the company had been burned by them and the further fact that the commission was permitted by the company to inspect but part of those which remained, and the further fact that the officials of the road and other witnesses summoned to appear before the commission refused to testify, the commission was unable to ascertain but part of the facts. The testimony obtained was, however, sufficient to incriminate the company in many unlawful acts, among the most important of which were the violation of laws, both Federal and State, in respect to monopolies; the use of the stockholders' money to control legislation, politics, and the press; and the deceptive manner in which the accounts were kept respecting the capital investment and the operating expenses.

On account of the refusal of certain officials to testify before the commission regarding their acts, an appeal was made to the Supreme Court of the United States, which court, in December, 1917, issued a mandamus directing these witnesses to appear before the commission and testify. When this additional evidence is taken the result will be to make the investigation of greatly added interest.

As the stories of all the railway systems investigated by the commission are nearly identical and include practically all of the same illegal acts, we will, for lack of space, record ony some of the principal features brought out in this case. On page 168 of the report is the following:


"On November 10, 1913, immediately following the adoption of the Senate resolution above referred to, the commission ordered an investigation into the questions presented and served formal notice of this investigation upon the carfiers concerned. Thereafter examiners of the commission were directed to exmine the accounts, records, and memoranda of the Louisville & Nashville Railroad Co. and the Nashville, Chattanooga & St. Louis Railway with a view to securing all information in the files of these carriers that would throw light upon the questions contained in the Senate resolution. Certain obstructions have been placed in the way of the commission's examiners by the carriers, and hese will be referred to later. The facts stated herein were secured from the nnual and statistical reports and the contracts and tariffs on file with the comnission, from such of the carriers' records and accounts as were voluntarily ubmitted by them; from testimony given at formal hearings in other cases efore the commission; and in a few cases, that will be indicated, from interiews by the commission's examiners with railroad officials and other persons. The questions presented by the resolution will be stated and answered in umerical order, accompanied by such comment as seems necessary. Following he report will be found an appendix illustrating and supplementing certain of he answers.


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The Louisville & Nashville Railroad Co. was incorporated in Kentucky in 850. The line from Louisville to Nashville, 185.81 miles in length, was comleted and placed in operation in 1859, forming the nucleus of the present sysm. Various extensions have since been constructed, aggregating 399.56 miles nd making a total of 585.37 miles constructed by the company under its own harter. The annual report of this carrier to its stockholders of the year ended une 30, 1913, shows that it owned or controlled on that date 7,889.77 miles of ad. A comparison of the miles of road constructed by this company under its wn charter, with the total miles of road owned or controlled by it. well illusates its activity in securing control of other railroads.

In connection with the acquisition of the roads owned or controlled by th ouisville & Nashville Railroad Co. the following information is of interest:


Before the Louisville & Nashville advised the commission that such of its records as were made prior to August 28, 1906, would not be submitted for inspection, schedules of most of the cost of road accounts had been drawn from the ledgers preparatory to completing the analysis of the accounts from information to be secured from the journals and other records of original entry. While a complete analysis of these accounts was prevented by the Louisville & Nashville the preliminary analysis was sufficient to indicate that the cost of road account is heavily burdened with charges which do not represent actual construction cost. From such incomplete information it is concluded that at least $16,000,000 shown in the cost of road accounts covers items which should not be charged as a part of the cost of this carrier's road, as follows:

Charges included in cost of road accounts but not expended for actual construction.

Discount on stock_.

Other expenses in connection with the sale of stock.

Discount on bonds_-_

Other expenses in connection with the sale of bonds_
Interest and dividends____

Amounts credited to profit and loss:

For reasons not stated.__

$2,640, 000. 00

To provide a surplus in order that a stock
dividend of 100 per cent might be paid____ 6, 300, 000. 00
To raise book value of stock above the actual
cost of acquirement__.

To adjust difference between advances made
for construction and par value of bonds
received in settlement therefor..

1, 422, 784. 00

$1,440, 018.00 32,671.48 2, 192, 142. 57 8.537.95

1. 917, 535. 13

78, 447. 72

10, 441, 231. 72

16, 032, 136. 85

"The above statement is illustrative of the character of charges which the carrier has included in its cost of road account. A full examination of the carrier's accounts might disclose conditions under which some of the above amounts could properly be charged to cost of road account, but it is also possible that other improper items would be found which would greatly augment the amount shown.


"As shown in the above table, a stock dividend of 100 per cent was declared by the Louisville & Nashville on October 6, 1880. According to a corporate history of this railroad which was found in its office, 10 stock dividends were declared by this company between 1860 and 1891, as follows:

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To make possible the stock dividend of 100 per cent declared on October 6. 1880, the amount of surplus was arbitrarily increased by raising the book value of certain assets. From the corporate history above referred to it ap

pears that when this dividend was declared the book value of the carrier's property exceeded its capital stock liability as follows:

On July 1, 1880, the cost of the main stem and branches amounted to

The capital stock then outstanding amounted to__.

Cost of main stem and branches in excess of outstanding stock was_
On October 6, 1880, the board of directors declared a stock dividend
of 100 per cent on the outstanding stock of $9,065,000___.
Cost of main stem and branches in excess of stock liability as
thus increased....

$18,585, 135 9, 065, 000 9, 520, 135

9, 065, 000

455, 135

"In declaring this stock dividend the directors were confronted with the fact that, notwithstanding the excess of cost of property over the capital stock liability, the entire net surplus on October 1, 1880, amounted to only $3,671,383, which was insufficient to pay the full amount of the dividend. To meet this situation the assets of the company were revalued, and the board of directors voted that the book value of certain assets should be increased. Accordingly entries were made on the books of the company crediting the profit and loss account and correspondingly increasing the book value of the following assets in the amounts shown below:

Evansville, Henderson & Nashville division_

Cecilia branch__

New Orleans & Mobile stock.

Stock in Eureka Go

Nashville & Decatur Railroad stock_

Glasgow Railroad bonds__.

Total credit to profit and loss_

$2,300,000 800,000 4, 000, 000

40,000 68, 546


7, 212, 226

“The above-mentioned entries brought the profit and loss account to $10.883,609, to which was charged the 100 per cent dividend of $9,065,000.

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Expenditures by the Louisville & Nashville during this period which appear to have been for the purpose of maintaining political and legislative agents amounted to $23.274.41. This amount was distributed as follows: Expenditures for securing copies of and information concerning legislative bills of particular interest to the Louisville & NashvilleExpenditures directly assignable to specific legislation... Contributions to various committees or associations for the purpose of influencing legislation___.

Expenditures on account of legislative agents in general___

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$1, 413. 58 5, 596. 60

6, 611. 29 9,652.94

The accounts of the Louisville & Nashville disclose that between September 1, 1906, and July 1, 1914, this carrier expended at least $59,322.48 for the purpose of creating public sentiment in favor of its plans.

"Of this amount, over $53,000 was spent in a publicity campaign in Alabama in the endeavor to mold public opinion through the medium of the press. Part of the balance was contributed by the Louisville & Nashville to a fund made up by numerous carriers to finance a campaign in Louisiana to prevent the change of tax laws. In order that the railroads concerned might preserve an outward appearance of indifference in regard to the legislation in question, the contributions for this purpose were placed in the hands of a bank to be disbursed by it as if in furtherance of banking interests. If the commission's examiners had been accorded access to the correspondence files of this carrier and to its accounts prior to 1906, there seems no doubt that information as to other substantial expenditures for the purposes referred to in the question would have been secured."


Some of the most interesting testimony, bordering upon the romantic days when Pizarro and Cortez subjugated the natives of the Western Hemisphere

about four centuries ago, is to be found in the testimony of two railroad presidents who having, as they thought, secured the subjection of the present American people as did those plunderers of old, felt the time had arrived when they could enjoy the realization of their dreams of conquest and accordingly, under the names of Pizarro and Cortez, Milton S. Smith, president of the Louisville & Nashville Railway System, and Samuel Spencer, president of the Southern Railway, gave vent to their feelings of pride and joy in some very interesting correspondence not included in the official report of the Interstate Commerce Commission, but to be found in the testimony taken by the commission and published as Senate Document 461, Sixty-fourth Congress, first session, entitled "Louisville & Nashville Railway Company hearings before the Interstate Commerce Commission," 1916. This correspondence, exemplifying the illimitable ambitions of railway financiers, is of great interest. The following extracts from the testimony of President Smith and the letters referred to appear on pages 369 to 372 of the document:


MILTON S. SMITH was called as a witness, and being first duly sworn, testified as follows:

"Mr. FOLK. Your name is Milton H. Smith?

"Mr. SMITH. Yes, sir.

"Mr. FOLK. You are the president of the Louisville & Nashville Railroad Co.? "Mr. SMITH. Yes, sir.


"The hearing was resumed at 2 o'clock p. m.


MILTON H. SMITH resumed the stand and testified further as follows:

Mr. FOLK. Mr. Smith, do you know who Pizarro was?

66 Mr. SMITH. I don't know much about him.

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Mr. FOLK. He was the conqueror of Peru.


Do you know who Cortez was?

Mr. SMITH. Cortez had something to do with Mexico, hadn't he?

"Mr. FOLK. He was the conqueror of Mexico.

"Mr. SMITH. Well, I have not read about him for a great many yearsprobably 40 or 50.


Mr. FOLK. And they met at the Court of Spain along in 1500 and agreed to divide up this new world.

"Mr. SMITH. Yes. Well, Prescott knew a great deal more about them than I do.

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Mr. FOLK. Now, then, we come

"Mr. SMITH. You might incorporate Prescott's history.

"Mr. FOLK (continuing). To President Smith, of the Louisville & Nashville Railroad

"Mr. SMITH. Yes.

"Mr. FOLK (continuing). And President Spencer, of the Southern Railway. Mr. SMITH. Yes.


"Mr. FOLK. After that conference between you and Mr. Spencer you had considerable correspondence with Mr. Spencer in relation to the distribution of this territory under that agreement, did you not?

"Mr. SMITH. There was no division of territory, and I do not know that we had any correspondence on the subject. I don't see why there should have been, but there may have been. He, as representing the Southern Railway. proceeded, to complete the organization of the Southern Railway, and he did not in any way interfere with the plans or the policy of the Louisville & Nashville Railroad Co., because the Louisville & Nashville Railroad Co. did not want any of those roads.

"Mr. FOLK. Did you ever hear of the conqueror Pizarro?

"Mr. SMITH. Yes; Pizarro and Cortez.



Mr. FOLK. And you were Pizarro, were you not?

Mr. SMITH. I didn't get even a piece of the Isthmus of Panama.

Mr. FOLK. But you were Pizarro, were you not?

"Mr. SMITH. I wasn't anything. I was a nonentity in the transactions.

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Mr. FOLK. Did you designate yourself as Pizarro' and Mr. Spencer as ' Cortez '?

"Mr. SMITH. Don't give me credit for any such humor as that. That originated with a lawyer in Louisville, a Mr. George Davie, who used that in some way. I never heard of it until after that.


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