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the State under which it is incorporated? To illustrate: For instance, in Ohio the question came up some years ago as to how far the board of directors might go in disposing of the business and property of a corporation, and we provided later on by statute a special method whereby the minority stockholders would be taken care of. Now, I am speaking of corporations generally, not of railroad corporations alone. And would it not be correct to say that before we could determine these questions we would have to look definitely to the statutes of each State, and there might be a different rule prevailing in each particular State with reference to the power and business of that corporation?

Mr. THOм. I would express the principle this way, as far as I understand it. I think in a great many States there is a general law relating to the powers of directors. Now that may be changed in any State by restrictions upon those general powers, or it may be changed in any State by the enlargement of those powers. The first thing we would do to find the powers of the directors is to analyze and to appreciate the general principle governing the powers of directors; then we must go to the statutes of every State where there has been an incorporation of one of these carriers to see whether those powers have been in any way altered by statute. That is my understanding of the law.

Senator POMERENE. I think that is correct.

Mr. THOм. But I do not understand, Senator Underwood, that that question is directly involved in the question of whether or not there shall be a power somewhere to make an agreement with these carriers. The question of how that agreement is to be made arises subsequent to that.

Senator UNDERWOOD. That is true, but here is the matter I had in mind. Of course if this matter is settled ultimately in a court or a judicial tribunal, that is a final arbitration as to all parties, but if it is settled by agreement, of course if the Government makes an agreement to pay a certain compensation for the taking over the possession of these railroads and that is agreeable to the carriers, it would be binding on the Government and it would carry out its contract. But if the officers, the directors who entered into that agreement. were not capable of making a binding agreement with the Government, it might bring for them a volume of lawsuits hereafter in which the stockholders might sue the Government for billions of dollars for the taking; therefore, I think the Government itself, if it enters into the agreement, ought to have its side of the case protected.

Mr. THOM. It will. The Government officers, in accepting an agreement with the carriers, will of course see that that contract by competent corporate authority is made

Senator UNDERWOOD. That is the reason I asked the question. what you considered the competent authority.

Mr. THOM. I think it ought to be regarded as a reasonable safeguard, at least, to have the stockholders assent to whatever arrangement is made. But I repeat that is a matter in the carrying out, and is not related to whether or not there should be a power in some representative of the Government to deal with the competent authorities of the corporation in respect to a basis of compensation. I regard

it as absolutely essential, if we are not to throw the financial structure of this country into a weakened condition, and to undermine its foundation, that there should be a quick settlement of this matter, and that it should be by agreement wherever an agreement is possible. Now, we believe this to be the case. We believe there is no rule which would be universally applicable. There are many situations that will be presented where every reasonable man must come to the conclusion that there are exceptional cases which must be dealt with in an exceptional way.

I will illustrate in this way: Here is a basis proposed by the President, which is a compensation arrived at by reference to the value of the use of this property in the hands of its owners over a period of years. Suppose it is new property, where there has been no use, where during these years the property has not been in existence. Manifestly there must be some other way of finding that out.

I will illustrate again. Here is a property which in the last six months has so improved its plant that it has become capable of greatly increased and more valuable use. It has put a lot of money in it. It is able to handle a largely increased volume of traffic. It has removed curves; it has reduced grades; it has done the thing to make an economical use of its property, as economical a use as possible over what it was in the test period. Now, manifestly, what the Government takes over is that plant as it existed on the 28th day of December, 1917, not the plant as it existed on the 30th day of last June. If the plant has changed in all that time so as to be a different thing from what it was during this test period, an exceptional situation arises at once in respect of which there must be some discretion for dealing with it in an exceptional way in order to arrive at it justly. Have you any more questions?

Senator KELLOGG. Mr. Chairman, I suggest that there is only one question in section 1 of this bill before this committee.

Senator ROBINSON. I move that we proceed to the consideration of Senate bill 3385.

The motion was agreed to.

The CHAIRMAN. Mr. Thom, if you are ready, or any of the gentlemen you wish to present are ready to be heard, we shall be glad to hear you.

Mr. THOм. Mr. Chairman and gentlemen, at the outset we desire to be understood that we are in no obstructive attitude in regard to this legislation. We recognize that this is a time when every interest in the country must be willing to make the sacrifices that are legitimately required of it in respect to the successful prosecution of this war, and we shall attempt in the presentation that we shall make to avoid in every way an attitude of obstructiveness. We are confronted, however, with the most monumental industrial transaction that has occurred in the history of mankind. A great deal of the future of this country will depend upon the wisdom with which this situation is met. There are many hundreds of thousands of people that are interested in it. As I stated before, there is not an institution in our land that is not founded upon these very securities. In view of the seriousness of the situation, in view of its far-reaching effect, in view of its influence upon the future and upon the fortunes of so many people, we have tried to consider what the duties of the railroads are in respect to this matter.

The President of the United States, in the performance of what he conceived to be his duty, has taken over these railroads. Likewise. in conformity with what he conceived to be his duty, he has made a suggestion to Congress as to the measure of compensation. How are we to meet that?

If we think that an inadequate basis of compensation, are we to say so in a proper spirit of submission to governmental authority or are we to remain sullen and say nothing? We have arrived at the decision; we have reached this conclusion, that it is our duty to lay before you the facts as we see them. As I said before, and I now repeat, in no obstructive spirit but with a desire to help along to the end of a just and helpful solution of this whole matter, so that in anything we say and in any facts we present I trust that the committee will understand that they are presented in that spirit. Bear in mind, we have arranged to take up the basis which has been suggested for compensation and to present our views about that.

In our judgment, that is an inadequate basis. While at a later stage of your deliberations I shall probably ask the privilege of making before you a legal argument on these questions, I shall assume for the present purpose that what you are trying to do, and what under the Constitution of this country you must do, is to arrive at a fair equivalent of the thing you take.

You take the use of these properties. Your duty, as we understand it, is to ascertain what is the fair equivalent of that use. We shall undertake to sustain the view that the fair equivalent of the use must be arrived at by determining what the use was worth in the hands of these companies themselves at the time that you took the use, or as near to that time as is reasonable and just.

As I have said, we appreciate that that will not be possible in all cases, and that there must be some exceptional method devised of dealing with exceptional cases, but taking the proposition as applicable to most of these carriers, we believe that the only fair and just, and the only legal method of proceeding is to find out what was the value of the use of these properties at the time you took them over, or as near that time as is reasonable and just. We think that all the more true because what the use of these properties was at that time is limited by law. The earnings of these companies was not a matter within thir own discretion, but the earnings were limited by a system of regulation in this country, so that there can be no doubt upon the proposition that what the properties showed in the way of the value of the use was legal and proper. If we are right in that-and I say I want to make a more extended argument on that point-if we are right in that conclusion, then the question before you is how must you determine what the value of this was to these companies. Are you to attempt to find it at a particular moment, or are you to attempt to find it by reference to a certain period? And if so, what is the proper period for you to examine in order to find out what the value of this use is?

That brings me to the first point that we want to present in our evidence. The period suggested in this bill is three years ending June 30, 1917, embracing the fiscal years 1915, 1916, and 1917. In England they have taken one year. Here it is proposed to take three years. Now, we shall attempt to show you that the inclusion of the year

1915 produces a result that makes the final figures of compensation entirely inadequate and we shall present our evidence first upon that subject.

Then, there is another question which we will present testimony upon. You took over on the 28th of December, 1917, a certain plant. The proposal is to find out during the years 1915, 1916, and 1917, the earnings of each railroad. Manifestly, if you are to arrive at a just conclusion as to the value of the use of the thing you took over, you must know what the earning capacity of that thing is, not of something else. If you found on December 28, 1917, that the lines of a certain system were twice in length and extent that they were in the year 1915, why, manifestly, you could not say that the value of the thing as it existed in 1917, when you took it over, is to be determined by the value of the thing that is only half as great, only half as valuable in the year 1915.

If you found that the thing you took over was a different thing than what it was in 1916, manifestly you can not conclude that the value of the use of what you took over must be governed by the value of the different thing that existed in 1916. Manifestly again, when you take over on the 28th day of December a certain plant, you can not determine the value of the use of that plant by what a different plant earned the year ending June 30, 1917.

Now, the suggestion in this bill is that the value of what you take over shall be determined by the earnings of certain plants during the years 1915, 1916, and 1917. We shall attempt, in our evidence, to show you that the plant you took over was a different thing from what it was in any of those years. That the plant you took over was greatly enlarged and greatly more valuable than that, and that therefore when you adopted an average of those years for the much larger and more valuable and more capable plant which you actually took over you are granting us an inadequate compensation.

I will confine my remarks at the present moment to section 1. I do not suppose you gentlemen want me to confuse the issues under that section with remarks on any other section of the bill, but we propose to introduce our evidence now on the two points I have alluded to, and as the other sections of the bill are reached I will ask the privilege to pr. sent to you views with respect to some of them.

Senator UNDERWOOD. Your proposition, as I understand it, Mr. Thom, is that the just compensation should be the net earning capacity of the railroads at the time of the taking over?

Mr. THOм. Or as near to it as reasonable.

Senator POMERENE. Of course these railroads, when taken over, are subject to the regulatory provisions of the commerce act. Now, assume, for the sake of the argument, that one of these roads was earning for its stockholders a compensation 100 per cent in excess of what would be a fair and just return for that road. When the Government takes that road over, in determining a reasonable compensation for the use of that road in the future ought we not to have in mind at the same time the regulatory provisions of the commerce act, under which the Interstate Commerce Commission could reduce the traffic rates to a point which would be just and reasonable?

Mr. THOм. Senator, I have very firm convictions on that point, and my convictions are that you have no power whatever and should

not exercise any power whatever in respect to that matter. I should like to present with a little fullness the views which I entertain in respect to that, as the matter has been brought up.

Senator POMERENE. At any time you suggest. The question has occurred to me as a very serious one, and I would be glad to have you do it.

Mr. THOм. Here is a power which is being exercised for the purpose of this war to take over certain properties. Now, during 30 years, with different grades and degrees of power, the earning capacity of these companies have been regulated by Government authority. You have a report before you of the regulating body, the Interstate Commerce Commission, which suggests to you that after all these years it is now safe for Congress to assume that the body of rates is a reasonable adjustment of charges, and should be so declared by act of Congress. If, in the taking over of the roads and in determining the amount of compensation to which they are entitled, you can exercise the power of beating down the value of these properties, you would be subject to a temptation which is at war with every principle of morality.

Senator POMERENE. Will it interrupt you if I ask you a question? Mr. THOм. No; not at all.

Senator POMERENE. Then do I understand that it is your thought that when the Government takes over these roads that, ipso facto, the regulatory provisions of the commerce act are suspended?

Mr. THOм. Oh, no; I do not think so. But I think that if Congress can take over these roads, and in the act of taking them over say they can not be worth what they have permitted them to be worth up to this moment, that Congress would be in a position, condemned by the act of Congress, which prevents a railroad officer from purchasing from a concern in which he has a private interest.

Senator UNDERWOOD. Does that not all go back to the original question that I asked you as to the constitutional status of this case, that we can not take private property without just compensation, and that that is a question that a judicial tribunal must find, and the preliminary foundation on the terms of which we can make an agreement rests fundamentally upon the basis of the court and the fundamental proposition that they can only be taken for just_compensation, and that a court must determine that in the last analysis? Mr. THOм. They must determine it, if it can not be determined by agreement.

Senator UNDERWOOD. Therefore the Congress has no power in itself to fix what is just compensation?

Mг. THом. No; it has not. Nor has Congress the right to say: "We are about to take over these properties now, and we will make them less valuable because we are going to take them over." Now, Congress attempted that once. Congress wanted to obtain for the Government a lock in the Monongahela River, and in order to get it cheap it said: "Nothing should be allowed for the franchises." And the case went up to the Supreme Court, and the Supreme Court said Congress could not do it; that that was a piece of property; and that that could not be taken away by Congress taking the position that that element of property should not be considered. Now, if

1 Monongahela Navigation Co. v. United States (148 U. S., 312).

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