The following table gives the relation between the balance of net income after the deduction of all dividends and sinking-fund charges charged to income of class 1 steam railroads, 1912-1917:

You will note that, except for the subnormal year 1914, there is the same tendency of increase in the percentages. These two tables, supplementing thosegiven in my letter, further support my contention that regulation by the commission has not had a tendency, as stated by you, to reduce earnings.

If return on property investment is the crux of the whole question, as you suggest. I am inclined to think that with respect to that we do not occupy common ground. The actual investment of the railroads of the country is not known. What we have is the investment as shown by the books of the railroads. That showing, as you must know, is the maximum. Investigation has demonstrated that the actual investment is very much less than is shown by the books. As will appear later in this letter, the book investment of a number of railroads in this country is by no means a reliable basis from which to determine returns. If the book investment is to be decreased by material amounts, of course the returns will be likewise materially increased.

The following gives the railway operating income compared with total railway capital and investment, as shown by the books of class 1 railroads, 1908-1916:

Of

You will note the marked difference between capital and investment. course, it would be unprofitable for you and me to engage in a controversy, in which many good men have taken part, over the right of railroads to earn a return upon outstanding capital as compared with investment. I wish, however, to again direct your attention to the continued upward tendency of the percentage of return to support my contention that regulation by the Interstate Commerce Commission has not been productive of declining returns, as stated by you. I insist that figures furnished by the railroads themselves show exactly the opposite of your contention. You further state in your letter:

"It appears that the validity of the repeated pleas of the carriers for living rates has been fully substantiated in the action by the Government in ad

vancing freight rates 25 per cent within a short time after the commission had advanced eastern rates by 15 per cent."

If you will refer to page 7 of my former letter, you will note that the Director General gave reasons why it was necessary to increase freight rates, passenger fares, and baggage charges. Those reasons had not the remotest relation to anything the commission had failed to do. Conditions growing out of the war necessities were the mainspring of the action taken. I invite your attention to another statement made by the Director General when the notice of the proposed increase in rates was given to the public. It is as follows:

"In this connection, it is important to make clear that no part of the increase in rates now initiated is on account of the making of additions and betterments or the purchase of new equipment or other expenditures chargeable to investment account. The increases initiated are solely on account of increased burdens tending to diminish railway operating income."

Is it not a significant fact that the leading railroads of the country are apparently perfectly willing to accept as compensation to them for their use during control by the Federal Government the average net operating income they had received under rates in effect for three years previous to July 1, 1917? Am I not fully justified if I take an appeal from your statements and deductions to the railroads themselves?

In your letter you make the following statement:

In the last six years before the Government took over the operation of the railroads the total amount of new capital for American railroads raised by the sale of stock was only $164,000,000, or an average of about $28,000,000 a year, when capital expenditures were averaging $400,000,000 a year."

The authority for the figures you give is not stated. From reports to the commission by the carriers it is estimated that approximately $392,000,000 of new stock was issued for the five and one-half years from June 30, 1911, or about $71,000,000 a year. Our records show that approximately $400,000,000 a year was expended on capital during the period. Of this amount approximately $190,000,000 a year was expended from earnings, A comparable amount has been expended from earnings for a great many years.

Turning now to property investment as the basis for returns, we face a very important controversy, about which I express no opinion, as to whether capital investment from earnings should be included when a return is to be calculated on the operation of a public utility. I leave the matter at this point with the suggestion that a determination of that controversy may have an important bearing on the question of the adequacy of the net returns to the carriers of the country.

You further state that:

I would be concealing my honest convictions if I did not assert, as I have in public addresses, that the serious check to railroad development in years preceding the war was largely due to the failure of the commission to deal boldly and courageously with this great economic question."

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From this I understand that you still adhere to the severe condemnation of the commission you made in the public addresses to which I referred in my previous letter. You do state that on numerous occasions you had the opportunity to defend the Interstate Commerce Commission against unfair attacks because of your sympathy with and perhaps greater understanding of the difficulties of their position." It has never been my good fortune until now to hear of any such defense. What I do know is that you publicly held the commission largely responsible for the failure of the transporation systems of the country to stand the strain of war conditions, and that in your letter to me you attempt to substantiate statements you have made, and reannounce conviction of their truth.

I have a conviction that the decline of railroad credit in this country and abroad is due to other causes than regulation of freight rates, passenger fares. and other charges by the commission. While it may make this letter somewhat long, I feel I am fully justified in referring to certain other facts which, to my mind, had a controlling influence on the decline of railway credit.

The figures I have given establish that if anything was the matter with the railroads from 1910 to 1917, so far as their credit was concerned, it is to be found from other causes than earnings.

I first call your attention to the situation in 1911, when the first rate-advance cases were decided by the commission. In Advances in Rates-Extension Case, 30 I. C. C., 243, 251, the commission said:

"We are told this increase in rates is necessary to maintain the credit of our railroads, and this claim has been made by high authority and with much

insistence. It is said that our railroads owe at the present time large sums which are being carried upon short-time paper and which should be converted into funded indebtedness; that other large sums must be had in the immediate future for necessary extensions and improvements; that the money for these purposes should come largely from foreign investors, since the rate of interest in England and upon the Continent is lower than with us, but that, at the present time, there is, owing to the treatment of our railroads by the Nation and by the various States, a feeling of distrust which has impaired the selling qualities of their securities, and which should be removed by a decision of this case in their favor. *** It must be conceded, therefore, that railway rates and the treatment of our railways should be such as will make the long-time railway bond, which bears a proper relation to the value of the security, a favorite with the investing public. This record does not disclose that railway credit has been impaired. * * * Comparisons that have been introduced between the selling price of the railroad bonds and municipal bonds would seem to demonstrate that the price of the railroad bond is better to-day, as measured by the price of the municipal bond, than it was 10 years ago, and this would indicate that in the last decade the credit of our railways has gained, not lost. As to conditions abroad no reliable information is before us. Whatever unfavorable impression prevails is due largely to the activities of the railroads themselves. Never before have the net earnings of the railroads equaled those for 1910, estimated on any basis. Never before has the gross amount paid in dividends been so large nor the average dividend rate as high as in the year 1910; and yet in the face of this unparalleled prosperity the press both at home and abroad has been filled, through railroad influences, with dire forebodings of coming disaster. If the credit of American railways is still sound either here or in foreign money markets it is not because of but in spite of declarations of railroad operators.

* * *

At that time there was no decline of railway earnings nor was there any decline in prospect. It may have been a fact that there was somewhat of a decline in the demand for railway securities at home and abroad. Such decline, however, was caused by certain matters that had no relation whatever to earnings.

In 1906 the Congress passed an amendment to the act to regular commerce, which greatly enlarged the powers of the commission and increased the penalties for disobedience of its orders. Soon after the passage of the act many of the leading railroads of the country came voluntarily to the commission and asked that the slate upon which was written their sins of omission and commission be washed clean, and they stated in that connection that in the future they would endeavor to obey the law in good faith.

In that year the commission instituted an investigation entitled "In the matter of consolidations and combinations of carriers, relations between such carriers, and community of interests therein, their rates, facilities, and practices." The first report was made July 11, 1907, 12 I. C. C., 277. The investigation conducted to that time related mainly to certain transactions of the Union Pacific Railroad Co., including the acquisition of control of the Southern Pacific Co., the purchase of large amounts of stock of various railroad companies, and other matters of kindred import. In the report a most astounding situation with respect to stock purchases and manipulation was disclosed. It is sufficient here to refer only to the Chicago & Alton Railway Co. In the report, at page 296, is the following in regard to that company: "In about seven years, to June 30, 1906, the outstanding capital indebtedness of this company was expanded from $33,951,407 to $114.610,937, or an increase of about $80,660,000, and there was expended in actual improvements and additions to the property out of this capitalization only about $18,000,000, leaving an increase of its stock and liabilities, without one dollar of consideration, of about $62,660,000, or $66.190 per mile on the 946.66 miles of road owned by the company on June 30, 1906."

On May 6, 1912, an investigation of New England railroads was undertaken, and a report was made on June 20, 1912, 27 I. C. C., 560. The report refers largely to the New York, New Haven & Hartford and the Boston & Maine. It is not necessary here to refer to but one paragraph in the report, at page 578: "June 30, 1903, the total capitalization of the New Haven company was approximately $93,000,000, of which $79,000,000 was stock and $14,000,000 bonds. The mileage then operated was 2,040 miles. On June 30, 1912, the capitalization, excluding stock premiums, was $417,000,000, an increase of $324,000,000, while the operated mileage was 2,090, an increase of 50 miles.

"The bonds and stock of the New Haven company had been during this period ordinarily issued at not less than par; the stock was sold at considerably above par. About $21,000,000 of the stock reported by the New Haven company as outstanding had been, in fact, issued to the New England Navigation Co., one of its subsidiary companies, by which it was held, so that this stock is still virtually in the treasury of the parent company. Disregarding this stock, treating its notes and bonds as issued at par, and including the premiums upon the capital stock which had actually gone into the hands of the public, the New Haven received during the nine years under consideration from the issue of stocks and securities about $340,000,000. While the New Haven operated 2,040 miles in 1903, it only owned of this operated mileage 438 miles. During the nine years this owned mileage was increased by about 800 miles, and the New Haven company expended approximately $40,000,000 in acquiring this additional owned mileage. It expended during the nine years something over $96,000,000 upon its railroad for betterments and equipment, making a total of $136,000,000 devoted to its railroad property proper. This would leave the sum of $204,000,000 which in nine years had been expended outside its railroad sphere."

In response to a resolution of the Senate of the United States, dated February 7. 1914, the commission entered upon a further investigation into the financial transactions of the New York, New Haven & Hartford Railroad Co. Financial Investigation of N. Y., N. H. & H. R. R. Co., 31 I. C. C., 34. In the report the commission gave in detail the disastrous results to the railroad from shameless financial operations.

Reports were made by the commission in the St. Louis & San Francisco Investigation, 29 I. C. C., 139; Chicago, Rock Island & Pacific, 36 I. C. C., 43; Cincinnati, Hamilton & Dayton, and Pere Marquette, 44 I. C. C., 1; and Wabash Pittsburgh Terminal, 48 I. C. C., 96.

In other proceedings such matters as the purchase of an interest in the Cincinnati, Hamilton & Dayton Railroad by the Baltimore & Ohio, and the distribution to stockholders of $20,000,000 by the Louisville & Nashville, as examples of many others of like character, were brought to public notice.

These reports disclosed indefensible financiering which resulted in the serious embarrassment of some fine railroad properties. It was shown that certain financial interests, when so minded, freely used carrier organizations for exploitation to any extent necessary to accomplish desired ends. Many of these matters were found by the commission when its accountants came to examine carriers' books under the power conferred by the amendment to the act of 1906. Shortly after the passage of that amendment the commission recommended to Congress that its jurisdiction be extended to control over and supervision of railway capitalization. This recommendation has been repeated year after year, but Congress has not granted the extension of power.

The increased rates carriers asked for in 1910, 1915, and 1916 would not have had the effect of restoring public confidence in the financial management of the railroads of the country. Conservatively and honestly managed rouds suffered with those that had been financially mismanaged. Those who had money to invest lost confidence in the railroad financial management. It came to be generally known that the men nominally in control of many of the roads, and who were capable of handling the properties so as to render the best service to enlarge terminals and to secure facilities for a rapidly growing business, could not act in a free-handed manner. Those who owned or controlled large blocks of stock or other securities were really running the roads. Surplus earnings were largely expended in accordance with their dictation. They knew nothing about or, at least, were not specially interested in transportation requirements of the public. When the time came, as it was bound to come, that the operation of the roads under such conditions failed to meet the demands of the expanding commerce of the country they found it necessary to lay the blame somewhere, and singled out the Interstate Commerce Commission. As has been shown, that body was not even remotely responsible for any of the financial difficulties in which the transportation systems found themselves.

During the years when their earnings were at the highest point carriers' representatives were informing shippers who desired better service and more facilities that it was impossible for railroads to buy more engines and cars or to enlarge their terminal facilities, because the commission refused to allow them to increase their rates. Newspapers took the matter up, magazine articles were inspired, speeches were made at business men's associations, and the propaganda was so general that many people came to believe what was

For example, the president of one of the leading banks of the country said in a speech in 1914:

The most important entry we would make on the debit side of the business outlook would be in connection with the operation and financing of the railroads. In spite of an easy money market many railroads find it impossible to refund their short-time obligations, and continue to keep going, like a juggler playing with balls, by rapidly and dexterously throwing a new short-term obligation into the market to take the place of another short-term obligation maturing. Higher expenses, increased wages, taxes that have doubled in a decade, the burden of new terminals, and the demand for improved service have all had to be met by the railroads, while there has been withheld from them permission to increase their income. The investor now hesitates to consider a long-term railroad security as the safest form of investment for his fund."

On November 18, 1917, he also said:

"We have already conscripted the railroads, and are paying them a rate they can not live on. The inevitable result is already apparent-they are inefficient, rendering unsatisfactory service to both Government and the public."

In many addresses made by yourself you took the same position, and you made the statements in 1918 to which referred in my letter.

The president of one of the leading railroads said in February, 1917:

But here the heavy hand of regulation has been laid upon the railroads, and the utter lack of elasticity in rates makes it impossible for them to do as other business institutions do."

On January 9, 1912, the president of a great western railroad, in speaking of the decision of the commission in 1911, said:

"The hardest part of the ruling was not so much in what the advance in rates asked for meant to the railroads as it was in the intimation the decision conveyed that the railroads were getting as high rates as they would be allowed to charge, and that it would be useless to ask for an advance in any line."

Another prominent railroad president, in a hearing before the commission, declared that he would not advise a friend of his to purchase railroad securities of any kind. Still another prominent railroad president, in a like hearing, stated that the railroads and railroad securities had all gone to the d-l."

Other quotations from statements of bankers, brokers, financiers, and railroad officials, from editorials appearing in daily papers and magazines, of which our records are full, might be made to any length. The quotations made are sufficient to show the general trend of public announcement by those best circumstanced to know the facts.

The most discouraging statements as to the waning credit of the railroads from 1911 to the spring of 1917 have been made by their officials and those interested in them financially. Nothing the commission has ever said or done was warrant for such view of the situation. Is it any wonder the credit of the railroads was impaired? Under such circumstances the result could not have been otherwise.

It seems to me that in consideration of what you think the commission ought to have done you have lost sight of what that body could have done under the limitations prescribed in the regulatory statute. No member of the commission has ever taken the position that the railroads of the country are not entitled to adequate returns for service performed. The commission has endeavored to be just to all interests involved in the movement of traffic throughout the country. My object in writing you was to show you, if I could, that when you held the commission largely responsible for all the ills to which the railroads are now subject you were not justified under the facts. The Nation faces stupendous problems of reconstruction in the immediate future. A burden of responsibility rests upon us all to see to it that as a result of the world war there shall come a greater Nation and a happier people. Neither consummation can be attained unless all thoughtful men shall accept truth and justice as guides for action. I agree with you that recriminations of old mistakes and abuses in such connection can avail naught of good.

It is only with a long pull, and a strong pull, and a pull all together by men devoted to the country's best interests that a sound future can be assured. This includes as one of the main considerations the fair and just treatment of our transportation systems.

Very truly, yours,

C. C. MCCHORD.