kind with any carrier whose property has been thus taken. There has been in some of the newspapers an apparent misapprehension, probably not shared by the members of this committee, on that point, as if section 1 were mandatory instead of permissive. It provides, you will observe, then, that the President having in time of war taken over the possession, use, and the control-called, for short, "Federal control "-of certain systems of transportation-called herein "carriers "—and I may here digress to say that the proclamation as now drawn undertakes, broadly speaking, to take over the chief rail carriers, including the Pullman and private-car lines and only the water lines connected therewith, excluding trolley lines, as we understand them, even including in the exclusion the interurban, That is the general scope of the present proclamation.

Mr. DOREMUS. Does it exclude the interurban railways doing interstate business?

Commissioner ANDERSON. Yes.

Mr. DOREMUS. Does it exclude all interurban electrics?

Commissioner ANDERSON. It excludes all interurbans, as I construe the proclamation. There may be some of those interurbans which may fall in the twilight zone, but it was obvious it was necessary to take in not only steam roads, but rcads operated by electric power, as some of the lines are across the Rockies and in New York and elsewhere, so you could not make an exclusion based merely on the operating power, steam or electricity. On the other hand, it was clear that the war needs would not extend, at least at present, to the operation of the ordinary street railway trolley systems. After some discussion it seemed to be clear there was not present necessity of taking the interurbans, most of which are intrastate, but a few of which are interstate. You will remember, Mr. Chairman, there is something in the proclamation to the effect that those are exclusions at the present time, reserving the right and power, if it be found necessary hereafter, by subsequent proclamation to take them over. That is a species of warning that the public needs would be further considered in that twilight zone.

Mr. DE WALT. Is it not a fact that the Government has already taken some of these interurban roads that do interstate business? I have one in mind now.

Commissioner ANDERSON. Maybe so. I did not know it.

Mr. DEWALT. There is one in Pennsylvania that carries freight and express matter from eastern Pennsylvania over into the Jersey side, and that line has already been taken by the Government in the last 10 days.

Commissioner ANDERSON. Is that not a part of one of the steam-line systems?

Mr. DEWALT. No, sir; it is operated entirely by electric power— the Eastern Transit System.

Commissioner ANDERSON. I am only undertaking to deal, as I must deal, with the present systems taken over, as I have had more to do with formulating legislation than with transportation.

The act further provides the President may agree with and guarantee to any such carrier that during the period of such Federal guarantee to any such carrier that during the period of such Federal control it shall receive as its just compensation an income at an annual rate equivalent as nearly as may be to its average net railway

operating income for the three years ending June 30, 1917 (called herein standard return), said net railway operating income for the purposes of this act shall, as to carriers making returns to the Interstate Commerce Commission, be computed from such returns, excluding, however, debits and credits arising from the accounts called in the monthly returns leased road rents and miscellaneous rents. I pause there before I come to the taxes. I ask to have distributed to members of the committee a statement of the accounts in order that the committee might, if otherwise in doubt as to just what is meant by the language used in section 1, which has been a matter of very long and detailed consideration, see precisely what is intended. This sheet, which has been distributed, gives the numbers of the accounts in what is called the "Income statement," the carrier returns, and you will find under the head of "Nonoperating income," items 503 and 504, and following, certain items which seemed to those of us who are trying to frame this act so as to include carrier property and carrier income and exclude noncarrier property and noncarrier income, although they are put in here as nonoperating income. Item 503 is "Hire of freight cars-credit balance." That is included. Item 510, "Miscellaneous rent income," is not, and there is a corresponding item on the other side; these are in the twilight It has been excluded here because the bulk of the property, which is held and from which this miscellaneous rent comes, is, to the best of my information, property which is not strictly or generally carrier property. Undoubtedly there are some items, like properties, carried which have been properly bought for prospective future needs, extending terminals or stations or yards, from which they now get some income pending the use of it for carrier purposes, and other properties which have been abandoned and for sale which they get some use of.

Mr. BARKLEY. Does the President's proclamation include that property you have just spoken of under governmental control?

Commissioner ANDERSON. I do not think you could say at the present moment that the President's proclamation either excludes or includes it. It was necessarily couched in general terms and follows the language of the statute, and takes over the possession, control, and use of carriers.

Mr. BARKLEY. This section of the bill-section 1-then, was based upon the theory that property is not in use by the Government, and therefore should not be considered in compensation?

Commissioner ANDERSON. I should not say that was exactly the theory. I should say it would be more accurate to say of necessity, in dealing with a problem of the magnitude of this, that the President's proclamation was couched in general terms; that when you come to apply it, even for legislation, you are required to make somewhat finer lines than was possible to make in the proclamation; and this is an attempt to define more accurately, by statute, as distinguished from the President's proclamation, that which is carrier property and carrier operation, and therefore ought to be included in Federal control, from that which is noncarrier property and noncarrier operation, and therefore might be left to the control of the corporations themselves, except so far as corporation control is necessarily affected by Federal control.

Mr. BARKLEY. In figuring the net railway operating revenue under the rules of the Interstate Commerce Commission what relation does this property occupy toward the result of that calculation? I mean this miscellaneous property which you said might not necessarily be used as carrier property but which is in the possession of the roads and from which they derive no revenue.

Commissioner ANDERSON. I do not think I get quite your point. Mr. BARKLEY. Was it figured at all in the net result, which you call the net operating revenue?

Commissioner ANDERSON. Called standard return under section 1? Mr. BARKLEY. Yes.

Commissioner ANDERSON. No; it was excluded on both sides, and I was explaining we thought it ought to be excluded on both sides, although it is in the twilight zone, and you could perhaps dispose of that under the de minimis rule, because it involves only a few million dollars on either side, and will not make much difference, either in principle or in financial result, whether you take in the rents, both coming and going, or lease them out. So I hardly think you care to give that much consideration. It is not a large matter.

The other matter which is excluded, leased road rents, those which have been included in the accounts are, in the opinion of those of us who have been drafting this bill, proper disbursements on account of capital. For instance, an operating road gets, we will say, $50,000,000, after paying operation expenses of the ordinary kinds. It pays out $20,000,000, generally in the form of dividends upon the stocks of leased lines. That is, so far as relates to the public, the situation is essentially the same as though they pay that in dividends on their own stock or in interest on their own bonds. A guaranteed stock of a leased line being, of course, closely analagous, in relation to the operating carrier, to bonds which have been issued by it. So that has been excluded, leaving the standard return to bear the expense of the leased road rents as being a capital disbursement or a disbursement on account of capital.

That, then, is the basis upon which the standard return, taken as the proper, the fairest, and the most easily applicable methed-has been figured. I may add that the question of determining the language of that section has been considered with great care with the accounting and statistical department of the Interstate Commerce Commission, and that I am now informed by the head of our Bureau of Statistics that there is no difficulty in making computations from the returns, determining, so far as you can determine anything which is based upon bookkeeping, with accuracy just what revenue is involved. In other words, there is a careful detailed system of accounts in which, in pamphlet form, going back practically to 1907, each account is by name described in substantial detail. And the language used in section 1 applied to those accounts makes perfectly clear to the accountant and to the Bureau of Statistics what they are to include and what they are to exclude.

You will observe with what I am now saying I came down to the latter part of section 1, beginning with line 12, on page 2:

The amount of such standard return as accruing during said period of three years shall be determined by the Interstate Commerce Commission, and the certificate of said commission as to the amount of said net railway operating

income shall. for the purpose of such agreement and guaranty, be taken as final and conclusive.

It follows, as I take it, as a practical matter, assuming that this section were law, that one of the very first things which would be done by the President would be to ask from the Interstate Commerce Commission a certificate (there referred to) of the amount of standard return to which each individual carrier would be entitled if the trade here contemplated were made. That would, of course, be referred at once to the Bureau of Statistics and Accounts, and the returns made by the carriers, checked up in such way as may be thought necessary in order to eliminate every reasonable possibility of error, the basis of the certificate made. And the certificate being made, it would be determinative simply of a single fact upon which the carrier and the President might then proceed to negotiate for a possible trade.

It is not unimportant to keep in mind that the determination of that fact is the determination of no ultimate right. It simply determines a statistical or financial fact, which, being determined, constitutes a part of the basis of negotiation between the President and the carrier. The carrier is not deprived of any right because of that determination of the fact. Indeed it is elementary, of course, that the carriers can not be deprived of their property under the due process of law clause except by trial in court. The compensation must be fixed by trial in court if they so insist.

As a practical matter, however, about 75 of the carriers do 90 per cent of the business. The expectation is, if the basis is sound, fair, and reasonable, that almost every carrier whose condition of health during the past three years has been fairly normal, so that its returns will be fairly normal, will enter into a contract or agreement with the Government on the basis of the standard return, thus limiting litigation to a very narrow field. You will observe, also, at the later part of section 1, that it is provided that:

During the period of such Federal control adequate depreciation and maintenance of the properties of the carriers shall be included as a part of the operating expenses or provided through a reserve fund, in accordance with such principles and rules as shall be determined by the President.

It is a fact that there have been no adequate methods and principles generally applied by the carriers for taking care of depreciation and maintenance, which, of course, are as much a part of operating expenses as the wages of trainmen. Some of them have probably charged too much to operating expenses, at least in some years; others have charged too little. There is no method, I have been able to think of at any rate, by which you can do strict justice as between carriers and carriers and the Government on that subject. The best I have been able to think of is the principle there laid down. It is clear that if the Government is to take these carrier properties over and operate them, into operating expenses should be charged proper maintenance and depreciation. It is also clear that their net earnings, to use a phrase which you will understand, although not used in section 1, for the past three years, proposed to be taken as the basis, does not exactly or accurately reflect their dealings with depreciation and maintenance. But a species of rough justice and practical business common sense seems to us to be set forth in the principle here stated. It is true that this principle may involve giving to certain carriers that have taken inadequate care of depre

ciation during the past, a little more than they ought to have, and to others a little less. That is the line of practical common sense, which on the whole, in dealing with the future, comes the nearest to working out essential justice not only between the aggregate of carriers and the Government, but between the carrier and carrier and the Government.

You will observe, however, going back to line 7, page 2, a statement as to taxes, as follows:

That no Federal taxes in excess of taxes assessed during the year ending June thirtieth, nineteen hundred and seventeen, shall be charged against revenue in computing such standard return.

And the Government is now assessing under the act of last October certain special increased income and excess profits tax called "general war taxes." Section 1 is drawn upon the theory that the owners of carrier property, now taken over for the benefit of the public, should bear their own war taxes, and that therefore there should be charged in as a part of operating expenses, to be deducted before you compute your standard return, only the taxes assessed prior to June 30 last. As I understand it-I am not much up on the details of the income-tax law for various reasons, personal and others the incometax law of October is retroactive. Even so, unless the taxes have been actually assessed before June 30 on the carriers, they would not be paid as a part of the operating expenses, but would remain to be paid. out of the standard return if the carriers should trade with the Government on the standard return.

Now I think that what I have said will be made a little clearer, if you will look, Mr. Chairman and gentlemen of the committee, at this little computation of only three sheets, which I had prepared in the Bureau of Statistics, and which is brief, but I hope full of information. You will find the following on the outside of the pamphlet which I will read:

The net railway operating income for the three years ending June 30, 1917, as defined in H. R. 8172 for the purpose of computing standard return, is for Class I steam roads, $896,259,264. This is based in part on estimates.

It ought not be overlooked, if you find us a little apparently lacking in some statistics, that not very long ago which used to be June 30 has been changed back to the calendar year, so in order to come down to June 30 last we have had to go outside of the ordinary scope of returns now being made. That has made the statistical task a little more difficult than it otherwise might have been.

Class I carriers are those having annual operating revenues of more than $1,000,000, and in the fiscal year 1916, their net operating revenue was 95.87 per cent of the aggregate net operating revenue of Classes I, II, III roads and switching and terminal companies.

For general legislative purposes you therefore see that this class of railroads will be a very practical and pretty nearly an adequate guide in the statistical field.

On this basis the $896,259,264 becomes approximately $935,000,000 for all carriers indicated above. This does not include the Pullman Co., express companies, or private car lines.

The private car lines have not made such reports as to make it possible within the time we had to figure to what extent their returns will increase the aggregate otherwise reached. But the Pullman Co.'s