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JAN 29 1918
BEFORE THE
Interstate Commerce Commission
THE FIFTEEN PER CENT. CASE.
Docket Ex Parte No. 57.
Supplemental Hearings, November 5th-19th, 1917.
GU ATA
ARGUMENT OF GEORGE STUART PATTERSON ON
BEHALF OF THE EASTERN CARRIERS.
PRESS OF ALLEN, LANE & SCOTT, PHIladelphia,
;
3
7
Bureau of Ry.
Reclass. 5-6-30 A.V.M.
BEFORE THE
Interstate Commerce Commission.
THE FIFTEEN PER CENT. CASE.
DOCKET EX PARTE. No. 57.
Supplemental Hearings November 5th-19th, 1917.
ARGUMENT OF GEORGE STUART PAT-
TERSON ON BEHALF OF EASTERN CAR-
RIERS.
OPENING ARGUMENT.
Mr. Chairman and Gentlemen of the Commis-
sion, may I ask your earnest attention to this brief
statement of what are the facts in this matter?
The Eastern carriers are at the present time on
an annual increased basis of cost over 1916 of
$278,000,000 a year, of which $103,000,000 is rep-
resented by labor, $86,000,000 by fuel, and $89,-
000,000 by the cost of materials. This figure of
$278,000,000 does not include anything for the
2
increased taxes which the carriers will have to
pay this year and in the future, approximated,
at the present time, for the Eastern carriers at
$19,000,000 per annum; nor does it include any-
thing to represent the increased cost of the capital
when the carriers shall be able to obtain such
capital; nor is there any increment representing
the increased depreciation charges which will
have to be made in the future on account of the
present increased cost of equipment.
As against this figure of $278,000,000, the Com-
mission have already this year, since January
first, granted increases in rates which will ap-
proximate $97,000,000 or $98,000,000. The in-
creases of the remaining rates which were not in-
creased last spring, and which are now imme-
diately before you today, will probably produce
revenue (on that same basis) of $57,000,000 or
$58,000,000, this leaving $123,000,000, which will
have to be made up by the carriers if they are to
be in a position in which they can meet the events
of today and the necessities of the future.
It will, therefore, be necessary for the carriers
to make application for further increases in rates,
and, as I assume that the Commission would re-
quire that a hearing be had before such increases
were granted, applications will be filed in due
course by the Eastern carriers, asking for further
increases in rates, in order that they may be
3
enabled to secure the revenue which they so sorely
need.
This point I want to make clear and bear in
mind through this entire discussion, viz., that the
completion of the balance of the 15 per cent. pro-
gram will not afford the carriers those revenues
which the public interests demand.
So far as it is humanly possible to look into the
future, it is clear that the present cost of conduct-
ing transportation and the present cost of the
maintenance of these properties will not decrease.
In fact, whatever evidence there is on the subject
would seem to indicate that the basis of cost, in
labor, at least, will increase.
COMMISSIONER CLARK:-Mr. Patterson, you
stated that the carriers were on an increased oper-
ating basis, involving $278,000,000?
MR. PATTERSON:-Yes, sir.
COMMISSIONER CLARK:-And you said what
would probably be realized from the increases in
rates. Now, you have not said anything about
whether or not there is any increased net to offset
any part of the increased costs.
MR. PATTERSON:-I am going to deal specifically
with that question, sir, when we come to the
figures, which show the results of the current nine
months' operation, and also the results of the year
ending June 30, 1917. They show the practical
result of the increases allowed.
4
Now, if it please the Commission, as our armies
increase into the million, as the carriers are called
upon to meet the competition for labor of in-
dustries whose prices are regulated or unregulated,
as the carriers are called on to meet the competi-
tion of the government itself in the labor market,
it is clear that neither the supply nor the efficiency
of labor will increase, and, therefore, for some
time to come, we must, unless the government is
prepared to both conscript labor and to limit its
wage and I do not suggest that it should do
either unless the Government is prepared to do
that, it is quite clear that labor, measured both
by its price and by its efficiency, will substantially
increase in cost to the carrier.
In the case of fuel, the Government fixed the
price originally at $2.00 a ton, which was from 70
to 80 per cent. higher than many if not most, of
the carriers were paying. That price has now
been increased by the Government to $2.45 a ton,
which is higher than the contract price, even at
the present time, of many of the carriers, and
which increase has had this further effect. The
increase from $2.00 to $2.45 a ton carries with it
an increase of wages to the miners, and under the
terms of the contracts of many of the carriers, an
increase in the rate of pay to the miners auto-
matically increases the price of coal to the pur-
chaser. Therefore, so far as the fuel situation is
5
concerned, the only relief that can come at any
time in the future is upon the expiration of exist-
ing contracts, and upon the assumption that, in
the meantime, the government does not again raise
the price of fuel at the mines.
The situation with respect to materials, though
more complex in its operation, is identical in its
results.
The upward tendency of the price of certain
materials seems to have been halted. The prices
fixed by the Government are, generally speaking,
far above the prices paid by the carriers in 1916,
and, therefore, for the purposes of discussion, it is
a conservative statement to take as our estimate
of increased basis of cost, the figures we had last
May, of $89,000,000. There is, however, the testi-
mony in this record of many of the witnesses as
to the higher prices which they have been and are
now paying, at this time.
We cannot therefore, unless we are to blind our
eyes to the plain facts, fail to recognize that the
eastern carriers are on a much higher basis of
operating costs, than they, or any other carriers
have ever been in this country. As Mr. Norris
said on Friday, we are in the position of the manu-
facturer who has had his raw material, namely,
fuel, labor and material raised in price. To meet
that, he must raise the price of his finished pro-
duct-in our case, transportation-and that is
what we are asking you to do.
6
Now, what has been the result of this increased
basis of cost to the carriers? There are three sets
of figures which are available for the use of the
Commission. Those figures are, first, the opera-
tions of the first nine months of the calendar year
1917 as compared to the corresponding months of
the preceding year; secondly, the results of the
year ending June 30, 1917, as compared with
previous years; and, third, the estimate of what
will be the result of the calendar year 1917 as
compared to previous years.
1917 is the year of largest gross revenues in the
history of the carriers. There never has been any-
thing like it. We would naturally expect, as the
result of that tremendous increase in gross, to see,
as we did in 1916, when the same phenomenon
was observed, that there would be a large increase
in net. The contrary is the fact.
In the case of the 38 systems, in the first nine
months of 1917, gross increased $123,000,000,
which should have afforded a substantial increase
in net. The fact is that net decreased $57,000,-
000. In the case of the so-called typical systems,
the Baltimore and Ohio, the New York Central,
and the Pennsylvania, gross increased $70,000,-
000. Net operating income decreased $38,000,000.
When we had this case before you last spring,
you only had the figures available for the first
four months of 1917. The figures for the last
7.
five months are now available, and they show an
increase in gross of $92,000,000 and a decrease in
net of $20,000,000.
· COMMISSIONER ANDERSON:-Mr. Patterson, are
you speaking of the year ending June 30, 1917,
or of the nine months of the calendar year 1917?
MR. PATTERSON:-The nine months of this cal-
endar year. I am speaking now of the calendar
year, that is, the first nine months of 1917.
Beginning with June and continuing up to and
including September, every month has shown a
larger decrease in net operating income, and every
month has shown a smaller increase in total
operating revenues. August, in which were ef-
fective the increased rates granted by the Com-
mission on export grain, export iron and steel,
tidewater coal, lake coal, line coal, ore, and many
of the class rates, but not all, showed an increase
in gross of $20,000,000 and a decrease in net
operating income of $3,750,000. And, mark you,
in each one of these months there has been a large
increase in both the trainloads and the carloads.
THE CHAIRMAN:-That figure for August of
$20,000,000 increase in gross and a corresponding
decrease in net was as compared with the preced-
ing month?
MR. PATTERSON:-The preceding year, sir.
THE CHAIRMAN:-The corresponding month in
the preceding year?
8
the preceding year, yes.
MR. PATTERSON:-The corresponding month in
In other words, the com-
parison is being made on the same basis as is the
comparison contained in the monthly reports of
the carriers to the Commission.
September shows an increase in total operating
revenues of $16,000,000-$16,400,000, if I remem-
ber correctly-and, again, a decrease in net
operating income of $6,400,000.
The October figures are not finally completed,
and are not available as yet to the Commission;
but if the figures for the 38 systems are similar
to the figures for the Pennsylvania Railroad Sys-
tem-and there is no reason to doubt but that
will be the fact-you will find that October will
also show large increases in gross and large de-
creases in net.
Now, you will remember that a few minutes ago
I said that in these first nine months the operat-
ing revenues increased $123,000,000. During that
same period of time—and I am speaking now of
the 38 systems-the transportation expenses
alone—primarily, of course, labor and fuel-for
the 38 systems increased $127,000,000, and in the
cases of three systems the total operating reve-
nues increased $71,000,000 in that same period,
and other transportation expenses increased $73,-
000,000. That is to say, as a practical matter,
though, of course, it is not technically accurate,
9
the increase in revenue which has been derived
not only from the increased business, but also
from the increase in the rates granted by this
Commission, has been entirely taken up and en-
tirely absorbed in the cost of transportation, leav-
ing nothing from either increased business or in-
creased rates to contribute to the cost either of
maintaining these properties or to the cost of
procuring the necessary capital to make additions
and betterments.
It is not necessary to refer in detail as to the
increased items of particular costs in transporta-
tion expenses, because that has been covered at
length in previous hearings and in this hearing;
but I want to call your attention to one thing,
and that is that labor, not the four Brotherhoods,
not the labor which was affected by the Adamson
Act adjustment, but other labor, has increased
in cost to the carriers $26,000,000 since the hear-
ing took place in May.
Within the last month the Pennsylvania System
has increased its wages to the amount of $7,000,-
000 to telegraph operators, maintenance of way
employes, machinists, employes in the motive
power department, clerks in the transportation de-
partment and accounting department, &c.
The Baltimore and Ohio and the New
York Central, though this fact does not ap-
pear upon the record, have, within the last week,
made another very large increase in their wages
10
to employes of the same general description. My
impression is, although it is only an impression,
that in the case of the New York Central it will
amount to something like $4,000,000 a year, and
in the case of the Baltimore and Ohio to some-
thing like $2,500,000 a year.
The true significance, however, of the results
of the first nine months' operation is not disclosed
by the bare statement that net operating income
has decreased $57,000,000, because, if it be a fact
that during that period those properties have
not been maintained to the extent that they
should, it is perfectly clear, that to the extent of
the deferred maintenance, the net operating in-
come and the net corporate income is overstated.
The maintenance figures which are available
for the first nine months on the 38 systems-and
we have substantially the same result for the
three systems-show that there has been an in-
crease in total operating revenues of approxi-
mately 9 per cent. and an increase in maintenance
of way expenditures of 6.3 per cent. Of course,
operating revenues have increased not only by
reason of the increase in traffic, which factor
would necessarily cause an increase in mainte-
nance expenses, but operating revenues have also
increased owing to the increases in rates which
have been allowed by the Commission, and that
factor, therefore, would not cause a corresponding
•
11
increase in the maintenance expenses. Therefore,
we cannot expect, nor do we suggest that where
there have been increased rates, the maintenance
ratio should increase in the same proportion as
the ratio of total operating revenue; but there is
a disparity of 50 per cent., one being 6 per cent.
and one being 9 per cent., in the ratio of increase,
and when we remember also—and this, after all, is
the all-important thing that the dollar expended
for maintenance in 1917 does not purchase either
the labor or wages which the dollar expended in
1916 purchased, it is quite clear that these per-
centage figures show that the maintenance of
these properties is not being kept up to its proper
standard.
THE CHAIRMAN:-Mr. Patterson, do you in-
clude in that maintenance of equipment?
MR. PATTERSON: No, Mr. Chairman; I am
speaking first only as to maintenance of way
THE CHAIRMAN:-Only as to maintenance of
way?
MR. PATTERSON:-Yes; maintenance of way,
that is all.
THE CHAIRMAN:-And in your revenues are
you including passenger revenues?
MR. PATTERSON:-I beg your pardon?
THE CHAIRMAN:-In your revenues, the figures
of revenue, are you including passenger revenue?
12
MR. PATTERSON:-The figures of the total in-
crease?
THE CHAIRMAN:-Yes.
MR. PATTERSON:-Oh, yes, sir.
THE CHAIRMAN:-Yes?
MR. PATTERSON:-Undoubtedly.
THE CHAIRMAN:-Has that revenue fallen off
through the cutting out of passenger trains?
MR. PATTERSON:-No, sir; there has been a tre-
mendous increase of passenger revenues. I am
speaking for the Pennsylvania on that, and I as-
sume that is so for all the lines. There has been
a tremendous increase.
THE CHAIRMAN:-You have been carrying more
poeple on fewer trains?
MR. PATTERSON:-Yes, sir; and I think it is a
very serious problem, though I do not speak with
any authority, as to whether the passenger busi-
ness is not growing to such an extent as to be a
positive detriment. I do not mean a detriment
to the railroads, but I mean a detriment to the
interests of the people.
COMMISSIONER MCCHORD:-Has any thought
been given to the question of increased passenger
rates?
MR. PATTERSON:-I have heard that discussed
a number of times. There are two practical diffi-
culties in the way of that. There is, first, the dif-
ficulty of securing the increases through the state
13
authorities. There are the 2-cent fare laws in
certain states. You are more familiar than I am
with the litigation that has grown out of those
laws. Your Commission suggested in 1913 that
the passenger rates be readjusted, that is, that
the passenger business was not bearing its full
share of the expense of transportation, and efforts
were made by the Eastern carriers to secure addi-
tional revenues from the passenger service. We
have secured those revenues, to an inadequate
extent and in part only. In one particular state
up to the last, I think, two months, or perhaps
three months, the action of that state has pre-
vented those increases from going into effect and
has not only been to deprive the carriers of the
increase in rates on the state business, but, by
reason of the geographical location of the state
itself, has interfered substantially with the col-
lection of the increased revenues on interstate
business.
There is also the second question which I think
everyone would have to very carefully consider in
connection with that passenger situation, and that
is the general feeling amongst people-it may be
an entirely mistaken feeling; it may not be
a proper one, but it is there-of unwillingness
to pay increased passenger rates, even though, if
they are intelligent people, they must realize that,
in many cases they must pay the increased freight
14
rates in the increased prices of commodities.
When however, they are called upon to pay di-
rectly through the passenger rate instead of in-
directly through the freight rate, there is bitter
opposition. That is another question which would
have to be considered, I do not mean to suggest
that it is a controlling reason; but I may say to
you, Mr. McChord, that that question is being
given careful consideration.
COMMISSIONER AITCHISON:-When you speak
of proposed advances yet to be asked for, you do
not contemplate the passenger advances at the
present time?
MR. PATTERSON:-Oh, no. These advances we
are talking about now are simply a completion
of the 15 per cent. program.
COMMISSIONER AITCHISON:-But do I under-
stand, when you said that you would have to come
back for further advances, that you did not have
in mind that you would have to come back to us
for passenger fare advances?
MR. PATTERSON:-I cannot state positively
whether they will or not. I would say probably
not. I do not know what might happen.
THE CHAIRMAN:-In your passenger revenues,
do you include that derived from the movement
of troops or their impedimenta?
MR. PATTERSON:-I presume so, but I do not
know. How about that, Mr. Shriver?
1
15
MR. SHRIVER:-They are included up to the
date of the closing of our statistics.
THE CHAIRMAN:-And you also include it
whether it has been paid or not?
MR. PATTERSON:-Oh, yes. I beg your pardon.
I thought you meant as to its apportionment be-
tween freight and passenger.
THE CHAIRMAN:-I did. I asked you two ques-
tions.
MR. PATTERSON:-It is all going into the freight
revenue, I presume, as to the impedimenta, if car-
ried on a passenger train. It does not if it is
carried on a freight train?
MR. SHRIVER:-No.
MR. PATTERSON:-Now, these maintenance fig-
ures which I have given you, and which are de-
rived from an examination of the records for the
first nine months of this year, are confirmed in
Bureau Exhibit No. 1, page 20, showing a com-
parison of the maintenance ratio for the year end-
ing December 31st, 1917, with the maintenance
ratios of the years ending June 30th, 1916, and
June 30th, 1915, and there is also in that exhibit
a comparison for those same periods, of the actual
work in maintenance of way done by the carriers
during the first nine months, and which will be
shown during the last three months of this year,
1917. Those figures show that there has been a
decrease in the installation of ballast of 48 per
16
cent., in ties of 1.7 per cent., and in rails of 36
per cent.
The evidence contained in these figures, remem-
bering also, when we come to talk about the
maintenance ratio, the tremendous decrease in
the purchasing power of the dollar, is corrob-
orated by the testimony of Mr. Rea, Mr. Willard,
Mr. Elliott, and Mr. Hobbs, all of whom testified
as to the failure on the part of their respective
companies to keep up their standard of mainten-
ance of way and maintenance of equipment, the
maintenance of equipment figures Mr. Chair-
man, as I recall it, being an increase of about 11
per cent. as compared to an increase in total
operating revenue of 9 per cent. These four gen-
tlemen testified as to the facts with respect to
their various properties, Mr. Rea estimating that
the amount of the deferred maintenance on the
Pennsylvania was $5,000,000; Mr. Willard esti-
mating for the Baltimore and Ohio from $1,000,-
000 to $1,500,000; Mr. Elliott estimating $800,000
for the New Haven, and Mr. Hobbs estimating
$320,000 for the Maine Central.
THE CHAIRMAN:-That being an estimate of
the annual rate?
MR. PATTERSON:-No, sir; that is an estimate of
the amount of the deferred maintenance in these
properties; that is to say, that is the estimate of
17
the amount of money that should be expended by
these companies at the present time.
MR. BOND: That is an estimate only for nine
months.
MR. PATTERSON:-I know-in order to bring
the properties up to their proper standard.
Bearing in mind the specific finding by this
Commission that these properties were not over-
maintained in 1916, it is quite clear that they are
under-maintained at the present time, and that
that maintenance must be made up at some time
in the future, and it ought to be made up as soon
as possible, because, as Mr. Willard pointed out,
the question of getting men and materials is
going to grow more difficult every day.
Our second comparison so as to show this in-
creased basis of cost upon which we are operating
is the figures for the year ending June 30th, 1917.
Those figures show that there has been an in-
crease in total operating revenues for the 38 sys-
tems of $154,000,000, and that there was a de-
crease in net operating income of $45,000,000,
notwithstanding an increase in property invest-
ment of $200,000,000, and the return on property
investment is lower than the return for the years
1906, 1907, 1910 and 1916, and identical with or
higher than the returns for any of the other four-
teen years.
18
The average dividend paid by the 38 systems
during the year ending June 30th, 1917, was 4.49
per cent., which is less than the average dividend
paid by those same railroads in six of the preced-
ing eighteen years; and one thing we should
always bear in mind, that, measured by the pur-
chasing power of money, the dividend of 4.49 per
cent. paid in that year ending June 30th, 1917,
was lower than any dividend which has ever been
paid by these companies at any time since 1900.
I have not gone back of 1900, and I do not know
whether it is lower than the dividends paid prior
to that time.
In the case of the combined three systems, we
have substantially the same result as in the case
of the 38 systems, with the exception that the re-
turn on property investment in the case of the
three systems is lower than in eight of the preced-
ing eighteen years, instead of in four as in the
case of the 38 systems.
COMMISSIONER ANDERSON:-Was that 4.49 per
cent. dividend on capital stock or return on prop-
erty?
MR. PATTERSON:-Dividend on capital stock.
The return on property was 5.71 per cent., I think.
COMMISSIONER ANDERSON:-How much of that
$200,000,000 was derived from new capital fur-
nished, and how much from excess earnings?
19
MR. PATTERSON:-I can tell you that, when I
reply. I have not got that on my notes. It ap-
years on the face of the exhibits, and when I come
to make my reply I will deal with that question.
The carriers have prepared an estimated income
account for the calendar year 1917 as compared
with the previous years. That estimated income
account shows that there will be an increase of
$161,000,000 in total operating revenues in the 38
systems, and notwithstanding that tremendous in-
crease in gross, there will be a decrease in net
operating income of $81,000,000.
So far as the Baltimore and Ohio Railroad Com-
pany is concerned, under its present basis of ex-
pense and present basis of rates, that company, at
the end of the calendar year, if I understand Mr.
Willard's testimony correctly, will not only not
have any surplus, but will not even earn its pres-
ent moderate dividend of 5 per cent.
The net corporate income of the Pennsylvania
System will, if the estimate is correct, have fallen
on December 31st, from $82,000,000 during the
calendar year 1916 to $61,000,000 during the cal-
endar year 1917, and after the payment of an
average dividend of 6.48 per cent. will have a
surplus on total capital obligations of $1,300,000,-
000, of only 1.6 per cent.
The New York Central net corporate income will
have fallen from $74,000,000 as it was in 1916 to
20
$39,000,000 in 1917, and after the payment of its
average dividend of 52 per cent., will have a
surplus on total capital obligations of $1,400,000,-
000 of only 1.3 per cent.
Now, what I have said to you is in no sense an
argument. It is a mere statement of facts which
leads irresistibly to the conclusion that the public
interests—yes, even the public safety-demands
that these railroads be permitted to increase their
rates.
Those facts may be summarized in this way:-
First, an increased basis of cost of $277,000,000,
as against an increased basis of revenue of $97,-
000,000.
Secondly, persistent decreases in net operating
income, notwithstanding tremendous increases in
total operating revenues, and substantial, if not
large increases in property investment.
Third, a decrease in the supply of efficiency of
labor, a situation which is being intensified daily,
and which, if persisted in, will increase the cost of
operation in the future to a greater extent than
it has in the past.
Fourth, the existence of deferred maintenance
in these properties at a time when the public
interest demands more than ever that these prop-
erties should be maintained at their highest stand-
ard.
21
Fifth, an inability on the part of the carriers to
sell stock, thus weakening, and seriously weaken-
ing, the general financial structure of the carriers.
Sixth, inability to make improvements which
are demanded by the traffic of today, and which
will be demanded by the traffic of tomorrow.
I have not said anything about the close and
intimate relation which this rate increase bears to
the successful prosecution of the war. That mat-
ter has been dealt with at length by Mr. Willard
and by Mr. Warburg, who are far better qualified
than I am to speak authoritatively on that subject.
They have told you, in substance, that increased
rates are necessary in order to aid the Government
in the successful prosecution of this war.
to
There is one thing, however, which I do desire
say in conclusion, and I desire to say it with all
the earnestness that lies in my power, and to say
it to you who are so keen to do what is the right
thing, and that is this, that the question of in-
creased revenues to the Eastern carriers has
ceased to be a question of economics, and has be-
come now a vital part of the entire problem of
national defense.
THE CHAIRMAN:-Mr. Patterson, before you
take your seat, let me ask you about the deferred
maintenance of equipment. Is there any substan-
tial falling off in the maintenance of equipment?
MR. PATTERSON:-There is some failure to re-
22
shop and failure to paint. That is dealt with at
length in the testimony of Mr. Rea. You will note
that the increase of total operating revenues is
9 per cent. with an increase of 11 per cent. in
maintenance of equipment expenses, but you will
remember that the prices of labor and materials
are at least 25 per cent., and probably 30 per cent.,
higher than they were in 1916. That corroborates
the testimony of Mr. Rea as to the failure on the
part of the carriers to shop their equipment with
the regularity they have in the past. That, of
course, will have to be made up in the future.
The unfortunate part of it is that the more it is
postponed, the more expensive it gets, and that
progressively.
THE CHAIRMAN:-Are there not fewer bad
order cars on the Pennsylvania now than usual,
and than is ordinarily the case?
MR. PATTERSON:-I gave some figures as to the
bad order cars. As far as equipment is concerned,
it is not a question so much of bad order. It
is more largely a question of failure to paint.
The figures which we were asked to file show, sir,
that the average number of freight locomotives
in shop or awaiting shop is 14.2 per cent., Sep-
tember, 1917, over September, 1916, and the aver-
age number of freight cars in shop or awaiting
shop is an increase of 44.86, or a percentage of
increase of 24 per cent.
23
THE CHAIRMAN:-Those figures are for the
Pennsylvania?
MR. PATTERSON:-Yes, sir; and they are in evi-
dence.
THE CHAIRMAN:-Whom shall we hear next,
Mr. Patterson?
MR. PATTERSON:-As far as the carriers are
concerned, that is our opening. If any questions
should come up about particular commodities,
there will be a reply made to them.
24
CLOSING ARGUMENT OF MR. GEORGE
STUART PATTERSON, ON BEHALF OF
THE CARRIERS.
MR. PATTERSON:-With the permission of the
Commission I will just take a few moments to
refer in a desultory way to one or two sugges-
tions that have been made here.
In reply to Commissioner Anderson's question,
I beg to say the property investment, 1917 over
1916, is $200,390,000, of which $39,840,000 was
paid out of income. The balance was paid out of
capital. The increase during that period of time
in total capital obligations was a little over $120,-
000,000, or $120,965,000. Those figures, of course,
cannot be compared, because the capital out of
which the improvements were made has been is-
sued either prior or subsequent to making the
improvements, and therefore it does not neces-
sarily come within the year. In other words, the
$120,000,000, plus the $39,000,000, do not make up
the $200,000,000.
COMMISSIONER ANDERSON:-That means about
$80,000,000 gone in from earnings?
MR. PATTERSON:-No, sir; it means $39,840,000.
I understood Mr. Thorne to say that the Penn-
sylvania System had, subsequent to 1910, about
$350,000,000 out of income
MR. THORNE:-1907.
MR. PATTERSON:-1907 ?
25
MR. THORNE:-And it was not just out of in-
come
MR. PATTERSON :-Oh, I beg your pardon; it in-
cludes everything.
MR. THORNE:-Out of earnings.
MR. PATTERSON:-Then it is from earnings, in-
come or surplus?
MR. THORNE:-It is from earnings through in-
come, surplus and otherwise. Mr. Rea and the
rest of you conceded it when Mr. Rea was on the
stand.
MR. PATTERSON:-Our figures are $185,000,000.
I do not propose to go into any discussion as
to the legal right of the carriers, to earn a return
on the amounts expended in property investment
out of earnings or out of surplus. That matter
is fully covered in the briefs which were filed in
the valuation matter. It has been decided about
thirty times by the different courts of this coun-
try, always one way. It is being decided that
same way almost daily by different state commis-
sions.
I find that I understated the testimony in con-
nection with deferred expenditures on equipment,
and I will ask the stenographer to note a refer-
ence to Mr. Willard's testimony on page 6344.
I may also say that the suggestion as to de-
ferred maintenance on my part never contained
the slightest intimation, and no intelligent person
26
could consider that it did, that there was no
money available to make those expenditures. The
reference to the deferred maintenance was simply
for the purpose of showing, which is a fact, that
the nine months' figure of net operating income
was necessarily overstated to that extent.
The suggestion has been made that Congress
can deal with this situation by repealing the pool-
ing provisions of the anti-trust law and of the
Interstate Commerce Act, or by providing for the
loaning of money to the carriers. Of course, as
has already been pointed out by several members
of the Commission, that will not help the labor,
material or fuel account.
COMMISSIONER AITCHISON:-Just a minute on
that, Mr. Patterson. With respect to the pooling
provision, may I ask what the attitude of the
carriers is on that?
I
MR. PATTERSON:-I really do not know. I have
no authority to speak for all the carriers.
would be very glad to tell you what my idea is.
As to the relation of surplus to total capital, it
is perfectly futile to consider the capital stock
alone, because then you might have two companies
with exactly the same total capitalization, while
one of them has a very high percentage of stock
and the other a very low percentage of stock.
You would have there for each carrier, a different
class of surplus, as expressed in items of percent-
27
age.
The only measure, of course, is the total
capitalization
MR. THORNE:-Can you name one financial
house that uses it?
MR. PATTERSON:-Some suggestion was made
here that net earnings were 30 per cent. higher
in September than in April. The percentage is
also very much higher than in February; but that
will not help the situation if we are correct in our
belief that the net return at the end of the cal-
endar year 1917 will only be 5.2 per cent., which
is considerably less than the danger point indi-
cated by the Commission in the 1914 case.
Mr. Reynolds referred in his argument, as I
understood him, to the competition that his
clients have with the artificial ice men. Of course
the artificial ice man has had the price of his ma-
terial tremendously increased, such as ammonia
and coal, and he has also had his freight rates on
coal and, I presume, on ammonia increased.
What we are trying to do in this particular pro-
ceeding is to bring up the remaining one-third-I
use those figures roughly-of the traffic which was
not increased last spring. There does not seem
to be any particular reason why they should not
pay the same rate or be subject to the same in-
crease as that traffic which was raised last spring.
As I have already said once before, this morn-
ing, this increase will not be sufficient to meet the
28
situation, and the carriers will be obliged to make
applications to file tariffs asking for further in-
creases; and in so doing they will pursue the plans
which they have pursued heretofore and which
they believe meets with the entire accord of the gen-
eral shipping public and the approval of the
country, by asking for a general percentage in-
crease on class and commodity rates except in re-
spect to those commodities where, for reasons
which are well known to the Commission, it is
necessary to make an increase in cents per ton.
I want to say just this one word in conclu-
sion, and that is that there has been no sugges-
tion, on the part of the carriers, or on the part
of anyone representing the carriers, that the car-
riers desire to make any profits out of this war.
What the carriers do desire, however, and what
the carriers insist is the right thing to do, is that
the general burdens of the war shall be universal-
ized; that they shall not be localized, and par-
ticularly, when the effect of the localization of
that burden is as injurious to the Government
and as injurious to the general interests of this
country, as it is, to the interest of the carriers
themselves.
COMMISSIONER ANDERSON:-I would like to ask
of you substantially the same question that I asked
Mr. Throne. There has been a lot of evidence
put in here as to the attitude of the investor as
29
distinguished from what you might call the in-
ternal economic condition of the carriers. In the
last sentence of your remarks you said, in sub-
stance, that the question was not an economic
question as affecting the condition of the carriers,
but was a question of general public interest. I
did not quite understand what you meant, and
I would like to get clear in my mind before the
hearing is closed your attitude and that of the
carriers whom you represent on the distinction
between what I might call the stock market credit
and the sound condition of the carriers apart
from credit and additions and improvements
which are obviously necessary and ought to be
provided out of new capital.
MR. PATTERSON:-I do not think I understand,
sir, the specific question that you want me to
answer.
COMMISSIONER ANDERSON:-Do you think that
the rates now existing, taking into account the
past nine months and the reasonable probabilities
for the future apart from the conditions of credit
and the getting of new capital for additions and
improvements, are adequate to keep the carriers
in sound condition, carrying the fixed charges,
including proper allowance for depreciation and
obsolescence, or are they inadequate?
MR. PATTERSON:-I am absolutely certain-it is
the only thing of which I am as certain as of the
30
mere physical fact of existence-I am absolutely
certain that the existing rate base is not anywhere
near adequate to take care of the carriers in
the conditions which you have described, and that
it would be a great public menace to have that
situation continue. I have not the slightest doubt
about it.
COMMISSIONER ANDERSON:-You regard this rec-
ord as demonstrating that if the carriers did not
need another dollar for additions and improve-
ments and had no occasion to consider the at-
titude of the free man with the free dollar in his
pocket that the present rates are inadequate to
keep the existing facilities in proper and efficient
operation and pay reasonable dividends and fixed
charges?
MR. PATTERSON:-Absolutely and unqualifiedly.
COMMISSIONER ANDERSON:—I wanted your at-
titude on that.
COMMISSIONER
AITCHISON: You have men-
tioned several times, Mr. Patterson, the necessity
for a further application for increases. That was
suggested to us at the informal conference which
we had here as being of considerable amount.
MR. PATTERSON :—Yes, sir.
COMMISSIONER AITCHISON:Do you not think
it would be well if you are prepared to give the
Commission some idea, and the country some
31
idea, of what further increases you believe are
necessary-something more definite?
MR. PATTERSON:-Of the amount necessary?
COMMISSIONER AITCHISON :—Yes.
MR. PATTERSON:-Well, the figures are jumping
by leaps and bounds almost every day. We have
had within the last week $7,000,000 more added to
the Baltimore and Ohio and the New York
Central. We have not got yet the increased price
of coal that is going to come in in November
and which will run from 30 to 45 cents a ton.
COMMISSIONER MCCHORD:-And if it continues
to come in by leaps and bounds, day after day,
then the rates must be raised accordingly.
MR. PATTERSON:-They must be enough to take
care of the
Do
COMMISSIOER MCCHORD:-The sky is the limit.
you think the rates must go to that extent?
MR. PATTERSON:-The rates must go just as
high as the increased costs go. That is the only
way in which the carriers can get the revenue.
COMMISSIONER AITCHISON:-Are you prepared
to give us any idea as to when your next applica-
tion will be and whether it will be a 15 per cent.
application or 20 or upwards, in a general way?
MR. PATTERSON:-No, sir. I suppose there can-
not be any question that the application would
have as a minimum a 15 per cent. general increase
32
on class and commodity rates, and possibly 10
cents on coal, coke and ore.
COMMISSIONER AITCHISON:-That is, 15 per
cent. of the increased rates?
MR. PATTERSON:-15 per cent. of the increased
rates. And those figures will not come anywhere
near-will not approach in the slightest degree,
the increases which the other government price
fixing boards have made within the last month in
Washington.
4
Gaylord Bros.
Makers
Syracuse, N. Y.
PAT. JAN. 21, 1908
UNIVERSITY OF MICHIGAN
3 9015 07375 3892
..
i
!
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