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 MAR 26 1918 
 
 FEDERAL OPERATION OF TRANSPOR- 
 TATION SYSTEMS 
 
 EXTRACTS FROM HEARINGS 
 
 BEFORE THE 
 
 COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE 
 OF THE HOUSE OF REPRESENTATIVES 
 
 SIXTY-FIFTH CONGRESS 
 
 SECOND SESSION 
 ON 
 
 H. R. 8172 
 
 ■OT rim 
 
 '< XT T \7 .^ » ;*. T T " 
 
 STATEMENT OF 
 
 HON. ALBERT M. TODD 
 
 PRESIDENT OF THE PUBLIC OWNERSHIP LEAGUE 
 OF AMERICA 
 
 JANUARY 29. 1918 
 
 Cl 
 
 i 
 
 JjV^ ' FOR ADDITIONAL COpIIBS ADDRESS 
 
 Public Ownership League 
 "^' of America 
 
 Westory Building, Washington, D. C. 
 
 WASHINGTON 
 
 GOVERNMENT PRINTING OFFICH 
 
 1918 
 

 COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, 
 
 House of Repbesentatives. 
 
 THETUS W. SIMS, Tennessee, Chairman. 
 
 FRANK B. DOREMUS, Michigan. 
 DAN V. STEPHENS, Nebraslsa. 
 ALBEN W. BARKLEY, Kentuclcy. 
 SAM RAYBURN, Texas. 
 ANDREW J. MONTAGUE, Virginia. 
 PERL D. DECKER, Missouri. 
 CHARLES P. COADY, Maryland. 
 ARTHUR G. DEWALT, Pennsylvania. 
 HARRY H. DALE, New York. 
 JOHN S. SNOOK, Ohio. 
 JARED Y. SANDERS, Louisiana. 
 
 W. Alta Tatlob, OJerh. 
 n 
 
 JOHN J. ESCH, Wisconsin. 
 EDWARD L. HAMILTON, Michigan. 
 RICHARD WAYNE PARKER, New Jersey. 
 SAMUEL E. WINSLOW, Massachusetts. 
 JAMES S. PARKER, New York. 
 CHARLES H. DILLON, South Dakota. 
 BURTON E. SWEET, Iowa. 
 WALTER R. STINESS, Rhode Island. 
 JOHN G. COOPER, Ohio. 
 
'^ 
 
 Public OwBsrsliip leape of America 
 
 Albert M- To<id, Pres-oent, 
 
 Westory Building. l--^14ihSte 
 
 Washington ^ '- 
 
 STATEMENT OF HON. ALBERT M. TODD, PRESIDENT OF THE 
 PUBLIC OWNERSHIP LEAGUE OF AMERICA. 
 
 January 29, 1918. 
 
 Gentlemen, in appearing before you to represent, so far as I may, 
 the interests not only of the Public Ownership League of America 
 but the citizenship at large of our country from whose industry t^ 
 means have been provided for building and maintaining all of (mr 
 transportation and other public utilities, I desire first to thank you 
 for the privilege you have so kindly accorded. 
 
 At no time in the history of our Nation or the world has legislation 
 been enacted of such colossal economic interest as that now before 
 
 915 
 
 371589 
 
916 FteDEkvL OPKflATION OF TRANSPORTATION SYSTEMS. 
 
 Cotigress^,' ^^Mcli .will so vitally affect the political institutions of our 
 country and the happiness and welfare of its people. 
 
 In placing my views before you I shall, on account of the limitations 
 of time, not enter in an academic argument, but ponfine my remarks 
 /^largely to the financial aspects of the question. (I will only briefly 
 state that pubUc ownership as well as operation of all those utiHties 
 and natural resources which by their nature are essentially monop- 
 olies, is one of the most natural functions of Government, and is 
 fundamental to justice, equality of opportunity, and democracy^ ^ 
 "This has been my belief for more than 30 years, and has been con- 
 stantly confirmed by study and observation in many foreign coun- 
 tries as well as in our own. In reference to this, I will briefly state 
 my experience in the genuinely democratic Republic of Switzerland. 
 
 Traveling through Switzerland, one is immediately impressed with 
 the industry, dignity, and liberty-loving spirit of the people, evi- 
 denced by their every act and word. The locomotive engineer, the 
 conductor, the fireman, the brakeman, and the men who construct 
 and maintain the tracks know they are not mercenary employees, 
 but are part owners of the railways and all the public works, and as 
 such take a just pride and interest in their duiies and labors. Under 
 this system, strikes or lockouts are unknown and impossible, for each 
 employee realizes that in rendering his best service he is rendering a 
 service to the State and, as a citizen of the State, to himself. It will 
 thus be readily seen how with every employee giving his best possible 
 endeavor and each setting an example to those operating the other 
 utilities (in all of which each ''citizen-employee'' has a personal 
 interest), the State secures much higher efficiency and service, with 
 proportionate decrease in cost to the public. As the fictitious 
 salaries paid in this country to presidents of the public-service com- 
 panies, whose chief interest is to absorb the earnings of the road are 
 unknown, and all officers and employees are coworkers under civil- 
 service rules — ''soldiers for the common good" — private graft and 
 plunder is impossible and unknown. 
 
 Illustrating the results under this system, I purchased this ticket 
 which T show you, good for 42 days continuous or intermittent rides 
 at the pleasure of the holder, over any and all of the railways and 
 steamboats, for the equivalent of $27, or about 67 cents a day. 
 Tickets are also issued for 1, 3, 6, and 12 months at much lower rates; 
 and yet, though these roads, in many places tunneled through the 
 mountains or skirting precipitous cliffs, cost a miUion dollars per mile 
 to construct, the results are so highly satisfactory that the Kepublic 
 is constantly building extensions as rapidly as possible. 
 
 Results in efficiency and economy equally marvelous as compared 
 
 with our corporate-owned systems prevail in the telegraph, telephone, 
 
 express, and street railways; and one wonders how the American 
 
 people, can be induced in the face of the reckless speculating and 
 
 plundering of our public utilities by so-called ''high financiers," 
 
 t£ permit the functions of their life to be thus controlled and abused. 
 
 W seems incredible that intelligent men engaged in manufacturing 
 
 and other legitimate business should not join the farmers and wage 
 
 reamers in the demand for public ownership. Under the present 
 
 I corporate system the rule of the railways is to charge "all the com- 
 
 I modity will bear," thus limiting both the profits of the producers 
 
FEDEHAL OPERATION OF TRANSPOKTATION SYSTEMS. 917 
 
 and the power of the consumers to buy; the transportation com- 
 panies thus levying the largest tax possible without entirely kiUing the 
 industry. 
 
 I will now turn to the practical questions involved in the bill under 
 consideration. 
 
 The President of the United States, by proclamation issued pur- 
 suant to the authority vested in him by Congress, has recently taken 
 over the railroads of the country for operation by the Federal Gov- 
 ernment during the continuance of the war, in which wise and 
 patriotic act he has had the support and approval of the entire 
 Nation; and as Congress is now legislating respecting the compen- 
 sation to be paid the railroads, and the various conditions mider 
 which these systems are to be operated, it is highly important that 
 in the solution of this question the wisest possible action by Congress 
 be secured. 
 
 We who believe that the public ownership and operation of dll 
 public utilities which by their nature are necessary to the welfare 
 and happiness of the people are natural governmental functions, 
 also believe that the rightful solution of the question is not based 
 merely upon the operation of these utilities during the period of the 
 war. We look forward to the time — which we hope is in the very 
 near future — when through the patriotism of our citizens and the 
 heroism of our soldiers, victory shall come to our arms, bringing a 
 peace that shall be wise and just to all mankind as the frait of the 
 great sacrifices America and her allies are making in this world 
 struggle. Among the fruits of such peace those of us who believe 
 in equality of opportunity, civil liberty, and democracy, hope that 
 public ownership and operation of public utilities and natural 
 resources will be among our greatest achievements. 
 
 These several circumstances unite to make the present year 
 momentous with respect to the development and solution of trans- 
 portation problems. Nothing like the present situation has been 
 seen before in the history of the world. No governmental under- 
 taking outside of the great war itself approaches in magnitude either 
 the valuation or the operation of the approximately 250,000 miles 
 of railroads in the United States. The welfare of the country is so 
 obviously bound up with the efficiency of its transportation system 
 and the prosperity of the coimtry is so largely dependent upon the 
 reasonableness of transportation charges that it is needless to dwell 
 upon these general aspects of the problem. But very few people 
 outside of the railroad men themselves appear to realize the tre- 
 mendous importance of the issues now being determined by the 
 President, Congress, and the Interstate Commerce Commission with 
 respect to the valuation of railroads; the fixing of the compensation 
 to be paid them during the period of governmental operation and 
 private ownership; and with respect to the determination of the 
 just and fair price to be paid by the Government when it shall pro- 
 ceed to Government ownership as well as operation. 
 
 The Public Ownership League of America has been organized for 
 the purpose of furthering the policy of Government ownership and 
 operation of public utihties, including transportation systems. It 
 is not blind, however, to the dangers arising out of the stress and 
 strain of these terrible times. It realizes that the mere form of 
 
918 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 Government ownership or operation will not in itself guarantee to 
 the people of this country tne benefits which they are entitled to 
 receive from the full recognition and performance of the transporta- 
 tion service as a public function. The success of governmental 
 operation of the railroads after the war is over will depend in large 
 measure upon the financial obligations which the Government 
 assumes in connection with their acquisition. Many of the great 
 railroad systems of the country have been exploited and robbed by 
 their managers over long periods of years in ways that have created 
 national scandals unparalleled in the world's history. In this man- 
 ner many of the roads have at different times been brought to bank- 
 ruptcy or to a financial condition verging upon it by the studied 
 acts of their officials, who, having been intrusted with the manage- 
 ment, have betrayed that trust for their private profit. The Public 
 Ownership League and the thoughtful public at large believe that 
 it would work a gross injustice to the Nation to take the railroads 
 as they are looted and over capitalized, and make good to the owners 
 all of the wicked and foolish speculations of the past, without respect 
 to the actual value of the properties now devoted to raihoad pur- 
 poses. It is not our desire to be destructive in our suggestions as 
 to governmental policies, but rather to be constructive in the best 
 sense, with the future success of Government ownership and opera- 
 tion constantly in view. 
 
 Few people outside of Washington realize the enormous one- 
 sidedness of the proceedings before the Interstate Commerce Com- 
 mission and the committees of Congress. The railroads represent 
 an investment of many billions of dollars and are naturally in a 
 position to employ and do employ great numbers of the most skillful 
 attorneys to take possession of the capital and try to enforce their 
 views and their will upon the governmental autnorities having to 
 do with the determination of the great problems at issue. The 
 league believes that the future welfare of the people of the United 
 States will be very greatly affected by the decisions now about to 
 be made with respect to two chief problems, as follows : 
 
 1. Tlie extent o^ the compensation to he paid hy the Government for 
 the use of the railroads during the period oj private ownership and 
 Government operation. — The primary importance of this problem 
 is not in the amount of compensation or rental that may be paid 
 during the continuance of the war or for the brief period of years 
 during which the scheme of private ownership and governmental 
 operation continues, but in the effect that the payment of such 
 compensation and the agreements made with respect to it have 
 upon the ultimate purchase price of the roads when their ownership 
 passes from private hands to the Government. The establishment 
 of a fixed compensation or rental to continue so long as governmental 
 operation of privately owned roads continues will naturally have 
 the effect of determining the earning power of the property from the 
 
 E resent time on to the time when the purchase price therefor is to 
 e fixed, and if the compensation or rental is excessive, the result 
 may be the addition of several billion dollars to the permanent 
 burdens of the transportation systems of the country. With the 
 railroads as with public utilities, it is of the utmost importance to the 
 consuming public that the recognized capital value shall be kept 
 as low as practicable and shall not be swelled by the capitahzation 
 
FEDERAL OPERATION OF TRA.NSPORTATION SYSTEMS. 919 
 
 against the public of gratuities and special privileges conferred upon 
 the transportation companies in times of great public need and 
 danger. 
 
 2. The principles of valuation to he applied in determining the value 
 of the physical a'ssets of the railroads. — Valuation is a technical and 
 difficult problem, largely hypothetical, with which the average 
 city is not familiar. Even many well-informed persons suppose 
 that the value placed upon a pubUc utihty property by a skillful 
 engineer is an ultimate fact which must be accepted by all parties 
 without question. In truth, however, the final valuation even of the 
 physical property of a railroad or any oth^r public utility is built 
 upon a series of assumptions and by the application of a series of 
 rules with respect to each one of which the particular interests and 
 judgment of the engineers doing the work have great influence. 
 Concealed in a final valuation are many technical questions which 
 are matters of grave doubt and with respect to which the interests 
 of the public and of the public-service corporations are diametrically 
 opposed. As applied to the railroads of the United States, the 
 difierence in the principles, advocated at many points in the valua- 
 tion work, affect the final results to the extent of hundreds of millions 
 or even biUions of dollars. 
 
 The principles to be applied respecting the capitalization of the 
 railroads in fixing their compensation. — ^As it will require about three 
 more years for the Interstate Commerce Commission to complete 
 its report on the physical valuations of the railroads, and as the true 
 amounts of money actually and legitimately invested have been so 
 completely hidden by irregular accounting and the burning of books 
 and records to conceal the facts, the true capitalization is at present 
 unknown. On this account I shall mtroduce herewith evidence and 
 the official findings of the Interstate Commerce Commission to show 
 that the present capitalization as claimed in every case examined is 
 without any vestige of reliabihty, and is swelled to many times the 
 true amount by extravagance and speculations outside of railroad 
 purposes. In consequence to these facts, I recommend that further 
 mvestigations be instituted with all speed, with the view of ascer- 
 taining the true and legitimate capital investments on which only, 
 and not on water, the Government compensation to the railroads 
 should be based, until the physical valuations be also completed. 
 
 In the above connection I respectfully suggest that the willful 
 falsifying of records and the destruction of accounts be included in 
 the section of the bill respecting criminal acts and punished accord- 
 
 I also respectfully suggest that the bill provide for a continuing 
 lien upon the railroads in favor of the Government for any over- 
 payments which may be made; that the extravagant salaries paid 
 m some instances be revised, and all salaries be based upon the 
 value of the services rendered; that 'income on surplus," which is 
 income on income, be eHminated ; and that if for temporary purposes 
 it be based on the average income of preceding years, the period 
 should be extended to include the past ten years, rather than for 
 the period proposed of three war years with their excessive profits. 
 
 Most important of all the recommendations which I have the 
 honor to submit to you is that Congress shall at the earhest possible 
 
920 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 date pass an act providing for the public ownership of transporta- 
 tion systems for the carrying of passengers and freight as well as the 
 telegraph and telephone systems, to accomplish which I am engaged 
 in consultation with practical students of the problem in the draftmg 
 of a bill providing for this great step, necessary to the emancipation 
 of the people of this country from the rule of special privilege. 
 
 When traveHng in France for the first time many years ago, I 
 observed over the entrance of all of their churches as well as public 
 buildings the following motto, which is also the motto of the French 
 Revolution: "Liberty, equahty, fraternity." Equahty here means 
 equality of opportunity, and when a few are given the right to 
 control the great functions of Government which are thus denied 
 to the general citizenship, equality of opportunity can not exist. 
 There can be no more natural and necessary function of government 
 for promoting general prosperity and happiness than the public 
 ownership as well as governmental operation of all these agencies 
 which contribute to the public good and which by their nature are 
 monopolies. This includes not only the means of transporting pas- 
 sengers, freight, and intelUgence, but also means those vast resources 
 of nature as well, which the Almighty placed under the ground for 
 the service of all of his creatures. 
 
 Public ownership is also fundamental to democracy, without which 
 civil hberty can not exist. 
 
 Herewith I respectfully submit the evidence on which my con- 
 clusions are based regarding the finances and practices of the Amer- 
 ican railroads; and in closing I desire again to express my high 
 respect for the patriotism and forward vision of the President m 
 this crisis. 
 
 The illegal and jraudulent practices oj the American railway com- 
 panies in the falsifying of their accounts to cover up the expenditures of 
 the stoclcholders^ money for influencing and controlling legislation^ 
 politics, and the press; the frauds practiced hy directors in talcing for 
 their private use^ the^ funds of the company; the deceptive accounting 
 regarding capitalization, investment, etc., and the burning of the 
 hoolcs and records to secure secrecy of their acts, as shown %n the 
 official reports of the Interstate Commerce Commission. — During the 
 years from 1912 to 1915 various complaints were made by shippers 
 and the public to Congress and the Interstate Commerce Commission 
 respecting certain illegal practices of four important systems of rail- 
 ways and their resulting inefficiency of service and unjust rates. On 
 account of these complaints, which seemed well substantiated, the 
 Interstate Commerce Commission, partly on its own initiative and 
 partly in compliance with resolutions of Congress, made investiga- 
 tions, and issued their official reports of findings, in the years 1913 to 
 1917, respecting the unlawful practices and financial transactions of 
 the following four railway systems : 
 
 The New York, New Haven & Hartford Railroad Co., Report No. 
 6569; date, July 11, 1914. 
 
 The Louisville & Nashville Railroad Co., Report No. 4788; date, 
 February 9, 1915. 
 
 The Chicago, Rock Island & Pacific Railway Co., Report No. 6834 ; 
 date, July 31, 1915. 
 
 The Cincinnati, Hamilton &> Dayton Railroad Co. and the Pere 
 Marquette Railroad Co., Report No. 6833; date, March 13, 1917. 
 
FEDERAL OPEBATION OF TEANSPORTATION SYSTEMS. 921 
 
 These investigations were made with the most painstaking care 
 possible, covering long periods of time, in which special agents of the 
 commission were employed to secure information and to investigate 
 the books and accounts, and officers of the companies were summoned 
 before the commission, severah thousand pages of testimony being 
 taken. Tlie findings of the commission were published in their 
 official reports mentioned and disclose, among others, the following 
 facts : 
 
 The evidence secured by the commission shows that every railroad 
 company investigated knowingly falsified their accounts, partly in 
 order to hide expenditures of large sums for controlling politics and 
 elections and influencing legislation and the administration of laws ; 
 falsified the accounts respecting capital, expenses, and profits, so that 
 the commission, in many instances, was unable to find for what 
 purpose vast sums were expended; and in many cases the books and 
 accounts were burned by the directors in order to hide, in so far as 
 possible, various illegal transactions. Many of these acts were done, 
 as the records conclusively show, by directors who are well known 
 as among the world's greatest financiers; yet even though many 
 records were -svillfully destroyed, the commission was able to secure 
 sufficient evidence in many cases to disclose the names, dates, and 
 facts. 
 
 In order to place the various illegal practices in systematic order and 
 to refer to official evidence and the findings of the commission, they 
 may be briefly classified as follows : 
 
 1. Extravagant speculations and purchases of worthless securities 
 in the interests erf the directors; peculations from the stocldiolders' 
 money by illegal devices, accompanied by the falsifying of books and 
 accounts and their later burning by the directors. 
 
 2. Illegally spending the stockholders' money and property to 
 corruptly influence politics, the press, and public opinion and to 
 secure secrecy respecting their acts. 
 
 3. Acts to secure a monopoly against the public interest, by the 
 violation of the laws of many States as well as of the Nation. 
 
 4. The organization by the railway directors of "fake" corpora- 
 tions, with ''dummy" officers to hide the identity of the real pro- 
 moters and shield them from prosecution. 
 
 5. The voting to themselves by the directors of extravagant sal- 
 aries, in addition to which large sums were taken by some of these 
 officials without warrant of law. 
 
 The various acts recited are necessarily interwoven and will be 
 grouped by subjects as systematically as convenient. 
 
 The wasting of the companies' resources in extravagant specula- 
 tion, and the burning of the records: The following extracts are from 
 the official report. No. 6569, of the Interstate Commerce Commission 
 respecting the New York, New Haven & Hartford Raikoad Co., 
 July 11, 1914. AU the extracts from the commission's reports 
 respecting the various railway systems are taken verbatim from 
 the records. 
 
 Public hearings were held extending over a period of 60 days of almost continuous 
 session. Witnesses in a position to have knowledge of the transactions under scrutiny 
 were examined. In the search for truth the commission had to overc(toie many 
 obstacles, such as the burning of books, letters, and documents and the obstinacy of 
 witnesses who declined to testify until criminal proceedings were begun for their 
 
922 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 refusal to answer questions. The New Haven system has more than 300 subsidiary 
 corporations, in a web of entangling alliances with each other, many of which were 
 seemingly planned, created, and manipulated by lawyers expressly retained for the 
 purpose of concealment or deception. Ordinarily in investigations of this character 
 evidence is easily adduced by placing the witnesses upon the stand, but in this in- 
 vestigation the witnesses other than the accountants for the commission were in the 
 main hostile, and with few exceptions their testimony was unwillingly given. 
 
 The result of our research into the financial workings of the former management of 
 the New Haven system has been to disclose one of the most glaring instances of malad- 
 ministration revealed in all the history of American railroading' In the course of the 
 investigation many instances were uncovered of violation of the laws of different 
 States. As these were not understood to be pertinent to our inquiry vmder the Senate 
 resolution we did not follow them into their details. As pointing to violations of State 
 laws, we have turned over the evidence concerning local occurrences in New York 
 City to the district attorney for the proper district, and the testimony relating to 
 irregularities in Massachusetts and Rhode Island have been laid before the proper 
 authorities of those States. The commission has also furnished the Department of 
 Justice with a complete record of the testimony. 
 
 The difficulties under which tliis railroad system has labored in the past are internal 
 and wholly due to its own mismanagement.* Its troubles have not arisen because of 
 regulation by governmental authority. Its greatest losses and most costly blunders 
 were made in attempting to circumvent governmental regulation and to extend its 
 domination beyond the limits fixed by law. 
 
 The subject matter of this inquiry* relates to the financial operation of a railroad 
 system which, on June 30, 1903, had a total capitalization of approximately 193,000,000, 
 of which $79,000,000 was stock and $14,000,000 bonds. In the 10 years from June 30, 
 1903, this capitalization was increased from $93,000,000 to $417,000,000, exclusive 
 of stock premiums, or an increase of $324,000,000. Of this increase approximately 
 $120,000,000 was devoted to its railroad property and was espended for betterments 
 and equipment. This leaves the sum of $204,000,000, which was expended for opera- 
 tions outside of its railroad sphere. Through the expenditure of this sum this railroad 
 system has practically monopolized the freight and passenger business in five of the 
 States of the Union. It has acquired a monopoly of competing steamship lines and 
 trolley systems in the section which it serves. The financial operations necessary for 
 these acquisitions, and the losses which they have entailed, have been skillfully con- 
 cealed by the juggling of money and securities from one subsidiary corporation to 
 another. 
 
 SIGNIFICANT INCIDENTS. 
 
 Marked features and significant incidents in the loose, extravagant, and improvident 
 administration of the finances of the New Haven as shown in this investigation are the 
 Boston & Maine despoilment; the iniquity of the Westchester acquisition; the double 
 price paid for the Rhode Island trolleys; the recklessness in the purchase of Connecti- 
 cut and Massachusetts trolleys at prices exorbitantly in excess of their market value; 
 the unwarranted expenditure of large amounts in ''educating public opinion"; the dis- 
 position, without knowledge of the directors, of hundreds of thousands of dollars for 
 influencing public sentiment; the habitual payment of unitemized vouchers without 
 auy clear specification of details; the confusing interrelation of the principal company 
 and its subsidiaries and consequent complication of accounts; the practice of financial 
 legerdemain in issuing large blocks of New Haven stock for notes of the New England 
 Navigation Co., and manipulating these securieties back and forth; fictitious sales of 
 New Haven stock to friendly parties with the design of boosting the stock and unload- 
 on the public at the higher "market price"; the unlawful diversion of corporate 
 funds to political organizations; the scattering of retainers to attorneys of five States, 
 who rendered no itemized bills for services and who conducted no litigation to which 
 the railroad was a party; extensive use of a paid lobby in matters as to which the di- 
 rectors claim to have no information; the attempt to control utterances of the press 
 by subsidizing reporters; payment of money and the profligate issue of free passes to 
 legislators and their friends; the investment of $400,000 in securities of a New England 
 newspaper; the regular employment of political bosses in Rhode Island and other 
 States, not for the purpose of having them perform any service, but to prevent them, 
 as Mr. Mellen expressed it, from ''becoming active on the other side' '; the retention by 
 John L. Billard of more than $2,700,000 in a transaction in which he represented the 
 New Haven and into which he invested not a dollar; the inability of Oakleigh Thorne 
 to account for $1,032,000 of the funds of the New Haven intrusted to him in carrying 
 out the Westchester proposition; the story of Mr. Mellen as to the distribution of 
 $1,200,000 for corrupt purposes in bringing about amendments of the Westchester and 
 
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 92 S 
 
 Port Chester franchises; the domination of all the affairs of this railroad by Mr. 
 Morgan and Mr. Mellen and the absolute subordination of other members of the board 
 of directors to the will of these two; the unwarranted increase of the New Haven 
 liabilities from $93,000,000 in 1903 to $417,000,000 in 1913; the increase in floating 
 notes from nothing in 1903 to approximately $40,000,000 in 1913; the indefensible 
 standard of business ethics and the absence of financial acumen displayed by eminent 
 financiers in directing the destinies of this railroad in its attempt to establish a monop- 
 oly of the transportation of New England. A combination of all these has resulted in 
 the present deplorable situation in which the affairs of this railroad are involved. 
 
 Pages 35 to 41 of the report give a history of the celebrated trans- 
 action in which 18 miles of railroad, in which Directors J. P. Mor- 
 gan, sr., WiUiam Rockefeller, and Mr. MiUer were interested was 
 unloaded by them on the railroad company at a meeting kept secret 
 from the rest of the board of directors, at which meeting President 
 MeUen presided. This property proved to be more than worthless 
 to the stockholders, having been operated at an annual loss of over 
 $1,000,000, and for which their directors forced them to pay the 
 vast sum of $36,434,173.25. 
 
 The principal accounts respecting this transaction were kept in 
 the office of J. P. Morgan & Co. in such a manner as to hide the pur- 
 poses for which moneys were received or expended, under the title 
 of '^Special Account No. 2." Part of the accounts were kept by 
 another banker interested in the transaction named Oakleight Thorne, 
 respecting which the commission report says : 
 
 It appeared during the progress of this investigation that the personal records of 
 Thorne which might have shown the details of these disbursements had been biu-ned 
 by him in January, 1912. 
 
 This transaction is all the more sensational since the president of 
 the road was not permitted by the directors, who robbed it to the 
 extent of millions of dollars, to know who got the money. 
 
 Another startling fact, the exact counterfeit of which may perhaps 
 often have occurred in the history of American railroading, but never 
 before known and published, is revealed in this investigation respect- 
 ing this road. The record shows conclusively that President Mellen 
 of the road was practically appointed, or selected, at the instigation 
 of J. P. Morgan, sr., and when this '^president" desired to ascertain 
 the facts respecting the transaction in which the road was robbed 
 by a conspiracy of Mr. Morgan with three other directors without 
 the knowledge of the rest of the board, '^ President" Mellen was not 
 permitted by Mr. Morgan to know (as he expressed it over his official 
 signature as disclosed in the record) ''Who got the money for the 
 truck turned over." 
 
 The following is from the report: 
 
 THE NEW YORK, WESTCHESTER & BOSTON RAILWAY CO, 
 
 The Westchester is a story of the profligate waste of corporate funds. The road was 
 not necessary as a part of the New Haven system. It parallels other lines already 
 owned by the New Haven and traverses territory which the New Haven already 
 served. That it was recognized as unnecessary by the New Haven itself at its incep- 
 tion is evidenced by the fact that the New Haven sought an injunction to restrairi the 
 construction of this road on the specific ground that it was not in answer to any piiblic 
 necessity and paralleled its already existing line. 
 
 The enormous sum of $36,434,173.25 was expended for a road only 18.03 miles in 
 extent, which is being operated at an annual loss of approximately $1,250,000, and 
 which will have to increase its earnings four and one-half fold before it can pay its 
 operating expenses and fixed charges. It is inconceivable that this enterprise could 
 have been entered into by the New Haven as a result of the mandates of good judgment 
 and proper railroading. 
 
924 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 The Westchester acquisition was planned and executed by a special committee of 
 the board, consisting of directors Morgan, Rockefeller, and Miller, with President 
 Mellen as chairman. The vote appointing this committee "on proposed competition 
 between the Connecticut State line and Harlem River, with power," does not disclose 
 an intention to authorize the buying of charters and promotion securities and the 
 building of a new railroad, much less one at a cost of $36,000,000. It is ambiguous 
 and was evidently intended to conceal a secret purpose. The full board was not 
 taken into the confidence of those directors who wanted these securities purchased, 
 and no report was ever made by this committee placing the situation as they found it 
 before the board. " . 
 
 The first information the board had concerning the extravagant acquisition of 
 Westchester and Port Chester securities was on November 8, 1907, when this com- 
 mittee made its only report. It was then learned that $11,155,000 had been ex- 
 pended in obtaining control of these two insolvent promotion schemes, and that tliis 
 expenditure carried with it an obligation to construct two railroads, under franchises 
 of doubtful validity, paralleling the existing line of the New Haven. 
 
 There is no record that this committee ever required from these parties an itemized 
 statement of the disbursements they made of the funds advanced from "special 
 account No. 2 " ; nor was any such statement ever rendered. No vouchers were taken. 
 Special account No. 2 on the books of J. P. Morgan & Co. shows nothing more than the 
 lump sums received from the New Haven and the disbursement of the same to Thome 
 and later to the Millbrook Co., on notes of the respective payees. It appeared during 
 the progress of this investigation that the personal records of Thome which might have 
 shown the detail of these disbursements had been burned b_y him in January, 1912. 
 
 In a letter of October 30, 1906, to C. S. Mellen from the attomey, Francis Lynde 
 Stetson, who was representing all the parties in the deal, namely, J. P. Morgan & Co., 
 the Millbrook Co., Perry & Thome, and the New York, New Haven & Hartford Rail- 
 road Co., there is the following language which is significant as to the course the 
 committee was pursuing: 
 
 "Referring to the conversation this morning between yourself, Mr. Thome, and 
 myself, it has occurred to me that it is possible that Mr. Thome's purchases and even 
 his payments may have to begin before he shall have ascertained the validity of the 
 two principal charters which he is to acquire, and that in the event of the develop- 
 ment subsequently of their invalidity it might be that the money spent would be 
 money lost." 
 
 The report of this committee, however, was unanimously "approved, ratified, and 
 confirmed" at the meeting of the board of November 8, 1907, at which the following 
 directors were present: Mellen, Rockefeller, Morgan, Milner, Thayer, Brooker, Brush, 
 Warner, Cheney, Miller, Skinner, Barney, Taft, Wittemore, JElton, Hemingway, 
 Robertson, Robbins, and Parker, 
 
 After this meeting of the board at which this undetailed report was ratified, Mr. 
 Mellen went to see Mr. Morgan and requested more information as to the expenditure 
 of the amounts. According to Mr. Mellen 's evidence, Mr. Morgan asked him if he 
 knew who wrote the report, and upon Mr. Mellen 's reply, "Yes; Mr. Stetson wrote 
 it," Mr. Morgan asked him, "Do you think you know more than Stetson "? Mr. 
 Mellen admitted he did not, and apparently acquiesced, but took the precaution to 
 write upon the back of his report, while still smarting under the humiliation of the 
 interview with Mr. Morgan, the following words: 
 
 "The trouble with this is there is nothing to show who got the money for the truck 
 turned over. I don't like the looks of it, and I don't see why the matter should not 
 be made plain. If I had the stock and sold it, I should expect others would state 
 they bought it of me; but that don 't seem to have been the disposition here. I never 
 have known the first thing about who originally held the securities, what the/ were 
 sold for, and no one has thought I was entitled to know. Perhaps I am not. I would 
 feel better if there were at least a disposition to let me know something more than 
 appears in the record. 
 
 "C. S. M." 
 ♦ * * ■ * •» * * 
 
 There were just thirteen things that had to be done, according to Mr. Mellen, to get 
 the Westchester out of its franchise difficulties, and it is significant that all amendments 
 to fhe franchises were obtained, and the sequence was that the New Haven, in addi- 
 tion to these things, received 30,431 of the 34,053^ outstanding shares of the New 
 York, Westchester & Boston Railroad Co. stock, which Mr. Mellen testified was not 
 worth 10 cents a pound. The testimony is somewhat occult, but the character of the 
 transaction is no less certain. This money was used for corrupt purposes and the 
 improper expenditures covered up by the transfer to the New Haven of these worthless 
 securities. 
 
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. . 925 
 
 The committee had kept minutes of its meetings, which were filed with its report, 
 but these show little beyond the authorizations to the president of the New Haven 
 to deposit large amounts from time to time with J. P. Morgan & Co. in an account 
 which appeared on the books of that banking firm as "special account No. 2." The 
 committee made a contract with Oakleigh Thome and Marsden J. Perry, both presi- 
 dents of banks which were large creditors of the companies whose securities were to 
 be acquired. The contract authorized and required Thome and Perry to purchase 
 for the New Haven 66 per cent of the stock of the several companies, and when this 
 was done they were to construct the railroad . The contract is remarkable in that no 
 limit is placed on the amount that might be paid for the securities or expended in 
 building the road, but these parties were to receive, as commission for their services, 
 7^ per cent of the amount expended. 
 
 * * * * * * * 
 
 To this (igure, however, must be added the $14,090,008.18 expended before the 
 construction began, making a total of $86,434,173.25, which yields the remarkable 
 per-mile cost of $2,020,752.81. 
 
 In providing the money for this construction bonds to the extent of $17,000,000, 
 sold at a discount of $1,20*0,000, were issued on the property, bearing the guaranty of 
 the New Haven. This guaranty has meant a drain on the New Haven resources of 
 $1,250,000 per annum, since the earnings of the Westchester fall this far short of paying 
 the fixed charges on the property. The president of the Westchester testified that the 
 earnings of his road would have to increase 4^ times before the Westchester will become 
 self-sustaining. 
 
 WTiat could have been the motive for unloading the Westchester upon the New 
 Haven at the expense of the stockholders of the latter must be left largely to con- 
 jecture. The one accomplished result, however, of the Westchester transaction was 
 the stifling of possible competition into New York City from New England. 
 
 The blame for the Westchester rests squarely upon the directors of the New Haven 
 road. Some are guilty for acts committed; others, the greater number, for their 
 failure to act. They are alike culpable and responsible to the stockholders. 
 
 Maladministration costs the stocJchoMers over $20,000,000. — On pages 
 55 and 56 is the following: 
 
 THE NEW ENGLAND INVESTMENT A SECURITY CO. 
 
 This company and its affairs constitute a striking illustration of the deliberate 
 attempt to entangle the New Haven with street railways which has recently been 
 publicly avowed by former president Mellen. * * * ' 
 
 The Supreme Judicial Court of Massachusetts (198 Mass. , 413) decided in substance 
 that this company was not separate and independent of the New Haven, but was a 
 mere device of that company to continue to hold stock in Massachusetts trolleys in 
 violation of the laws of that State. 
 
 The testimony shows that Charles S. Mellen held control of the common stock of 
 this company through James B. Brady, as a dummy, until quite a recent period. 
 These shares have been transferred to Sanderson & Porter, a firm of railroad con- 
 tractors and builders, who since 1902 have from time to time been engaged in opera- 
 tions for the New Haven. 
 
 It seems quite clear, in view of the relations of this firm with the New Haven in 
 the past, that this stock is now held by Sanderson & Porter for the New Haven. 
 
 All profits which this company has made in the past have been the result of trans- 
 actions in the purchase and sale of securities in which the New Haven had title or 
 large interests, not in the open market, but under circumstances which would have 
 been collusive and fraudulent if this security company was in fact an independent 
 organization entirely separate from the New Haven. 
 
 On its note there were turned over to it at one time $9,918,145.65 of securities bought 
 and paid for with New Haven funds. 
 
 The inside facts as to its dealings show a continued operation in violation of Massa- 
 chusetts laws and in flagrant violation of the injunction issued by the highest court 
 of that State. 
 
 A summary of the operations of the New England Investment & Security Co., as 
 recorded on its books appears in the appendix, identified as Exhibit D. 
 
 Juggling the accounts to increase capitalization and hide irregulari- 
 ties.~It has always been a favorite device of the American railroads 
 to print additional certificates of capital stock which represent no real 
 value, and sell them to the public; and in other cases b}^ the juggling 
 
926 . FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 back and forth of the assets and accounts to suit the private purposes 
 of directors and financiers, to form an excuse for increased rates. 
 The Interstate Commerce Commission refers to these methods in the 
 following extracts from pages 57-58 of the report. 
 
 ■QUESTIONABLE METHODS EMPLOYED TO INCREASE THE AMOUNT OF CAPITAL STOCK. 
 
 Increases in capital stock of the New York, New Haven & Hartford Railroad Co. 
 have been made upon the basis of transfers of assets from one subordinate company 
 to another. 
 
 The steamship properties of this system at one time were held by the New England 
 Navigation Co., approximating a cost of $11,500,000. This latter company in 1907 
 transferred the title to these steamship properties to the Consolidated Railway Co. at 
 a value of $20,000,000. The Consolidated Railway Co. thereupon increased its capital 
 fltock $20,000,000. The Consolidated Railway Co. was then merged with the New 
 Haven, and the stock of the latter company increased $30,000,000, $20,000,000 of 
 which went to the New England Navigation Co., and placing in its treasury by this 
 transaction $20,000,000 Consolidated Railway stock, which by the merger became 
 New Haven stock, with a market value of over $80,000,000. It was this stock with 
 which control of the Boston & Maine Railroad Co. was secured. 
 
 MANIPULATION OF ACCOUNTS.^ 
 
 Proper accounting demands that the records of a company should reflect accurately 
 the transactions relating to the matter recorded, and where accounts fail to reveal a 
 true history of the transactions it can be due to but one of two causes — carelessness or 
 design. 
 
 Several transactions appear of record which show that by no stretch of imagination 
 •can the irregularity of recording be classified as due to carelessness; the following are 
 illustrations: 
 
 In February, 1911, the New York, New Haven & Hartford Railroad purchased 
 23,520^ shares of the Rutland Railroad Co.'s stock from the New York Central & 
 Hudson River Railroad Co., giving in exchange therefor its check upon the Farmers' 
 Loan & Trust Co. in the sum of $2,364,977.15. No entries can be found in the record 
 of the New Haven Co. which reveal this transaction. The stock thus acquired was 
 on the same day, with a check for $135,022.85, delivered to the New England Navi- 
 gation Co. in exchange for its note of $2,500,000. The effect of the recording of this 
 transaction is that the sum paid the New York Central for the stock shows as a cash 
 advance to the New England Navigation Co. 
 
 February 14, 1910, the New England Navigation Co. sold, through the firm of J. P. 
 Morgan & Co., 50,000 shares of New York, New Haven & Hartford Railroad Co. stock 
 at a price of 157 net, the cash proceeds amounting to $7,849,000. A check was 
 remitted by J. P. Morgan <& Co. for $5,162,203.02 to the New England Navigation Co., 
 and 16,744 shares of Worcester, Nashua & Rochester stock were acquired for the 
 account of the New England Navigation Co. at a total cost of $2,686,796.98. 
 
 Dummy companies formed to hide the identity of railr^oad officials as 
 to their complicity in illegal acts and frauds on the stocTdiolders . — The 
 following is from" pages 45, 60, and 61 of the official report: 
 
 Witnesses who were officers of some of these companies appeared before the com- 
 mission and testified that they acted as "dummies" under the directions of Robbins 
 and of attorneys selected by him. Some of them handled, without any knowledge 
 of the nature or purpose of the transactions, checks approximating $3,000,000. 
 « • * * * * * 
 
 DUMMY COMPANIES. 
 
 The frequency with which dummy corporations and dummy directors appear 
 in this record leads to the conclusion that some one high in the councils of the New 
 Haven had an obsession upon the subject of the utility of such sham methods. ^ The 
 directors of the Billard Co. confessed that they were dummies and knew nothing of 
 its operations. Why men of respectability and standing as these appear to be should 
 lend their names as dummies passes comprehension. 
 
 In the organization of one of the steamship companies the young lady stenographer 
 was made president; and a youth of 21 years of age by the name of Grover Cleveland 
 Richards was selected as treasurer of another company. 
 
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 927 
 
 Clerks and irresponsible persons were drawn upon to supply the demand for dum- 
 mies in the financial joy nding by the management of the New Haven. Mellen's 
 stock in the New England Investment & Secruities Co. was held by James B. Brady, 
 who testified that he was merely a dummy for Mr. Mellen. Director Skinner's stock 
 in this same company was held by a relative and a bookkeeper in his office. Thus, 
 throughout the entire story of deception, the New Haven management vainly en- 
 deavored to hide the true facts behind these dummy individuals and dummy cor- 
 porations. 
 
 As a matter of law, such devices are feeble and puerile, but if the master financiers 
 behind these New Haven transactions could use these sham methods and thus give 
 their indorsement to the availability of such crooked schemes to cover the true sub- 
 stance and fact of financial transactions it indicates a low state of financial morality. 
 No condemnation can be too severe to apply to the frequent use of these companies 
 by the New Haven. 
 
 While in many States there are safeguards established by law, in other States there 
 is such a prodigality in the creation of corporations as to greatly prejudice the interests 
 of investors, creditors, and the public welfare generally. 
 
 While stock in the New Haven road was listed on the New York Stock Exchange a 
 large portion of its funds were invested in "blue sky" corporations, the officers of 
 wluch knew nothing of the purposes or assets of the companies of which they were 
 managers or officers. 
 
 How the ojficials profited at the expense of their roads hy contracts 
 with companies in which they or their friends were financially interested. — 
 The records of the New Haven, as well as the other railway systems 
 investigated, invariably show that the officials did not purchase their 
 supplies in a businesslike manner and at reasonable prices, but at 
 extravagant prices in their own interest without regard to that of 
 the stockholders. As this was the general custom, and the history 
 abounds with many transactions, a smgle reference must suffice from 
 page 61 of the report. 
 
 LARQE PURCHASES WITHOUT BIDS. 
 
 Purchases of cars and coal are two large expenditures that railroads make. The 
 New Haven purchased cars almost exclusively from James B. Brady without com- 
 petition and to the extent of some $37,000,000. Mr. Brady, as a witness, made no 
 secret of his generosity to the officials with whom he had business. His methods 
 were justified by him on the ground that the officers of the New Haven were old 
 friends. 
 
 Locomotives were purchased from a company in which a director of the New Haven 
 was also a director. Many supplies obtained by the New Haven were from companies 
 having directors who were also directors of the New Haven. 
 
 Corporate economy is not practicable where gifts and obligations arising from 
 friendship tend to obscure official duty. 
 
 The following extract respecting the railroads' expenditures for 
 controffing poUtics is found on pages 61-62 of the report: 
 
 POLITICAL CONTRIBUTIONS. 
 
 The New Haven Railroad had no politics. It was Democratic in Democratic States 
 and Republican in Republican States. As Mr. Mellen testified, its effort was always 
 to "get under the best umbrella." 
 
 Payments made for political purposes totaled a large sum. 
 
 For instance, in 1900, $50,000 was contributed by the New Haven for campaign 
 purposes through J. P. Morgan & Co. No proper and complete voucher for this pay- 
 ment appears on the books of the New Haven Co. 
 
 In 1904 a payment of $50,000 was made through Mr. Mellen for political purposes. 
 This was secretly done and not reported to the directors or stockholders or in any 
 manner made public. 
 
 No public-service corporation may rightfully use corporate funds to promote a 
 political cause or to support a political candidate or a political party. 
 
 A corporation as such has no political principles to maintain and no political candi- 
 dates to support. 
 
928 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 The revenues of a public-service corporation are for the most part derived from the 
 exercise of the right delegated to it by the sovereign power to tax the public by fixed 
 rates established in accordance with law. Shippers and the traveling public may be 
 presumed to be divided in political Opinion. Corporate revenue derived by public 
 tax from men of one political conviction can not be used to support the fortunes of a 
 candidate or party of contrary political principles. 
 
 Regardless of the injustice to stockholders and travelers belonging to another party 
 which results from such use of funds, the withdrawal from corporate use and the 
 diversion to political use is illegal and indefensible. 
 
 THE STEAMSHIPS. 
 
 The New Haven, from time to time, had felt the harassing effect of competition 
 from the steamship lines that plied between the several larger cities that it served. 
 Restless of any limitation of his power, President Mellon proceeded to acquire the 
 steamship lines and thereby stifle this interference with the New Haven properties. 
 
 The Hartford & New York Transportation Co. cost the New Haven $2,538,916.78; 
 the Eastern Steamship Corporation cost $4,200,000; the Merchants & Miners' Trans- 
 portation Co. cost $5,774,500; the New Bedford, Marthas Vineyard & Pawtucket 
 Steamboat Co. cost $141,700; the New England Steamship Co. cost $12,100,000; the 
 Maine Steamship Co. $17,300, or a total of $24,772,416.78. 
 
 The testimony shows that the physical valuation of the properties acquired as a 
 result of these outlays approximates something like $10,000,000. The New Haven 
 advises that it has recently disposed of its holdings in the Merchants & Miners' Trans- 
 portation Co. at a loss of $3,594,500. 
 
 These steamship lines were not acquired by the New Haven openly, but covertly 
 and by devious methods. Dummy companies, and dummy officers and directors 
 were used in financial maneuvering that resulted in the New Haven controlling 
 these steamships. 
 
 In connection with these steamship purchases it was necessary to have piers. The 
 record shows money payments in connection with pier leases which were unmis- 
 takably improper, and these payments were covered up by being charged on the 
 books of other companies to the New Haven under such headings as "repairs on 
 steamers." 
 
 There were payments to one John Hall McKay of many thousands of dollars for 
 which no itemized vouchers were given. Mr. McKay left for Europe after this inves- 
 tigation was commenced, and his evidence could not be secured. These pier leases 
 in the city of New York are controlled by public officials, as the municipality owns 
 the piers and arrangements for the leases had to be made through these officials. But 
 because of the methods employed to conceal these expenditures by increases of capital 
 stock and otherwise, it has been impossible to give any total amount of these payments. 
 
 After Mr. Mellen had obtained control of every boat line of any importance in New 
 England he suddenly changed his attitude when the public discovered the real 
 ownership. It was then that he proposed and urged that they be disposed of, but 
 in this he was overridden by his board . 
 
 Millions wasted in the purchase at extravagant prices of trolley lines 
 and steamship companies in which transactions a United States Senator 
 and railroad directors profited at the expense oj their stockholders, — 
 The following is from pages 41-44 of the report: 
 
 RHODE ISLAND TROLLEYS. 
 
 The purchase of the Rhode Island trolleys was another instance of millions wasted 
 in acquiring properties that bring an annual deficit instead of a surplus, and con- 
 stitute a liability instead of an asset in the New Haven system. 
 
 ^ * * * * * • * 
 
 The evidence shows that the Rhode Island trolley transactions were deliberately 
 entered into with a full knowledge of the large deficit that they would bring, and 
 with the determination to acquire trolley control in Providence regardless of expense. 
 
 A committee of the board of directors of the New Haven had been appointed for 
 the purpose of looking into the Providence trolley "situation, with a view of pur- 
 chasing that property, and this committee, after considering the proposition, reported 
 adversely. Not content to abide by this action of his board, Mr. Mellen, after some 
 six months, revived the matter. This was done after a conference between Mr. 
 Mellen and former Senator Nelson W. Aldrich, who was largely interested in the 
 United Traction & Electric (;!o., the largest lessor company. 
 
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 929 
 
 The United Gas Improvement Co., of Philadelphia, that controlled this property 
 under lease, had capitalized the future hopes of the proposition into a holding com- 
 pany known as the Rhode Island Securities Co. and had issued §19,899,tC0 of deben- 
 tures, which represented an investment of approximately only $6,000,000. The 
 difference in these amounts was, as Mr. Mellen testified, merely capitalized water. 
 
 Not to be deterred by extravagant expenditure, Mr. Mellen undertook to exchange 
 the debentures of the Providence Securities Co., which he had created for the purpjse, 
 for these debentures of the Rhode Island Securities Co., and to add thereon the guar- 
 anty of the New York, Isew Haven & Hartford Railroad Co., both as to principal and 
 interest. 1 he result of the transaction was to enable the United Gas Improvement 
 Co. to realize par value on these securities based merely upon lively expectation of 
 future possibilities, and thereby immediately placed the burden of the watered stock 
 upon the bucks of the New Haven stockholders. 
 
 'i he millions that were made from this transaction did not come through magic, but 
 were brought into existence at the expense of the stockholders of the i\ew Haven, 
 upon whom and the public the yoke of giving value to these securities ultimately 
 rested, and the New Haven stock was diluted to the extent of the water thus added. 
 1 his gas company also owned some Connecticut trolley lines, and it was made a further 
 condition of the Rhode Island trolley acquisition that the New Haven take over these 
 properties. 
 
 When the details had been worked out by Mr. Mellen for the assuming of this addi- 
 tional burden the board of directors without question acquiesced. Mr. Mellen testified 
 that these Connecticut trolleys represented a payment of about $10,000,000 more than 
 their value. 
 
 1 his transaction seems such an extravagant purchase as makes it a matter of interest 
 just who owned the securities of the Rhode island Securities Co. Ihis information 
 could be furnished from the stock books of that company, but during the progres'* of 
 this investigation it was learned that these books had also been burned. A detailed 
 report on the Rhode Island trolleys is to be found in the appendix made a part hereof, 
 Exhibit B. 
 
 1 he Rhode Island and Connecticut trolley ventures are further evidences of the 
 prodigality in the expenditure of the money of the New Haven stockholders in carrying 
 out an unlawful policy of transportation monopoly. 
 
 Losses of S60,000,000 to $90,000,000 due to waste, mismanagement, 
 and peculations by railroad officials, and attemvts to control 'politics, the 
 press, and public opinion, — The following is irom pages 63-70 of the 
 official report: 
 
 There is the additional loss growing out of the unfortunate Billard transaction cf 
 $2,748,700 unless John L. Billard is compelled, as he should be, to make restitution. 
 
 In addition there have been large expenses incurred in litigation, in procurmg 
 legislation, and in a vain attempt to stem the tide of adverse popular opinion. 
 * * * ^ * * * 
 
 The annual deficit to the New Haven from bond interest, interest on other obliga- 
 tions, and taxes resulting from the Westchester venture amounts to $1,179,243.92. 
 When the operating deficit is added, the total annual loss to the New Haven is 
 $1,657,241.99. 
 
 ******* 
 
 These annual losses will, to a large extent, recur from year to year for an indefinite 
 period, and therefore represent large future losses. 
 
 From all of the foregoing and from a careful consideration of the method in which 
 expenditures, not specified herein, have been made, it is submitted that a reasonable 
 estimate of the loss to the New York, New Haven & Hartford Railroad Co. by reason 
 of waste and mismanagement will amount to between $60,000,C00 and $90,000,000. 
 
 The splendid property of the New Haven Railroad itself will be called upon for 
 many a year to make up the drain upon its resources resulting from the unpardonable 
 folly of the transactions outside the proper field in which stockholders supposed their 
 moneys were invested. 
 
 But honesty and efficiency of management of this property as a railroad only will 
 undoubtedly, in time, restore its former standing. 
 
 EVIL OP INTERLOCKING DIRECTORATES. 
 
 A system of interlocking directorates has grown up and flourished in the past few 
 years which has brought about combinations and intercorporate relationships not 
 conducive to the public welfare. On the New Haven board of directors there was a 
 
 41215—18 2 
 
930 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 representative of the Pennsylvania Railroad, whicli railroad owned 35,000 shares of 
 New Haven stock; there was a representative of the New York Central, which owned 
 35,000 shares; there was a representative of insurance interests that owned 35,000 
 shares and a representative of an express company tliat had a contract with the rail- 
 road; there were directors who were also directors of the Standard Oil Co., the United 
 Steel Corporation, the Pullman Co.; in fact, every other interest seemed better rep- 
 resented on the New Haven board than the average stockholder's interest. 
 
 After an exhaustive investigation of this great railway property 
 the commission summed up its findings as follows : 
 
 NEW HAVEN MONOPOLY CORRtJPT. 
 
 This investigation has demonstrated that the monopoly theory of those controlling 
 the New Haven was unsound and mischievous in its eliects. To achieve such monoi> 
 oly meant the reckless and scandalous expenditure of money; it meant the attempt 
 to control public opinion; corruption of government; the attempt to pervert the 
 political and economic instincts of the people in insolent defiance of law. Through 
 exposure of the methods of this monopoly the invisible government which has gone 
 far in its efi'orts to dominate New England has been made visible. It has been clearly 
 proven how public opinian was distorted; how officials who were needed and who 
 could be bought were bought; how newspipers that could be subsidized were sub- 
 sidized; how a college professor and publicists secretly accepted money from the New 
 Haven while masking as a representative of a gre it American university and as the 
 .guardians of the interests of the people; how agencies of information to the public 
 -were prostituted wherever they could be prostituted in order to carry out a scheme 
 lOf private transportation monopoly imperial in its scope. 
 
 DIRECTORS CRIMINALLY NEGLIGENT. 
 
 It is inconceivable that these wrongs could have gone on without interference if the 
 members of the boird of directors had been true to the faith they owed the stockholders. 
 A number of directors appear in many instances to have voted without knowledge and 
 to have approved the expenditure of many millions without information. According 
 to the testimony of some of the directors they merely approved what had been done by 
 some committee or bv some officer of the company. The directors' minutes reveal 
 that it was largely a body for ratification and not authorization as the law intended a 
 board of directors should be. None of the directors would have been so careless in 
 the handling of his own money as the evidence demonstrates they were in dealing 
 the money of other people. The directors actively or passively acquiesced in the 
 efforts of the Mellon-Morgan -Rockefeller reirimo to extend the domination of this 
 corporation over the whole transportation field in New England. 
 
 If these directors who were faithless to their stewardship were held responsible in 
 the courts and at the bar of public opinion for the failure to do those things they should 
 have done, the le.sson to directors who do not direct would be very salutary. 
 
 Most of the directors of the New Haven accej)ted their responsibilities lightly. 
 They failed to realize that their names gave confidence to the public and that their 
 connection with the corporation led the public to invest. When these directors were 
 ne digent and serious losses resulted therefrom they were guilty of a grave dereliction 
 of duty and a breach of trust that was morally wrong and criminal in its fruits. 
 
 Directors should be made indixidually liable to civil and criminal laws for the 
 manner in which they discharge their trust. A corporation can be no belter or worse 
 than those who operate it. It should be just as grave a crime to plunder stackholders 
 or the public through a railroad corporation as it is to personally rob an individual. 
 
 SUBSIDIARY CORPORATIONS CONDEMNED. 
 
 It was found in the investigation of the New Haven system that there were 336 
 erbsidiary orporati >ns, and tne books of the New Haven road proper refiect only a 
 emdl put of the actual financial transactions of the railroad. Many of these sub- 
 Biaiary (•< rp rations served no purpose save an evil one. They were used to cover up 
 transaf tioiis that would not bear scrutinv and to keej) from the eyes of pubhc ofhciala 
 m a:er^ tnat were sought to be kept secret. The cjmmission should have the power 
 to e<am ne not on >r the books, records, papers, and correspondence of interstate 
 cardeiS but of subsidiary companies as well. 
 
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 931 
 
 REMEDY IN PUBLIC CONSCIENCE AND LAWS. 
 
 The insiirin;? of honestv thrDuofhoiit the manasrement of the ,s;reat railroads of the 
 country is a most imp >rtant ritiestion before the people to-day; and only when, through 
 exp;:)3ure of wr)ni:d()ing and an awakened pub'ic conscience, coup'ed with effec'tive 
 laws, this result is p-o luced may railroading: be placed u;) )n the hi2:h level that it 
 should occupy. The ravel.itions in this record make it essential for the we' fare of the 
 Nation that the reckless and profliij^ate finanrierinu: which has blighted this railroad 
 system be endod, and until this is fully done there vvid be no assurance that the st )ry 
 of the New FTaven will not be told again with the stockholders of some other railroad 
 system as the victims. 
 
 THE CniCAGO, ROCK ISLAND & PACIFIC RAILWAY CO. 
 
 Having reviewed some of the principal transactions of the New 
 York, New Haven & Hartford Railroad Co. in defrauding its stock- 
 holdars and the public, extracts will now be submitted from the 
 official report of the Interstate Commerce Commission, No. 6834, 
 dated July 31, 1015, entitled "In re Financial Transactions, History, 
 and Operation of the Chicago, Rock Island & Pacific Railway 
 Company.'* 
 
 Owing to the limits of space available in this statement to Congress, 
 and having gone into the transactions previously investigated in 
 considerable detail, we will content ourselves witli brief extracts 
 from the official report just mentioned, which, when read in full, 
 discloses a duplication of the illegal acts of the other systems investi- 
 gated, together with some new details respecting the salaries of its 
 officers and the manner in which they abstracted, for their private 
 uses, from the company treasury la^ge sums without accounting 
 therefor. The same system of false accounting, extravagance, waste, 
 and the use of the stockholders' money for controlling politics and 
 the press and for other illegal acts is found in the official report of tho 
 commission. 
 
 The result of these illegal practices was to reduce the vahic of the 
 stock, which in 1902 was $200 a share, to $20 in 1014, and to put tho 
 road in the hands of a receiver — all in the private interest of a 
 minority of its directors, without the knowledge of the rest of tho 
 board, for the purpose of further exploiting the stockholders. 
 
 Among the acts so startling and sensational as to vie in interest 
 with the wildest fiction may be mentioned the following: 
 
 The chairman of the executive committee, L. F. Loree, in addition 
 to a salary of $75,000 per annum, demanded and received a contract 
 giving him a present or "bonus" in an additional sum of $500,000 
 after the expirat ion of his five-year contract. Owing to trouble which 
 arose between him and the rest of the board after only 10 months' 
 service, he was given a "bonus'' of $450,000 to quit the job, so that 
 his compensation for 10 months exceeded $500,000. 
 
 A majority of the officers took money from the company's treasury 
 whenever they desired without warrant of law or without specifying 
 the purpose the money was to be used for. A stockholder who 
 brought suit to secure an investigation and an accounting of the acts 
 of the directors was paid $217,000 to rehnquish his suit in order to 
 keep these facts from public knowledge. 
 
 The following extracts from tho official report of the commission 
 giving a sketch of the system, the methods by which the directors 
 squandered the funds of the stockholders in extravagance, specula- 
 
932 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 tion, and dishonesty; and the conclusions of the Interstate Commerce 
 Commission are found on pages 43 to 61 of the report. 
 
 In 1902 the main line of Ihe Chicajro, Rock Island & Parific Iliiilway Co. extended 
 from Chicago to Denver, with branch lines to St. Paul, Minneapolis, and Kansas City. 
 The territory served is one of the richest and most prosperous in the country and the 
 system's rami fical ion of branch linos insures to it a larj^e volumo of tonnage It was 
 then thriving and its prosp^vts were promising, its stock selling in the markets of the 
 world at more than $200 a share. In 1914 the shares had fallen to $20 and the road is 
 now in receivers' hands. The evid'"'nce shows that the earnings of the railway com- 
 pany have steadily increased, and that in 1914 they were the largest in its history. 
 
 On June 4, 1902. the capital stock of the railway company was increa=*ed to $75,000,000 
 and the board authorized President Leeds to sell to certain individuals portions of this 
 increased stock at par, although at the time the stock was quoted on the market above 
 175. 
 
 The original articles of consolidation provide that the maximum of indebtedness 
 to which the company might subject itself should not exceed two-thirds of its out- 
 standing capital stock. This maximum has been increased from time to time until 
 the funded debt of the railway on June 30, 1914, was $2.38.740,000, an increase of 
 nearly $175,208,000 over the amount outManding on June 30, 190]. On June 30, 1914, 
 the total capitalization of the railway company was $313,741,000. Of this amount only 
 $75,000,000. or 28.73 per cent, was capital stock on which dividends might or might 
 not be paid, according as the net earnings of the fompany might or might not warrant. 
 The remainitig 71.27 per cent of the total capitalization coUvsisted of interest-bearing 
 debt, including $3,500,000 of short-term loans, on which interest was required to be 
 paid regardless of earnings. 
 
 In 1902 plans were laid by five directors to form a syndicate and 
 holding company and secure control of the road to plunder and to 
 wreck it. 
 
 The following is from the official record : 
 
 SYNDICATE CONTROL. 
 
 In 1901 Daniel G. Reid, W. H. Moore, J. H. Moore, and W. B. Leeds purchased 
 about $20,000,000 of stock of the company, and by the use of proxies they soon became 
 members of the board of directors, W. B. Leeds being made president and D. G. 
 Reid chairman of the executive committee. This syndicate procured the selection 
 of other members of the board of directors, notably F. L. Hine, George McMurtry, and 
 George T. Boggs, each of whom appears to have acted and voted in accordance with 
 the wishes of the members of the syndicate. One other director stated that he knew 
 but little of what was being transacted in the affairs of the railway company, and that 
 he was a member of so many other boards of directors that he had no opportunity to 
 examine into things for himself, but had to take the word of those in authority. Thus 
 the syndicate controlled the board through the directorships held by themselves and 
 by those subject to their wishes. 
 
 ORGANIZATION AND USE OF HOLDING COMPANIES. 
 
 In July, 1902, the syndicate organized two holding companies, the Chicago, Rock 
 Island & Pacific Railroad Co. of Iowa, and the Rock Island Co. of New Jersey. The 
 railway or operating company will be referred to hereinafter as the railway company, 
 and the holding companies as the Iowa company and the New Jersey company, 
 respectively. The St. Louis & San Francisco Railroad Co. will be referred to as the 
 Frisco. 
 
 The directors paid a large sum to have a suit suppressed which 
 would have exposed their illegal transactions. . Upon page 46 occurs 
 the following: 
 
 A significant transaction at this time is that growing out of the action of C. IT. Venner, 
 a stockholder of the railway company. He made demands upon the officers of the 
 railway company in December, 1902. and in January, 1903, for a list of its share- 
 holders. Being ignored, he instituted on January 31, 1903. a proceedins in a State 
 court of Illinois to enjoin the organization of the holding companies and the exchange 
 of railway company stock for their securities. In February and March. 1901, the 
 railway company paid Venner $291,000, ostensibly in consideration of his delivery 
 
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 933 
 
 tD it of securities of the New Jersey company and of the railway company valued 
 at 591,000 and stock of the Nebreaska Central Railway and of the Nebraska Con- 
 struf'tion Co. of a nominal value of $200,000. Thereupon the suit to restrain the 
 holding; companies' plan was dismissed. Neither the Nebraska Central Railway Co. 
 nor thp Nebraska Co istru'.'tion Co. had any road or othf>r taniril>le assets, and their 
 stock is therefore considered to be without value. The conclusion is obvious that the 
 payments to Venner were in consideration of his refrainincf from further pro.secutin» 
 in the courts his opposition to the syndicate plans. The railway company incurred 
 in this liti'^ation expenses amounting to about $17,000. 
 
 Compensation and peculations of officers who defend salaries of 
 $50,000 to $75,000 for themselves, hut assign the wages of clerks, 
 telegraph operators, conductors, and hrakemen as the reason for the 
 financial troubles of the road. — On pages 47-50 is the following: 
 
 SALARIES OP AND CONTRIBUTIONS TO OFFICERS AND DIRECTORS. 
 
 The salaries paid to some of the principal officers at various periods were as follows : 
 
 Per annum, 
 
 H. U. Mudge, president $60,000 
 
 L. F. Loree, cliiirman executive committee (one-half to be paid by the Frisco) 75, 000 
 
 R. A. Jackson, vice president and general solicitor 50, 000 
 
 R. R. Cable, member of board of directors 32,000 
 
 W. B. T,eeds, president 32. 000 
 
 B. L. Winchell, president 40,000 
 
 B. F. Yoakum, chairman executive committee 30,000 
 
 Daniel G. Reid, chairman board of directors 32,000 
 
 C. H. Warren, first vice president 35,000 
 
 W. G. Purdy, upon his retirement from the presidency, was given two years' salary 
 at ?22,o00 per annum. 
 
 Mr. Mudge, president of the railway company and now one of the receivers, asserted 
 that the troubles of the railway were in a measure due to increase of wages and gov- 
 ernmental regulations. When asked what wages he referred to as being increased 
 he pointed out the wages of clerks, telegraph operators, conductors, and brakemen. 
 While he regarded the wages of these minor employees as having partially sapped 
 the financial strength of the railway, he declared that the salaries paid to the higher 
 officers of the company had no appreciable effect on its expenses. 
 
 1). G. Reid, upon the witness stand, was interrogated and answered as follows: 
 
 "Question. Mr. Reid, do you think these men earned these high salaries? 
 
 "Answer. I do not think there is a man who did not earn more than he was getting. 
 
 "Question. In other words, you defend paying these high salaries? 
 
 "Answer. I defend nothing. Here is 8,000 miles of railway; a man who can run 
 8,000 miles of railroad is worth all he can get." 
 
 Many large contributions were made to officers and directors of the railway company. 
 George T. Boggs, a director and secretary to the board of directors of the railway 
 company, and also a director in the two holding companies, admitted that he served* 
 in these capacities merely as a dummy for the syndicate. On the question of the 
 right of the public to have corporate funds of common carriers properly applied, he 
 testified as follows: 
 
 "Question. Do you consider that the directors of a railway company, a public 
 service corporation, have the right to do whatever they please with the money -of the 
 railway company? 
 
 "Answer. As in their judgment seemed right; yes. 
 
 "Question. Did it ever occur to you that the money in the treasury of the railway 
 company was the result of taxation of the public in passenger and freight tariffs, and 
 that the public had an interest in the funds in the treasury? 
 
 "Answer. 1 don't know that I ever thought of it particularly. 
 . "Question. And that the public had a concern in the funds" of the railway company 
 not being dissipated in order that they might be applied to improvements and bet- 
 terments and to proper purposes? 
 
 "Answer. I never considered that they were dissipated. 
 
 "Question. And did il;ever occur to you that in taking money from the treasury 
 of the railway company, a public-service corporation, an additional burden was 
 placed upon the passenger and freight traffic in order to make good the loss? 
 
 "Answer. No; I never thought of it in that light. 
 
934 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 "Question. You don't believe it now, do you? 
 
 "Answer. No." 
 
 This opinion was also expressed in effect by other officers and directors. It appeared 
 to be the idea of those in control of the railway that it was no concern of the public 
 what became of the corporate funds so long as rates were reasonable. Tliose stating 
 this opinion apparently did not take into consideration the fact that if the funds 
 derived from transportation services are expended wastefully or corruptly the inevi- 
 table result must be either increased charges in order to enable the railway company 
 to obtain money to pay operating expenses, or bankruptcy. 
 
 Following are specific instances shown of record of the contributions referred to: 
 
 J. E. Gorman, first vice president in charge of freight and passenger traffic, was 
 secretly paid $18,7.50 per annum, making his total compensation $43,750, whereas 
 the pay roll showed $25,000. 
 
 C. A. Morse, chief engineer, received a salary of $15,000 per annum and a secret 
 bonus of $3,000 on the first of each year. 
 
 Upon the retirement of R. A. Jackson as general solicitor he was given $100,000 in 
 cash. 
 
 As an inducement to L. F. Loree, chairman of the executive committee, to relin- 
 iquish, after 10 months' service, a joint contract with the railway company and the 
 Frisco under which he was to receive a salary of $75,000 per annum for a i)eriod of five 
 yeirs and in addition was to be paid a bonus of $500,000 at the expiration of the con- 
 tract, he was given bonds of the railway company of a par value of $450,000. This 
 was borne equally by the two companies, and the proportion of the railway company 
 was charged to profit and loss. The total amount borne by the railway company in 
 this transaction exceeded $250,000. 
 
 C. II. Warren, vice prcbident, was given by the railway company $150,000 in par 
 value of the conunon and $105,000 in par value of the preferred stock of the New 
 Jersey company and $50,000 in cash. There was no board authorization for the latter 
 expenditure, the item being represented in the records of the railway company 
 merely by a voucher sjiirned by D. G. Reid. 
 
 R. R. Cable, a member of the executive committee, received from the railway 
 company $30,000 in bonds of the Iowa company, then worth $24,500. for his services 
 in the acquisition of the Burlington, Cedar Rapids & Northern Railway Co., and he 
 was paid by the latter company $S5,000 in the same transaction. Llr. Cable also 
 received another contribution, which will be referred to later. 
 
 Fobert Malher, vice president, was given $25,000 in cash. 
 
 George T. Roggs. director and secretary of the board of directors of the railway com- 
 pany, was given $15,000 in cash when he retired from the secretaryship of the railway 
 company. 
 
 As hereinbefore indicated, when the capital stock of the railway company was 
 increased to $75,000,000, shares of the par value of $880,500 were placed in the name 
 of the president, to be thereafter distributed in accordance with the following reso- 
 lution of the executive committee passed at a meeting held in New York July 1, 1902: 
 
 ** Resolved. That such portion as the president may determine of the shares of the 
 increased capital stock of the company not required for the purpose of Ihe foreeoin? 
 resolutions shall he disposed of at par by the president for the benefit of such officers 
 .of the company as the j>resident shall elect and determine." 
 
 This stock was later exchanged for securities of the Iowa and New Jersey companies 
 in the same manner as was stock of the stockholders of the railway company. 
 
 Following this exchan'jre P. R. Cable received securities of a market value of 
 $308,300 for which he ])aid $200,000. 
 
 H. A. Parker, first vice president, received securities then worth $27,900 for which 
 he paid but $15,000. 
 
 Fobert Mather received securities of a market value of $145,912 above his payments 
 therefor. 
 
 The contributions to officials of the railway company in excess of their salaries 
 aggregated about a million dollars. 
 
 • IRREGULAR VOUCHER PAYMENTS. 
 
 Unexplained vouchers for amounts aggregating $72,523.45 were disbursed to the 
 officers of the railway company for purposes not clearly defined. One such voucher 
 for $6 823.12 was drawn apparently to reimburse W. H. Moore for losses sustained by 
 him in "supporting the market while bonds of the railway company were being 
 Bold." The voucher was certified by D. G. Reid. "for the benefit of the railway 
 company." No papers were attached to the voucher and no other information was 
 available with respect to the disbursement. 
 
FEDERAL OPEBATION OF TRANSPOBTATION SYSTEMS. 935 
 
 Another voucher in favor of the Liberty National Bank of New York City, in ex- 
 hange for a cashier's check issued to Robert Mather for $25 000. is charQ;ed to "general 
 expenses" under "operating expenses." This voucher refers to a miscellaneous file 
 shown by the index thereto to have comprehended "contributions to campaign 
 committee." The file, however, was not produced and a diligent effort on the part 
 of the accountants to secure it was unavailing. Without this file it is impossible to 
 state the purpose for which the money was expended, but the generalization "con- 
 tributions to campaign committee." in the light of the practices Indulged in by the 
 syndicate in question, is clearly suggestive. 
 
 The books of the railway company reveal payments aggregating $44 066.05 to the 
 Denver Post. The vouchers attached read, "for advertising in editorial and news 
 columns." Other entries show that three of these vouchers, aggregating $20 000, 
 cover a refund that this newspaper received at the rate of 25 cents per hundred on 
 its freight carried over the lines of the railway company from points in Wisconsin. 
 
 Another voucher is for $50,000 to S. M. Felton for the railway's proportion of amount 
 "paid by E. H. Harriman and his associates for money expended by them to secure 
 the discontinuance of a line of toad being constructed in 1900 between Peoria. 111., 
 and Clinton. Iowa, as per agreement between R. R. Cable, chairman of the board, 
 and E. H. Harriman." 
 
 AGGREGATE OP LOSSES. 
 
 The aggregate losses sustained by the railway company in connection with the 
 foregoing transactions may be summarized as follows: 
 
 Expenses of maintaining and housing holding companies, more than . . . $290, 000. 00 
 
 Frisco deal, approximat ly 6, 500, 000. 00 
 
 Alton deal, approximately 6, 370, 000. 00 
 
 Trinity & Brazos Valley Ry. deal, more than 4, 500, OCO. 00 
 
 Consolidated Indiana and Bering Coal Cos.. at least 1, SOO, 000. 00 
 
 Contributions or gratuities to officers and directors, about 1, 000, 000. CO 
 
 Venner transaction 21 7, 000. 00 
 
 Miscellaneous and unexplained expenditures. 72. 523. 45 
 
 These items show an aggregate loss to the railway company of more than $20,000,000. 
 In addition thereto it is to be noted that prior to June 30, 1914, the railway company 
 paid to financial institutions, in connection with the issuance of bonds, commissions 
 aggregating more than $1,600,000 and suffered discounts of more than $17,700,000. 
 
 INDIVIDUAL PROFITS OP PROMOTERS, OFFICERS, AND DIRECTORS OP THE HOLDING 
 
 COMPANIES. 
 
 The amount of gains accruing to W. B. Leeds, D. G. Reid, W. H. Moore, and J. H. 
 Moore through their control and manipulation of the railway company are probably 
 not ascertainable. Reid. when interrogatod with a view to ascertaining his profits 
 from the various transactions, explained that he always burned his books at the end 
 of each month. 
 
 The quotations placed in the record from the stock market of the New Jersey com- 
 
 Eany stock and the railway company stock showed wide fluctuations. W hatever have 
 een the gains realized by these persons, it is certain that the present holders of the 
 stocks and bonds of the holding companies have that which is of little or no value. 
 
 REPORTS TO STOCKHOLDERS, 
 
 Misrepresentation of assets in reports to stockholders appears to have been a prac- 
 tice of the directors of the railway company. On June 30, 1904, a book surplus was 
 claimed for the railway company of $22,343,955.26. By June 30, 1914. the company 
 conceded a reduction of this surplus to $6,199,841.08, and even this amount was 
 
 fictitious. 
 
 ******* 
 
 The directors also reported as assets the 5 per cent debenture bonds of the Iowa 
 company, which were in fact worthless, but which were reported as worth nearly 
 16,000,000. 
 
 In view of the fact that the reported value of the "securities" listed for the year 
 1914 was nearly $18,000,000 in excess of their actual value, instead of a surplus of 
 more than $6,000,000, claimed by the railway company, there should have been shown 
 a deficit of over $11,600,000, 
 
 Another misleading and objectionable practice of the railway company oflBcials was 
 the failure to state on the pay roll the true amounts paid to its oQlceTB, 
 
936 FEDEBAL OPERATION OP TRANSPORTATION SYSTEMS. 
 
 The publication of misleading reports to stockholders can not be too severely con- 
 dennsd, and the individuals guilty of such acts should be subject to adequate 
 penalties. 
 
 The bankrupting of railwaj^s in the United States has invariably 
 occurred from maladministration and speculation on the part of the 
 officers in charge, and never because of insufficient revenues when 
 wisely and honestly administered. Receiverships have always re- 
 sulted from the above cause or else have been planned by directors 
 for their own private gain. In some cases the condition of the 
 companies did not warrant receiverships, even though the directors 
 had placed their companies in an embarrassing condition. The 
 receivership of the Rock Island system is an example of the cause 
 last nientioned, and was planned without the knowledge of the 
 majority of the board by a conspiracy of a few directors in which 
 they were joined by the chief counsel of the company, who afterwards 
 acted as receiver m their interest. "Fake" legarproceedings were 
 had through attorneys employed fraudulently to prevent the stock- 
 holders defending their rights. 
 
 The following is taken from the official report: 
 
 RECEIVERSHIP. 
 
 The syndicate decided to put the railway into a receivership. The general counsel 
 of the railway company at the suggestion of W. II. Moore, a member of the syndicate, 
 drew the bill asking for a receivership and engaged an attorney ostensibly to represent 
 the other side. The bill was placed in the hands of this attorney with the name of the 
 complainant omitted and he was instructed by the general counsel to locate some 
 creditor of the railway company willing to act as complainant. There was an agree- 
 ment between the general counsel and this attorney as to the parties the latter would 
 recommend to the court as receivers, the general counsel agreeing to instruct the 
 attorney appearing for the railway company to acquiesce in the recommendations so 
 made. 
 
 The board of directors of the railway company was not informed of the intention to 
 file a bill for receivership and at no meeting of the board was any authority ever 
 given for such action. Members of the board of directors not in the confidence of the 
 syndicate were kept in ignorance of the fact that such a bill had been prepared. The 
 stockholders had no information of the purpose to put the railway company into a 
 receivership, although a stockholders' meeting was held after the date upon which 
 the receivership bill was completed by the general counsel, and this general counsel 
 attended the meeting. According to the testimony, the Bill was completed by the 
 general counsel March 29, 1915, and the fact that it' was to be filed whenever desired 
 by those in authority was known only to certain insiders. The testimony clearly 
 establishes the fact that the railway company could easily have paid the debt of 
 $16,000 upon which the receivership application was based, and that arrangements 
 probably could have been made to meet all pressing obligations of the railway 
 company. 
 
 The creditor at whose instance the receivership application was filed appeared as 
 complainant by request. R. P. Lamont, the president of the American Steel Foun- 
 dries, the complainant, testified that he would not have thought of bringing such a 
 proceeding against the railway company unless he had understood that it would be 
 regarded as not unfriendly but as a friendly act to oblige the railway company. He 
 only consented that his company should appear as complainant when he was assured 
 that this course was in accordance with the wishes of the railway company and that 
 his company was not to have any care or expense in the preparation of papers or pay- 
 ment of counsel fees. The suit was not a bona fide proceeding to collect a debt, but 
 was instituted to carry out the purposes and schemes of the syndicate controlling the 
 r-iilway. 
 
 N, L, Amster, who was elected to the board of directors of the railway companv by 
 the minority stockholders at the stockholders' meeting held in Chicago, April 12, 
 1915, believing, according to his testimony, that no sincere effort was being made by 
 other members of the board to finance the obligations of the railway, undertook to 
 assist in raising about $6,000,000 needed by the railway to meet obligations soon 
 thereafter to mature. On April 16, 1915, he met and conferred with Messrs. James, 
 
FEDERAL OPEBATION OF TKANSPORTATION SYSTEMS. 937 
 
 McLean, and Schumacher, all directors of the railway and members of the executive 
 committee, and discussed the company's finances. These three expressed approval 
 of his purpose to negotiate for the money. Amster testified that he Lad secured as- 
 surances for the furnishing of the money from responsible Boston bankers on securities 
 which the railway company had. When he arrived in New York on the morning of 
 April 20 to report this fact he went to the office of the railway company, and, quoting 
 his testimony, "could not find anybody there that would say anything, except a lot of 
 people moving back and forth. I left the office and found on the ticker that the 
 Rock Island had been put in the hands of a receiver." This, Amster testified, was 
 the first information he had of the receivership or that such a step was in prepara- 
 tion, yet he was a director of the road and after the stockholders' meeting in Chicago, 
 April 12, traveled from Chicago to New York with Roberts Walker, the general coun- 
 sel of the railway company. 
 
 It will be remembered that the bill was completed by the general 
 counsel on March 29, this fact being known onl}^ to a special few. 
 
 The bill was filed April 20. The records of the New York stock market reveal that 
 the railway stock was inactive until the day this bill was completed, March 29. Then 
 the stock b^gan to be largely dealt in, and the price increased from $20 to $39 a share. 
 When the bill was filed and receivers were appointed the stock dropped from $39 to 
 $20 a share. 
 
 1 1 is a forceful commentary on the methods by which a great railway may be ma- 
 nipulated into a receivership, when it is noted that the general couns3l, after drawing 
 the bill for a rec3iver3hip, sold his stock, and the local couns?), who reprrs^nted the 
 railway company ii th? r^cnvership proceediigs owned no stock in the railway com- 
 pany, and that none of thos3 directly participiting in the receivership proceedings 
 had any financial interest in the railway companv. The real owners of the railway, 
 the stockholders, the S3curity holders, and the directors, except th^se composing the 
 svndicate and in its confidence, were in ignorance of the receivership application. 
 Mr, Mudge, former president of the railway company, is one of the receivers. 
 
 The g3neral counsal for the railway companv, who planned the receivership in 
 obedience to the will of the syndicate, is now counsel for the receivers. 
 
 SUMMARY AND CONCLUSION. 
 
 This review, giving a brief glance at the wild speculations, frauds, 
 and conspiracies of the officials to plunder and wreck the properties 
 intrusted to their care and place heavy burdens upon both the 
 stockholders and public, needs no further commentary than the 
 closing words of the Interstate Commerce Commission in its report: 
 
 The property of t'le railway company will be called upon for many years to make 
 up the drain upon its resources resulting from transactions outside tl e proper sphere 
 in which stockholders had a right to suppose their moneys were invested. This 
 record emphasizes the need of railway directors who uctually direct. There are too 
 many passive directors who acquiesce in what is being done without knowledge and 
 without investigation. A director of a railroad is a quasi public ofFcial who occupies 
 a position of tiust. A director who submits blindly to the exploitation of his com- 
 pany is a paity to its undoing and lie should be held responsible to tl e same extent 
 as it he had been a principal instead of an accessory before the fact. The greater his 
 prominence the greater his responsibility and the greater his dereliction. Obviously 
 a man of large affairs could not attend to all the details in intricate transactions, but 
 it is inconceivable that a director of ordinary business prudence and sagacity would 
 sanction large expenditures without an inquiry as to the purposes of such disburse- 
 ments. So long as this situation exists, however, it suggests the need of a law to 
 charge such directors with individual responsibility for tne dissipation of corporate 
 funds. 
 
 The Clayton Antitrust Act, which becomes effective October 15, 1916, will make it 
 unlawful for any parson at the same time to be a director in two or more competing 
 corporations, anv one of which has a capital, surplus, or undivided profits aggregating 
 more than $1,000,000, but common carriers are expressly exempted from its applica- 
 tion. It should be just as grave an offense for an official of a railway to be faithless to 
 his trust for financial sriin as it is for an elected official of the Government to betray his 
 trust for money reward. 
 
938 FEDERAL OPERATION OP TRANSPORTATION SYSTEMS. 
 
 THE LOUISVILLE & NASHVILLE RAILWAY SYSTEM. 
 
 This railway system was investigated by the Interstate Commerce 
 Commission. The results of its investij^ation are to be found in the 
 official report of the commission No. 6319, dated February 16, 1915, 
 entitled: /'In re Financial Relations, Rates, and Practices of the 
 Louisville & Nashville Railroad Co., the Nashville, Chattanooga & 
 St. Louis Railway, and other Carriers." 
 
 This investi^ration was the result of a resolution of the United States 
 Senate, prompted by complaints of the public respecting illegal acts 
 of the above company and its subsidiaries, in which it requested the 
 Interstate Commerce Commission to inquire into the financial afi^airs 
 and capitalization of the company, its practices, and its efforts to 
 illecrally influence or control politics, legislation, and pubhc opinion. 
 
 ^Pecause of the fact that some of the records and accounts of the 
 company had been burned by them and the further fact that the 
 commission was permitted by the company to inspact but part of 
 those which remained, and the further ifact that the officials of the 
 road and other witnesses summoned to app3ar bsfore the commission 
 refused to testify, the commission was unable to ascertain but part 
 of the facts. The testimony obtained was, however, sufficient to 
 incriminate the company in many unlawful acts, among the ipost 
 important of which were the violation of laws, both Federal and 
 State, in respect to monopolies; the use of the stockholders' money 
 to control legislation, politics, and the press; and the deceptive man- 
 ner in which the accounts were kept respecting the capital investment 
 and the operating expenses. 
 
 An added romantic interest attaches to this report since it includes 
 correspondence between two railroad presidents, who proudly styled 
 themselves "Pizarro" and ''Cortez," joyfully imaginmg they have 
 "subjected the natives" and can now divide the Western Hemisphere 
 between them. 
 
 On account of the refusal of certain officials to testify before the 
 commission regarding their acts, an appeal was made to the Supreme 
 Court of the United States, which court, in December, 1917, issued 
 a mandamus directing these witnesses to appear before the commissioa 
 and testify. When this additional evidence is taken, the result will 
 be to make the investigation of added interest. 
 
 As the stories of all the railwa}^ systems investigated by the com- 
 mission are nearly identical and include practically all of the same 
 illegal acts, we will, for lack of space, record only some of the prin- 
 cipal features brought out in this case. 
 
 The following brief extracts from the commission's report, out- 
 lining the history of the road, its accounting as to capitalization, 
 operating expenses, etc., appear in pages 168-173: 
 
 METHOD OF THE INVESTIGATION. 
 
 On November 10, 1913, immediately following the adoption of the Senate resolution 
 above referred to, the commission ordered an investigation into the questions pre- 
 sented and served formal notice of this investigation upon the carriers concerned. 
 Thereafter examiners of the commission were directed to examine the accounts, 
 records, and memoranda of the Louisville & Nashville Railroad Co. and the Nashville, 
 Chattanooga & St. Louis Railway with a view to securing all information in the files 
 of these carriers that would throw light upon the questions contained in the Senate 
 resolution, ^'ertain obstructions have been placed in the way of the commission's 
 
FEDEKAL OPERATION OP TBANSPOBTATION SYSTEMS. 939 
 
 examiners by the carriers, and these will be referred to later. The facts stated herein 
 were secured from the annual and statistical reports and the contracts and tariffs on 
 file with the commission, from such of the carriers' records and accounts as were volun- 
 tarily submitted by them; from testimony given at formal hearings in other cases 
 before the commission; and in a few cases, that will be indicated, from interviews by 
 the commission's examiners with railroad officials and other persons. The questions 
 presented by the resolution will be stated and answered in numerical order, accom- 
 panied by such comment as seems necessary. Following the report will be found an 
 appendix illustrating and supplementing certain of the answers. 
 
 INTEREST OP THE LOUISVILLE & NASHVILLE RAILROAD CO. IN OTHER RAILROADS, 
 
 The Louisville & Nashville Railroad Co. was incorporated in Kentucky in 1850, 
 The line from Louisville to Nashville, 185.81 miles iri length, was completed ai d 
 placed in operation in 1859, forming the nucleus of the present system. Various ex- 
 tensions have since been constructed aggregating 399.56 miles, and making a total of 
 585.37 miles constructed by the company under its own charter. The annual report 
 of this carrier to its stockholders of the year ended June 30, 1913, shows that it owned 
 or controlled on that date 7,889.77 miles of road. A comparison of the miles of road 
 constructed by this company under its own charter with the total miles of road owned 
 or controlled by it well illustrates its activity in securing control of other railroads. 
 
 The several lines acquired by the Louisville & Nashville through purchase, lea.se, 
 control, or otherwise, together with the dates of acquisition and the length of each, are 
 listed under appropriate captions in Appendix A to this report. 
 
 COST OP ROAD. 
 
 Before the Louisville & Nashville advised the commission that such of its records 
 as were made prior to August 28, 190G, would not be submitted for inspection, 
 schedules of most of the cost of road accounts had been drawn from the ledgers prepara- 
 tory to completing the analysis of the accounts from information to be secured from 
 the journals and other records of original entry. While a complete analysis of these 
 accounts was prevented by the Louisville & Nashville the preliminary analysis was 
 sufficient to indicate that the cost of road account is heavily burdened ^^ith charges 
 which do not represent actual construction cost. From such incomplete information 
 it is concluded that at least $16,000,000 shown in the cost of road accounts covers 
 items which should not be charged as a part of the cost of this carrier's road, as follows: 
 
 Charges included in cost of road accounts but not expended for actual construction. 
 
 Discount on stock $1, 440. 018. 00 
 
 Other expen.ses in connection with the sale of stock 82,671.48 
 
 Discount on bonds 2, 192, 142. 57 
 
 Other expenses in connection with the sale of bonds 8, 537. 95 
 
 Interest and dividends 1, 917, 535. 13 
 
 Amounts credited to profit and loss: 
 
 For reasons not stated $2, 640, 000. 00 
 
 To provide a surplus in order that a stock dividend 
 
 of 100 per cent might be paid 6, 300, 000. 00 
 
 To raise book value of stock above the actual cost 
 
 of acquirement 1, 422, 784. 00 
 
 To adjust difference between advances made for 
 construction and par value of bonds received in 
 
 settlement therefor 78, 447. 72 
 
 10, 441, 231. 72 
 
 16, 032, 1'^.fi. 85 
 
 The above statement is illustrative of the character of charges which the carrier 
 has included in its cost of road account. A full examination of the carrier's accounts 
 might disclose conditions under which some of the above amounts could properly be 
 charged to cost of road account, but it is also possible tliat other improper items 
 would be found which would greatly augment the amount shown. 
 
 StocJc and dividends of 100 to 200 per cent declared and excessive 
 charges made to property account. — The extracts referring to the 
 above subjects are taken from pages 171-173 of the commission's 
 report. 
 
940 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 STOCK DIVIDENDS DECLARED. 
 
 A3 shown in th? above table, a stock dividend of 100 p3r cent was declared by the 
 Loiisville <fe Nashville on October 6, 1880. According? to a corporate history of this 
 railroad, which was found in its office, 10 stock dividends were declared by this 
 company between 1880 and 1891. 
 
 * * * ■» it * * 
 
 To make pi33ible the stock dividend of 100 p3r cent declared on October 6, 1880, 
 the aiionnt of sirplus wa? arbitrarily increased by rai^ins^ the book value of certain 
 a^33ts. FriTi th3 corpiratg history above r3ferr9d to it app3ar3 that when this divi- 
 d^nl was declared the book value of the carrier's proparty exceeded its capital stock 
 liability. 
 
 ******* 
 
 To meet this situation the assets of the company were revalued, and the board of 
 directors voted that the book value of certain assets should be increased. Accord- 
 iuG^ly entries were made on the books of the company creditinp; the profit and loss 
 account and corre^pondino^ly increasing the book value of the following assets in the 
 amounts shown below to $7,212,226. 
 
 The above-mentioned entries brought the profit and loss account to 110,883,609, to 
 which was charged the 100 p3r cent dividend of $9,005,000. 
 
 The above facts illustrate the manner in which p3rmanent improvements on the 
 Louisville & Nashville have in the pist to a large extent been made out of earnings 
 and subsequent! V charged to the capital account. As the commission in its annual 
 reports has previously pointed out, only by the fullest publicity and public sujoer- 
 vision of stock and bond issues may such increasing of the capital accounts of carriers 
 at the expense of the public be prevented. 
 
 EXCESSIVE CHARGES TO PROPERTY ACCOUNT. 
 
 The issued capital stock of this carrier amounts to $16,000,000, par value, of which 
 $15,^84,787.50, par value, is outstanding. It appears that cash aggregating only 
 about $9,831,840.77 was received for this stock, while an amount exceeding 
 $8,107,398.50 was given to stockholders in the form of stock dividends and by the 
 sale of stock at prices below par and also below market value. Included in this 
 amount is a stock dividend of 200 per cent on the outstanding capital, which was 
 authorized by the board of directors on August 10, 1873. The dividend as origina'ly 
 declared amounted to $4,324,032.98, which was charged to the carrier's property 
 investment account on July 31, 1873, as an offset to the carrier's liability for stock 
 issued from which no funds were derived. Later the dividend was increased 
 $251,671.79, which amount, however, was not charged to property investment but 
 to profit and loss. Of this amount $181,537.88 was recorded in the books by an entry 
 dated June 39, 1875, and represented the dividends of 200 per cent on $91,201.44 of 
 capital stock held in the treasury. 
 
 How the directors spent l^rge sums of the stockholders^ money to 
 control the press, politics, and legislation and to influence public senti- 
 ment, for which purpose they formed the '' Tennessee Railroad Associa- 
 tion"; other ''falce'' organizations for the same purpose were formed. — 
 The foUowing extracts are from pages 229 to 233 of the report: 
 
 EXPENSES FOR THE PURPOSE OF MAINTAINING POLITICAL AND LEGISLATIVE AGENTS 
 
 Expenditures by the Louisville & Nashville during this period which appear to 
 have been for the purpose of maintaining political and legislative agents amounted 
 to $23,274.41. This amount was distributed as follows: 
 
 Expenditures for securing copies of and information concerning legislative 
 
 bills (>l particular interest to the Louisville & Nashville $1, 413. 58 
 
 Expenditures directly assignable to specific le^^islation 5, 596. 60 
 
 Contri].utii)ns to various committees or associations for the purpose of 
 influencing legislation 6, 611. 29 
 
 Expenditures on account of legislative agents in general 9, 652. 94 
 
 FOR THE PURPOSE OF INFLUENCING PUBLIC SENTIMENT. 
 
 The accounts of the Louisville & Nashville disclose that between September 1, 
 1906, and July 1, 1914, this carrier expended at least $39,322.48 for the purpose of 
 creating: public sentiment in favor of its plans. 
 
 Of this amount, over $53,000 was spent in a publicity campaign in Alabama in the 
 endeavor to mold public opinion through the medium of the press. Part of the 
 
FEDERAL OPEEATION OF TRANSPORIATION SYSTEMS. 941 
 
 balance was contributed by the Louisville & xVashville to a fund made up by numerous 
 carriers to finance a campaign in Louisiana to prevent the change of tax laws. In 
 order that the railroads concerned might preserve an outward appearance of indif- 
 ference in regard to the legislation in question, the contributions for this purpose 
 were placed in the hands of a bank to be disbursed by it as if in furtherance of bank- 
 ing interests. If the commission's examiners had been accorded access to the corre- 
 spondence files of this carrier and to its accounts prior to 1906, there seems no doubt 
 that information as to other substantial expenditures for the purposes referred to in 
 the question would have been secured. 
 
 TEN'NESSEE RAILROAD ASSOCIATION. 
 
 The Louisville & Nashville was one of the railroads which about 1884, for the pur- 
 pose of combating adverse legislation in Tennessee, formed the Tennessee Railroad 
 Association. 
 
 A large number of vouchers, aggregating, between September 1, 1906, and July 1, 
 1914, approximately $295,000, were issued by this carrier to various persons, as to 
 which the accounts contained no information other than that the expenditures were 
 for "special" services and expenses. Although a number of these vouchers bore 
 the notation "as per statement on file in the general manager's office," a request that 
 such files be submitted for inspection was denied. 
 
 Numerous other vouchers issued between September. 1906. and July, 1911. and 
 aggregating $67 722.30. are recorded as having been issued under the direction of the 
 legal or executive departments without the purpose being stated. These were for 
 amounts in excess of $1 000 — one such voucher, made in February. 1910, is for 
 $20 715.06. Whether such sums were spent for the purposes referred to in the question 
 can not be determined. 
 
 The character of some of the special ledger accounts recording large expenditures, 
 the purpose of which could not be learned Ifrom the accounts is outlined below: 
 
 An account was opened in the name of the Immigration & Industrial Association 
 of Alabama in January. 1907. This records cash advanced to George W. Jones, 
 assistant district attorney at Montgomery, Ala., made under the authority of the first 
 vice president; $13 068.80 was charged to this account; $7,808.86 was re-collected 
 from other carriers who were parties to the association and credited to this account. 
 The balance of $5 199.94 remaining was charged to operating expenses by authority 
 of the first vice president. The nature of this account is indicated by notations on 
 the treasurers statements of cash receipts entered therein, such as "proportion of 
 expenses account adjourned session of Alabama Legislature." 
 
 The above are illustrative of numerous suspense accounts opened prior to 1913 in 
 which the entries were of such a vague character as not to disclose the purposes for which 
 they were kept. Under the accounting rules prescribed by the commission the keeping 
 of such vague accounts at the present time would subject the carriers to prosecution . 
 
 In the testimony taken during these investigations bj the com- 
 mission, which is printed in a volume of 519 closely prmted pages 
 (S.Doc. No. 461, 64th Cong., 1st sess., 1916), over 150 pages of testimony 
 appear in reference to the bribing of legislators, chiefly through 
 passes, which aggregated over 7,000,000 miles of free transportation. 
 These passes were accepted by governors and in many cases by 
 judges, as well as by more than 90 per cent of the members of the 
 legislatures of the various States through which the lines passed. 
 That these passes were understood by the legislators as bribes is 
 clearly shown in letters where they promise the railway officials to 
 ''give them whatever they wanted" m return for the passes. An 
 interesting letter is one introduced in the evidence, in which the 
 writer addresses the railway official as "Dear Bribe Giver:" 
 
 [J. A. Clement, lawyer, suite 11-12 Baker Building.] 
 
 Dickson, Tenn., October 7, 1915. 
 Mr. D. G. Hudson, 
 
 Nashville, Tenn. 
 Dear Btube Giver: You promised me Saturday you would send pass for Mr. C. 
 from Dickson to Nashville and return, Monday, but you overlooked yoiu- hand again. 
 Luke must have you thinking. Please send it by the 2.15 train to-morrow, if possible. 
 
 Yours truly, J. A. Clement. 
 
942 FEDERAL OPEKATION OP TRANSPORTATION SYSTEMS. 
 
 Division of tioo continents. — Having subjugated the American citi- 
 zens, as they thought, as did Cortes and Pizarro of old, two railroad 
 Presidents proposed to divide the Western Hemisphere between them. 
 Dme of the most interesting testimony, bordering upon the romantic 
 days when Pizarro and -Cortes subjugated the natives of tlie Western 
 Hemisphere about four centuries ago, is to be found in the testimony 
 of two railroad presidents who having, as they thought, secured' the 
 subjection of the present American people as did those plunderers of 
 old, felt the time had arrived when they couLl enjoy the realization 
 of their further dreams of conquest and accordingly, under the names 
 of "Pizarro'^ and ^'Cortez," Milton H. Smith, president of the Louis- 
 ville 8c Nashville Railway System, and Samuel Spencer, president of 
 the Southern Railway, gave vent to their feelings of pride and joy 
 in some very interesting correspondence, to be found in the testimony 
 taken by the commission and published as Senate Document 461, 
 Sixty-fourth Congress, first session, entitled *' Louisville & Nashville 
 Railway Company Hearings Before the Interstate Commerce Com- 
 mission," 1916. This correspondence, exemplifying the illimitable 
 aml)iti^ns of railway financiers, is of great interest. The following 
 extracts from the testimony of President Smith and the letters 
 referred to appear on pages 369 to 372 of the document. 
 
 A letter from President Smith, of the Louisville & Nashville Railroad, to President 
 Spencer, of the Southern Railway : 
 
 [rersonal and confidential.] 
 
 On Pennsylvania Railroad Train No. 21, 
 
 February 22 y 1896. 
 Samuel Spencer, Esq., 
 
 President Southern Railway, 60 Broadway, New Vorl City. 
 
 Dear Sir: 
 
 Pizarro. How shall we divide the new world? 
 
 CoRTEz. I will ta' e North America and you can have all of South America, except 
 , and neither of us will do anything to the Isthmus without notice to and cooper- 
 ation of the other. 
 
 Pizarro. While Patagonia is not a very large or important part of the world, yet, 
 perhaps, it is as muc h as I can tote. 
 
 Refer to typewritten report of our interview at Kenesaw, Ga., on October 28, 1894, 
 and to the interviews and correspondence that ha\e taken p^ace since that date, and 
 to that portion of our interview of this morning re'atine to the future of certain railroads 
 that are or may be tributary or competitive with roads controlled by the L. & N. R. R. 
 and the Southern Ry. 
 
 May it not be well to review the subject and perhaps make our understandings more 
 specific? 
 
 Your affairs, since our interview in October, 1894, progressed with rapidity, and 
 without, so far as I know, encountering serious difficulties. You have acquired the 
 G. S. & v., the Atlanta & Florida, and the Central Railroad has been reorganized in 
 accordance with your p^ans. I do not recall now what has been done with the Macon 
 & Northern, nor what has been done with the G. M. & G., Macon & B'ham, and one 
 or two other roads, aHhough I be'ieve you told me that your intention was to allow the 
 Macon & B'ham to be abandoned. The Paducah, Tenn. & Alabama and Tenn. 
 Midland Rds. have been disposed of as anticipated. The L. & N. will not compete 
 for the control of the M. & 0. Rd. The L. & N. will not compete for the control of the 
 B'ham, Sheffield & Tenn. River Rd., provided you will acquire it, should it become 
 necessary to do so to prevent its extension into Birmingham, or will not permit it to 
 get into a position where it may become a disturber. The L. & N. Rd. will not com- 
 pete for the control of the Mobile & Birmingham with the expectation that you will 
 acquire it. It is not clear what disposition ought to be made of the Georgia & Alabama 
 Railroad. 
 
FEDERAL OPEBATION OF TBANSPORTATION SYSTEMS. 943 
 
 I hav9 advised Mr. Belmont of our agreement that neither party will acquire the 
 prop rty of the Marietta & North Georgia Railroad Co. without the consent of the 
 other. 'You may, therefore, freely communicate with him upon the subject, and 
 T assume he will do likewise. 
 Yours, truly, 
 
 , President. 
 
 Letter from Samuel Spencer, president of the Southern Railway, to M. H. Smith, 
 president of the Louisivlle & Nashville Railroad Co. : 
 
 New York, February 29, 1896. 
 Mr. M. H. Smith, 
 
 President L. & N. R. R., Louisville, Ky. 
 
 Dear Sir; Your letter of the 22d instant. 
 
 Pizarro: Since our last conversation, the division of the New World between us 
 has made some progress. 
 
 Cortez: Yes; you seem to have acquired Patagonia, and I have secured a con- 
 siderable part of North America which touched my former territory, but it seems 
 to me you have acqnired a considerable neck of the Isthmus which is the connecting 
 liik between us. Was it understood that connecting links which touched both oi 
 of us should be a matter of consultation before acting or not? 
 
 Pizarro: * * * I agreed that it is desirable to renew the subject and, if prac- 
 ticable, to make our understanding more specific. The principles on which I think 
 this understanding should be based are: 
 
 (1) That neither the L. & N. nor the Southern, shall acquire lines in the territory 
 of the other, and that lines connecting with or touching one and not the other shall 
 be regarded as in the territory of the one which they connect or touch. 
 
 (2) That neither will acquire lines allied by former ownership, lease, or otherwise, 
 to the other, and which at the moment are not controlled by reason of pending re- 
 organizations or other cause. 
 
 (3) That neither will acquire lines which connect with or touch both, either directly 
 or through subordinate or controlled lines without previous consultation and, if 
 possible, agreement. 
 
 (4^ That neither will foster the construction of new lines or the completion of 
 unfinished ones into the territory of the other, but when questions with reference 
 to such lines arise, we shall proceed by agreement with each other, if possible. 
 
 Will you please consider this and say if such a declaration of principles is satisfac- 
 tory? 
 
 « « « « « •» 'N' 
 
 Confirming our verbal understanding of the 22d instant, I beg to say that we will 
 give no encouragement to the construction of such a line \vithout previous consulta- 
 tion and understanding with you, but if the present projectors, or others, devel* p 
 sufficient strength to carry the enterprise through from Nashville to Harriman we 
 will cooperate with you on a fair basis as to the handling of any business in con- 
 nection with it which is competitive with you. I note your advices to Mr. Belmont 
 concerning our agreement that neither party will acquire the property of the Marietta 
 & North Georgia without the consent of the other, and I confirm that agreement. 
 Yours, very truly, 
 
 S. Spencer, President. 
 
 The Pere Marquette and Cincinnati, Uamilton c£' Dayton. — The 
 history of this railroad system in its gross mismanagement, mal- 
 administration, and the peculations of the great financiers who 
 wrecked it, is largely a counterpart of the history of the three systems 
 whose rise and fall from power have already been sketched. Time 
 will not permit ^oing into the details of this interesting history, 
 which is replete with startling instances of financial legerdemain. It 
 is interesting to the people of Ohio and Michigan, through which 
 States these lines are chiefly laid, to learn of the pressure which was 
 brought to bear upon the legislatures of these States to increase the 
 rates of charge, on the excuse that they were insufficient to pay legiti- 
 mate revenue; whereas the investigations of the Interstate Com- 
 merce Commission clearly show that the troubles of this railway 
 
944 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 system were due entirely to the wild speculation and disregard of 
 tKe principles of business ethics which are practiced by reputable 
 business concerns. 
 
 The following brief extracts are taken from the official report of 
 the Interstate Commerce Commission, No. 6S33, dated March 13, 
 1917, entitled ''In re Pere Marquette Railroad Company and Cin- 
 cinnati, Hamilton & Dayton Railway Company." 
 
 INTRODUCTION. 
 
 It may be well at the outset to marshal the outstanding facts, among the many dis- 
 closed of record, which have affected the abi'ity of these two carriers to do their duty 
 as common carriers and also the value of their securities in the hands of the investing 
 p ihiio. 
 
 The Pere Marquette came into being as a consolidation of three relatively unsuc- 
 cessful Mi ?higan roads and be:^an operation on January 1, 1900. The consolidation 
 WIS brought about by New England interests heided by W. W. Crapo and Nathaniel 
 Thavc*, and in the process outstanding capital stock in the hands of the public was 
 inflated by $1,461,250 and book value of property by $4,290,230.41. The Crapo- 
 Thaver control continued for three years. Its operating policies were sound in the 
 main; rolling stock and miles operated were increased; a small surplus was accumu- 
 lated and used for im])rovements; no common-stock dividends were paid, and physical 
 condition was bettered. Outstanding long-term debt was increased by almost 
 $6,000,000 and at the end of the three years was about $31,000,000. In the next 12 
 years it was increa?ed by more than $50,000,000 under the succeeding managements. 
 
 The first of these was' the Prince management, which secured control on December 
 29, 1902, through purchaee of Pere Marquette common at a maximum of $85 per share. 
 Its policy of expansion included acquisition of new equipment costing over $6,000,000, 
 «nd of about 383 miles of main and branch lines, most of which had a history of failure. 
 ]n acquiring this mileage underhdng bonds of over $4,000,000 were assumed and 
 IPmost $3,500,000 bonds issued. The Prince interests reversed the policy of their 
 predecessors, undermaintained road and equipment, paid unearned dividends on 
 common stock, and, in the 18 months of their management, added $2,500,000 net to 
 current liabi'ities, also added over $14,500,000 to outstanding long-term debt, pro- 
 moted a C, H. & D. syndicate, and through it sold 110,000 shares of Pere Marquette 
 common to the C, H. & D. at $125 per share. 
 
 The next management was that of the C, H. & D. syndicate, which took control 
 o'' both carriers on July 7, 1904, and parted with it in the following month to the 
 Zi Timer man-Hollins interests. During these few weeks new and heavy burdens were 
 bouid upon the Pere Marquette. 
 
 ■ The Zimmerman-Hollins management succeeded to the control in August, 1904, 
 and continued the work begun by the Prince interests, with the result that when the 
 coutrol of both roads was sold to J. P. Morgan & Co. on October 20, 1905, both were 
 promptly put under the first receiverships which began in December, 1905. 
 
 Meantime another $10,000,000 of long term Pere Marquette securities had been 
 marketed through interested parties at a cost to the road of over $1,100,000 in discounts, 
 $1,645,000 was paid to certain members of Hollins's pool for their worthless stock in 
 the Toledo Railway & Terminal Co., $400,000 was advanced under syndicate schemes 
 to affiliated companies and lost, and over $1,100,000 was used to pay off floating debts 
 contracted by the Prince regime. The mileage and equipment were somewhat 
 increased. Operation was unsuccessful and resulted in deficits. 
 
 Two years of receivership were succeeded in December, 1907, by a Morgan reorgani- 
 zation based on the consolidation of the Pere Marquette with its already controlled 
 Pere Marquette of Indiana, 20 mi^es long. This furnished the pretext for further 
 stock inflation, for an issue of $5,000,000 of 6 per cent debentures, and for the writing 
 up as " cost of road and equipment" of the direct losses, aggregating almost $5,000,000, 
 of the former administrations. Morgan control has continued since, except for the 
 second receivership, which began on April 5, 1912. In the intervening yeais the Pere 
 Marquette was in constant difiicuHy, revenues failed to provide for expenses and 
 charges, and bond interest was paid only at the cost of adequate maintenance of the 
 property. Road and equipment deteriorated markedly, financing became more and 
 more difficult, and needed funds were secured only at the expense of heavy discounts. 
 The second receivership was necessary to accomplish what the first had failed to 
 accomplish — the physical and financial rehabilitation of the Pere Marquette. 
 
 The road is now emerging from the second receivership. During five years of court 
 control it has greatly improved in physical condition, and its service has improved 
 
FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 945 
 
 accordingly. Under the reorganization plan a large part of the fixed interest-bearing 
 obligations outstanding on June 30, 191G, are to be exchanged for capital stock, of 
 which there is to be $11,200,000 of 5 per cent prior preference, cumulative, $12,429,000 
 of 5 per cent preferred, cumulative, and $45,046,000 of common shares. The plan 
 contemplates a decrease of over $8,000,000 in capitalization, exclusive of overdue 
 interest on funded debt amounting to approximately $10,000,000, and a considerable 
 decrease in fixed interest charges. The new capitalization will a^so represent $16,- 
 000,000 of new money provided for reorganization expenses, additions and better- 
 ments, working capital, and other purposes. 
 
 In contrast to the Pere Marquette the C, H. & D., prior to July 7, 1904, when the 
 C, H. & D. syndicate took control, was a highly prosperous road, despite losses of 
 several millions through Henry S. Ives and his associates in the late eighties, the 
 drain of supporting less prosperous lines west of Hamilton, Ohio, a funding of deficits 
 and interest on the western lines into some $1,800,000 of bonds, and the injection in 
 1895 of $10,200,000 of water into the capital stock through the consolidation effected 
 by the Shoemaker-Woodford interests, then in control. These interests sold out to 
 the C, H. & D. syndicate in 1904, receiving $125 per share for their common stock, 
 which was water, and $110 per share for 10,000 shares of preferred stock. The surplus 
 of that date was replaced in the following year bv a deficit of at least $1,086,127.49, 
 allowance being made for some $843,000 concealed by falsification of accounts. 
 
 * * * * ■it * * 
 
 More/an control, from 1905. — The next important changes came when the control 
 of the 0., H. & D., and incidentally of the Pere Marquette, passed to the Erie Railroad 
 Co. Representatives of the Erie took charge of the Pere Marquette management on 
 October 20, 1905. Shortlv thereafter upon the rescission of the Erie's purchase of 
 the C, H. & D. from J. P. Morgan & Co., George W. Perkins, of the latter firm, on 
 December 4, 1905, went on the Pere Marquette board and the Erie representatives 
 remained. It appears that Perkins more than anyone else guided the Pere Mar- 
 quette through the reorganization following the receivership of December 4, 1905. 
 
 In discussing the matter of stock control after the first receivership consideration 
 must be given to the reorganization which followed. This "reorganization" of 
 December 11, 1907, was on paper only. The thing accomplished was release of the 
 Pere Marquette from receivership without either foreclosure or a downward adjust- 
 ment of capital liabilities. The means used as a pretext was merely the consolidation 
 of the Pere Marquette of Michigan with its subsidiary, the Pere Marquette Railroad 
 Co. of Indiana. This subsidiary will be furtl er considered, but note may be taken 
 here that it was only 20 miles long; that its capital stock of $500,000 was owned by the 
 
 Earent company; that its bonds bore the guaranty of that company; and that it had 
 een constructed, in effect, by the parent company to piece out the latter's line toward 
 Chicago. In this consolidation the name "'Pere Marquette Railroad Company" 
 was retained; capital stock, including first and second preferred as well as common, 
 was provided for to the amount of $28,500,000, equaling the authorized issues of the 
 two constituents; their funded debt and other obligations were assumed; and last, 
 but of great importance, $5,000,000 of 6 per cent five-year debenture bonds were 
 authorized to take up current indebtedness, including receiver's certificates, and \\ ere 
 offered to the stockholders. 
 
 The first board of the reorganized company, elected August 12, 1907, was a Morgan 
 board. No changes of consequence occurred in its make-up until November 5, 1909, 
 when certain representatives of the Baltimore & Ohio Railroad Company were elected, 
 following the latter road's entrance into C, H. & D. affairs. But even then the 
 Morgan interest was the dominant one in the Pere Marquette board. Early in 1911, 
 when the C, H. & D.'s 110,000 shares were finally sold to J. P. Morgan & Co., the 
 Baltimore & Oliio directors resigned. 
 
 A little more than a year later, on April 5, 1912, the road again went into the hands 
 of receivers. On March 9, 1914, there was another extensive change, with more 
 residents of Michigan on the board. 
 
 ******* 
 
 Passing now to a consideration of the roads "affiliated," it appears that for the 
 Huron & Western, which ran west from Bay City principally to serve a coal mine, 
 the Pere Marquette paid $106,559.29 to the Grand Trunk Railway system, which 
 seemingly had built it at that cost. At the same time the stock came into the posess- 
 eion of the Pere Marquette, and since 1903 the road has been operated as a part thereof. 
 At the price paid this property cost about $9,340 per mile. 
 
 No accounts of the Grand Rapids, Kalkaska & Southeastern can be found. This 
 line ran from Rapid City, Mich., in a generally southeastern direction, to Stratford, 
 Mich. It was built to connect a timber tract of the Thayer Lumber ( o., located in 
 Missaukee County, with the Chicago & West Michigan. This latter road, by contract, 
 
 41215—18 3 
 
946 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS 
 
 agreed to oversee the construction, furnish the necessary rolling stock, and lease and 
 operate the road for 10 years following its completion, paying as rental $20,000 per 
 annum plus 15 per cent of gross receipts except upon pine. 
 
 Its minute books show that the Kalkaska road was to be constructed by William 
 Alden Smith, under a contract dated October 21, 1897, by which the constructor was 
 to receive as payment $200,000 in bonds and $284,000 in stock, less such as had been 
 Subscribed by him. According to the State railroad commissioner's reports the 
 entire sum of $484,000 was treated by that carrier as cost of road and equipment. 
 
 In 1903, a few years prior to the expiration date of the lease, the Pere Marquette, 
 through a contract with George A, Fernald and others, purchased the entire capital 
 stock of the Kalkaska road for $107,000, payable in Pere Marquette consolidated 4 
 per cent bonds, and assumed its $142,000 of first mortgage 5 per cent bonds then re- 
 maining outstanding. The result was a standing minimum hxed charge against the 
 Pere Marquette of $11,380 annually for what was originally a tap line and undoubtedly 
 diminishing in value as the timber was being cut out. Speaking of this branch in 
 May, 1915, the chief operating officer of the Pere Marquette said: 
 
 "It is bad. There are 14 miles of the track from Eastman Junction to the end at 
 Stratford that is so bad that we operate it under caution, and I am about to ask the 
 railroad commission for the authority to take it up. There is no business on the branch, 
 to warrant our continuing in operation, and we are now going up there twice a week 
 to bring out what little business there is. " 
 
 * * * « * * . * 
 
 Morgan's purchase was on behalf of the Erie Railroad Co. The incidents of that 
 purchase, its speedy rescission by the Erie, and the assumption by Morgan of the 
 obligation, are later set forth. Immediately after the control had been returned to 
 Morgan a receivership was asked, and it began December 4, 1905. 
 
 ******* 
 
 vni. MORGAN MANAGEMENT, PROM 1905. 
 
 It seems proper to treat these years as one period in the history of the Pere Marquette. 
 During this period there were extensive changes in the stock ownership, particu- 
 larly in the transfer of the C, H. & D. holdings of 110,000 shares of Pere Marquette 
 common to J. P. Morgan & Co., and there were changes in the Pere Marquette direc- 
 torate as a result of the purchase of control of the C, H. & D. first by the Erie and 
 then by the Baltimore & Ohio, while the C, H. & D. still held that common. But 
 from December 4, 1905, when George W. Perkins went on the Pere Marquette board, 
 representing Morgan & Co., that firm seems at all times to have been the guiding 
 hand in Pere Marquette affairs. 
 
 The first event of importance, following the acquisition of C, H. & D. control by 
 the Erie on October 20, 1905, and the reorganization in its interest of the Pere Mar- 
 quette board, was the receivership under Judson Harmon, commencing December 4, 
 1905. This was coincident with the receivership of the C, H. & D., and on behalf 
 of Morgan & Co. it is insisted that the step was necessary in order to separate the two 
 corporations. However that may be, it is apparent that the Pere Marquette of itself 
 was then well on the way toward a receivership. It continued under a receiver 
 until December 14, 1907. 
 
 Thelosses to the stocTclioldersunder Morgan control exceed$22fi00, 000. ~ 
 The following is from page 59 of the commission's report: 
 
 Through this Morgan reorganization the Pere Marquette emerged from receivership 
 in 1907 carrying a load of outstanding capital stock and funded debt heavier by 
 $7,000,000 than that under which it was staggering when the receivership began two 
 years before. It never succeeded in carrying itself thereafter. A proper reorganiza- 
 tion would have included reduction and not increase of fixed charges. The plan of 
 reorganization dated October 30, 1916, carries marked decrease in fixed charges. 
 
 Other losses carried through the profit and loss account in addition to the results of oper- 
 ation must be considered. In the aggregate the showing to June 30, 1914, was as follows: 
 
 Debits: 
 
 Net loss from income ^12, 962, 905. 48 
 
 Debt discount extinguished 10, 500, 486. 02 
 
 Net loss on retired road and equipment 3, 054, 800. 59 
 
 Miscellaneous debits "24, 047. 40 
 
 Total debits 27,242,239.49 
 
 Credits: Miscellaneous credits 5> 1^7, 199. 76 
 
 Profit and loss balance (deficit) 22,055,039.73 
 
FEDERAL OPEKATION OF TRANSPORTATION SYSTEMS. 947 
 
 Falsification of accounts. — Under the above heading the commission 
 reports in detail certain accounts which proved to be false, respecting 
 which they make the following remarks : 
 
 12. Falsification of accounts during Zimmennan- Rollins control. — The following 
 etatement presents a condensed income account covering the year ended June 30, 
 1905, for the C, H. & D., including its proprietary line, the Cincinnati, Indianapolis 
 & Western, 1,038.24 miles operated, as recorded in the carrier's books of account: 
 
 Gross earnings from operation $6, 008, 917. 65 
 
 Operating expenses 8, 095, 885. 11 
 
 Income from operation $1, 913, 032. 54 
 
 Taxes 316, 061. 12 
 
 Net income from operation 1, 596, 971. 42 
 
 Income from other sources 59, 688. 65 
 
 Gross income.' 1, 656, 660. 07 
 
 Deductions from gross income: 
 
 Rents paid for lease of road $517, 288. 35 
 
 Miscellaneous rents 372, 273. 11 
 
 Interest accrued on funded debt 1, 009, 515. 63 
 
 Other deductions 348. 52 
 
 Total deduction from income 1, 899, 425. 61 
 
 Net deficit 242, 765. 54 
 
 The 4 per cent preferred stock bore guaranteed dividends, which makes the accrual 
 of the dividend more in the nature of a fixed charge than a division of profits. If 
 these dividends are so considered, the net deficit for the year was $251,969.20. 
 
 The foregoing income account bore little resemblance to the truth. The fact is 
 that large sums properly chargeable to the income for 1905 were ordered to be charged 
 to various other accounts and were so charged in a way to conceal the true state of 
 the company's affairs. These entries violated commonly accepted accounting prin- 
 ciples in such a flagrant manner as to make it evident that the purpose was to delib- 
 erately falsify the accounts in an effort to avoid showing the utter failure of the com- 
 pany to earn anywhere near its fixed charges. 
 
 The charges against the income of that year thus willfully omitted included inter- 
 est on loans made to retire preferred stocks; interest 
 
 But what the Zimmerman-Hollins management accomplished along that line was 
 little compared with what it attempted. 
 
 On pages 161-162 are the following, showing how false and ''fake" 
 telegrams were used: 
 
 Further, in connection with this financial statement, on which such great reliance 
 was placed, we must refer to an exchange of correspondence which occurred between 
 August 15 and 24, 1905, concerning a certain statement then being prepared at the 
 direction of the Hollins firm by President Zimmerman, and one copy of which eventu- 
 ally went to that firm and another to George W. Young. This statement is described 
 in the correspondence as one showing "capitalization, fixed charges, estimated earn- 
 ings, etc., of the C, H. & D. and P. M.," the figures for the Chicago, Cincinnati & 
 Louisville to be omitted, and this description fits well the document placed in this 
 record on behalf of J. P. Morgan & Co. It was prepared in and forwarded from Cin- 
 cinnati by N. B. Hersloff, an employee of Hollins & Co., but evidently did not show 
 as favorable results as were desired, for on August 24 the firm wired Zimmerman as 
 follows : 
 
 "Better not have Young show statement you sent him; estimate earnings too poor; 
 telegraph him in two separate telegrams, one not use statement sent him, as you have 
 aiiother corrected one, and another telegram saying have not mailed statement because 
 will bring on figures with me early next week." 
 
 One of the starthng disclosures in this investigation is the ease 
 and informaUty with which one man, in a leisure hour at his home, 
 can, on a sheet of note paper, either buy or sell a great railroad, as 
 happened in the case of the Pere Marquette. Mter referring to 
 
948 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 instances of the maladministration of this system, showing losses 
 of the stockholders of about $16,000,000, the following story of the 
 sale of this system is found in the report of the Interstate Commerce 
 Commission, on page 166: 
 
 What had happened in the 24 hours meanwhile was that J. P. Morgan and H. B. 
 Hollins had met at the former's New York residence on September 9, 1905, and 
 closed an agreement for the purchase by Morgan of Hollins's C, H. & D. stock hold- 
 ings, involving an expenditure of some $12,000,000. Francis Lynde Stetson was 
 present as Morgan's counsel and wrote the agreement on a sheet of note paper. Its 
 text follows and its significance will be further considered: 
 
 9 Sept. 1905. 
 
 219 Madison Avenue. 
 
 H. B. Hollins & Co. will sell and J. P. Morgan & Co, will purchase 56,000 shares 
 of C. H. & D. R. R. Co. Common Stock at the price of 160% with interest at the rate 
 of 4|% per annum from December 7th, 1905, until date of delivery, all dividends 
 to be credited against the interest and to J. P. Morgan & Co. 
 
 This delivery may be made by H. B. Hollins & Co. at any time, and must be made 
 by them upon October 1st, 1906, or at such time thereafter as shall be specified by 
 J. P. Morgan & Co. by three months' notice in writing. 
 
 If so requested by H. B. Hollins & Co., J. P. Morgan & Co. will lend to them upon 
 their obligations secured by C. H. & D. stock or syndicate subscriptions at 135% 
 such sums as they may find necessary to carry such stock or subscriptions, to an 
 aggregate amount not exceeding 56,000 shares, the rate of interest to be 4^%. 
 
 This contract and all obligations of J. P. Morgan & Co. may be terminated by them 
 at any time after October 1, 1906x, by three months' notice in writing by J. P. 
 Morgan & Co. 
 
 J. P. Morgan & Co. 
 H. B. Hollins & Co. 
 
 X1906 
 H.B.H. 
 J.P.M. 
 
 *In addition we gave H. B. H. & Co. order to buy about 16,000 sh. participation 
 ctfs. at about 135. 
 
 * * * * * « * 
 
 In working up this new syndicate it seems that all concerned were informed as to 
 the true financial condition of the properties, so that it would appear to have been a 
 difficult matter to induce subscribers to embark in the new venture. Even though 
 certain of the obligations were recapitalized so as to reduce the fixed charges to the 
 level of the earnings, as seems to have been proposed, the proi)osition would still seem 
 to have been too uncertain to attract such substantial subscriptions as were needed. 
 It may well be that the following sentence from Erb's letter of September 20, 1905, 
 addressed to one of the original subscribing interests of May 19, 1904, suggests one, if 
 not the underlying, purpose of this syndicate: 
 
 "Messrs. Edwin Hawley and John W. Gates were unim-portant participants in 
 this syndicate and their names were made use of, with J. Pierpont Morgan & Co., 
 to create the impression that the property would go into speculative hands, and they 
 have since stepped forward to take the property from Messrs. H. B. Hollins & Co., 
 thus relieving the entire situation and to the satisfaction of everybody in interest." 
 
 Whatever motive lay beneath the new syndicate scheme, there is no doubt as to 
 the effect it had on the Erie management. 
 
 Mr. Harriman is introduced in the transaction and the president oj the 
 Erie Railroad is snubbed by Mr. Morgan. — The following is from pages 
 172-173 of the report: 
 
 President Underwood's reference to Harriman 's whereabouts prior to their interview 
 arose from a question as to the accuracy of a report that the Erie's purch<ise of the 
 C, H. & D. had transpired during Harriman 's absence from the country. This record 
 does not settle this point definitely, but it does show that Harriman did not attend 
 any meeting of the board or executive committee during the period July 26 to Novem- 
 ber 1, 1905. The record also clearly Indicates Harriman 's emphatic disapproval of 
 
FEDERAI- OPERATION OP TRANSPORTATION SYSTEMS. 949 
 
 the purchase upon his return in November, with the result that President Underwood 
 obtained another interview with Morgan, as to which he testified as follows: 
 
 "Then I went down and had an audience with Mr. Morgan, and I told him that 
 practically the C, H. & D. had a floating debt that was not visible and in the statement 
 he showed me. He said: 'Well, we will look at the statement,' and there was some 
 attempt made to find that statement, but it was unsuccessful; it was not produced. 
 I had not kept it because— well, I did not keep it. I said: 'Mr. Morgan, the state- 
 ment that I made to you of the effect that the acquisition of the C, H. & D. on the 
 Erie's finances is null and void, because the statement was inaccurate.' He looked 
 at me and said: 'Well, sir, if the statement that we made to you was inaccurate, and 
 for any reason you think that the Erie Railroad has made a bad trade, your duty is 
 very simple — you have only to convene your board of directors and rescind it, and I 
 advise you to do it at once.' 
 
 "I bade him good afternoon and walked out of his office, and as I came out of his 
 oflSce I met Mr. Stetson, and I told him, being counsel, 'Mr. Morgan has just authorized 
 the rescinding of that trade, and I think it was a very unusual and extraordinary 
 thing for him to do. I am surprised that he would do it. And I wonder if it would be 
 bad taste for me to tell him that. ' He said: 'He might like to hear it.' So I went back, 
 and Mr. Morgan was standing with a paper in his hand, and I said, *I would like to 
 speak to you for a minute?' He made no answer. I said again, 'I would like to speak 
 to you for a minute.' I said, 'I want to tell you I think you have done a very big 
 thing, the biggest thing I ever came in contact with.' He said nothing. I said, 
 'Did you hear me?' He said 'I did, sir.' And I walked out." 
 
 In closing the report the Interstate Commerce Commission says as 
 follows : 
 
 Nothing disclosed in the record before us is to be more regretted than the readiness 
 of great banking institutions in our financial centers to loan enormous sums of money 
 upon exceedingly precarious security in aid of such schemes as have been devised in 
 the wrecking of these railroads. Not only this, but the high officers of such institu- 
 tions, while acting ostensibly as directors of the railroads, have in fact been little 
 more than tools and dummies for the promoters. The trustees of other people's 
 money seem to have had little compunction about violations of their trusts for the 
 benefit of the promoters, and at their demand. 
 
 Can the like of what has befallen these two road^s be made impossible hereafter? 
 Perhaps not entirely, so long as financial circles continue complaisant toward financial 
 exploitafions which prove succe^ful. But it will help if minority stockholders are 
 more watchful of their interests and if bondholders assert their rights before their 
 security fades away for lack of upkeep, purposely neglected in order to pay interest 
 and dividends unearned. It would, in our opinion, render such exploitation more 
 difficult if the issuance and marketing of all securities of common carriers were sub- 
 ject to Federal regulation. As to that we renew the recommendations repeatedly 
 made to the Congress in our annual reports. We also point to the lesson, here again 
 taught, that access to correspondence files is indispensable for a thorough and accu- 
 rate understanding of the motives and purposes which underlie the formal entries 
 made in accounts and records. 
 
 Unwise management contributed to the downfall of these roads, but breach of trust 
 by corporate officials, often for personal gain, was the main cause here, as in the records 
 developed in other investigations. Consolidations and Combinations of Carriers, 12 
 I. C. C, 277; The New England Investigation, 27 I. C. C, 560; St. Louis & San 
 Francisco Railroad Investigation, 29 I. C. C, 139; Financial Investigation of N. Y., 
 N. H. & H. R. R. Co., 31 1. C. C, 32; Financial Transactions C, R. I. & P. Ry.Co., 
 36 I. C. C, 43. That downfall, with its deplorable consequences, can be traced only 
 to betrayal within, and not to compulsion from without. Neither rivalry, nor rate 
 level, nor regulation, nor all combined, can be found on this record to have contrib- 
 uted in any appreciable degree to the disaster. 
 
 In discussion of transportation conditions during the last two years or more much 
 has been made of the fact that over 40,000 miles of our railroads were under receiver- 
 ship. A recent publication lists 69 railroads, among them the Pere Marquette and 
 C, H. & D., as m the hands of receivers on December 31, 1916. Their combined 
 operations cover 34,559 miles. Over 40 per cent of that mileage is in systems which, 
 as shown by our investigations, have suffered principally from financial mismanage- 
 ment and exploitation. Over 40 per cent more, of which a large part is located in 
 Texas, is comprised in two southwestern systems. The remaining 5,800 miles are 
 distributed among fifty-odd carriers in different parts of the country. 
 
950 FEDERAL OPERATION OF TRANSPORTATION SYSTEMS. 
 
 The statements of fact herewith presented having all been verified 
 from the official records and sworn testimony taken before the Inter- 
 state Commerce Commission, disclose a condition of profligacy, waste, 
 falsifymg and destruction of records, and the ignoring and violation 
 of law, both State and National, so vast in its conception and so 
 successfully carried out in defrauding the American people as to be 
 beyond belief. 
 
 Can it be possible that the American people, after learning how our 
 great governmental functions liave been usurped by the few, who have 
 been given such vast and dangerous powers by special privilege, will 
 permit this '' invisible government" to destroy democracy and the 
 public welfare in our Republic as here disclosed ? The record is before 
 you and the only remedy lies in the ownership by the people and the 
 operation through the agencies of their Governemnt of all those 
 utiHties and natural resources which by right belong to the people, 
 and upon the just and democratic administration of which the public 
 welfare and happiness depend. 
 
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