TO AMEND THE INTERSTATE COMMERCE ACT TUESDAY, JUNE 27, 1939 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON INTERSTATE COMMERCE, Washington, D. C. The subcommittee met, at 10:30 a. m., pursuant to adjournment on yesterday, in room 457, Senate Office Building, Senator Harry S. Truman presiding. Present: Senator Truman (chairman of the subcommittee). Mr. FLETCHER. Mr. Chairman, might I make a brief explanatory statement before Mr. Taylor begins his testimony? Senator TRUMAN (chairman of the subcommittee). Yes. STATEMENT OF R. V. FLETCHER, GENERAL COUNSEL, ASSOCIATION OF AMERICAN RAILROADS, TRANSPORTATION BUILDING, WASHINGTON, D. C. Mr. FLETCHER. My name is R. V. Fletcher. I am general counsel of the Association of American Railroads. Mr. Chairman, unfortunately I am compelled to leave town this morning at 11 o'clock to keep a long-standing engagement in another part of the country. However, there will be representatives of the Association of American Railroads here to look after the interests of the carriers at this hearing. I wanted to say, before I withdrew, a word or two on the question of procedure. After S. 1310 was introduced some time ago, and realizing the importance of the matters involved, as counsel for the association I organized a special committee of railroad counsel to consider the questions involved in this bill and in one or two other bills that have some relation to the same subject. This special committee has been very diligently at work endeavoring to reach some sort of conclusion as to what statement could be made reflecting the composite views of the railroad industry. Now, it must be remembered that there are probably 140 carriers that are members of the Association of American Railroads. Not all of these carriers but a great many of them have situations which would be affected by this bill. For the most part of those situations grew up rather accidentally and incidentally. That is to say, the railroads found themselves in possession of land, as an illustration, which had been acquired for transportation purposes but seemed to be no longer necessary for those purposes, and they were developing some lines which were indicated on yesterday by Commissioner Eastman in his testimony. 59 There are now in the country certain oil developments which have sprung up on lands owned by railroads in one part of the country, and perhaps in another part of the country hotels have been built on lands owned by railroads; and it would take a very long time indeed to go into detail as to the various forms of noncarrier activities in which the railroads have been driven by the necessity for protecting their interests. Now, in order to reach an intelligent conclusion upon all these questions so far as the railroads are concerned it was necessary to cavass each individual situation. For instance, the question arose at once: How would this bill affect each of the carriers under the pecular circumstances that existed in the case of the carriers? The question arose as to how certain amendments might be offered which would affect one railroad in one way and another railroad in another way. Some railroads owned such properties directly while other railroads owned them through the medium of subsidiary corporations. The whole question is an exceedingly complicated one. Now I think no one knows better than the chairman of this subcommittee how many important railroad legislative matters have been before the Congress during this session and which have engaged the attention of those of us who devote our time to matters of that sort. At the present time I think I may say the House Committee on Interstate and Foreign Commerce is about to report a general railroad bill somewhat along the lines proposed by S. 2009, and that will take a great deal of our time and attention. Now this committee to which I refer at one time had the impression, which I am not sure was entirely justified, that the hearings on this bill would not be concluded at this session of Congress. That impression may have grown out of some misunderstanding. I am not charging anybody with having made representations on the subject upon which we could authoritatively depend. But all this leads me to make the suggestion to the subcommittee, and I am not asking for a ruling at this time, Mr. Chairman, but I only wanted the opportunity to express my wishes in the matter before I was compelled to leave the hearing room; it leads me to make the request, which I hope the subcommittee will take under advisement, that the railroads be not required to go forward with their testimony at this session of the Congress. I sincerely believe that if time were given for the necessary study, by the time Congress reconvenes in January this special committee would be in a position to have canvassed the situations quite thoroughly, and have ascertained just what situations exist on each particular railroad, and would then be in position to come in before you and make some suggestions which would be really helpful, far more so than if we are required on short notice to express ourselves within the next 2 weeks. And when I say "on short notice" I do not want to be understood as meaning there is any suggestion of bad faith at all, but I mean only in view of the importance of the matters which have pressed upon us for attention in the railroad field we have only within the last few days come to a realization of the fact that we might be called upon to express our views at this time. May I therefore respectfully submit the suggestion for the consideration of the members of the subcommittee, that when you conclude this phase of the hearings this week, you will not require the carriers to go forward with their testimony until they have had opportunity to examine the question a little more carefully than they have now? Senator TRUMAN (chairman of the subcommittee). We will take the matter under advisement. Mr. FLETCHER. Do any of my colleagues wish to supplement that statement? [A pause, without response.] I thank you, Mr. Chair man. Senator TRUMAN (chairman of the subcommittee). You may now proceed with your statement, Mr. Taylor. STATEMENT OF TELFORD TAYLOR, ASSOCIATE COUNSEL TO THE SUBCOMMITTEE OF THE SENATE INTERSTATE COMMERCE COMMITTEE INVESTIGATING RAILROADS AND RAILROAD FINANCE UNDER SENATE RESOLUTION 71 Mr. TAYLOR. Mr. Chairman, my name is Telford Taylor. I am associate counsel to the subcommittee of the Senate Committee on Interstate Commerce engaged in an investigation of railroad finance and related matters under Senate Resolution 71. I have been with the staff of that subcommittee since October of 1935, and in charge of the committee's New York office, 45 Broadway, New York City. I am appearing on this bill at the request of the chairman because in the course of my connection with the subcommittee just mentioned I have had occasion to deal with some matters covered by this bill, and likewise because Commissioner Mahaffie and members of the Interstate Commerce Commission's staff consulted with me to some extent in the preparation of this bill. Before taking up the bill itself I want to say a few words about what I understand to be the genesis of the bill. It deals of course with matters on which the subcommittee investigating railroad finance spent some time. It deals with the acquisition of stocks by railroads. It deals with the activities of noncarrier subsidiaries. It deals with the purchase of securities by noncarrier subsidiaries, and various other matters covered in greater or less detail in the course of the hearings by the subcommittee to which I have just referred. On the other hand, I think it ought to be understood that the bill does not by any means originate, so far as its ideas are concerned, with the Senate subcommittee. I think it fair to say that the basic ideas of the bill are far older than that; in fact, as Commissioner Eastman and Commissioner Mahaffie brought out here on yesterday, the basic ideas of this bill go back 30 or more years, as long ago as the Harriman investigation by the Interstate Commerce Commission, back in 1906, and I think the report itself was made in 1907. The Commission, in that report, had something to say about the practice of investing large amounts of carrier funds in railway securities. I would like, if I may, to quote very briefly from the report of the Commission in the Harriman inquiry. Senator TRUMAN (chairman of the subcommittee). You may proceed to do so. 159927-39-5 Mr. TAYLOR. In the course of that report they stated as follows: Railroad securities should be safe and conservative investments for the people. To this end the risks of the railroad should be reduced to a minimum. Everyone knows that railway securities fluctuate more or less according to the prosperity of the times and also by reason of the wide speculation in such securities. It therefore adds an element of hazard to a railroad's capital and credit to have its funds invested in the stocks of other companies, thereby endangering its solvency and its ability to pay reasonable dividends upon its own capital stock. It is a serious menace to the financial condition of the country to have large railway systems fail to meet their obligations or go into the hands of receivers, and the object of legislation and administration should be to lessen the risks of railway investments. Yesterday the Commissioners indicated how that thought had been developed in the course of the years since that report, in the first investigation of the New Haven Railroad by the Commission shortly before the war, and the amplication and greater specificity of the ideas in the report of the Harriman investigation, which were expressed in the first New Haven investigation. They also mentioned that after the war, during the twenties, this purchasing of stocks started again for a variety of reasons. Under the Transportation Act of 1920 the question of consolidation of railroads arose. For a variety of reasons I think it fair to say that consolidation during the twenties did not proceed precisely as contemplated by the Transportation act. By and large there were very few actual consolidations, and most of the consolidation tendency was exemplified by these stocks purchases which took place in increasingly large amounts toward the end of the twenties and which came to an end shortly after 1930. Following that period, in the Commission's annual reports for 1937 and 1938 recommendations upon which this bill is based were set. forth very specifically, and I think on the whole the bill follows those recommendations quite closely. There are some matters upon which it goes further, and there are some matters that the Commission recommended which are not covered; but on the whole it corresponds quite closely to the recommendations of the Commission in those reports and to the recommendations in the report of the second investigation of the New Haven Railroad in 1938. Likewise the committee of three Commissioners appointed by the President last year, which reported to the President in March of 1938, dealt generally with this question, and with other phases of this question also, which they described as financial abuses. I would like to quote very briefly from the report of the three Commissioners, and I refer to page 43 of the printed copy of that report, under the heading "financial abuses": As has been shown by various investigations which have been made in the past, and by that which is now being investigated by the Senate Committee on Interstate Commerce, railroads have suffered from what might be termed for want of a better designation, "financial abuses." Broadly speaking, they have been of four main types: (1) The acquisition of controlling interests in other railroads, or other transportation companies, at extravagant prices and often with a consequent improvident increase in indebtedness, and often associated also with the use of holding companies to this end and with a view to greatly minimizing the investment necessary for control purposes; (2) acquisition of terminal or other auxiliary properties from shipping interests on an extravagant or improvident basis for traffic-control purposes; (3) improper or misleading accounting for the purpose of concealing actual financial condition; and (4) unwise issuance of securities in the interests of those who market such securities. Legislation in 1933, and the further legislation to this end, except with better control by the Commission for the purpose, is desirable. Recommendation with respect to such legislation covering the holding-company situation among others, will no doubt be brought forward by the Senate committee. We believe it to be clear that the expenditure of carrier funds for other than strictly carrier purposes should be permitted only with the approval of the Commission. As an aid in such supervision noncarrier subsidiaries of railroad companies should be brought within the Commission's jurisdiction. These last two sentences state most exactly the principal object of this bill, and as will be noted in that quotation the three Commissioners suggested that the Senate Committee on Interstate Commerce had been dealing with this question, and in pursuance of that suggestion, I suppose, I was asked to help in framing the bill, and I am generally familiar with its contents. Now, Mr. Chairman, to come to the bill itself. In my testimony I should like to refer to the committee print, the comparative print of the bill. My references to lines and pages will be to the comparative print of the bill. There are one or two places in this comparative print where the Government Printing Office has dropped a word or left out a word or two, where it departs from the bill, and I will come to those later on. In the committee print and in the bill itself the definitions come first, but I think it might be clearer if instead of starting out with definitions I take up some of the substantive provisions of the bill and, as some of the words that are defined are encountered, I can refer to the definitions and describe how they are to operate. At the outset I would like to deal with the last section of the bill, which begins on page 16 of the committee print, at line 5. This is the only part of the bill which adds a new section to the Interstate Commerce Act. The remainder of the bill is chiefly concerned wtih adding paragraphs or phrases or words to tighten up or amplify some of the provisions. I think this section, which begins on page 16, at line 5, is really the heart of the bill. There are a number of things in the bill which are of importance, but this is undoubtedly the most important proposal which it contains. As the Commissioners pointed out yesterday the general object of this new section is to give the Interstate Commerce Commission power to supervise expenditures and commitments or contracts by carriers which are outside their normal field of operation. At the very outset in discussing this matter I would like to mention one of the arguments which I think it is easy to predict may be made against this bill. The present depressed condition of the railroads has brought about a lot of activity about railroads, and a great many arguments, as to why they have gotten into bad shape, and as to what ought to be done about it. Some people have suggested that too much regulation has hurt the railroads and that regulation ought to be eased up. Such people may say that this bill goes in the wrong direction, that instead of easing up regulation it will add new restrictions. On that general argument as to whether there is too much regulation of the railroads I do not want to comment although I personally do not take much stock in it, and Commissioner Mahaffie indicated yesterday that he was of the same opinion. But apart from that general argument I think it should be borne in mind, if such argument is made against this bill, that there is nothing in this section |