office and in all such cases I shall appreciate your suggestions or recommendations. Among such subjects are financial problems and legal problems.

"I wish to emphasize that I do not consider it expedient for the Regional Directors to undertake to establish without my approval, policies of a public character, i. e., policies which substantially affect the character of service rendered the public or the rights of the public.

"Substantial reduction of passenger service is an example of this character. It is impracticable to define these matters clearly, but practical definition will evolve gradually as cases arise. Meanwhile doubtful questions should be submitted to me.

"The controlling principles is that the Government being now in possession and control, it is important for the Director General, as the direct representative of the Government, to have a voice in deciding matters which primarily affect the public, because we cannot expect that the public will be entirely satisfied to have these matters settled by the railroad managers, which in the public estimation will still be regarded as imbued with the attitude of private management, no matter how disinterestedly those managers may be endeavoring to represent the public interest and nothing else.

"Generally speaking, you will develop your organization as you think necessary, but it seems to me that in any event you will need a competent traffic representative who should be selected with the concurrence of Mr. Edward Chambers, who will be in charge of the Division of Traffic with headquarters at Washington. I think you had better treat your organization as tentative until you have submitted the organization plan to me, as I may, upon consideration of tentative plan, wish to make some suggestion upon the subject.'

CHAPTER V

THE CONTRACT BETWEEN THE GOVERNMENT AND THE RAILROAD COMPANIES

F

ROM the date of the passage of the Federal Control Act,* March 21, 1918, until the latter part of the following October, a large part of the time of the Director General and his legal and other advisors was taken in framing a standard contract* between the Government and the railroad companies. While the contract was to be based upon the provisions of the Federal Control Act, the terms of the Act were so hurriedly drawn that many complications and opportunities for dispute in interpretation were apparent when the attempt was made to draft a formal contract. The negotiations between Mr. McAdoo and his legal staff, representing the Government, and T. DeWitt Cuyler, Alfred P. Thom, and others, representing the Association of Railway Executives, were long drawn out, and the contract finally agreed upon contains many compromises, nearly all of them in favor of the Government. On the part of the Director General there was a disposition to be unyielding and on the part of the railway executives there was an appreciation of the fact that

*The Federal Control Act and the standard contract are inIcluded in the Appendix.

the stress of the emergency was such that they could not afford to make an issue on controversial features which in calmer times would have been decided in their favor.

The principal points of difference were in connection with the method of measuring the adequacy of maintenance and as to the payments for additions and betterments. The Director General insisted that the Government should have the right to deduct the cost of such work from the payments to be made as rentals. The contract as finally approved provided (section 7) that the power to make such deductions should not be exercised so as to prevent the companies from supporting their organizations, keeping up sinking funds, and meeting other obligations such as corporate taxes, rents, and interest. It provided further in the same section:

"The power provided in this paragraph to deduct the amount due from the companies for the cost of additions and betterments not justly chargeable to the United States is further declared to be an emergency power, to be used by the Director General only when he finds that no other reasonable means is provided by the companies to reimburse the United States, and, as contemplated by the President's proclamation and by the Federal Control Act, it will be the policy of the Director General to so use such power of deduction as not to interrupt unnecessarily the regular payment of dividends as made by the companies during the test period.'

The committee of railway executives sought earnestly to prevail upon the Director General to change his attitude in denying the right of

the companies to institute litigation at the end of federal control to recover for damages by reason of diversion of traffic during federal control, but Mr. McAdoo, supported by a ruling of the Solicitor General, insisted that the railroads having been taken over for war purposes, Congress intended that the authorized rentals should cover the possibility of future losses of the kind. Section 3 of the contract specifically provided that the companies may make no claim for loss or damage "to their business or traffic by reason of the diversion thereof or otherwise which has been or may be caused by said taking or by said possession, use, control, and operation."

The committee of the Association of Railway Executives acted only in an advisory capacity. Its acceptance of the contract did not bind any individual company.

The Federal Control Act gave legislative effect to the program outlined by the President in his proclamation of December 26, 1917, in which the Director General was directed to "enter into negotiations with the several companies looking to agreements for just and reasonable compensation for the possession, use and control of their respective properties on the basis of an annual guaranteed compensation above accruing depreciation and the maintenance of their properties equivalent, as nearly as may be, to the average of the net operating income thereof for the three-year period ending June 30, 1917."

In his proclamation the President stipulated also that the taking of the roads should not be

allowed to impair the rights of stockholders, bondholders, creditors, and other persons having interests. Regular dividends hitherto declared and maturing interest upon funded debt and other obligations were to be paid in due course, and the companies were to be permitted, unless otherwise directed by the Director General, to continue to pay such dividends and interest.

These assurances in the President's proclamation, duly enacted in the Federal Control Act two months later, were made a part of the standard contract. As has already been stated the companies were to be paid as annual compensation (called the standard return) a sum equal to the average yearly net railway operating income earned by each company during the three years ending June 30, 1917. By net railway operating income was meant the amount remaining after operating expenses, taxes, uncollectible railway operating revenue, and the net balances for use of joint equipment and joint facilities, had been deducted from operating revenues. The amount of the standard return for each road was to be determined by the Interstate Commerce Commission from its records, but provision was made for adjustments in the standard return to take account of unusual conditions which affected the test period as an equitable basis for compensation. For example, a road may have been subjected to abnormal expenses because of floods or other extraordinary circumstances; or it may have gone through a physical rehabilitation following a receivership; or it may have had its expenses bur