A Strange Alliance for Monopoly

» Speaking straight from his own experience, the fighting head of the Alleghany Corporation denounces the banker-government domination of our railroads which, he says, if it be continued, will lead to insolvency and then to socialization.

by ROBERT R. YOUNG

1

EVER since the first tie was laid, railroad history has been dominated by the banker. When most potent this banker-railroad power has named Presidential candidates and dictated foreign as well as domestic policy.

What started in 1933, with the Pecora investigation, the Banking Act, and the Securities Act, as a complete rout of the bankers, in time developed into a strange new alliance of government and New York financiers — an alliance which was the outcome of the railroad bankruptcies of the thirties. Control of these properties, and of the banking and political plums to flow from them, has resulted in a new form of American monopoly.

The businesses of this country which have made outstanding successes are those having a close relationship between owners and managers. It should be a matter of national concern that we are moving rapidly away from this principle in our railroads.

Nothing is more dependent on the railroads than the Army, unless it be the Navy. Should it come to atomic warfare, the railroads will probably surpass both in cold essentiality. An Army in Europe or a Navy in the Dardanelles may only embroil us, but a sound transportation system at home will go far to defend us. From the repeal of the Neutrality Act to date, the Army has cost the taxpayer 179 billion dollars, and the Navy 99 billion. During the same period the railroads did as much to win the war, — if it is won, — rendered countless productive services, and paid more than G billion dollars into city, state, and federal treasuries.

But let us blink away the threat of war and consider all the other things that the railroads mean to us. Railroad securities to the sum of 4 billion dollars, mostly senior mortgages, are held by insurance companies for the account of their 70 million policyholders. Banks, charitable and other institutions, hold 3 billion dollars. The balance in bonds and stocks, having a par value of 10 billion dollars, is owned directly by 5 million individuals, most of whom are women. No other American industry has its securities so widely distributed.

Our 135 major railroads employ 1 1/2 million individuals. If each employee provides for a family of five, this makes 7 1/2 million Americans directly dependent upon the railroads for their livelihood. There are, of course, many times this number who through supply or service are affected by the ebb and flow of railroad efficiency and prosperity.

The man in the Western town who goes down to the station of a summer evening to watch the eastbound train pull in, the returning schoolboy who feels a tight little spot in his middle when the train swings around the last curve and a vista of his home town opens across the meadows — each of us has his own feeling of nostalgia about his Katy, Pennsy, or Monon. For a century, the railroad has figured in most annals of birth, death, and love. The clicking joints oil a frosty night, the far-off whistle of a summer’s eve, rouse equally poignant memories.

In the thirties, 37 out of our 135 Class I railroads, or over 25 per cent of railroad mileage, went into bankruptcy. Many of them are still there, held in ransom, after ten, twelve, and fourteen years, although they are in stronger cash position and better physical condition now than most solvent carriers.

For three generations Morgan and Kuhn, Loeb had dictated the policies of the railroads without a dollar of permanent ownership. Now and then independent figures like Harrhnan, Vanderbilt, or Van Sweringcn bobbed up, but eventually financial or social pressures brought them into line.

This system of complaisant vassalage extended into the life insurance companies, the banks, trust companies, investment trusts, and brokerage houses: custodians of large concentrations of the people’s voting securities. Through friendly directors maneuvered onto the boards of railroads, industrials, and utilities (who are large issuers of securities), and of insurance companies, banks, trustees, and charitable institutions (who are large buyers of securities) it was a simple matter for the banker to sit in between — to advise one to sell at 95 and the other to buy at 100. The bond issue might be 100 million dollars and the bankers’ spread 5 million. Were this process repeated often enough, the bankers’ “take” could ultimately equal the value of the property.

Rail financing, traditionally, had been in bonds. From the point of view of the bankers, who controlled rail policy, the more debt that came due and the oftencr it was rechurned, the better. Businesses whose earnings are highly cyclical, like steel and railroads, are more wisely financed with stock. The error made by the bankers in the railroads was as dangerous as their policy of lending money on call to security speculators on thin margins. Both policies, when touched off, set up chain reactions as disastrous to bank assets as to employment. Rail earnings vanished. The dilemma of the railroads was aggravated, as it had been in no previous panic, by 23 million automobiles, 3 1/2 million trucks, and 100,000 buses operating over new tax-built highways.

Congress, alert to the injustices that could come from harsh creditors, protected home and farm owners from foreclosure; and for the railroads, required that new capitalizations should recognize future normal earnings.

This was the situation, then, in the desperate thirties when the creditors of these railroads began to pile in and when control of a large segment of the industry was subjected to the possibility of change. Fees for insurance, legal services, advertising, auditing, financing, stock transferships, paying agencies, equipment trusteeships; countless emoluments, political and economic, that flow from the control of an immense amount of bank deposits, purchasing, salaries, and jobs were threatened on a grand scale.

The ruling houses rose to the emergency. They would set themselves up as protective committees for the security holders to reorganize the railroads and relaunch them safely. For this they resorted to the voting trust. It was a device so odorous that even the New York Stock Exchange in the days of Whitney had condemned it; nevertheless, with proper circumlocutions and window dressing, and with coöperation from Washington, it might work.

Voting trustees usurp the voting rights of the stockholders: they become vested with complete control of the railroad, its directors and its officers, subject only to their own consciences. In drawing legislation designed to prevent abuses of power or privilege inherent in positions occupied as officers and directors, Congress overlooked their absolute master in the bankrupt carrier: the voting trustee.

The Senate Committee’s Report of April 11, 1946 said: —

Many of these railroads could have been left out of the reorganization proceedings altogether, as 10 of them actually were left out for 4 1/2 years until the institutional group decided to put them into court for purposes of consolidation. Fifteen of these roads have no right to be in court at all . . . ; there is no ground for burdening the court to reorganize them; they can pay all their debts . . . not merely of an intercompany bookkeeping nature.

What would the Securities and Exchange Commission do to a banker, unbacked by high government officials, who put even solvent corporations into bankruptcy and wiped out his customers for purposes of consolidation?

2

THE Interstate Commerce Commission is a bipartisan body of eleven men appointed by the President to preserve a sound transportation system. Their term is seven years, but by reappointment their tenure usually is life. Eager as they are for continuance in office, they become keenly sensitive to pressures from a multiple-term Chief Executive or his Postmaster General, Republican or Democrat.

Labor and shippers arc organized and articulate. The railroad security holders are neither. By liberal wages and niggardly rates the government can salve labor and shippers. This raid upon public savings for political gain can be made invisible to the extent that interest-paying debt and dividendpaying stock can be wiped out in reorganization — a principle which, once established and repeated a depression or two, could soon reach the last dollar of the capitalistic system.

Thus the New York group found a powerful ally: the trade would abdicate your, and my, and Aunt Jane’s property rights in exchange for voting trusts. The national interest and incentive enterprise could be damned. The lifeline Congress threw to the sinking railroad security holder in 1933 — the requirement that capitalization recognize future earnings — was to be used to garrote him. For ten representative railroads, the ICC guessed earnings would be only 2.04 per cent on ICG’s own official valuation of 3 billion dollars. This guess — unobjected to by the bankers — of an unfair rate of return, by a body responsible for maintaining a fair rate of return, was in my opinion a clear declaration of misintent.

The forfeiture that was taking place did not merely shift title from an equity holder to a creditor as it does in the case of the farm or home winch is foreclosed. The senior holder too was scaled down in order that voting stocks might be received in exchange for non-voting bonds.

The group was surprised at the readiness with which Washington fell in with the scheme. The bankers were to continue control tighter even than before. Old stockholders were to disappear. New ones created through the drastic dilution of old bonded debt were to have no voice in the management of the new company. This 100 per cent disenfranchisement of the owner was to occur even if the insurance companies reduced or sold their holdings before the reorganization was consummated, which in many cases they have done.

This unconscionable laxity was not unrelated to the fact that the RFC had become a creditor in nearly every railroad bankruptcy. Its personnel, too, liked voting trusts — liked them so well that many present or past agents (some of them former Wall Street men) occupy positions alongside the bankers in numerous railroads, and will continue to occupy them long after the RFC is paid off. Here, also, is a case of unwarranted trespass and seizure which only death or legislation can end.

This was business the bankers had been engaged in since 1861, and they did it very cleverly. If you will analyze each one of these voting trusts you will find that invariably the bankers have three out of the five members. The other two are usually window dressing: eminent citizens along the line. The bankers do not care if they have Molotov for a partner, if they have three votes out of five.

Congress gave the background of the problem, in the spring of this year, in introducing a Bill, S.1253, to Provide for Voluntary Modification of the Financial Structure of Railroads: —

The bill enables railroad companies to adjust their financial affairs quickly, economically, and on a business basis. . . .

The existing law, section 77, was enacted in 1933 . . . in the belief that it-would help railroads to correct their financial affairs. It was found to do the opposite. It has placed in the hands of Government officials extraordinary power. . . :

(1) to demolish every part of the financial and corporate structures of those railroads;

(2) to plan in every respect the financial and corporate future of those railroads;

(S) to pick men to control those railroads; and

(4) to decree the forfeiture of $2 1/2 billion of investments.

The present bill puts an end to every one of those powers and restores the operation of railroads to their managements. . . .

Opposition to S. 1253 grew in the dank corridors of the Capitol as the spring advanced. The bill, however, passed both houses by an overwhelming vote in the closing days of the last session.

Early in August of this year, I was in France when a phone call came through to me.

“The President will veto S. 1253,” my friend said,

“Ridiculous!” I laughed. “It would be contradictory to everything in his record.”

“I tell you,” he said, “the insurance people are working through the Secretary of the Treasury.”

The connection was bad, I did not believe the President would fail to sign the bill, there was little I could do at that distance — so I hung up.

My confidence in the President was based upon the recollection of his Senatorial statements back in 1937: —

If government regulations and the depression brought about the present condition of the railroads, then Wall Street brought about both the government regulation and the depression. If Wall Street had produced the necessary statesmen to run the railroads they would never have needed regulation.

And: —

While greed along the lines I have been describing brought on the depression, when investment bankers, so-called, continually load great transportation companies with debt in order to sell securities to savings banks and insurance companies so they can make a commission, the well finally runs dry.

In Paris, on August 18, I found a cable: “Reorganization rail bill vetoed. Letter follows.”

The letter contained this sentence: “I was shocked at the action taken apparently at the insistent request of the Secretary of the Treasury.” In London, on August 22, I found a letter from another Washington observer, telling me that the work of the opposition from the time the bill was passed until it was vetoed was engineered by John W. Stedman, Vice-President of Prudential Insurance Company. In London I also found the full veto message, which included this sentence of the President’s going directly to the heart of the purposes of the bill: “I am in agreement with those objectives of the bill which prevent undesirable control . . . and which prevent forfeiture of securities.”

True, the President said he believed that the next Congress can pass a better bill. But the victims who had fought an uphill fight for nine long years were quite content with the bill as passed by Congress. And the President did not say that he would urge the Congress to pass a new bill. Nor did he call upon the courts, the ICC, and other parties in interest to suspend progress of pending plans until it did, though he knew that the Senate Committee had warned: —

The problem is pressing because if something is not done — and done quickly — two great wrongs which cannot be righted subsequently will have been carried to fruition:

(a) the savings of hundreds of thousands of American families will have been irrevocably wiped out (in fact, $850,000,000 ¹ of such investments already have been wiped out beyond recall); and

(b) an additional large part of the Nation’s railroads will fall under control of a half dozen powerful New York financial institutions. . . .

Forfeitures are taking place, or are contemplated, that have no basis in equity or moral right.

3

THE Interstate Commerce Act makes it unlawful for any person to participate in bringing two or more carriers under common control without specific approval of the Interstate Commerce Commission, an approval which Alleghany has received in its control of the Chesapeake and Ohio family of rail lines.

The Act reads in part: —

It shall be unlawful for any person ... to participate in accomplishing or effectuating, the control or management in a common interest of any two or more carriers, however such result is attained.

The term “person” as used in this part includes an individual, firm, copartnership, corporation, company, association, or joint-stock association; and includes a trustee, receiver, assignee, or personal representative thereof.

There is evidence that most railroads are controlled in violation of the foregoing; that essentially every reorganization plan promulgated under section 77 was designed to extend such control. The language of the statute, which certainly sounds as though it means business, is irreconcilable with the state of affairs revealed by the most cursory examination of documents on file with the ICC.

We find that the following closely related Eastern life insurance companies participate, either jointly or separately, in the control of bankrupt carriers, many of which are highly competitive: Metropolitan Life in 21 railroads; Prudential in 17; New York Life in 16. Present or former agents of the RFC appear in 11 of these railroads.

The above situation is equally irreconcilable with the Commission’s own language when it applied another section of this same act, in 1942, to an eminent engineer: —

Under the provision of section 20 a (12) of the act, a person may be an officer or director of one carrier, and no more, unless we find that the holding of such positions with more than one carrier will adversely affect neither public nor private interests. For us to make an exception in favor of an applicant, there must be strong and convincing showing that it should be made.

The ICC in this case denied the engineer’s request to serve on the board of the second railroad, though it was non-competing with the first railroad; but bankers, if less useful, are more favored.

Sixteen of the 25 directors of Metropolitan Life are connected with top Eastern banks, as are 8 of Prudential’s 16, and 15 out of New York Life’s 24. As the life insurance executive can be tickled by the banker, so can the railroader be tickled by the insurance executive.

Let us give the loaded wheel of fortune another spin. I have a compilation which shows that 79 per cent of the non-employee directors of solvent railroads are affiliated with financial institutions. If we take only the ten major Morgan roads, we find that 86 per cent of the directors are so affiliated; and of the six major Kuhn, Locb roads, the figure reaches 89 per cent.

There is a crying need for a diversity of talent on railroad boards: engineering, promotion, advertising, public and labor relations, personnel, and so on. Why should bankers preempt these boards, particularly when they have failed in the banking function, which is to maintain a sound financial structure? A banker’s heart can be deep in Texas but not if he aspires to a railroad board.

What did Senator Truman once think about this kind of situation? On May 26, 1937, he admonished me as follows when I stood before a Subcommittee of the Senate: —

SENATOR TRUMAN: I know that you are tired, Mr. Young, and we are going to quit. But I think the sooner the railroads and the transportation companies, all of them, can be returned to the operating companies, the better it is going to be for the country. That is the whole reason for our labors here — to see if we cannot reach a conclusion that will permit railroad operation again to come back to the operators that ought to operate them, and take it out of the hands and the control of New York bankers. . . .

On my return to New York from this hearing I was called down to the House of Morgan and put upon the carpet by Mr. Thomas W. Lamont, head of the firm. In effect, his ultimatum was: our plans for the rehabilitation of Alleghany Corporation would be worked out with him or our plans would fail. Remembering Senator Truman’s injunction, I ignored Mr. Lamont’s threat.

Our first step — the merger of Alleghany Corporation with the Chesapeake Corporation — failed on August 14, 1937, as a result of a three-pronged legal attack — as far as the judge knew, spontaneous and unrelated: one led by a Morgan banking satellite, one by a great motor company on whose board Messrs. Morgan and Whitney sat, and the third by a great university whose President was a former Morgan partner.

4

OUR heads were bloodied again in the spring of 1938 when our Chesapeake Corporation board was deadlocked for six months because the two banking directors refused to attend meetings with the two owner directors. (Moral: beware of even-numbered boards when you associate with bankers.)

This forced us to go to the Guaranty Trust Company, trustee of Alleghany’s bonds, hat in hand, to seek its help in breaking the deadlock, for under a strange indenture drawn by the Morgan counsel, the voting power over Chesapeake Corporation stock fluctuated between Alleghany and Guaranty according to the idiosyncrasies of the market. Mr. Lamont and other Morgan men sat on the Guaranty Trust Executive Committee. The crusty answer we got was that Guaranty would take over the board, including the positions held by my associate, Mr. Allan P. Kirby, and myself.

There ensued a hot proxy fight, as well as a lawsuit against Guaranty for breach of trust. During the pendency of the suit, Judge Manton’s bagman told us that we could havo the decision for $250,000, else the decision would go to the bankers, who were threatening to see that the Judge’s loans wore called. I disbelieved. We lost the decision, and some time later Judge Manton and his bagman went to jail.

In the fall of 1938 a 30-million-dollar Chesapeake and Ohio bond issue came up for refunding. We were determined to see that, for the first time in history, a railroad bond issue should be opened up to competition. Conversations late in November with the Western bankers, Harry Stuart and Cyrus Eaton, got us a firm bid in writing of 100 cents on the dollar for 3 1/2’s with a 30-year maturity, to remain good against competition until 5 o’clock, December 2, provided the price was not disclosed.

Chesapeake and Ohio’s banker, Morgan, and the ostensibly rival firm, Kuhn, Loeb, were notified of our intentions and invited to submit bids: a situation so unprecedented that, for the first time in history, a representative of Morgan left his office for business; for, on December 1, Mr. Elisha Walker, of Kuhn, Loeb, phoned that he and Mr. Harold Stanley, of Morgan, wished to appear before the C&O Finance Committee. They rode on the train with me to Cleveland, and I remember feeling a little guilty about the Stuart-Eaton letter in my inside pocket.

The meeting began next morning with a lengthy statement by Mr. Stanley, in which he outlined the past relations of his firm with C&O, and concluded by stating that while ho was willing to allow the Kuhn, Loeb name to appear on the same level with his in the advertising, the Morgan firm was to have an overwriting commission in which Kuhn, Loeb was not to share.

“Mr. Stanley,” I said, heartlessly, “we are not interested in the advertising, or whose name appears above whose — nor are we interested in the overwriting commission. What we are interested in is what C&O is to get for the bonds.”

Mr. Stanley then requested that they be allowed to withdraw until after lunch, talk to New York, and come back with an indication of what they would be willing to pay. This was agreed to, although I did not fail to point out that they had already had most of the week to talk to New York — a week spent, apparently, in “getting together.”

At two o’clock the bankers returned: they were prepared to pay 95^ for the bonds. The Board of Directors met at three o’clock and gasped at the disparity in the two bids, and the bond issue went to the Western bankers at par, with a saving of $1,350,000 against the Morgan bid — not however, without attempts by the Guaranty men on our board to persuade us into delay, or into direct bank or insurance financing.

This incident turned out to be typical of the savings to come from competition — quickly confirmed by the Cincinnati Union Terminal and the St. Louis Union Terminal bond sales at competition, both C&O affiliates.

The SEC was swift to recognize the savings and, after hearings, instituted a competitive bidding requirement for public utility securities on May 7, 1941.

Erie was 51 per cent owned by C &0, this control having been approved by the ICC. In 1938 it succumbed to its maturities. Although the last road to join bankruptcy, it was the first to come out — in 1940 — because it had been found unwise to press us too far. We could not, however, preserve control, which passed ironically enough to our opponents in New York — their agents being Mr. Henry S. Sturgis, Vice-President of the First National Bank in New York, Mr. Stedman of Prudential, and a representative of the RFC. This trio had been members of the Finance Committee of the new company but a short time when it leaked to us that RFC’s loan to the Erie was to be refunded by Morgan without competition and at an actual out-of-pocket loss to the Erie.

RFC policy was not to press its debtors into losses, but here it was alleged to be doing so. Our suspicions were further aroused when we discovered that Western bankers had offered Erie more for the new bonds than Morgan had offered. We protested, but the RFC, Morgan, and Erie only hurried. As a last resort, C&O as an Erie stockholder intervened before the ICC to prevent the railroad’s bonds from being deliberately underpriced by its own Finance Committee. The bonds went to the Western bankers at substantial saving.

Alleghany’s investment of nearly 70 million dollars in the stock of Missouri Pacific railroad, along with that of thousands of others, was to have been wiped out by the ICC’s plan of reorganization for that carrier. By newspaper advertisements we forced a compromise plan in 1942 — negotiated with the same duo, Sturgis and Stedman. Under this compromise, stockholders were to be given warrants and Alleghany was to be allowed 2 out of the 15 directors. These concessions, however, turned out to be worth nothing, for when the plan got to the ICC the warrants were denied us, and the directorships were given to New York, along with the other 13.

All this occurred just as two wars burst upon us, every freight car was bulging with high-tariff freight, and every furnace in the nation was going full blast. But the Commission was adamant. The earnings outlook was hopeless! Their “Dust Bowl” estimate of 1937 must stand!

5

THE monopolization of railroad policy by this banker-government alliance is shown by the pattern of uniform action.

There was the pattern of competitive bidding. It was as if there were only two railroads in the country: one controlled by Alleghany, the other by Morgan. The Association of American Railroads appeared before the Commission, representing all the railroads except the C&O, and pleaded that the bankers be kept in their position of preference. This intervention of management against security holder, in the face of the record, was a gross violation of obligation.

Senator Truman broke precedent by leaving the Hill and appearing alongside C&O, in favor of the Competitive Bidding Rule, which finally, on May 8, 1944, was grudgingly put into effect.

The same pattern was woven in the Pullman antitrust case. At a joint meeting of the railroads in Washington, three months after V-E Day, they agreed to petition the Philadelphia court for two years’ delay in its decree, for no other reason that I can see, but to enable the Pullman monopoly to enjoy two more years of high traffic earnings on old equipment. The nation’s sleeping-car plant had long passed obsolescence and cannot be rejuvenated for years: its 6800 cars average almost 22 years in age. At the time I speak of there was not a single new sleeping car on order, and only 900 new cars had been built in the previous 15 years.

There was the same pattern of opposition to our campaign to establish through passenger service at Chicago and St. Louis.

There was the pattern followed by the trustees of most of these bankrupt railroads: the hoarding of cash in favored banks, the resistance to paying off the RFC (and its reluctance to accept payment), the failure to extinguish debt at a discount by openmarket purchases.

The Senate Committee summed up the record in these words: —

The condition pictured is literally shocking in its stark rejection of every recommendation made by the famed 1933 Senate Banking and Currency Committee investigation of stock-market practices, in its evasion of many of the recommendations made by this committee in its investigation of railroads from 1935 to 1940, and in the legalistic blinking at the real purpose of correctives sought by enactment of section 77 of the bankruptcy laws. . . .

Even now I believe insurance executives would be sorry to see a rate increase.

Always it is the same pattern. Air conditioning in day coaches was discouraged, by illegal agreement, when it was first introduced. Could it have been because it would have forced the Morgancontrolled Pullman Company into what was stupidly regarded as unnecessary expense? Where would the automobile industry have been if it had agreed not to install starters?

There is the failure to encourage competition in the manufacture of equipment. What matters it if a Pullman car costs three times as much per pound as a Buick automobile? Think of it! That the purchasers of a vehicle so simple as a boxcar must face 150 items of patronage; that the manufacturer has to buy the doors, the ends, even the roofs from specified suppliers! Sometimes I wonder if the manufacturer will be allowed to fabricate the hole through which the axle is greased. One builder of these patented devices died with a fortune of 20 million dollars, but not without first remembering the two most influential railroad presidents with a legacy of $100,000 each — the same two railroads, incidentally, that have dominated the A.A.R. in the interest of the bankers and which seek to dominate the new sleeping-car business. The directors of the two railroads I refer to have traditionally interlocked with the directors of the Pullman Company and the key investment bankers.

Would any other industry continue to employ a president who accepted a legacy from a supplier — a supplier running a patent racket? Anyone who could pay off his customers’ purchasing agents with tax-free legacies would get a whale of a lot of business.

Railroad men are still buying ice for refrigerator cars, delaying delivery of perishables by stops at icing stations. Because railroads and some officers are financially interested in icing stations, they have thrown obstacles in the way of those who would manufacture or operate self-refrigerated cars.

The Department of Justice in 1944 filed a complaint against the Western Association of Railway Executives, and others (whose top committee meetings were held in Wall Street), alleging that their railroads had under written agreement, entered into in 1932, agreed (among other things): —

(a) to impose upon shippers in the Western District freight rates which are higher than those fixed by defendants and their co-conspirators for comparable service to shippers in the Eastern District.

(g) to deprive shippers of perishable products of competitive transportation rates and services by holding cars of perishables shipped from the Western District upon side or spur tracks in order to delay their delivery at eastern destinations.

(l) to disconnect and place out of operation aircooling equipment on cars coming from connecting railroads which had installed such equipment.

(m) to prohibit the installation and provision of various recreational facilities, including motion pictures and radios upon trains operated by defendant railroads.

(n) to refrain from solicitation of certain types of low-rate passenger traffic.

(o) to eliminate competition by restricting the individual railroad’s right to advertise and to solicit business.

Other defendants in this action include the Association of American Railroads, J. P. Morgan & Co., Kuhn, Loeb & Co., and many railroad presidents and directors. Not included, strangely enough, is the present Secretary of Commerce, who, as Chairman of the Board of the Union Pacific and a leading New York banker, headed the committee selected for execution of the Western agreement. It was his investment banking firm, incidentally, that circulated in 1939 a 73-page booklet condemning C & O’s campaign for competitive bidding in the sale of securities.

With record-breaking traffic continuing, domestic and Avorld shortages of unprecedented proportions still to be made up, a public appreciation of their military importance never before equaled, the outlook for the railroads under the kind of deal they have been getting is such that their position has come to be regarded so hopelessly by the market that many of them sell for less than their net, quickly salable assets. The Central of Georgia, for example, has cash, governments, and other net current assets aggregating 25 million dollars. The net book equity in its equipment is 15 million dollars — a sum far less than its cars and engines could be sold for. Its roadbed and other fixed plant, which serve a rich and growing territory, are conservatively valued by the ICC at 65 million dollars. (It would cost a much greater sum to replace them.) Yet, all the outstanding securities of this road on October 10, bonds and stocks, were valued by the market at 27 million dollars.

The Central of Georgia owners — you and I and Aunt Jane are among them — are not getting the kind of reward for capital which developed this rich and varied land.

To register our still further protest against all these things, we issued the following statement, in part, on October 15 of this year: —

The Presidents of the Chesapeake and Ohio, Nickel Plate, and Pere Marquette roads have today forwarded to the Association of American Railroads notice of their withdrawal from the Association. This action was authorized today by the three Boards of Directors at meetings held in Cleveland.

The Chesapeake and Ohio Lines invite the constructive elements of railroad industry to consider the creation of a new organization to include railroads, railroad security holders, and railroad labor.

The Association has now lobbied for three years for legislation to exempt it from the anti-trust laws, when its money and energies might better have gone to improve equipment and service, to fight for the billions in rail securities which are being unjustifiably squeezed out in reorganizations, and to preserve a fair balance between wages and rates.

Bluntly, we think the quarter of a million dollars a year we have been paying in AAR dues can be better spent by ourselves.

Railway Age, in commenting upon the press interview at the time, stated: “Mr. Young contends that railroad unions, in their own interest, will back up efforts to secure a reasonable return for railroad capital for the principal reason that they would find the only alternative — government control—less palatable than private management. They would rather have Bob Bowman (C&O President) as their chief than Mr. Hannegan.”

6

DURING the recent market crash, Representative Sabath charged that it was a bear raid engineered by Republicans to influence the elections. Many of us believe that the crash was more nearly related to ICC’s stalling and the attempts of government agents to block rate relief even at this late date. For example, on September 23, when rail stocks went into new low ground Mr. Schindler, Acting Secretary of Commerce, filed with the ICC a lengthy statement questioning the “economic wisdom” of granting rate relief until the situation is “clear.”

I immediately wrote an open letter to Mr. Schindler reading in part: —

Testimony has already gone into the records that the railroads this year will earn a return of 1.34 per cent on their investment and next year will probably earn nothing. This at a time of record-breaking traffic.

A petition for a freight rate increase has now been pending before the Interstate Commerce Commission since away back in 1941. . . .

Since 1933 five wage increases have been granted aggregating 90 per cent. Fuel prices are up 117 per cent and other supplies 86 per cent. Yet freight rates today are lower than they were then; and the rate of return on investment has averaged only 2.75 per cent, an amount pitifully inadequate to attract new capital. In the meantime other utilities serving the public have been allowed to earn two or three times as much. Could there be a clearer case for the railroads’ long-pending request than these simple facts?

Yet hearings, at great expense to the railroads and the taxpayer, have been going on ad infinitum. To cap the climax of chicanery and folly, the railroads, early in September, were forced, by the stalling tactics of the Commission, to publicly predict calamity and bankruptcy by 1947. . . .

P. S. I am wondering if you made any attempt to withhold recent wage increases until the situation became “clear.”

Soon after my letter to Mr. Schindler there occurred one of those circumstances which seem to go beyond coincidence and border on — well, we will say the supernatural, in its fortuitous setting of time, incident, and person. The editor of the Financial World had invited me to their Annual Report Awards Banquet — to sit at the head table, he urged. I had declined because of a prior engagement. A few days later he phoned again to say that C&O had won the grand prize — best of all industry — as well as three lesser ones, and that I simply had to be there. “Besides, Mr. Snyder, Secretary of the Treasury, will attend,” he added.

My interest in Mr. Snyder had begun with my interest in the RFC. He had entered that agency from the office of the Comptroller of the Currency, in 1937, the same year in which I had entered Alleghany. He was then stationed in St. Louis, head of the local RFC loan agency, which figured in the reorganization of railroads such as the Missouri Pacific and the Frisco, whose vast systems center at that point. With the ascendancy of Mr. Truman and Missouri, Mr. Snyder was catapulted to the head of the RFC.

Now for the banquet. There was scheduled to be present a distinguished audience of one thousand officers and directors, the president of the Stock Exchange, a few public servants, the chairman of the Securities and Exchange Commission, many representatives of the press; the subject: annual reports and the obligations of officers to stockholders. All of these things I had foreseen, but I had not dared to hope that Mr. Snyder would say: —

“I have always believed an informed public is one of the strongest bulwarks of democratic government.”

The audience had begun to turn its eyes toward the exits when the announcement of the grand prize came. Miss Sylvia Porter of the New York Post, who sat next to Mr. Snyder, commented (see brackets) in her column upon the effect of what I said in my acceptance, which follows: —

“Mr. Snyder’s statement that the stockholders in the government, meaning all of us, should be better informed, so that they may assist him in reaching a sound financial policy, is as encouraging as it is interesting.

“Wall Street, under the Truth in Securities Act, is quite different from the old Wall Street. Business, having found that it pays to be honest, might well insist that Pennsylvania Avenue follow its example. [Moderate applause. Slight smiles from Snyder and Emil Schram.]

“Our country was started by placing limitations, regulations, and restrictions — not on the people, but on the government; that is what the Constitution is, a comprehensive plan for the regulation of government. But for 175 years now, the politicians have been reversing this wholesome initial process, by taking the limitations off the politicians and putting them on the people.

“What we need today is a Truth in Politics Act to match the Truth in Securities Act, clause for clause. [Big applause, laughs from the audience, none from Snyder.]

“1. If my annual reports and proxies were filled with broken promises and half-truths, the Truth in Securities Act would have got me if the common Law had not. [Young turned, looked at Snyder after saying this. More applause. No move from Snyder.]

“2. The sources of income of every public servant would make as interesting reading as do those of officers and directors.

“3. Is it any less a crime for a public bureau or commission to divert the substance of Peter to buy the vote of Paul than it is for some Kreuger to convert the assets of a publicly held corporation to personal use? [Kreuger’s name is almost a synonym for colossal dishonesty. Gasps intermingled with applause. The men on the dais seemed frozen to their seats.]

“4. To pretend to seek price stability while quietly encouraging wage increases is, to say the least, not being frank.

“5. Taxation should be direct where the underprivileged can have a look at it. To cause them to believe that only the rich bear these price-spiraling burdens is to deceive them.

“A Truth in Politics Act to impose penalties upon such abuses would give us better government just as certainly as the Securities Act has given us better business.

“The standards for measuring the honesty of our public servants, who ask us that we trust them with our liberties and our life, certainly cannot be lower than those they themselves have laid down for the custodians of merely our money. [Emphasis on “trust with liberties and life,” expressive shrug accompanying “merely our money.” A man near me whispered “Ouch!” Schram looked worried. Snyder just sat, looked straight ahead.]

“Labor, farmer, and capital must take time out from form-filling, and the time-consuming annoyances of Washington-created scarcities, to insist upon accountings and explanations for the wastes and confusions of Washington.

“If you agree with the purposes of the Financial World in fostering these awards for more informative annual reports — and T take it you do by your presence here tonight — and if you agree with Mr. Snyder that a better-informed public with regard to financial matters can help the Secretary of the Treasury — and I take it you do by your applause for him — then you must agree that fuller information concerning other phases of government activity will be equally wholesome.

“It is time for all of us outsiders — outside the government, I mean — to get off the defensive, to go on the offensive and insist upon a healthier balance of regulation — a little less here and a little more there.” [Standing applause. The master of ceremonies stepped up and said, “The opinions of Mr. Young are his own.” Laughs. End.]

It is not easy to say unkind things, but if I had not we would never have had through service or competitive bidding and a lot of other things. Honest and efficient government, certainly, is no less to be desired than a comfortable trip across the continent.

The dry rot that has come from this pattern of banker control as opposed to ownership control, this elimination of competition in the railroad field, — by those men who talk so much about free enterprise, — has brought the largest and most essential industry In the richest nation in the world to the sad state where a dollar invested in it is not as good as an idle dollar in the bank. This fact is of appalling significance in its impact upon post-war employment prospects and the need for further technological development in the railroad field.

Just as our economy has always thrived where there was cheap and efficient transportation, and languished where there was not, —from the days of tidewater and the clipper, — so they may both decay together. For as goes transportation, so goes industry; and unless there is a change for the better, the railroads in America are headed for insolvency and then socialization.