RAILROADS WORKING SECURITY GAME

...In support of the above conclusions, we submit the following statement: This bill have been reported by the committee after hearing only two witnesses, Eugene Meyer, Jr., managing director of the War Finance Corporation, and Mr...

...In addition, according to the statement of Director-General of the Railroad Administration Davis, there is now in round number* a sum approximately $700,000,000 owing to the government by the railroads on account of additions and betterments made during the period of federal control...

...If for any reason the railroad bond market should decline, the government's loss will be proportionately increased...

...Buying far Above Market Prices THE provision in the bill requiring the government to accept railroad bonds upon the 6 per cent basis means that the government will acquire the bonds at a considerable advance above their present market value...

...We have no doubt that many of the railroads are in need of funds...

...Their net earnings during recent months have been constantly increasing in spite of a decrease in traffic...

...The chances are overwhelming that the government will lose several hundred million dollars directly in this transaction...

...In any event, no such emergency exists as to justify the extraordinary legislation proposed in this bill...

...In the first case the government will hold somewhere in the neighborhood of' $1,500,000,-000 of unsalable railway securities...

...The War Finance Corporation will therefore become a dominant influence on the stock exchanges through its power to withhold or throw upon the market hundreds of millions of dollars' worth of securities...

...The best secured railroad bonds are today selling at a price which yields about 7 per cent, while other bonds having no physical property behind them are selling at prices which yield to the investor more than 8 per cent...

...On the contrary, railroad earnings and railroad credit are steadily improving, and are likely to improve even more rapidly with the increase of traffic accompanying the crop-moving season which is about to begin...

...We have, therefore, a total of approximately $1,359,000,000 of railroad securities which are now in the possession of the government or which may be acquired hereafter under the terms of this bill...

...The lack of substance in these railroad claims is indicated by the fact that in the case of claims already adjusted by the railroad administration, out of claims amounting to $225,562,764, all but $68,-141,222 have been disallowed...

...In pursuance of this act the standard contract entered into between the railroads and the government, when the roads were taken over, expressly provided in section 7 that the United States shall have the right to deduct from such rentals "all amounts required to reimburse the United States for the cost of additions and betterments made to the property of the company not justly chargeable to the United States, unless such matters are financed or otherwise taken care of by the company to the satisfaction of the director-general...

...The government is not morally or legally bound to fund the indebtedness of the railroads on account of additions and betterments made during the period of federal control, but only that part remaining after the railroad claims have been offset...

...Except for this and other limitations designed to prevent the power of offsetting this indebtedness in such a way as to cripple individual railroads, it was understood and agreed that the indebtedness on account of additions and betterments might be offset against the amounts due railroads on account of compensation or claims and that the government would fund only the amount remaining after this balance had been struck...

...McAdoo was ready to appear upon the call of the committee and that no unreasonable delay would be occasioned by taking his testimony...

...Mere Matter of Hundreds of Millions THE difference to the government between offsetting this indebtedness against the railroad claims and funding the balance and the plan now proposed of funding substantially the entire amount is a matter of several hundred million dollars...

...L. E. Sheppard, president of tbe Order of Railway Conductors, representing the four railway brotherhoods, and Mr...

...If the bond market should for any reason decline the government's inevitable loss would be proportionately greater...

...There is no reason to believe that the market for railroad securities will be measurably improved within a reasonable time...

...Committee Refuses to Hear Opposition Senator Robert M. La Follette, of Wisconsin, Senator A. Owsley Stanley, of Kentucky, and Senator Key Pittman, of Nevada, submitted a minority report from the Interstate Commerce Commission, to the railroad funding bill...

...We can see no "reason why the government should embark upon this highly speculative venture at such a time...

...The aggregate amount of railroad securities which the War Fhiance Corporation is authorized by this act to sell is nearly $1,500,000,000...

...Meyer and Mr...

...Government Stands to Lose Heavily UNDER the terms of this bill, the government will almost certainly lose hundreds of millions of dollars in the proposed transactions...

...This same provision was also embodied in section 207 of the transportation act which authorized the president to offset the indebtedness arising out of additions and betterments against the claims of the railroads and provided that "any remaining indebtedness of the carrier to the United States in respect to such additions and betterments shall, at the request of the carrier, be funded...

...It is certain, however, that the total claims to be filed by the railroads will amount to more than $750,000,000...

...Many of the railroads undoubtedly need money, but this is true of every class of individuals and businesses in the United States...

...As the committee did not hear any witnesses from the Interstate Commerce Commission, we have no exact information as to the amount of claims already filed, nor have we any estimate as to their probable total...

...It is impossible also to understand how the transaction provided for in this bill can be carried out without injuring the interests of agriculture, which have been provided for in a measure already considered by the senate, or without detrimental effects upon the value of Liberty bonds and other government securities-now held by the public...

...During the past 18 months, since the passage of the transportation act of 1920, the government has paid or loaned the railroads $1,376,403,024...

...As we propose to demonstrate elsewhere, the terms under which this business is to be transacted are such that the government will almost inevitably lose large sums...

...In the second place, both of these witnesses are unquestionably qualified by reason of their experience to express authoritative opinions as to whether the transactions proposed in the pending bill were sound from a financial standpoint and in the interest of the goverment...

...Due to the weight of taxes many of the great estates in England are to be sold...

...In other words, more than two-thirds of the claims examined by the railroad administration have been found to be invalid...

...There is nothing in the proposed amendment to prevent the War" Finance Corporation from deciding that inasmuch as the immediate needs of agriculture do not require the use of any large proportion of the cash now standing to the credit of the War Finance Corporation in the tpeasury, a large part of this cash should be used to purchase railroad securities from the director-general of the railroad administration, and thus put him in a position to furnish the railroads the relief which they are so earnestly seeking...

...We are brought to this apprehension by a consideration of the ardor with which the plight of the railroads is pictured and the general revival of business which will inevitably follow upon the carrying out of his plan which has been embodied in the present bill...

...We believe that this is a power which no official of the government should possess and a purpose for which the credit of the United States should never be made available...

...On April 30,1921, the treasurer of the United States reported that the securities of railroads then held by the government aggregated $659,-684,437...

...The total loss of the government, if the bond market remains in its present condition, may therefore be from $150,000,000 to $300,000,000, and in case of a fall in the stock market may be much greater...

...Section 2, paragraph (c), provides that any securities sold by the War Finance Corporation, must be disposed of at not less than the price at which they were originally acquired by the president...

...The condition of the railroads, on the contrary, is constantly improving...

...This minority report, which Senator La Follette presented, shows that the government is being forced into the most speculative business in the world, with an inevitable loss of hundreds of millions of dollars...

...If it had been the intention of congress that all the indebtedness of the carriers to the United States on account of additions and betterments should be funded, the transportation act would have so stated in plain terms instead of providing merely that the president might within certain limitation offset such indebtedness against the railroad claims and providing that any remaining indebtedness should be funded...

...In the second case, in order to get rid of this huge mass of railroad securities it will be necessary for the government at some future time to authorize the War Finance Corporation to sell the bonds at whatever price can be obtained for them...

...They were refused a hearing by a vote of the majority of the committee, although the interests of the hundreds of thousands of railroad employes whom they represent are directly affected by this legislation...

...The president of the United States in his message to the senate of July 26, 1921, urging the passage of this legislation, stated that it would involve "no added expense, no added investment, no added liability, no added tax burdens, and no added appropriation...

...Far from taking the government out of business, it will inevitably involve it in the most speculative business in the world—the marketing of corporate securities...

...This amount can be offset against the $700,000,000 which the railroads now owe the government on account of additions and betterments, and the balance of $200,000,000 can properly be funded under the provisions of the transportation act...

...By offsetting the claims against the indebtedness this entire question can be settled without injuring any carrier and without the payment of a single dollar from the treasury or the marketing of a single security...

...It is believed that their testimony would throw a great deal of light upon the obligations which the government had assumed in taking the railroads over, and also upon the general character of the indebtedness and claims as between the rail-roads and the government, which the present legislation proposes to provide a means of settling...

...In addition, since the present transportation rates were fixed, the railroads have been granted wage reductions estimated to represent an aggregate saving of $400,000,000 a year...

...The indirect losses will be almost as great...

...He then adds, if the claims yet to be filed are prepared on the same general lines as those already filed, the total claims presented on final settlement will aggregate a little more than $1,250,000,000...

...If the final settlement amounts to more than $500,000,000 it will be necessary for the congress to provide for the balance by appropriations...

...William H. Johnston, president of the International Asociation of Machinists, appeared personally before the committee and requested that they be given opportunity to be heard upon the bill...

...A great deal has been said recently by President Harding and other spokesmen of the administration about the desirability of "taking the government out of business...

...Upon this point we believe that the president has been misinformed...

...The railroad administration and the Interstate Commerce Commission, as a matter of fact, have fixed as their policy the disallowance of all claims arising out of alleged inefficiency of labor...

...No emergency of a character to justify the extraordinary transaction provided for in this bill has been shown to exist...

...This is no part of the legitimate functions of a government nor should the credit of the United States be used for such a purpose...

...As the present market for the best secured railroad bonds is now upon a 7 per centrbasis, with inferior bonds yielding 8 per cent or more, the government will acquire these bonds at from $10 to $20 per $100 above their present market value...

...Setting Up Strawmen Claims AS against these obligations of the railroads to the government there are claims of the railroads amounting to a sum which no one is willing even to estimate...

...Nevertheless, assuming even that the government had an opportunity to make a handsome profit out of the transactions, we submit that the purchase and sale of such speculative securities is no part of the functions of government and will inevitably have demoralizing results...

...Although it was not required specifically by the act, the director-general of railroads agreed with the carriers that the indebtedness of the railroads on account of additions and betterments would not be deducted from the standard return in such manner as to interfere with the payment of dividends at the rate which had been maintained during the test period...

...We are unable to find in any of the various acts passed by congress with reference to federal control of the railroads any intimation that the government is morally and legally bound to fund this indebtedness...

...But that the hearings should have been terminated by action of the majority of the committee immediately after the conclusion of their testimony and without permitting the calling of witnesses whose testimony might be adverse to the proposed legislation is a procedure which we believe to be without precedent in the annals of congress...

...A. OWSLEY STANLEY...

...The committee by vote of the majority refused to permit either of these witnesses to be called, although it had been ascertained that Mr...

...In the first place, it was under their administration of the railroads that the contracts between the government and the carriers were drawn...

...Receive More Than a Billion IN considering the'proposed legislation, we believe that congress should keep in mind the large sums which have been paid to the railroads out of the United States treasury since the passage of the transportation act...

...James C. Davis, Director-General of the railroad administration...

...This latter sum, according to the advocates of this bill and the argments accepted by the majority of the committee, is to be funded into obligations which should be accepted by the government...

...Thus this bill, authorizing transactions of a novel character, entirely without precedent in the history of government, and which may involve sums aggregating approximately $1,500,000,000, comes to the senate with no other evidence or expert opinion available except that presented by the joint authors and proponents of the legislation...

...Public Credit Used for Private Gain UNDER the proposed bill, the War Finance Corporation will have the power to use the government's credit in the purchase of railroad securities and in the sale of such securities as are acquired...

...On the contrary, every piece of legislation affecting the relations of the railroads to the government including the federal control act and the transportation act, has specifically provided for such an offset and has only authorized the funding of the remaining indebtedness...

...No investor can possibly be persuaded to buy securities on a 6 per cent basis from the government when he can go to any bank or broker and obtain the same or similar securities upon a basis which will yield him 7 to 9 per cent...

...That one chance of avoiding loss is an advance of the railroad bond market at least 10 points above its present condition...

...In the case of the best secured railroad bonds which now yield 7 per cent, the government will be obliged to take them from the railroads at an advance of approximately $10 per $100 above their market price, while in the case of the poorly secured bonds which are now on an 8 per cent basis, the advance made will be about $20 per $100...

...THE undersigned members of the committee on interstate commerce are unable to approve the report made by a majority of the members of that committee accompanying the bill S. 2S37, for the following reasons: This bill has been reported by the arbitrary action of the majority of the committee upon ex parte hearings and after a refusal to permit the testimony of any witnesses who might oppose or criticize its proposals...

...William G. McAdoo, former secretary of the treasury and director general of railroads at the time the railroads were taken over by the government, and Hon...

...On the contrary, there are many strong reasons for the expectations that railroad securities will decline in value rather than advance...

...The American people are already overburdened with taxes...

...By withholding or throwing upon the market the large blocks of railroad securities which the government will acquire under this legislation, the War Finance Corporation will be able to exert a great influence upon the Wall Street market...

...It must follow, therefore, that the government will be obliged either to hold these securities indefinitely until the bond market reaches a 6 per cent basis or authorize the War Finance Corporation to dispose of the bonds at prices which will make them marketable...

...We do not believe that this affords adequate protection in this direction...

...It will have the power to advance or depress at will the stock market value of the securities of the railroads in general or of any particular railroad...

...No Emergency to Justify Great Loss matter what amendments may be adopt-ed, the imposition of this great problem of disposing of millions of dollars' worth of railroad securities will inevitably hamper the War Finance Corporation in handling the even greater and more important function of financing the marketing of agricultural projects...

...The committee has proposed an amendment to the bill, apparently intended to protect agricultural interests...

...The marketing of such a mass of securities by the government cannot fail to depress the market for Liberty bonds and other government securities...

...The reasons for requesting the calling of these witnesses were twofold...

...Such a chance seems almost impossible in view of the world-wide social and industrial distress...

...The government is required to accept the railroad securities upon a 6 per cent basis...

...These highly speculative transactions are not required to secure a just and speedy settlement of the railroad claims...

...I sincerely trust that every person will read every word of this-important document and make their position clear to their congressmen during the present congressional recess.—From Editorial in Wisconsin Farmer...

...In the latter case the government stands to lose from $10 to $20 on every $100 worth of bonds sold...

...The bulk of these claims, according to the testimony of the director-general of the railroad administration, is made up of claims on account of alleged "inefficiency of labor...

...If the claims on account of inefficiency of labor are entirely disallowed, and be believe they should be, the total claims will not amount to more than $500,000,000 at the outside...

...The farmers are not only in a position where they have lost their normal income but many of them are bankrupt and have seen the savings of a lifetime swept away during the past 12 months...

...Section 1 of the proposed bill provides that the securities acquired by the government from the railroads shall bear interest at a rate of 6 per cent, or a rate of less than 6 per cent, provided that in the case of bonds bearing a rate of less than 6 per cent they should be received at a price that yields an average annual return of 6 per cent of the purchase price, including interest and depreciation, if held to and paid at maturity...

...The purpose of this bill, according to the report of the majority, is "to authorize the United States to sell and the War Finance Corporation to purchase and to sell in the market, or as agent of the United States to sell, the securities taken from the railroads or hereafter to be taken and owned by the government, and to use the proceeds for the purpose of settling with the railroads under the provisions of section 202 of the transportation act...

...This measure, if enacted, will put the government of the United States in the business of dealing in railroad securities...

...It is this' enormous mass of securities which the War Finance Corporation is authorized, under the terms of this bill, to "sell, market, or dispose of...

...In the case of Mr...

...That such litigation is expected is indicated by the president in his message of July 26, 1921, in which he states: "In order to expedite settlement and funding, an informal understanding, which is all that is possible or practical, has been reached, under which the railway claims based on the "inefficiency of labor" are to be waived to hasten surrender of any rights in court in case there is failure to settle...

...This bill authorizes the War Finance Corporation to purchase from the president any rail-Toad securities which he, or the various agencies of the government which represent him, may have acquired either now or hereafter to the extent of $500,000,000, and in addition authorizes tbe War Finance Corporation, at the request of the president, to sell any additional railroad se-surities which may at any time be in the possession of the government...

...Assuming, however, that the bond market may remain in approximately its present condition, it will be necessary for the government to stand a loss of from $10 to $20 on every $100 of these securities which it sells on the entire lot of $1,500,000,000 worth of railroad securities...

...In order to understand the inevitable effect of these two sections it is necessary to understand that the market for railroad securities is now roughly on a 7 1/2 per cent basis...

...It follows, moreover, that the government will not be able to sell these bonds upon a 6 per cent basis to private investors when they can buy similar securities from banks and brokers at prices which will yield 7 or 8 per cent...

...Hines, who is now in Europe, the request was made with the proviso that his testimony might be secured within a reasonable time...

...On the contrary, the federal control act, approved March 21,1918, expressly required that in every agreement between the United States and the railroads it should be stipulated that the United States may, by deductions from the just compensation (rental to be paid to the railroads) or by other proper means and charges, be reimbursed for the cost of any additions, repairs, renewals, and betterments to such property (railroad property) not justly chargeable to the United States...

...We find it impossible to accept this view of the proposed transactions...

...The government loss could, therefore, reach at least $150,000,000, and might be twice as great...

...These two gentlemen are admittedly the authors of this bill and its principal advocates...

...They should, of course, have been heard, as they were, to lay before the committee the reasons why in their opinion this legislation should be enacted by congress...

...This makes a total of $1,376,403,024.34 which has been paid to the railroads during a period of a little less than 18 months...

...We submit that instead of taking the government out of business, this bill proposes to put the government into the most speculative business in the world—the buying and selling of railroad securities...

...No more accurate, stirring presentation of the case has been made by any man or set of men, in any public document...

...Believing as strongly as he does that the entire stability of the nation is dependent upon speedy relief of the railroads, it does not seem to us wise to intrust the decision as between the needs of agriculture and the needs of the railroads entirely to his discretion...

...Nevertheless, it is quite certain that this will not end the matter and that these and other unsubstantial claims will be the subject of endless litigation against the government...

...On the contrary, we believe that this question of claims arising out of alleged inefficiency of labor should be dealt with by congress in such a manner that it will be disposed of forever...

...By this plan the railroad claims can be settled without the payment of a single dollar out of the United States treasury and without the sale of a single railroad security by the United States government...

...It should be self-evident that as long as the bond market remains upon its present basis of high interest yields it will be impossible for the War Finance Corporation to sell any of these securities...

...In the meantime the War Finance Corporation will have advanced to the director-general $500,000,-000 to be used in the settlement of the railroad claims...

...At another point he characterizes this indebtedness owing to the government as sums "which are morally and legally bound to fund...

...The credit of the railroads has been steadily advancing, and with the great savings in the wage bill, which have been brought about by reason of the reductions, ordered by the railroad labor board, there is every reason to believe that their net earnings, and, consequently, their credit will continue to improve with the greater volume of traffic which normally accompanies the crop-moving season...

...It will put the War Finance Corporation in control of an enormous mass of railroad securities, larger probably than the holdings of any private interest...

...Before the testimony of Mr...

...The government will, therefore, be obliged either to hold this great mass of securities until the railroad bond market is by come miracle again upon a 6 per cent basis or by some future legislation authorize the War Finance Corporation to sell them at market prices...

...This amendment merely provides that the War Finance Corporation shall not purchase railroad securities at a time when such a transaction will interfere with the provision of credit for agriculture...

...Speculation for Railroads' Benefit IN any event it must be evident that the entire transaction provided for by this bill is nothing more nor less than a speculation for the benefit of the railroads, in which the government has only one possible chance of avoiding geat loss...

...ROBERT M. LA FOLLETTE...

...The agricultural situation requires the application of financial assistance over a long period, while, according to the testimony of Mr...

...Under the proposed plan the government will fund the entire indebtedness of the railroads and assume the enormous liability of disposing of these securities...

...For the government to undertake the financing of the railroads upon a basis which will tend still further to depress its own obligations would seem to be a transaction which the congress should refuse to permit...

...The President Sadly Misinformed THE president, in recommending to congress the passage of such legislation as this bill embodies, states, with reference to the indebtedness which the railroads owe the government on account of expenditures made for additions and betterments, that "there has been, at no time, any question about the justice of funding such indebtedness to the government...

...Meyer, managing director of the War Finance Corporation, who is charged with the administration of this measure as well as the act for the relief of agriculture, the railroad situation requires that a large amount of money be immediately available to carry out the settlements with the railroads and enable them to purchase cars and equipment which will be required during the coming winter...

...If this precedent is permitted to stand and is followed in the future, the senate will cease to be a deliberative body and will degenerate into a mere tool of the majority...

...In order to make the situation quite clear it is necessary to examine in some, detail the exact nature of the authorization provided for in this bill...

...Few are immune from the effects of the great industrial depression which has thrown millions of men out of employment and enormously increased the number of business failures in every part of the country...

...These claims relate only to the period of federal control...

...Walker D. Hines, who succeeded him as head of the railroad administration...

...In addition there are claims already filed with the Interstate Commerce Commission amounting to several hundred million dollars on account of the period of federal guaranty after the roads were turned back to their private owners...

...This is the condition which today confronts nearly every individual and nearly every private business in the United States...

...KEY PITTMAN...

...Davis was concluded, the chairman of the committee was formally requested to call as witnesses before the committee Hon...

...During the same period the government has loaned the railroads $218,111,667...

...World-famed Runnymede, where the Magna Charta was signed in 1215 is for sale as common farm land, and the minister of agriculture is handling the matter...

...The director-general of railroads states that the total amount of claims filed with the railroad administration to date is $633,708,281...

...We submit that the senate should not give its sanction to this unprecedented procedure...

...In our opinion there is grave reason to question whether the government will ever be able to dispose of the securities under the terms provided in the bill...

...Since March 1, 1920, the date upon which the railroads were returned to private ownership, and up to May 31, 1921, the United States treasury has paid to the railroads in cash $1,158,291,357.34...

...The Voice of the People Stilled UPON the same day upon which this action of the committee was taken Mr...

...We do not beiieve that a matter of such great importance should be left to a mere informal understanding...

...Liberty bonds are now selling far below par, and many of them yield more than 6 per cent at present prices...