into it in this situation with the railroads, and I am afraid that short of nationalization, which, of course, to me is a dirty word unless you really need it, I think myself that the Government will have to do quite a bit if we are going to maintain this system of transportation. My section of the country would die without the railroad. We would die without the railroad. There is no question at all about it. When you realize that 20 percent of all the freight that is fed into the railroad system of this country, nationally speaking, comes from Penn Central, it makes it quite important that you do something about it.

But it is true that a lot of people are quite reluctant and restrained in this matter because of some of the abuses that have crept in, not only on the part of the matters that we have had to discuss at the time that we passed the resolution on the railroad strike but also with reference to management.

I brought out here the other day, here is the Penn Central on the verge of bankruptcy, and yet they have decreed $144,000 a year as a pension fund to Mr. Saunders. Now, where does this money come from? Who is paying for it? I hope we do not have to subsidize that kind of abuse.

I think what we have to do is clean up the railroads first and then give them what they need, but we have got to clean them up first.

Senator JAVITS. Unhappily, for all of us, we have to do both at the same time, because the road has to continue to operate. With a $20 million a week payroll you have got a problem probably the day after tomorrow, and that is all I am talking about.

Senator HARTKE. Senator Javits, before you leave, I do think that we ought not leave in the record that we have never lost any money on the guaranteed loans. Even under this provision, under the 1958 law, there were several loans which were in default and I think that at this place I will insert those into the record, because it leaves a false impression that this has been totally without default. Some of the loans have been paid back and there are a number of loans in different areas which have been paid back, but, as is true of practically every loan in any operation, you do not get all 100 percent and it has not been so for the Government.

Senator JAVITS. There is no question about it. When I say lose money, I am speaking of the overall operation. We lose money in individual FHA operations, but I am talking about the overall guarantee operation of the Federal Government across the board, and you have to be actuarial about it.

On the whole, the Federal Government has not lost money on the guarantee technique. That is all I was pointing out.

Senator HARTKE. Let me say I think it amounts to about $6 million under the 1958 act.

Senator JAVITS. If we lost $6 million under the 1958 act, we have made $150 million in the FHA. You run a business. That is really what business the Government is in when you run a guarantee. Senator HARTKE. I just wanted to make that clear.

Senator ScoTT. May I offer into the record the article from the Time Magazine of July 6, 1970, "The Case For and Against Nationalization."

1 See p. 33.

Senator HARTKE. Fine. That will be part of the record at this time along with Senator Javits' full statement. (The article and statement follow :)

Several years ago, Louis Armand, former head of the French national railways, lunched with seven U.S. railroad presidents. At that time, he recalls, "I remarked that sooner or later they would have to face up to the question of nationalizing American railroads. They all roared with laughter." Last week, in the midst of the Penn Central's financial fiasco, no one was laughing at the idea any more. Transportation Secretary John Volpe warned Congress that if the Administration's bill to guarantee loans for railroads fails to pass, and other roads fall into bankruptcy, the only alternative would be for the Government to nationalize the rails. The Transport Workers Union has already called for nationalization. Said James A. Schultz, vice president of the Association of American Railroads: "The country has got to have railroads. So you either have nationalization or Government participation and help."

Nationalization has its attractions. The U.S. is almost the only industrialized nation without it. Stalled and stymied by high operating costs, local taxes, labor featherbedding and Government regulation, 21 of the nation's major railroads ran in the red last year. Though the Government's past policies have often hurt the railroads, Washington seems to be the only power that has the potential, at least, of building a rational, balanced national rail system.

Compartments for Cardinals. That is just what has been done abroad. Americans who travel overseas marvel at the swift, efficient and inexpensive nationalized railroad service they encounter. In France, the Paris-Marseille-Riviera express made 182 trips in a three-month period last winter and was late a total of one minute and a half. Japan's 125-m.p.h. "bullet train" between Tokyo and Osaka is the technological wonder of the Eastern World.

But there are some curves in the track. The foreign systems follow a costbe-damned philosophy and lose staggering sums. The Japanese railroads lose $1,000,000 a day. Many of the overseas systems are operated partly as makework projects and are featherbedded to an extent that would shock even a U.S. rail unionist.

Foreign lines court popularity by keeping fares low. On the Italian railroads, 80% of the passengers ride at reduced rates or pay nothing at all; full fares are paid only by tourists and the few odd souls who do not fit into any of the categories in the eleven-column, fine-print list of those entitled to "special" rates. In the Italian railway hierarchy, cardinals rate free private compartments; judges and most government officials get free seats; bishops, crippled people and journalists qualify for 20% to 70% fare reductions.

$60 billion for openers. In the U.S., the costs of nationalization would be enormous. The current estimate is that the Government would have to pay $60 billion merely to buy the railroads. Then Washington would still face the tremendous task of running the roads effectively. With rare exceptions, such as the Tennessee Valley Authority, the record of Government management of business-type enterprises is, if anything, even less impressive than that of private management of the railroads.

If railroads were nationalized as the Post Office is, says University of Chicago Economist George Stigler, "the same political forces, the same million employees would be running things through Congress." Stigler foresees an even greater danger: federal juggling of freight rates could confer great boons on some areas and penalize others. "If you subsidize freight rates in the Pacific Northwest," says Stigler, "that means their lumber industry booms. Every section of the country that has powerful political representation will seek favors in the rate structure."

Yet the Government has an obligation to help the railroads. The U.S. needs what is by far its most heavily used form of intercity transportation, and besides, Washington is largely to blame for the sad state of the railroads. The Government has refused to permit roads to drop unprofitable lines, dragged its heels in approving sensible mergers or rate increases and subsidized the railroads' competitors by ladling out money for highway, airport and canal con

struction. "At present, the railroads have the worst of all possible worlds," says Ben Heineman, president of the North Western road's parent company. "The managements have the responsibility for running them, but Government has all the authority. I used to say that as a chief executive of a railroad I was able to make an important decision: I could decide whether to paint our freight cars red or green."

Fortunately the Government is now examining with sympathy some relatively radical proposals to improve rail service. One that interests the Department of Transportation is for the Government to buy stretches of track for nominal prices and make "federal rail highways" out of them. Trains would pay tolls, as trucks do on turnpikes, but any company could use the highways and travel anywhere along the system. The Federal Government would relieve the railroads of the cost of maintaining those stretches of track, and the highway concept would permit more flexibility and efficiency in rail operations. A Seaboard Coast Line train heading north, for example, would no longer have to change crews and engines at Washington, where its line now terminates; it could carry cargo straight from Florida to New York. An electric utility, if it desired, could run its own trains to the coal fields.

Much more than this would be needed to build an efficient, economic rail system. Short of full nationalization, the Government could:

Take over passenger service. Railroad men are convinced that passenger service can never make a profit, and private enterprise simply cannot operate on that basis. The Senate already has passed a bill to create Railpax, a public corporation that would run the passenger service of any road that wanted to give it up. No improvement in passenger service can ever be expected from private railroad officials who regard that service as a despised orphan that they would like to be rid of. Railpax would at least put passengers in the care of a public corporation dedicated solely to serving them. With the Government's authority behind it, Railpax also would have a chance to drop some of the trains that few people ride. In addition, Washington would do well to encourage creation of metropolitan-area bodies to take over and run commuter services and to plan coordinated areawide systems.

Reduce regulation of freight. Railroads should be set free to charge any freight rates they wish, subject only to minimum supervision to guard against blatant discrimination. The present structure of rate regulation is a hangover from the 19th century, when railroads were big, rich monopolists. Today, intense competition from trucks, airlines, barges, pipelines-and the pressure of large shippers who often have much more financial clout than the railroads― can be trusted to "regulate" rates.

Introduce a national transport policy. Such a policy should equalize subsidies and taxes among various forms of transportation and let the most efficient form prevail. A first priority should be removal of the legal barriers to creation of integrated transportation companies that could own railroads, airlines and truck lines, and move goods and people in the most economic manner. The fragmentation of transport today is costly. A shipper should be free to turn his goods over to, say, the Land-Sea-Air Transport Co., rather than having to negotiate separately with airlines, railroads, truckers.

What the railroads need is much less Government involvement in freight operations and much more Government involvement in passenger operations. That may seem like an odd coupling, but it would be far more sensible than the country's present inequitable transportation policies, which have led to delays, debts and delinquencies.

STATEMENT OF HON. JACOB JAVITS, U.S. SENATOR FROM NEW YORK

Mr. Chairman, I would like to thank you for this opportunity to appear before your Committee to discuss legislation to extend emergency financial assistance to our nation's railroads. In doing so I would like also to commend the Committee for holding these hearings. I am aware of the chairman's interest in railroad matters, since it is this Committee which reported out and passed through the Senate S. 3706, the National Rail Passenger Bill. That bill constitutes the most important piece of rail legislation in many years, and should go a long way toward alleviating some of the structural problems being faced by railroads today.

In the meantime, however, the problems are legion, and simply will not wait for Congress to enact the complicated legislation which is required to help ensure the development of a national transportation system this country needs so urgently. In fact, the application of the Penn Central Railroad for reorganization under the bankruptcy laws-which sparked these hearings-illustrates the far-reaching damage which can be done when we continue to defer action in the face of a growing though complicated crisis.

For Penn Central's problems, and those of the rail industry, have been chronicled in hearing records and the press for years. As long ago as 1961, the Doyle Report, which was commissioned by this Committee, outlined the "strong indications of trouble ahead in the not too distant future," with regard to railroad finances. The same report made recommendations to Congress aimed at rationalizing rail transportation,—at bringing rail transportation legislation into the sixties.

We are now in the seventies, and few of the Doyle Report recommendations have been implemented. On the other hand, the "strong indications of trouble ahead," to which the Report referred are now upon us, not only with the Penn Central crisis but also with the many side effects which this crisis has caused. How long are we to wait to enact a transportation program for the seventies when it is already at least ten years behind the times?

The unfinished priority work before the Congress is obviously immense. The railroads need help. Testimony which this Committee has received on the capital structure of the railroads, their earnings trends, their operating costs and their capital needs paints a picture of a scarcely viable though absolutely essential institution.

Nevertheless, the National Rail Passenger Bill, the Rail Safety Bill, the Urban Mass Transit Bill, and S. 2289 which would prevent discriminatory taxation of rail properties by states and municipalities are all awaiting action in the House. Each of these measures were examined and/or specifically recommended in the Doyle Report. Each would help substantially to correct fundamental bottlenecks in the rail industry which have been recognized for years and now, of course, take on extra importance.

This is the background for the legislation before you today, and the spirit in which Representative Reid and myself introduced identical bills (with Senator Goodell as cosponsor of the Senate bill) in the Congress on June 23rd, to provide emergency loan guarantee authority and to establish a Joint Congressional Committee on Railroads.

S. 4014 is a two-part bill which recognizes the emergency nature of the current rail crisis, but realizes that we must at the same time take a long-range and comprehensive look at our rail transportation needs.

Title I would give the Secretary of Transportation emergency loan guarantee authority of $750 million to assist financially troubled railroads in maintaining essential transportation operations. It is identical to the Administration bill (S. 4010), with three significant exceptions.

First, our bill would not bar a railroad which is in court and in reorganization from obtaining a loan guarantee so long as all other conditions in the bill are complied with (§ 103 (a) (3)). While I understand that the Administration bill intends the same effect, it is silent on this subject; our bill would dispel any confusion on this score.

Second, our bill would specifically require that any loan guaranteed pursuant to Title I be used for railroad transportation purposes. In this regard, it also would authorize the Secretary to prescribe such other terms and conditions as he deems appropriate to assure that the purpose of the Act is met (§ 103 (a)). One aim of these additional terms and conditions would be to ensure that corporate funds freed as a result of the guaranteed loan also be applied to railroad purposes only. The reason the bill would give discretion to the Secretary to prescribe these extra terms and conditions directly is to allow him the leeway which might be required according to the variations of the individual case. However, I want the record to show clearly that the purpose of this bill -as well as the Administration bill, I trust-is inconsistent with guaranteed loan which merely frees funds of the borrowing railroad for non-railroad purposes.

The third difference between Title I of our bill and S. 4010 concerns the Secretary's visitation powers after the guarantee is made. The Administration bill, in section 6, would direct the Secretary to consult as necessary with the

rail carrier concerning any matter which may bear upon the ability of such carrier to repay; our bill would extend this consultation to include ensuring that the purpose of Title I is being carried out. As I have explained above, the consultation could legitimately deal with the purposes to which guaranteed loans, as well as funds freed by such loans, are put.

Title II of the bill would establish a Joint Congressional Committee on Railroads, to conduct a comprehensive investigation of the financial and other problems of the nation's rail carriers and to make recommendations for solutions before September 30 of this year. Such an investigation is necessary first to enable us in Congress to consider railroad problems in their totality; second, to produce recommendations of a weight sufficient to gain broad support in the Congress. Members of this Committee, as well as the Banking and Currency and the Labor and Public Welfare Committees would, I believe, be willing to sit on this Joint Committee with their House counterparts. The intent of the September 30 deadline is to give the Committee approximately 90 days within which to do its work.

A comprehensive approach, cutting across jurisdictional lines, is especially important. The Doyle Report pointed out that most of the problems of the transportation industry "interlock to a degree that should forbid tinkering in isolated areas and which requires a broad program approach." A recent Wall Street Journal editorial, which I would like at this point to introduce into the record of this hearing, points out persuasively that much more than loan guarantees is required; rather, a "broad scale attack on the problems" of rail carriers.

[From the Wall Street Journal, July 22, 1970]

REVIEW AND OUTLOOK-BAILING OUT THE PENN CENTRAL

No one was entirely happy with the Government's plan to guarantee sizable loans to the Penn Central Transportation Co., and perhaps the Administration was correct in withdrawing from its promise for the time being. In the circumstances, though, some such action now seems inevitable.

Under the bankruptcy petition the company filed yesterday, it will continue to provide vital rail services during the reorganization period. The court-appointed trustees will presumably still need substantial Federal help.

In the current uncertain economic climate, no one can say for sure what the impact of the bankruptcy of so large a corporation will be. The Administration's original aid plan was obviously aimed at preventing damage to Penn Central's suppliers and customers, as well as to its stockholders.

A large part of the company's trouble stemmed from its own mismanagement. There is no guarantee that a new management will be any better, but a change was clearly in order. Even with the best of management, however, the Government will have to take a number of other steps if it wants to keep other railroads from going the way of the Penn Central.

The first step involves the railroads' abysmal labor relations. Earlier this year the Administration proposed a major overhaul of the Railway Labor Act, whose complex provisions in recent years have done little to promote labor peace.

Perhaps some of the provisions of the overhaul are arguable, but Congress has seemed to prefer to try to forget the whole matter. Yet the problem simply will not go away. The many railroad unions are coming in for new contracts all the time, and any dispute carries the real danger of a national rail shutdown.

The Administration also has proposed a corporation to take over vital rail passenger service, most of which is a money-losing proposition for the railroads. For months before the Penn Central crisis came to a head, the company had been trying to discontinue most of its long-haul passenger service.

It's pretty pointless to argue now over who or what should be blamed for the rail passenger troubles; there's plenty of blame to go around. Rail management deserves a share, along with the growing availability of highway and airline aiternatives.

At the moment the fact is that the nation does need some rail passenger trains; they're still the most economical means of transporting large numbers of people from place to place. Someone must do a careful, conscientious job of deciding what service is really essential, giving no weight to such matters as local civic pride and the pleas of rail buffs, some of whom haven't ridden long-distance passenger trains in years.