It shows that speculation in rail bonds far exceeds that in stocks. The profit in rail bonds speculation far exceeds the profits in stocksthe profits, where there are any, perhaps I should say.

If the leading bond issues of these three leading railroads now under section 77-and those three are Rock Island, Missouri Pacific, and New Haven-if, to repeat, the leading bond issues of these three roads had been bought at the lows in 1932 and sold at the high in 1945, the result would have been a profit of $416,941,674.

But in all the stock issues of these three railroads for that period, 1932 to 1945, the same operation would have resulted in a loss of $5,479,000. Speculators do not buy and sell securities to lose money, as a general rule.

Senator REED. That is to say, if I get this correctly, the sales price in 1945 of all these bonds was $416,000,000 above the sales price of 1932?

Mr. HARRISON. For the three roads, at the respective low and high figures for those years.

Senator REED. Not for the Rock Island alone but for all three roads. You took the stocks, common and preferred?

Mr. HARRISON. All the stocks; yes, sir. All classes of preferred and common of all three roads.

Senator REED. You took all of them?

Mr. HARRISON. Including whatever stock the New Haven had outstanding, and the Missouri Pacific. I did not prepare this myself, sir, that is why I am anxious to get the break-down and see how this was done.

Senator REED. That is very interesting. So the value of these three stocks in these three roads was $5,000,000 less in 1945

Mr. HARRISON. At the high point.

Senator REED. Than it was in 1932.

Mr. HARRISON. This, I think, I have touched upon in my statement, which I hope you will allow me to read, because it is concise and to the point. Now that brings me to something that is very interesting. I think today you will find that as soon as the news of this court order comes out generally, there will be a turn-over in the securities, particularly the equities of the Rock Island.

Each successive adverse step we have had, either from the courts. or form the Interstate Commerce Commission-at every slap we got in the face, we lost a friend.

You hit a man once, and he might take it. Hit him twice and he might take it. But pretty soon he gets disgusted.

Senator HAWKES. Of course, Mr. Harrison, the stock naturally would be very much down in 1945, as related to 1932. There would be very much of a different picture there between the values of 1932 and 1945 on the stock as compared with the bonds because these very reorganization plans are the clouds on the horizon, and they are worrying everybody, and nobody wants to buy something they think is through under the plan. Is that true?

Mr. HARRISON. Yes, sir. But my point is that that also forces a turnover in the stocks, which might not otherwise occur.

May I again refer you to this chart of which, unfortunately, I have only one copy.

I took eight solvent railroads. They are the Santa Fe, the Baltimore & Ohio, Delaware & Hudson, Illinois Central, Lehigh Valley,

New York Central, Northern Pacific, and Southern Railway. I think that is eight. And I made the same compilation there.

I am glad you brought the point up, because it is rather important. From the low prices of 1932 for the active bonds of those eight solvent roads to the high prices of 1945, there was a gain of $1,366,000,000.

Senator HAWKES. That comes along the line of my suggestion. These roads were not in the situation of the three roads you selected. Mr. HARRISON. Yes; but when you contrast that with how the stocks of those railroads have increased-they have increased only about $850,000,000.

Senator REED. From 1932 to 1945?

Mr. HARRISON. Yes.

Senator REED. What was your increase in the value of the bonds? Mr. HARRISON. $1,366,000,000. In other words, the increase in value of just part of the bond issues of these roads was over one and a half times the increase of all of their stock issues.

Now to turn to my statement. For brevity, when I refer to S. 249 or to "the bill," I shall be referring to that bill as proposed to be amended in the Subcommittee print of May 8, 1947, unless otherwise indicated.

May I respectfully call the committee's attention to the fact that in the present hearings we are now picking up the discussion of section 77 proceedings where it stopped about a year ago, as illustrated by the following quotation from Senate Report 1170 (Calendar No. 1190, 79th Cong., 2d sess), pages 145-6:

The section 77 procedure was unanimously condemned at the hearings in October and November (pp. 22, 28, 70, 71, 79). The leading witnesses all agreed that the chapter XV procedure was far superior to the section 77 procedureInterstate Commerce Commissioner Splawn (hearings, p. 5), Commissioner Mahaffie (hearings, p. 22), Mr. Hagerty, vice president of Metropolitan Life Insurance Co. (hearings, p. 28), Mr. Benson, speaking for the savings banks and for the Security Owners Association (hearings, p. 69), and Mr. Fooshee, speaking for the leading investment banking firm handling railroad financing (hearings 'p. 74).

The procedure proposed in S. 1253 by the Commission was praised by all the witnesses who testified in October and November 1945, to wit:

Commissioner Mahaffie, who drafted this procedure in behalf of the Interstate Commerce Commission (hearings, pp. 22, 164); Mr. Benson (hearings, pp. 70-71); Mr. Hagerty (hearings, p. 32); Mr. Fooshee (hearings p. 77); Mr. Purcell (hearings, p. 78); Mr. J. Carter Fort, vice president and general counsel of the Association of American Railroads, speaking in behalf of its law committee, made up of the general counsel of 40 representative railroads and, also in behalf of the board of directors of the association (hearings, p. 115); and Mr. J. M. Hood, president of the American Shortline Railroad Association, speaking on behalf of the 316 railroads in his association (hearing, p. 121.)

It is now about 4 years since legislation on the present subject was first proposed in Congress, not long after the unexpected and (as it turned out) catastrophic decision of the Supreme Court in the Milwaukee and Western Pacific cases. It was not a great length of time prior to those decisions in 1943 that the Supreme Court had set forth quite different doctrine in Case v. Los Angeles Lumber Products (308 U. S. 106), and Consolidated Rock Products Company v. Du Bois (312 U. S. 510). In those carlier cases the high court had held that the trial court must proceed to an exact determination of the rights of the parties, and could not deal out rough or approximate justice.

But in the Milwaukee and Western Pacific cases the Sureme Court found that short-cut procedures, which the Federal courts themselves could not adopt, not only might be adopted by the Interstate Commerce Commission but after that could not be reviewed by the courts if there was evidence to support the Commission's findings.

In fact, the Supreme Court's attempt to justify its doctrine lead to the use of such a complex phrase as "the present fairness of the former exercise of powers," in the first Denver & Rio Grande Western decision in 1946. The court was trying to maintain, in the face of what to this layman appeared to be all logic and common sense, as well as (according to counsel) the court's well-established doctrine in all matters other than the railroads, that changes in conditions could not be judicially noted, and in effect that circumstances did not alter railroad cases.

By way of a footnote on this contradiction of doctrines, the court, only a few days ago, held in the Equitable Office Building case (Knight et al. v. Wertheim & Co., Docket No. 82, C. C. A. Second Circuit, decided December 31, 1946; sustained in spring term, 1947), that the lower courts must recognize considerable changes in circumstances, and reaffirmed the familiar doctrine that until the decree is final and the rights of parties have finally vested, any change whatsoever may be made in a plan of reorganization--or the proceedings terminated by discharge without decree (as indeed is now contemplated in the Cotton Belt case).

Parenthetically, here in this Cotton Belt case is a stellar demonstration of what I and many other witnesses have been contending during these four weary and (procedurally) discouraging years; namely, that practically every major property in the courts under section 77 is either already solvent or rapidly becoming so, and gross travesties of justice have been and are about to be perpetrated in the name of nothing whatever that we can see but just plain stubbornness.

In the last 3 years we have seen the RFC, the courts, and the ICC combine to put through a deal through which, by temporarily casting a kind of mist or cloud around $133,000,000 of assets of the Chicago & North Western, and hiding them from judicial notice, $40,000,000 of the North Western's obligations and $180,000,000 of its stock issues were wiped out.

We have seen the Chicago, Milwaukee, St. Paul & Pacific plan confirmed and put into effect amidst angry charges of fraud, misrepresentation, deceit and broken promises as regards the voting trust. and a straight wipe-out (without any screening cloud) of some $368,000,000 dollars of debt and stock (the issuance of practically all of which for cash or equivalent the Commission had approved hardly 15 years before). (And this notwithstanding the fact that the Milwaukee in the 25-year period ended 1946 earned all of its old fixed charges with a margin of over $67,000,000).

We have seen the Supreme Court twice refuse to permit modification of the Denver & Rio Grande Western plan which wiped out, in addition to all the stock, 90 percent of the claims of the general-mortgage bondholders, although the $37,000,000 of cold cash it had on hand was about 10 times its cash resources in 1939 and exceeded the entire amount of accumulated interest on every other obligation except the general-mortgage bonds.

It is impossible, from the standpoint of any kind of sanity and experience in investment banking, to say that the Denver & Rio Grande, with that kind of resources, could not have made a better bargain with its creditors if given a chance. It is this sort of utter refusal on the part of the Interstate Commerce Commission, backed up by the courts, to recognize the everyday business realities of life which has brought the present witness and many others to the doorstep of Congress again and again, crying for relief in the name of common

sense.

And we have seen the ICC and the courts put their imprimatur of approval on a Missouri Pacific plan calling for the use of treasury funds of the estate to finance open-market operations in the stock of the new company.

Now, I would like to attempt to demonstrate to you gentlemen how thoroughly competent, both relatively and absolutely, the railroads covered by this proposed legislation are to take their places again in the everyday world of private management, and plead with you not to allow any more crimes like the above to be committed in the name of beauracracy, expedition, or what have you.

First, let me say this: Almost every important railroad now in reorganization and covered by S. 249 as proposed to be amended has for 25 years earned all of its fixed charges with millions of dollars to spare. A schedule showing the details of this is appended-table I. One noteworthy exception is the Wisconsin Central, and this railroad was operated as a leased line by the Soo line, with consequently no true showing of its operating potentiality whatsoever from 1909 until disaffirmance of the lease on December 3, 1932. Its operating reports before the latter date bear no relation whatever to its earning power. The same thing is true to date of the Boston & Providence. I cannot help interjecting at this point a reference to the contradiction between the attitude of the Commission toward pledged collateral in two different cases. The preferred stock of the Wisconsin Central was deposited under the so-called leased-line certificates of the Soo line. In the reorganization of the Soo line, the holders of these leased-line certificates were invited to come and get their collateralSeptember 1944-which was considered worthless.

However, in a parallel case, where common stock of the Gulf Coast Lines was pledged under Missouri Pacific 54's, not only have the holders of Missouri Pacific 5's so far been denied any chance whatever of electing to take the pledged collateral, but they were denied by the ICC the right to organize a protective committee to solic t deposit of bonds, and as such were denied by the Federal courts the right to intervene in the Gulf Coast Lines' reorganization proceedings. Of course, the essential difference was that the corpus of the parent estate in one case wanted the collateral and in the other case did not, but in either case the powers that be were perfectly willing to make "corpses" out of the rightful claims to the collateral.

The next thing I wish to point out is what various solvents and socalled insolvents do with their money in certain significant ways after taking it in. We have already noted that practically all of the socalled insolvents took in enough money to pay their interest in fixed charges and more over a period of 25 years.

Now-leaving out of consideration entirely the amounts of money received by the security holders of these various roads, which you

could consider are private or selfish interests-the significant ways in which the railroads could place or dispose of this money were payments of Federal income and excess-profits taxes, capital expenditures on the property, accumulations of current resources for present and future needs.

For the last 10 years, let us take the "cream of the crop," the outstanding leading railroads of the United States, few of which have been involved in any reorganization proceedings for 50 years. The Union Pacific is omitted because of its relatively disproportionate investment income. Let us see how these roads disbursed their dollars in the above respects, and how the reorganization railroads covered by the present bill did in comparison.

In order that the committee may readily determine which railroads deviated from the average, and so that the committee staff can readily determine just how we arrived at these figures, the appended figures will show the detail for each railroad-tables II and III. It will appear from these figures that our little group of reorganization railroads has actually done better than the lordly and impressive list of solvents in certain respects.

It appears, if anything, to be better prepared rather than worse prepared to resume its place in that group. It spends a larger proportion of its gross receipts in capital expenditures, and its so-called newness per mile, which I will explain, is superior to the average of the solvents. It has paid less out to its security holders, but this, as much as anything, was because the courts would not let it do so. These so-called reorganization roads are now well heeled and in an excellent position to negotiate with their creditors and to make substantial disbursements in settling back accounts and readjusting their capital structures in the future.

You may well ask, if these things be true, how did the insolvents. become such? Why are they in the courts at all, and why are witnesses down here seeking to have them rescued?

The answer consists of two principal factors. In the first place, the reorganization group of roads did not average as great a margin of safety over fixed charged as did the solvents.

In the second place, intimately connected with the first factor and in part because of it, the insolvents as a group were somewhat behind the general procession and had not, at the time their difficulties overtook them, adjusted themselves for the competitive race as completely as the others.

A further highly significant factor was, as in the case of the Rock Island, that of impending maturities. With about $134,000,000 of bonds coming due in 1934, the depression came at a very awkward time for the Rock Island. This awkwardness of timing was a principal factor in preventing the Rock Island from working out of its difficulties by negotiation, as did the Baltimore & Ohio, Lehigh Valley, the Delaware & Hudson, and the Boston & Maine, among others. Now let me explain some of the figures.

For several years past my office has been using, in statistical calculations we publish, a certain figure which for lack of a better term we called newness per mile. Our view is this. A railroad, like anything else, gets old. Fifty million dollars invested as of 1920 is not worth anywhere near to the investor what $50,000,000 invested in 1940 is worth, notwithstanding higher price levels recently. The earlier