Mr. ERB. Judge, my contention is that the development of these railroads the purchase of additional equipment for their development-will become impossible if the Interstate Commerce Commis sion is to give its consent to selling their securities at a reasonable price rather than the low prevailing market price. The present market value will not permit it.

Mr. SIMS. I think you are exactly right. I do not think the commission ought to do it.

Mr. ERB. They ought not to do it. The low prices of railroad securities in comparison with industrials, and indicative of their undermined and failing credit, is shown in the following diagram, which I respectfully submit.

ALIZATION OF FOREIGN ROADS COMPARED WITH THOSE OF THE UNITED STATES.

Ive following table affords a very fair showing of the developde and growth of capital cost of foreign railroads per mile of line. line. We need not enter the field of speculation to properly Late the future requirements of our railroads. Abroad, where er populations have brought with them greater traffic density nile of railroad, their investment cost furnishes us with a bench which we will certainly be called upon to reach.

While the original cost of right of way was much greater abroad In with us, their cost of labor, materials, and equipment was more n correspondingly lower in the aggregate.

Ir. SIMS. The United Kingdom is in very bad shape just now, too. Mr. ERB. Yes; it is.

We are justified in assuming that with growth of population, our Mustries and commerce, we must be prepared to increase our raild investments to much further limits than we have been felicitatourselves would be required.

When we bear in mind the cheaper labor with which the railroads foreign countries have been created, we should more fully apeciate the economies of our own railroad construction. The public vitally interested in seeing that the credit of the railroads of the Cuntry, taken as a whole, should be such as to enable them to obtain oney for capital expenditures at lower interest rates than has been ssible during the past few years.

All important waste, all habits of extravagance, and all destruction property more or less affects the people as a whole, and we have ached a period of our national economic life where waste, extravaince, and losses in our transportation industry vitally affect our ormal development and progress as a growing nation. We can not ntinue to economically operate over 829 separate railroads with uplication of mileage and facilities, with uncoordinated operation ad control, and adequately perform our duties to the public and ir shareholders.

Mr. SIMS. I meant gross earnings when I said "earnings" a while

go.

Mr. ERB. Yes; I understand so.

FORBEARANCE BY SECURITY HOLDERS.

If the railroads go back to separate corporate control or otherwise, aeans should be created to afford security holders an opportunity

and the right to grant forbearance or extensions in the pay any maturity, whether of interest or principal.

Under our present system, it is made impossible to grant !! tension, any accommodation, without the unanimous consent of stockholder, every holder of either a bond or a claim, and quently happens that a railroad company requires some assist. tide over a period of depression, of crop failure, of a calami act of God, or, in some cases, the inconsiderate and unreas conduct or bad management of officials.

There are no other means than foreclosure and reorganization sible. That has become a very pressing evil. Abroad, two-thir amount of the holders of any particular class of securities can the other third; insolvency and receiverships are avoided, ani! are permitted by the act of two-thirds of the whole of the sect to tide over a difficult situation.

You are dealing now with interstate commerce, and you are u ing with roads engaged in interstate commerce, and I think : within your constitutional power, for the purpose of avoiding re erships and foreclosures, to declare that two-thirds in amount ef class of claims or securities shall have the right to extend for ance and to agree upon some other and different terms of par than have been stipulated. If not, it certainly should be mai apply to all securities that may hereafter be issued.

The CHAIRMAN. Will you put your suggestions in the form of amendment in regard to receiverships?

Mr. ERB. Yes; I will be very glad to.

REORGANIZATIONS.

Then we come to reorganizations. A fundamental evil of our pr ent methods of reorganization is the facility with which pe notably bankers and brokers, are able to obtain control of vast pr erties without having any substantial interest in them, or wit being concerned in any material degree in their credit or stand or in their securities. That is a vicious practice. It is a com experience to see an advertisement from very reputable men, stat that at the request of a large number in amount of a certain class security holders, in view of the approaching insolvency of a road. the probable default at the next interest period, they ask the hol of these securities to deposit them through some trust compar That has been disastrously expensive to investors, and has added: the instability of the securities which have been issued by railro companies.

I would suggest in that respect that where securities that are pos tive securities of any corporation engaged in interstate commerce ar requested, that when a majority of the class of securities has bee deposited, a list of the depositors shall be sent to each depositor, that they may have an opportunity to confer with each other an that a day be fixed for a meeting and for the election of a permaner! committee; that the accounts of such a committee be subject to the supervision of the courts; all of their disbursements, all of ther allowances, and a complete statement exhibited and approved by th

court.

If it is a friendly reorganization without the interposition of the courts, then it should have the supervision of the Interstate Commerce Commission.

I may call attention to one railroad company now in the hands of a receiver from which a tentative plan was recently issued, from which $5,000,000 was set aside for reorganization fees and expenses. I have been myself the victim of charges and expenses of that kind, and in one case where there was $5,000,000 added for reorganization expenses, there was not a single member of the committee who had the slightest interest in the property, yet they have perpetuated their control of the property because the shareholders have no means of conferring with each other, and even, if known, would take quite sum of money to circularize and obtain cooperation.

And I can say to you-and I have lived in the atmosphere of Wall Street for more than a quarter of a century that I believe a majority of the mileage of the railroads of the United States is in the control of men who have no relatively substantial interest in them. That is a deplorable condition, and has done as much as anything to discredit railroad securities.

I believe that the time has come to discredit and pass all of these practices.

Mr. STINESS. What you want, then, is a Government financial hospital, is it not?

Mr. ERB. No. I want these vicious practices to be made impossible. I am not suggesting that the Government intervene and take charge of these reorganizations, but I want it to be made impossible for people who have no interest in these public highways to control them; control should be left to the owners. Reorganizations, reorganization committees, and their accounts should be left to the supervision of the Interstate Commerce Commission or other proper scrutinizing authority.

If you are going to supervise the issuance of securities, you want to supervise the expenses of these reorganization committees and the fees they are to charge.

REORGANIZATION OF RAILROADS.

The reorganization of railroad companies should be placed under the control of the courts having jurisdiction of the foreclosure of their mortgages or of their insolvency. When a committee of security holders shall call for the deposit of claims or securities under any reorganization agreement or plan of readjustment the members of the committee involved shall state the amount and character of claims or securities held by them or the institutions or firms with which they are connected, respectively, and when a majority of all claims or each class of securities are deposited a list of all the depositors shall be sent to each of them and a day named for a general meeting of the depositors, giving reasonable time for attendance and authorizing a majority of those present in person. or by proxy to name a new permanent committee under a system of cumulative voting. The allowances to and disbursements of all committees should be made subject to the supervising control of the courts having jurisdiction of the foreclosure or other proceedings affecting the solvency of the company; or if a so-called friendly readjustment without foreclosure shall be formulated, then sub

་ །

ject to the supervising control of the Interstate Commerce Comm

sion.

The practices affecting the reorganization of railroad companie have been in the past generally arbitrary and autocratic. Lo involving hundreds of millions of dollars to investors have bee imposed by committees having no substantial interest in the secur ties of the companies concerned, while the real owners have be more frequently deprived of the control of their properties, whi are usually placed in the hands of parties having no substanti interest in them, and therefore no real interest in their economica management and financing.

The committees are usually self-constituted and fix their own co pensation. The commissions to the banks and bankers are witho restraint of any kind, and the committees are not called upon t account for their acts to the security holders. This has become formidable evil and should be corrected if the railroads are to le returned to private ownership.

If the credit of the transportation companies would admit of their obtaining needed capital requirements on a basis of State or Government credit, their expansion would continue under conditions admitting a lower cost for their service.

If the consent of the commission to the sale of securities on basis of 7 per cent and higher should be given, long-time burdens will be imposed which simply contribute higher rates; and in its finality the public must pay the higher rates. Many of the roads are unable to sell 4 per cent mortgage bonds at the present time above 65 per cent of their par value, and some of them are quoted for less than 50 per cent of their par value. They are solvent. No question of earnings sufficient to pay the interest is involved, but the fear of eventualities, the uncertainty and instability of the transportation structure, the low factor of safety provided for under present conditions or apprehended on their return to the corporation has affected their values so that they could not and should not obtain the consent of any controlling body to the issue of further securities at existing market prices. Their development would consequently be completely arrested and they would be placed at the mercy of the stronger lines in any scheme short of their absorption under regional systems. They would otherwise be forced into s helpless condition.

To avoid this immediate possibility, I would suggest that the return act provide for a guaranty of a return equal to payments and provisions under the Federal-control act or the contracts made under it for a period of two years, and that meanwhile rates and divisions to be the subject of consideration and decision by the Interstate Commerce Commission; that they be allowed 10 years within which to repay any indebtedness remaining upon settlement of the balance with the Director General of Railroads with interest at the rate of 4 per cent. The obligations given to evidence such indebtedness shall take priority of any other indebtedness which may be subse quently incurred or created.

LESS-THAN-CARLOAD TRAFFIC.

In the recent case before the Interstate Commerce Commission 38 carriers presented an analysis of cost of handling less-than-car-load