Management

''So long as American investors know that there has been something wrong with the management and control of the railroads, so long as they know that their money has been used for improper purposes, so long as they feel that the facts have been kept from them . . . and so long as they feel that nothing substantial has been done to prevent the return of the railroads to men of the same type as those who have mishandled the roads in the past, just so long is the confidence of the American investor going to remain impaired. The way to restore confidence is to get the facts, to secure redress for the investing public, and to make sure that the railroads and $20,000,000,000 to $25,000,000.000 of the people's investments will be placed in hands far more honorable and competent than in the past."

Thus did Charles A. Beard indict the U. S. railroads before the Senate Interstate Commerce Committee last fortnight. Something of an authority on railroad mismanagement. Historian Beard was urging adoption of a pending Senate resolution authorizing a railroad investigation on the order of the Banking & Currency Committee's famed stockmarket probe. Even Jesse Jones, whose RFC millions have not prevented the worst succession of railroad failures since the days of Jay Gould, has admitted that the investigation "might be a good thing."

Currently serving on an independent protective committee in connection with bankrupt Missouri Pacific (mileage: 12.183), Mr. Beard blames the bankers as the carriers' real managers. But bankers or no, financial ineptness is almost a railroad tradition. With a few notable exceptions like Burlington, Union Pacific, Atchison, Topeka & Santa Fe, Chesapeake & Ohio and Norfolk & Western, U. S. railroads have habitually increased their fixed charges when they should have reduced them; they have sold bonds when more prudent corporations were selling stock; they have paid dividends when they should have been paying off debts; they have sunk millions in improvements that failed to up traffic or revenues; they have frittered away millions trading (for "strategic reasons") in stocks of other roads.

Two carriers made news last week which pointedly documented Historian Beard's indictment. As Wall Street had long expected, Chicago, Milwaukee, St. Paul & Pacific (mileage: 11,226) acknowledged itself in financial difficulties. Hav-ing failed to meet a maturing bond issue, it announced that it would present a reorganization plan before July i. Only seven years ago it emerged from a notoriously expensive reorganization managed by Kuhn. Loeb & Co. But instead of permanently paring the road's topheavy debt, the reorganization reduced fixed charges little, and the total capitalization was actually increased.

The second classic example of banker-management was rehashed in the St. Louis-San Francisco bankruptcy hearing in Manhattan. Late in 1925 Frisco's Edward Norphlet Brown, alarmed over the "strategic" situation in his territory, proposed to his bankers that they purchase working control of Chicago, Rock Island & Pacific, whose 8,330 miles of line far exceeded Frisco's 5,859 miles. For James ("Jimmy") Speyer, the shrewd, dapper, little 73-year-old banker who, for all practical purposes, is Speyer & Co., that deal proved highly profitable. From commissions and the firm's own speculative commitments, Speyer & Co. made no less than $1,900.000. For Frisco, however, the deal was disastrous. What was more, Mr. Brown did not even bother to tell his directors what he was up to until his plans were virtually completed. Frisco invested $10,000,000 in Rock Island stock which now has a market value of about $300,000, and both roads are in the hands of the U. S. courts.

No one knows how many thousands of miles of U. S. railroads will have to be reorganized before the Depression can be called over. At least a half-dozen more big railroad failures are freely predicted. No one knows how wisely that mileage will be reorganized. But one thing is certain: Jesse Jones, as the railroads' biggest single creditor, will have his say at the council tables. And Jesse Jones is a stern realist when it comes to money long lost forever.

No less a voice than that of Bernard Mannes Baruch was raised last week against the practice of supporting unsound railroad investments. Testifying before the Senate Munitions Committee (see p. 13), he remarked that railroad rates in case of war should be fixed solely on the basis of "service and efficiency."

'I am thoroughly opposed to the guaranteeing of interest and dividends on capital unwisely invested," said the white-crested financier. "I have made unwise investments and I did not receive, and did not consider myself entitled to receive, dividend or interest."

After six months of hearings and cogitation, the Interstate Commerce Commission last week turned down the plea of the 149 Class I railroads for a 10% increase in freight rates, which the carriers claimed would up their revenues as a whole by $172,000,000. In the 5-to-4 decision, however, the Commissioners granted certain emergency surcharges on a long list of specified commodities which may increase railroad revenues by $85,000,000.

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