New-York tribune., 1919-07-13
Lovett Opposed to
Using Strong Roads
To Uphold Weak
Credit of All Lines, Union
Pacific Head Says, Would
Be Impaired by Consoli-
dation Into Few Systems

udt1OH 1HtO rev systems
Opposition to the proposal that the
railroads of the country should be
consolidated into twelve or more large
systems in order that the weaker prop
critics may be supported by the
stronger ones is expressed by Judge
Robert S. Lovett, president of the
UNION Pacific system, in memoran-
dunn to be forwarded to members of
Congress this week.
Judge Lovett also disapproves the
plan under which the Interstate Com
merce Commission would divide the
carriers into territorial or traffic
groups and take the property invest
ment" of all the roads in each group
and establish rates sufficient to yield
6 per cent or some other specified
return on such investment.
With reference to the scheme of con-
solidation, the head of the Union Pa
clflc believes that instead of improv-
ing the credit of the weak roads the
only effect of such a project would be
to impair the credit of the stronger
systems, and that the inevitable re-
suit would be to reduce the average of
the credit of all the railroads. He
makes the further point that Congress ss
has no right to compel one corporation
to consolidate with another, and adds {:
ut may give one the right to ac-
quire the property of the other by con-
demnaton, but it must pay for it, and
(here is the difficulty) pay for it in
cash. Congress has no power to COM
pei the stockholders of the railroads to
be absorbed to accept in exchange the
stock of one of the dozen or moro
companies which are to be absorbed.
When these absorbing companies ac-
quire the railroads assigned to them
t.ey must pay the value in cash to all
who demand cash.
Must Provide Underwriting
whether this will be few or many
no one knows. 1t is certain that many
will demand cash. and then it must be
provided if the transaction is to be ac-
compished. The underwriting of a
fabulous amount must be provided
Since no one will know in advance how
many will demand cash instead of
new securities, the underwriting must
be for the entire amount.
"My judgment is against the consol-
datlon of all the railroads of the coun-
try into few companies, because l
believe the companies would be too
large and unwieldly for efficient and
economical management. | believe
thot the absorption of some of the
weak lines by the strong lines, upon
fair terms, should be promoted, but
competition in service and facilities
should not only be preserved, but
should be extended, and no consolida
tlon shoulu be permitted which in sub
stantial degree eliminates such compe-
tition.
IL believe that the existing railroad
systems should be taken as basis and
such consolidation as is desirable
should be built up on that basis"
Judge Lovett said that the plan for
guaranteeing at least per cent on the
railroad Investment by establishing
sufficiently high rates in territorial
groups would result in much higher
Yield than the average for the eff
cient roads and much lower than. the
average for the inefficient.
But it is proposed as part of this
PLAN" he states, "that the most eff
cient roads shall be limited to the
average, and their earnings in excess
Of the average shall be set aside for
the benefit, in some form, of the un-
profitable roads that earn less.
"However disguised, and in spite Of
all the refinement and craftsman
ship and legal expression, the substan-
tial object sought is to take, directly
or indirectly, from the stockholders Of
their properties and give the same to
the security holders of the weak
roads"
Says Congress Lacks Power
Congress is without power, in the
opinion Of Judge Lovett, to take the net
earnings belonging to the stockholders
Of i1,.oo 81 bo ban +
Of the security holders of another. He
believes that it would be denial of
the due process Of law, and would be
contrary to the Fifth Amendment to
the Federal Constitution, which pro-
hibits the taking of private property
for public use without just compensa-
ton.
Referring to the belief Of some finan-
ciers and railroad men that a guaranty
of dividends or some definite return on
the money invested in the railroads is
necessary to reestablish faith in their
securities, Judge Lovett states that
such a procedure would be impractical
Bile "because it is not believed that the
government, as permanent policy,
would guarantee the owners fair re-
turn upon the full value of their prop
erty and leave the management in their
hands, taking all of the risk and none
OF the prohts; whereas, II the govern
ment should take the excess above the
guaranty, then it would cease to be a
guaranty, and all incentives to COM
petition and economy by the private
management would be eliminated. l
fancy that the people would prefer to
come directly to government owner
ship, unpopular though it is"
THE Importance of reestablishing
railroad credit cannot be overestimat-
ed" Judge Lovett says in concluding
his memorandum, "but nevertheless I
am persuaded that no guaranty short
of return upon the full value of the
railroad property will be helpful to
that end, and that a guaranty of full
value is not practicable without gov
ernment operation; and, as indicated at
the outset, l regard that as beyond
present discussion"
Stock Exchange to