St. Paul's Conversion

The transition of U. S. railroaders from private business men, not seldom of piratical bent, into public servants, was begun in 1887 with the founding of the Interstate Commerce Commission. The railroaders had collected the money, begged or bought the land, built and consolidated the lines. The Commission was established to prevent the railroaders: 1) from charging the public exorbitant rates, to the detriment of the public pocket; 2) from cutting each others' business throats, to the detriment of commerce; 3) from mishandling their finances, to the detriment of public transportation and of general business security.

Since 1887, the emphasis of I. C. C. actions, and of laws to back up the actions, has extended from the first-named function (rate-making) to the third-named (scrutiny of financial structures). In 1906, for example, the so-called Hepburn Bill finally gave the I. C. C. power to fix rates. Whereas in 1920, the Esch-Cummins Act, which returned the railroads to private control after the War, invaded whatever "private rights" a "public utility" may have, by requiring the railroads to pay the Interstate Commerce Commission one-half their profits above 6%. This so-called "recapture" clause, designed to create a revolving fund to help weak companies, has become notably unpopular among railroaders.

Less popular still was the attitude taken by the Interstate Commerce Commission toward a famed railroad which, in 1925, became so weak that it crashed with one of the loudest crashes in U. S. railroad history, the Chicago, Milwaukee & St. Paul. Last week, the Interstate Commerce Commission finally decided the St. Paul case. But the Commissioners greatly grudged their decision and protested, even in their majority report, that they had decided against their will.

To railroaders and to the public, this grudging was significant because the questions at issue in the St. Paul case were not questions of rates, rebates, wages, schedules, porter's uniforms or any other question about the actual operation of a railroad. The questions were: 1) The St. Paul having crashed, who was to blame? 2) In putting the St. Paul together again, how should it be done?

While railroaders, security holders, bankers and lawyers strove for months and months to reorganize the company, the I. C. C. watched and listened almost jealously,* not only because the I. C. C. would have to pass upon the reorganization when it was evolved, but also because the I. C. C. felt duty-bound and empowered to have a hand in the actual reorganization. In their grudging majority decision, the Commissioners wrote: ". . . We were confronted with two alternatives. The first was to approve in toto the securities proposed . . . the other, to reject them in toto. . . . We should not, however, have been forced to make a choice of this sort."

To get thousands of far-flung security holders to consent to another new plan would have taken the I. C. C. another two or three years, perhaps. Meantime, the St. Paul's service would have continued to be an uncertainty instead of an enterprise. But if the I. C. C. could have assembled the St. Paul security-holders at once for an executive session, it would have pressed its objections to the plan engineered by suave Jerome J. Hanauer of Kuhn, Loeb & Co., and associates of the National City Co., and Robert T. Swaine of the potent Manhattan law-firm of Cravath, Henderson & De Gersdorff. The objections:

1) The ratio of bonds to stocks in the reorganized company is too large. The stockholders, not the bondholders, are responsible for a company's directors; and through them, for its officers; and through them for its management. By the adopted reorganization, many a former St. Paul stockholder became a bondholder, i. e. a creditor instead of a partner. The Commissioners felt this feature tended against public interest.

2 ) Bankers and lawyers are necessary to such a reorganization "but they ought not to dominate its preparation." (The I. C. C. stipulated that no underwriting or attorney fees should be paid for the financial reorganization without court approval. But the Kuhn, Loeb & Co. and The National City Co. long ago had voluntarily made that provision.)

3) The reorganizers should have been impartial and neutral, not close to holders of the railroad's securities.

The vote of the I. C. C. on the St. Paul's conversion was 7 to 4. What the vote constituted was approval of a court order made last spring permitting the St. Paul's receivers to put the railroad up at auction and ceremoniously sell it to a new corporation called the Chicago, Milwaukee, St. Paul & Pacific R. R., through Lawyer Swaine. Before the new company could operate, the I.C.C. would still have to approve its choice of directors.

The I.C.C., which sits behind a long desk much like the Supreme Court's to render decisions and build up a body of law almost as fundamental as Supreme Court precedent, is composed mostly of lawyers who have gained reputations for patience and probity. They are not "distinguished" men, as distinction goes, but they are able and honorable. Commissioner John Jacob Esch of La Crosse, Wis., chairman of the Commission last year, served in the U. S. House of Representatives for 21 years before his work with Senator Albert Baird Cummins of Iowa on the Transportation Act of 1920 brought him wide notice. His elevation to the Commission followed in 1921. The new occupant of the Commission's chair (each man has his turn) is Commissioner Johnston B. Campbell, long a railroad lawyer in Duluth and Spokane. Commissioner Joseph Bartlett Eastman, who dissented vigorously and voluminously from the St. Paul decision, is a product of Amherst and the Massachusetts public service commission. Richard V. Taylor, oldest Commissioner, 68, was once (1921) elected Mayor of Mobile, Ala., where he was a railroad official. Commissioner Frank McManamy is a workaday railroader out of Michigan who helped William Gibbs McAdoo run trains during the War.

* The I.C.C. occupied its time also by conducting a blame-fixing inquiry into the St. Paul crash.