The Manufacturers Record of August 4, 1927, tells of the refusal of the Maryland Public Service Commission to authorize the purchase of electric light plants in four small towns in that State appraised by it at $200,000 for $518,000, including an issue of bonds to the amount of $50,000, the total capital stock of the four companies being $45,375. The same article tells of a gentleman who made half a million dollars within a brief period buying up some plants in the South and selling them at an advance to the big combinations.

Information found in my files leads to the conclusion that transactions quite similar in character to those above referred to are not uncommon.

Will you have the kindness to write me of any such coming under your notice or of which you have knowledge or information otherwise?

I shall be thankful for any views you may care to express on the general subject of centralizing control of power and light companies and of the methods through which it is going forward, having in mind that the investigation contemplates the development of whatever good there may be in the movement as well as evil.

I am sending you herewith copy of an address made by me in the Senate on February 28, 1927.

Senator SMITH. Who wrote that, Senator Walsh?

Senator WALSH of Montana. I wrote that. That refers to an article in the Manufacturers Record; and, as it contains some information very pertinent to the inquiry, I should like to read it. The CHAIRMAN. Certainly.

Senator WALSH of Montana. This is the Manufacturers Record of August 4, 1927, a magazine published in Baltimore.

H. W. Hoye, of Newton, Miss., writes the Manufacturers Record as follows: "We have a town of about 2,500 people, an electric-light plant that we run with oil engines, a plant that is making us from $1,000 to $1,500 a month. In addition we have a waterworks plant that cost us around $90,000 to install, that is paying us something.

"You understand that the electric-light companies are buying all the light plants of the South. We have but few towns left in Mississippi not owned by the Mississippi Power Co. and the Mississippi Power & Light Co., the two large hydroelectric companies doing business in our State. The smaller companies buying these plants tell the people they will continue the use of the oil engines, which will be in the interest of such manufacturers and they say also that the hydroelectric company will not be a success.

"We have such a fight in Newton. I have opposed the sale of our light plant from the first. About four months ago our board of aldermen sold the plant for $75,000 and I defeated the sale by 55 votes. The sale was made to one of the oil-engine companies; these companies have been here for the past 10 months trying to poison the minds of the people against the hydroelectric lines. Since that time we have been offered $115,000 for our light plant.

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Last Monday night one of the oil-engine people offered us $140,000 for our electric light and waterworks, and our board of aldermen made them an offer of $150,000 for both, which I understand they will accept. On Monday night also the Mississippi Power Co. bought the waterworks and electric-light plant from Corinth, Miss., a town of about 6,000 people. They paid $750,000.

"I have opposed the sale of our plant to anyone. My idea has been, if we would wait one, two, or three years, we could get a much better price. Corinth is only a little more than twice the size of our town, and it occurs to me that our plant should be worth not less than $250,000, and this I firmly believe we can sell for within a short time.

"In case I should be willing to sell, my idea is that it would be best for us to sell to one of the large hydroelectric companies, that will get power from the Wilson Dam and the other large dams in Alabama, Tennessee, and in this State, and that they make us a 10-cent kilowatt price with a reduction scale against a 12-cent rate charged by the oil-engine people or the people we are trying to sell to.

"I believe if we expect to get new factories here in future, we will have to sell to one of the hydroelectric companies, and get the lowest rates for power and have all the power we might want; then the second consideration would be the price.

"The Mississippi Power Co. and the Mississippi Power & Light Co. own the plants in all the large towns and cities in Mississippi, and have the lowest rates of any company doing business in the State. The smaller companies too are trying to buy in the small towns and telling the people that oil engines are the only power. In my opinion they are buying to sell later to these hydroelectric companies. Should we sell to one of these small oil-engine companies and get a 12-cent rate, my opinion is that we will remain forever on this high rate and that our possibilities for factories will forever be barred on account of such rates."

That is the end of the letter. Now, the magazine continues:

We give Mr. Hoye's letter in full with his permission, because it raises a number of interesting points as to the efforts now being made in different parts of the country, as illustrated by this case in Newton, for the purchase of small public-utility plants, especially electric-light companies, although there is also a movement under way for the purchase of municipally owned water plants. Mr. Hoye's letter raises several questions in regard to the reported competition between oil-engine companies and hydroelectric power companies for the purchase of small plants and their recapitalization.

Recently an effort was made by the Electric Public Utilities Co., a Delaware corporation, to buy four electric companies in Maryland as follows: The Lonaconing Elecetric Light Co., the Emmitsburg Electric Co., the Antietam Electric Light & Power Co., and the Midland Electric Light Co. These plants are located in small towns throughout the State.

The Lonaconing Co. has 550 shares of stock with a par value of $13,875, the Emmitsburg Co. 1,500 shares with a par value of $15,000, the Antietam Co. 115 shares with a par value of $11,500, and the Midland Co. 500 shares with a par value of $5,000, making a total for the four companies of $45,375. The price offered for these plants was $468,000 cash, plus a bonded indebtedness of $50,000, making a total of $518,000. It is said that the owner of the stocks in these companies is Thomas A. O'Hara, of New York City, and that the annual average dividend for the past five years has been $1,747.69. The application for the purchase of the properties made to the Maryland Public Service Commission set forth that the applicant has authority to issue 1,000 shares of no par value stock and that the company controls and manages various electric-light and gas corporations in Ohio, Kansas, Oklahoma, and Colorado. The net earnings of the four companies available for interest, depreciation, etc., including taxes, was reported as follows: In 1925, $20,279.47; in 1926, $48,828.32; in 1927, $49,757.44.

The engineers of the public-service commission made a report giving a replacement value on these four properties of something over $200.000, and a firm of engineers made a replacement value of something over $300,000. The price agreed upon between the buyer and seller was $518,000, and the annual profit on that price, as indicated by the earnings for the last three years, would be about 9 per cent.

The application was denied by the public-service commission on the ground that a sale of the companies at that price would set such a high value on them that in order to pay dividends to the purchaser the rates for power would be higher than would be good for the public.

Discussing this situation with an engineer who has recently come across sev eral transactions of this kind, he made the statement that a friend of his had netted about $500,000 profit recently by buying up small utility companies in the South, spending a few thousand dollars on improvements, and then selling them at high figures to big electric combinations. He stated that as public-service commissions give to these companies the right to charge a rate which yields a profit of 7 to 8 per cent on the total valuation, many of them were perfectly willing to pay a big price to the intermediary, because capitalized or valued at these high prices they were still allowed to make 7 or 8 per cent by publicservice commissions.

This is an extremely interesting phase of this competition now going on in the purchase of utility companies throughout the country and in many cases involving the prompt resale of them to the big operating companies.

Is it true that these companies are paying far more than the properties are intrinsically worth, because they are allowed to charge a rate which will make a good profit on this higher valution?

We raise the question for discussion and invite the views of hydroelectric people, oil-engine people, and others who are buying and selling these small utility companies so rapidly throughout the country. Are the values they are putting on them justified by the replacement cost, and are they charging a rate that must be based on earning a profit on the big prices for which the property is bought?

Also, Mr. Chairman, in connection with the testimony of the representative of the Old Colony Trust Co. and other testimony of the same character that was given, I want to read an editorial appearing in the St. Louis Post-Dispatch of January 17, as follows:

WHAT HAPPENED TO LACLEDE?

The Post-Dispatch does not know, and does not pretend to know, what will happen if the State public-service commission permits the City Utilities Co. to purchase 40 per cent of the stock of the Public Service Co.

The Post-Dispatch does know what happened to the Laclede Gas Light Co. Charles A. Munroe came down from Chicago in 1924 and bought control of Laclede. The price was $5,650,000. He himself put up $1,200,000, and five of his associates supplied the $4,500,000.

Mr. Munroe came to St. Louis with admirable sentiments and pretty words. This was not speculative adventure for him. This was an investment. St. Louis was to be his home. He had left Chicago forever. Such, in substance, was his salutatory. The State Public Service Commission, we imagine, remembers Munroe's pleasing manner and beguiling talk.

What happened? Munroe at once organized a holding company under the name of the Laclede Gas & Electric Co. The only property of that holding company was the common stock of the Laclede Gas Light Co.

What next? With this common stock as its only security, the holding company issued the following securities: Bonds, $4,700,000; preferred stock, $1,260,000; common stock, 200,000 shares.

The next step? Munroe gave the bonds to his five associates to reimburse them for $4,500,000 they had provided in the original purchase. He kept the $1,260,000 of preferred stock to reimburse himself for his original investment. Of the 200,000 shares of common stock, Munroe kept 60 per cent and his five associates got the remaining 40 per cent.

About a year later the five associates sold their $4,700,000 of bonds to the Union Trust Co. of Pittsburgh, which in turn sold them to the investing public. The status then was: Munroe and his five associates, by possession of the common stock of the holding company retained controlling ownership of the Laclede Gas Light Co. and it had not cost them a cent. Subsequently they sold this control to another Chicago public utility magnate at a handsome profit. Munroe cleaned up something like $4,470,000.

Is this typical of holding company financing? We do not say so. But it did happen in the case of Laclede, and if there is anything to prevent similar juggling with our local transportation utility, other than the disinclination of Mr. Newman and his associates to make a lot of money, we should like to know what it is.

Explanations can, of course, be made. We shall be told that no holding company can sell its securities in any State without the consent of the blue-sky department of that State.

But did any blue-sky department interfere with, or obstruct, the Laclede operations of Munroe and his associates?

And what blue-sky department would question an issue of securities sponsored by the Union Trust Co. of Pittsburgh, or by any bank with which the proposed holding company of our street railway company would do business?

The truth is that holding companies have been issuing securities in terrifying amounts. That is one of the principal reasons why Senator Walsh of Montaną has proposed an investigation of these companies. And this, we submit, is an almost conclusive reason why the State Public Service Commission should gravely question the prudence or justice of placing any group of men in a position to do with our street railway what Munroe and his associates did with Laclede.

Mr. Chairman, the other day I put in the record what purported to be an interview with Mr. Owen Young, and I have from him this morning a letter which he asked me to submit to the committee. I shall be glad to do so.

The CHAIRMAN. Yes; certainly.

The Hon. THOMAS J. WALSH,

GENERAL ELECTRIC COMPANY,

120 Broadway, New York, January 21, 1928.

United States Senate, Washington, D. C.

MY DEAR SENATOR WALSH: The light and power people have called my attention to your statement before the Interstate Commerce Committee of the Senate which they quote as follows:

"A clipping from the Brooklyn Eagle was sent to me a few days ago containing an interview with Owen Young of the General Electric Co. advocating the adoption of the resolution and saying that so far as his company was concerned it was perfectly satisfactory to them."

While perhaps it is not a matter of great importance either to you or to the committee, I am most anxious personally that I be not misunderstood. To accomplish this, I must quote exactly what I said in order that it may not be confused with what Mr. Manly, as a reporter, said:

"Mr. Young said that the General Electric had never opposed but always welcomed investigation by proper authorities whenever charges were made, as in his opinion that was the only way to get the facts before the people in a way to carry conviction."

"As to the power and light industry," Mr. Young declared, "I believe the industry as a whole is soundly financed and efficiently managed. If, however, there has been unsound financing or other unwise proceedings in the promotion of corporations it is desirable that the fact should be known, so that any tendencies in that direction may be corrected. Any investigation, however, should be specific and nonpolitical and have for its object fair and full disclosure of the facts.

"As far as the General Electric Co. is concerned, it is interested solely in the manufacture and sale of electrical machinery, equipment, and supplies. It desires to see the widest possible market developed for such products. It is in the interest of this corporation, therefore, that the price of electricity should be lowered as rapidly as compatible with sound business principles, so that ultimately every home, every farm, and every factory in the United States may enjoy the great economies and conveniences arising from this great source of power, heat, and light. Through research in the art the General Electric Co. is making its contribution toward such lower costs."

Is it not clear from this statement that the General Electric Co. does not oppose but welcomes as a policy investigation by proper authorities whenever charges are responsibly made against it? That is our policy. Therefore, so far as the General Electric Co. is directly concerned, if any charges are made by you or by other responsible persons through you against it I have no objection to any resolution authorizing investigation of the General Electric Co., however sweeping its terms may be.

A resolution to investigate the General Electric Co. is a specific inquiry. When one starts to investigate an intire industry, however, that is another matter. The resolution, in my judgment, authorizing the investigation should be to investigate specific questions affecting the industry which are clearly set forth and defined. That is especially true if the inquiry relates to any question which may affect credit. To impair the credit of an industry would be a public calamity.

It is all well enough to say that if a thing is all right, investigation will not hurt it but perhaps help it, and if it is wrong, it is in the public interest to have disclosure. I agree to that if the inquiry be specific and is so set up to bring out all the facts. As a practical matter, however, when you pass a sweeping resolution to investigate an industry, and particularly when you authorize a legislative committee to do it, the members of which have, in the nature of things, a thousand and one other duties to perform, the investigation necessarily seeks out a few bad practices of individual companies or some unwise scattering actions, and advertises them to the world as representative of the industry. If there were one-tenth of 1 per cent of bad securities issued in the power industry, it would be the result of the investigation to disclose and

advertise them, but not to disclose or advertise the thousands of issues of good securities. It would be physically impossible, unless the investigating committee, with a large expert staff, were to take at least several years, to make a full and fair disclosure to the public of the soundness or unsoundness of all publicutility securities. I have no doubt in my own mind about their soundness as a whole, but I would not be surprised if, in a great industry, with many people operating, especially in speculative times, some small percentage might be criticized. I do not think the cloud of that percentage should be cast on all the securities of the industry and impair its credit.

In the credit of the power industry, the General Electric Co., as a manufacturer, has very large concern. Without it, the rapid development of the past can not be continued. Certainly no industry has contributed so much to the comfort and economic advancement of our people as the electrical industry during the last generation. It has increased the power of the individual worker, and consequently his productiveness and his wage. It has relieved the burdens of the housewife, both in the cities and on the farms. In these respects the United States is far in advance of any other nation in the world. Whatever may be said in minor criticism of the industry, no one can say that its major business of supplying power and light to our people has not been done with vision, courage, and efficiency. No other industry excels it in service. I doubt if any equals it. I mention this only because it is most important that in seeking small things to correct, we do not impair the effectiveness of the industry as a whole, and nothing would impair it so soon as a reflection upon its credit. This is especially true when its securities are so widely spread to millions of small investors who might well be influenced to sell good securities at reduced prices to the specialists in the money markets, who, understanding values, will not be misled by an incomplete investigation.

I suggest, Senator Walsh, in the interest of the industry, and of the investors, and of our people as a whole, that your resolution be made specific as to the question in the industry to be investigated. Certainly, there could be no doubt about the propriety of the Federal Government investigating the question of power in interstate commerce with the view of ascertaining whether the Federal Government should legislate in that field. Certainly, it is within the power of Congress to say whether securities of any kind should be dealt in through the mails, but there is, it seems to me, grave objection to an inquiry as to whether the securities of a particular industry should be dealt in through⚫ the mails. This is true whether it be the electrical, steel, cotton, or any other industry. The very fact that such an inquiry is proposed with reference to the securities of a particular industry as a whole, ipso facto, throws doubt upon such securities and unjustly impairs the credit of that industry. That seems to me to be a most serious and unfortunate undertaking, especially for an industry which requires each year not less than a billion dollars to carry on. May I ask you to present a copy of this letter to the committee in order that the members of the committee may know, as fully as you, my views relating to this matter. As I said at the beginning, it is perhaps not important to you or to them, but it is to me inasmuch as I have been quoted in the record.

Very respectfully yours,

(Sgd.)

OWEN D. YOUNG.

P. S. Because the light and power people called this matter to my attention, I am sending a copy of this letter to Mr. G. B. Cortelyou.

Senator WALSH of Montana. Mr. Chairman, I merely desire to say in reference to this letter that from the interest manifested in the investigation, as demonstrated here before your committee. I think probably the good things will be brought out as well as bad things, and the soundness of securities as well as the weaknesses of them.

I introduced the editorial from the St. Louis Post-Despatch to show that common stocks of these companies issued under the circumstances disclosed there, are dealt out to the public, and the public are required to invest in them, and that the public as to those stocks have not very much protection from the investment companies and bankers, for which a representative of the Old Colony Trust Co. and others have appeared before you.