holding companies, holding public utilities which are State controlled, because the objection to intercorporate stock holdings does not apply to it, as we contend.

The CHAIRMAN. I understand.

Senator LA FOLLETTE. Have you a copy of your brief here? Mr. GIBBONEY. Yes, sir; copies were passed out this morning. The CHAIRMAN. Mr. La Follette, Mr. Gibboney's contention is that he represents holding companies which are intended simply to promote the development of the public utilities in the various States, such as gas plants, electric plants, electric railroads, and the purpose of the holding company is to enable the local corporation in a State that can not command capital of the great markets to finance their enterprise through the sale of their securities to this holding company, which, in turn, issues its bonds and securities, based upon the stocks and bonds that it owns, and is thus enabled to command moneys at lower rates of interest and to turn them over to these local enterprises that have difficulty in getting access to the great money markets.

He contends that it ought to be excluded from the operation of this

act.

Mr. GIBBONEY. The Senator can understand that, because his State, Wisconsin, has a very excellent public-service commission, and an excellent statute on that subject, and all the public utilities are well regulated in the State of Wisconsin.

The CHAIRMAN. Mr. Gibboney says that of the 48 States about 32 have commissions which regulate the stock issues of these public utilities, and there is therefore no necessity of national action on the subject.

Mr. GIBBONEY. Our exception only excepts those that have no such public-service commissions.

Mr. Beekman, who is very familiar with and is counsel for two of the large holding companies, is here and would like to explain in detail how those companies acquire and hold the stock, etc., and I think it would be very helpful to the committee.

The CHAIRMAN. Very well; we will hear him.

STATEMENT OF MR. CHARLES K. BEEKMAN, OF THE LAW FIRM OF BEEKMAN, MENKEN & GRISCOM, NEW YORK, N. Y.

Mr. BEEKMAN. I appear before you as general counsel for two of the large so-called public-service holding companies, which are in a way representative of all the other large holding companies in the country, of which you have heard there are a great many.

The two companies are the American Cities Co., which owns and operates numerous public-service companies in the South, including New Orleans; Little Rock; Houston, Tex.; Memphis, Tenn.; Knoxville, Tenn.; and Birmingham, Ala. Also the United Gas & Electric Corporation, which owns and operates, through stock ownership, the street railroads in the city of Buffalo, and certain public-utilities companies in Connecticut and in the States of Pennsylvania, Indiana, Kansas, and Colorado-widely scattered properties so that we have had experience under most of these public-service boards which have come into existence in the last few years.

I will say that those two companies are typical of all other companies, and I think it would apply to a great many other corporations. These companies are not controlled by the large moneyed interests in any respect. Their stocks and bonds are scattered all through the country, and they are held by small investors. They are held by widows and orphans, and furnish a popular way of investment for the savings of the comparatively poor people who are industrious enough to save a few dollars for old age.

As an example of that, the bonds and stocks of the American Cities Co. and of its subsidiary companies, to the extent of almost $60,000,000, are held in the smaller cities in the South-through Louisiana, Mississippi, Alabama, Arkansas, Tennessee, and Kentucky-all through that district. Their bonds are scattered as far abroad as Switzerland and Belgium, where a large part of the money comes from to resuscitate a large number of these small companies which have not had enough money to take care of themselves.

The idea is very prevalent that these companies are the creatures of the large moneyed interests, which are scattering inflated securities and taking no part in the management and for the purpose of making money easily. That is entirely wrong. The securities are held all over the United States and abroad, and no set of bankers or any clique of moneyed interests control any part of these companies. There are bankers who assist them and advise, but none have control of these companies, and they fill a very necessary need in the country. The United Gas & Electric Corporation in the last few years acquired certain small properties in the Middle West, which were in bad financial and physical condition. Their rates for gas and electricity were high. These companies had been so poor that they had not been able to set aside what is known as a replacement fund. In other words, as their equipment was getting old and had to be replaced they did not have actually enough money to set aside a fund to take care of these replacements. They were unscientifically run. They did not have money and did not pay dividends, and could not set aside replacement funds. The result was that when the time came to put in these replacements they had to issue bonds and made it a capital charge, and they were living on their capital and were getting worse and worse every day.

The first thing the public utilities holdings company did was to finance the companies properly and put the best engineers and operating men in the country to work to solve their problems and to get their finances and books so that the proper replacements funds could be set aside, so they would stop, in the future, living on their principal and gradually bring them to a position where they could furnish proper and reasonable services to the public.

Now, the public utilities companies finance themselves under several different ways.

The CHAIRMAN. Mr. Beekman, we will have to take a recess at this point for a few minutes to answer a call for a vote in the Senate. (Whereupon, at 4 o'clock p. m., a recess was taken until 4.50 o'clock p. m.)

AFTER RECESS.

Mr. BEEKMAN. Mr. Chairman, when I stopped talking I was about to explain how these public-service companies finance themselves and finance their subsidiary companies.

They do it in several different ways. Of course they always have to get the money for the improvement of their systems as cheaply as possible, and therefore, as times vary, their methods naturally vary too. If a public-service holding company is about to acquire a property it will sometimes, in order to get money to pay the purchase price, sell its stocks or its bonds or its debentures and use that money to acquire the stock of the local company to be purchased, or else it will exchange its stock for the stock of the company to be acquired, or else it will sell its securities abroad, if there happens to be a market abroad, and use the money for that purpose. In case it wishes to finance or assist a local company to finance itself the parent company will either acquire the securities of the local company, whether it be stocks or bonds, and hold those securities in its treasury and get something for the sale of its own securities-the securities of the holding company-to the public, or else it will cause the local company to sell its bonds or its stocks, and very often its preferred stock, if there can be found a market, or if all those methods fail, as during the last year-1913-owing to strained conditions in the money market, the holding company would guarantee the obligations or securities of the local company. For instance, in the last year the New Orleans Railway & Light Co. had to expend a large sum of money for betterments and improvements, which the city demanded, and had to extend its lines to take in the suburbs. Both gas, street railway, and electric franchises required additional construction. Certain improvements had to be made in the service, and they demanded better cars. We had to rebuild our electric-light plant

Senator POMERENE. What company have you in mind?

Mr. BEEKMAN. The New Orleans Railway & Light Co. It was impossible for the New Orleans Railway & Light Co. to sell its bonds, because of the existing conditions. It was not peculiarly the trouble with that one company, but the trouble with all public-service com panies and some steam railroads at that time. The public would not buy them. So the holding company, in that case the American Cities Co., guaranteed and issued the notes of the New Orleans Railway & Light Co. for several millions, and those obligations, with the guaranty of the American Cities Co., were sold to banks throughout the United States, and largely abroad, where the American Cities Co. has a credit, and in that way the local company was able to meet the crisis which faced it.

In the year 1913 our local companies-that is to say, the local companies of the American Cities Co. and the United Gas & Electric Corporation, which I represent-in order to meet their absolute requirements the requirements of the localities where they did business-had to issue some $14,000,000 of securities to keep pace with the demands of the public. A large part of those securities were only salable and were only sold through the guaranty of the two holding companies.

Senator POMERENE. Let me ask you a question right there. You say $14,000,000 of these securities were sold in order to furnish equipment, etc. What portion of that, in fact, went to the furnishing of that equipment, and what portion went to financiers who were financing the proposition?

Mr. BEEKMAN. I think the financiers, it is safe to say, made hardly anything.

Senator POMERENE. That is an unusual case.

Mr. BEEKMAN. I think you will find all through the transactions of these public-service companies that the bankers make a very small profit.

Senator POMERENE. Well, I happen to know something about the gas business and electric-light business in the State of Ohio. There is not a man who has touched it who has not become fabulously rich. Mr. BEEKMAN. Those days are over, I think. I do not think there is a reputable public-service company running.

Senator POMERENE. One of the best friends I had on earth started out 15 years ago in the gas business-the artificial gas business--and he did not have a dollar to his name. He is now worth a number of millions which he acquired by manipulating properties in this manner. They need money to finance a proposition, and then, of course, dispose of it in the usual way, which is well known to every man who has studied this proposition. The public pays for that. Mr. BEEKMAN. The public has to pay for all those things. Senator POMERENE. Yes, indeed.

Mr. BEEKMAN. The money can not come from any other source. In that respect, I would like to draw your attention to the way the local management of these companies-and that bears on what the Senator says in the case of my two companies and most other companies, the local management is kept absolutely local. That is to say-take Birmingham, for instance, where we have a public-utilities company; the great majority of the directors of that company are local men, and well-known men in the town, and are interested in the banks and interested in the commerce of the place, and those men have a personal pride in their company's property. They feel their responsibility to the community, and we would not dare

Senator POMERENE. They have a very small portion of the stock. Mr. BEEKMAN. They have a small portion of the stock, but there is the personal responsibility.

Senator POMERENE. The larger part of it is held by the financiers in New York and other cities.

Mr. BEEKMAN. I do not understand that that is the case in our companies and most other companies. There is no group of bankers or financiers who control either of these companies. Their securities are scattered all over the United States. Sixty millions of our securities are held right in the South, in the neighborhood of New Orleans and Birmingham and Little Rock, Knoxville, and all through that territory. There is no body of men, bankers or capitalists who control that property. As I was going to say

Senator POMERENE. They control it just the way, as one of the railroad presidents said yesterday before the committee-that the directors get together, or the executive committee, and there appears to be a vacancy and they meet among themselves and agree that John Jones shall be selected as a director to fill the vacancy that has occurred, and when it comes to the election of course they have proxies out, and those proxies are sent in. The man to whom you make a sale of those stocks is content with his 4 per cent or 5 per cent, and asks no question about it, but, nevertheless, there is a certain element that is controlling that company.

Mr. BEEKMAN. I suppose that is true of every corporation in the United States, whether competitive or not or whether interstate or intrastate. That is human nature.

Senator POMERENE. There is so much human nature in this thing that it is necessary to have something of this kind.

Mr. BEEKMAN. What will we do? The people who hold the stock prefer that the people who run their business shall stay there. They will not go on the boards themselves. They prefer to have men who have been tried and found safe to do the business for them. If I had a small interest in a business I should not want to be a director. I would want a man who has had experience to conduct the business for me. In these local companies the large majority of the boards are composed of leading citizens of that locality. They are glad to serve, and they feel the responsibility to the people, and they do not dare to do improper things.

When one of the local companies wants to finance itself, it does not go to a bank and say, "You sell my bonds for me and I will give you 5 or 10 per cent."

Senator POMERENE. They do this-and this is one of the troublesthey will come to a given town and get six or eight given men, bankers, lawyers, and business men, and they have a small block of stock for which they paid perhaps par or nearly that, and they are organized on the theory that this is a competing company, that they are going to cut down prices for the services in the other company, and this local company is thoroughly installed, and then some arrangement is made by this outside influence with the other company by which the prices are boosted. They are the same. It has repeatedly happened out in my own State. They come out there and organize independent companies in many of the larger towns the more prosperous towns and make the representation that they would give better service and cheaper service, and as a matter of fact it was only a few years until the prices were boosted up, and they did not get even as good service as before. That has happened in the telephone business. They organized these independent companies in opposition to the Bell Telephone Co., and as I say, after the prices were boosted up they did not get even as good a service as the Bell Co. gave.

Mr. BEEKMAN. In the case of public-service utilities, where they have had competing companies, it generally happens that one has gone to the wall and failed, because they can not exist together, and it has been necessary to combine them, and huge sums of money have been wasted, and the public eventually had to pay for it. I think it is generally accepted now that as far as public utilities go, it must be regarded as a natural monopoly, and regulated. In our companies the prices have been steadily going down on electricity and gas, while our railroad companies have not gone, because 5 cents is as low as you can get the fare.

Senator POMERENE. You mean street railways?

Mr. BEEKMAN. Yes, sir.

Senator POMERENE. They have gotten several object lessons in Ohio. We have 3-cent fares at Cleveland, and eight tickets for a quarter at Columbus.