tive character of the borrower in terms of a continuing relationship, the bank would say "We are not interested."

Now, if it came to a matter of the operation of the road, actual operation in extremis, it may be that you would get a bailout coalition of banks. It may be, but it is too risky and there is too much at stake. Furthermore, it really does not cost the United States anything to guarantee them.

I would like to turn the question around. Why not guarantee the loan? If we charge them a 112 percent of the premium, we should not lose money. Anybody that studies the record knows that in every guarantee plan offered by the United States, from the $100 billion plus that we have always made money. We have never lost money on guarantees.

The idea that our people who are managing these things, Secretary Volpe or whoever it may be, is going to be imprudent and deal only with his pals and have some corrupt, inside deals, we all know is nonsense in the fishbowl in which we live today. He has 100 people looking over his shoulder and 10,000 newspapermen, and he is not that insensitive.

So, I think the question ought to be turned around. This railroad has to operate. There is difficulty in getting liquid money in order to operate it, and the U.S. guarantee is now in the hands of the United States-it is essentially a facility of the United States, when you get right down to cases. Why should we not give them the guarantee in order to get the wheels moving?

Senator PEARSON. Thank you, Senator.

Senator HARTKE. Senator Scott.

Senator SCOTT. Senator Javits, you speak of rationalizing the system. Does that concept include, in your mind, the possibility of nationalizing the system?

Senator JAVITs. It does. I do not think you can shrink from it. It is as essential to run the railroads as it is to have the Army, Navy, and Air Force. If the railroads can only roll on that basis and serve the people as they should be served, we cannot shrink from it. There is nothing doctrinaire about freedom except its loss.

Senator ScorT. Do you regard nationalization as a last resort, or as a very real possibility in the near future?

Senator JAVITS. I regard it as a last resort because the nationalization also can be very corrupt and very wasteful. Argentina was literally destroyed by the cost of operating its railroads and its dictator, Peron, used the railroads as a patronage trough, with the most ghastly results.

On the other hand, there are systems in Europe which are nationalized and which run admirably. So there is no iron rule about it. We may make a terrible bust of it.

On the other hand, as Senator Pastore says, you are always hearing the Japanese system bragged about. It is a tremendous attraction, a tremendous facility, and very successful.

Senator SCOTT. In Japan, the predominant railroads are probably above the world's standards. At the same time, they cost the Japanese Government subsidies of over $1 million a day. The formerly good railroads in Great Britain are now, to put it mildly, extricable.

On the other hand, as you say, some nationalized systems in Europe are working out on the whole quite well.

So the problem is not automatic or simplistic in any sense.

Senator JAVITS. Not at all. I would lean towards a business-Government partnership. I think more and more you can get the best of both worlds in that way. You can get the efficiency and incentive of business operation and you can get the backup of Government to keep the thing going and give it that degree of liquidity which_apparently it cannot attain in the private enterprise system alone. I see nothing in that that should scare us.

Senator SCOTT. In other words, Government aid, if it can be worked out, is preferable to Government ownership?

Senator JAVITS. I would say yes, but I think that where the Government aids the Government also cannot be kept at arm's length and it has the right to get right in there on the board and to see what is going on. I do not think there is anything wrong about the Government making money as a partner. I do not see anything wrong with that at all.

Senator SCOTT. The thought is acceptable.

Senator JAVITS. Yes.

Senator Scort. The railroads now are really the only transportation system which does not receive substantial Government assistance with the exception of the Rail Passenger Act, if passed

Senator JAVITS. And that is hung up, as we all know, including the urban mass transit.

Senator SCOTT. That is hung up, as usual, with the other body which is going to take about a 4-week vacation.

Thank you, Senator.

Senator HARTKE. Senator Pastore.

Senator Pastore. That is the point I was making.

Senator HARTKE. Well, we are not going to chastise anybody this morning I do not believe.

Senator BAKER. I arrived late and I apologize for that, but I am sure Senator Javits has done his usual splendid job in this situation and I will read his statement.

Senator HARTKE. Senator Pastore.

Senator PASTORE. Do you not think, Senator Javits, we might even have to go further than guaranteed loans?

Senator JAVITS. We may. I believe the guarantee technique will work because I think that when you make the guarantee dependent upon the national interest factor, for there is a national interest. factor cranked into top level business decisions today, in my judgment

Senator PASTORE. But the point is that many of these railroads of today are in financial difficulty. Now, when you borrow money, no matter at what rate you borrow it, you have to pay at least the principal back, and the question is whether or not the cash return will be sufficient enough to give you the maintenance that you need efficiently, and at the same time, empower you or make you capable of paying back the loan.

Now, if you start out with a very depressed financial condition, the question I raise is, you said that we never lose any money on these guaranteed loans that is true. But we have never really got

into it in this situation with the railroads, and I am afraid that short of nationalization, which, of course, to me is a dirty word unless you really need it, I think myself that the Government will have to do quite a bit if we are going to maintain this system of transportation. My section of the country would die without the railroad. We would die without the railroad. There is no question at all about it. When you realize that 20 percent of all the freight that is fed into the railroad system of this country, nationally speaking, comes from Penn Central, it makes it quite important that you do something about it.

But it is true that a lot of people are quite reluctant and restrained in this matter because of some of the abuses that have crept in, not only on the part of the matters that we have had to discuss at the time that we passed the resolution on the railroad strike but also with reference to management.

I brought out here the other day, here is the Penn Central on the verge of bankruptcy, and yet they have decreed $144,000 a year as a pension fund to Mr. Saunders. Now, where does this money come from? Who is paying for it? I hope we do not have to subsidize that kind of abuse.

I think what we have to do is clean up the railroads first and then give them what they need, but we have got to clean them up first.

Senator JAVITS. Unhappily, for all of us, we have to do both at the same time, because the road has to continue to operate. With a $20 million a week payroll you have got a problem probably the day after tomorrow, and that is all I am talking about.

Senator HARTKE. Senator Javits, before you leave, I do think that we ought not leave in the record that we have never lost any money on the guaranteed loans. Even under this provision, under the 1958 law, there were several loans which were in default and I think that at this place I will insert those into the record, because it leaves a false impression that this has been totally without default. Some of the loans have been paid back and there are a number of loans in different areas which have been paid back, but, as is true of practically every loan in any operation, you do not get all 100 percent and it has not been so for the Government.

1

Senator JAVITS. There is no question about it. When I say lose money, I am speaking of the overall operation. We lose money in individual FHA operations, but I am talking about the overall guarantee operation of the Federal Government across the board, and you have to be actuarial about it.

On the whole, the Federal Government has not lost money on the guarantee technique. That is all I was pointing out.

Senator HARTKE. Let me say I think it amounts to about $6 million under the 1958 act.

Senator JAVITS. If we lost $6 million under the 1958 act, we have made $150 million in the FHA. You run a business. That is really what business the Government is in when you run a guarantee.

Senator HARTKE. I just wanted to make that clear.

Senator ScoTT. May I offer into the record the article from the Time Magazine of July 6, 1970, "The Case For and Against Nationalization."

1 See p. 33.

Senator HARTKE. Fine. That will be part of the record at this time along with Senator Javits' full statement.

(The article and statement follow :)

[From Time July 6, 1970]

THE CASE FOR-AND AGAINST-NATIONALIZATION

Several years ago, Louis Armand, former head of the French national railways, lunched with seven U.S. railroad presidents. At that time, he recalls, "I remarked that sooner or later they would have to face up to the question of nationalizing American railroads. They all roared with laughter." Last week, in the midst of the Penn Central's financial fiasco, no one was laughing at the idea any more. Transportation Secretary John Volpe warned Congress that if the Administration's bill to guarantee loans for railroads fails to pass, and other roads fall into bankruptcy, the only alternative would be for the Government to nationalize the rails. The Transport Workers Union has already called for nationalization. Said James A. Schultz, vice president of the Association of American Railroads: "The country has got to have railroads. So you either have nationalization or Government participation and help."

Nationalization has its attractions. The U.S. is almost the only industrialized nation without it. Stalled and stymied by high operating costs, local taxes, labor featherbedding and Government regulation, 21 of the nation's major railroads ran in the red last year. Though the Government's past policies have often hurt the railroads, Washington seems to be the only power that has the potential, at least, of building a rational, balanced national rail system. Compartments for Cardinals. That is just what has been done abroad. Americans who travel overseas marvel at the swift, efficient and inexpensive nationalized railroad service they encounter. In France, the Paris-Marseille-Riviera express made 182 trips in a three-month period last winter and was late a total of one minute and a half. Japan's 125-m.p.h. "bullet train" between Tokyo and Osaka is the technological wonder of the Eastern World.

But there are some curves in the track. The foreign systems follow a costbe-damned philosophy and lose staggering sums. The Japanese railroads lose $1,000,000 a day. Many of the overseas systems are operated partly as makework projects and are featherbedded to an extent that would shock even a U.S. rail unionist.

Foreign lines court popularity by keeping fares low. On the Italian railroads, 80% of the passengers ride at reduced rates or pay nothing at all; full fares are paid only by tourists and the few odd souls who do not fit into any of the categories in the eleven-column, fine-print list of those entitled to "special" rates. In the Italian railway hierarchy, cardinals rate free private compartments; judges and most government officials get free seats; bishops, crippled people and journalists qualify for 20% to 70% fare reductions.

$60 billion for openers. In the U.S., the costs of nationalization would be enormous. The current estimate is that the Government would have to pay $60 billion merely to buy the railroads. Then Washington would still face the tremendous task of running the roads effectively. With rare exceptions, such as the Tennessee Valley Authority, the record of Government management of business-type enterprises is, if anything, even less impressive than that of private management of the railroads.

If railroads were nationalized as the Post Office is, says University of Chicago Economist George Stigler, "the same political forces, the same million employees would be running things through Congress." Stigler foresees an even greater danger: federal juggling of freight rates could confer great boons on some areas and penalize others. "If you subsidize freight rates in the Pacific Northwest," says Stigler, "that means their lumber industry booms. Every section of the country that has powerful political representation will seek favors in the rate structure."

Yet the Government has an obligation to help the railroads. The U.S. needs what is by far its most heavily used form of intercity transportation, and besides, Washington is largely to blame for the sad state of the railroads. The Government has refused to permit roads to drop unprofitable lines, dragged its heels in approving sensible mergers or rate increases and subsidized the railroads' competitors by ladling out money for highway, airport and canal con

struction. "At present, the railroads have the worst of all possible worlds," says Ben Heineman, president of the North Western road's parent company. "The managements have the responsibility for running them, but Government has all the authority. I used to say that as a chief executive of a railroad I was able to make an important decision: I could decide whether to paint our freight cars red or green."

Fortunately the Government is now examining with sympathy some relatively radical proposals to improve rail service. One that interests the Department of Transportation is for the Government to buy stretches of track for nominal prices and make "federal rail highways" out of them. Trains would pay tolls, as trucks do on turnpikes, but any company could use the highways and travel anywhere along the system. The Federal Government would relieve the railroads of the cost of maintaining those stretches of track, and the highway concept would permit more flexibility and efficiency in rail operations. A Seaboard Coast Line train heading north, for example, would no longer have to change crews and engines at Washington, where its line now terminates; it could carry cargo straight from Florida to New York. An electric utility, if it desired, could run its own trains to the coal fields.

Much more than this would be needed to build an efficient, economic rail system. Short of full nationalization, the Government could:

Take over passenger service. Railroad men are convinced that passenger service can never make a profit, and private enterprise simply cannot operate on that basis. The Senate already has passed a bill to create Railpax, a public corporation that would run the passenger service of any road that wanted to give it up. No improvement in passenger service can ever be expected from private railroad officials who regard that service as a despised orphan that they would like to be rid of. Railpax would at least put passengers in the care of a public corporation dedicated solely to serving them. With the Government's authority behind it, Railpax also would have a chance to drop some of the trains that few people ride. In addition, Washington would do well to encourage creation of metropolitan-area bodies to take over and run commuter services and to plan coordinated areawide systems.

Reduce regulation of freight. Railroads should be set free to charge any freight rates they wish, subject only to minimum supervision to guard against blatant discrimination. The present structure of rate regulation is a hangover from the 19th century, when railroads were big, rich monopolists. Today, intense competition from trucks, airlines, barges, pipelines-and the pressure of large shippers who often have much more financial clout than the railroadscan be trusted to "regulate" rates.

Introduce a national transport policy. Such a policy should equalize subsidies and taxes among various forms of transportation and let the most efficient form prevail. A first priority should be removal of the legal barriers to creation of integrated transportation companies that could own railroads, airlines and truck lines, and move goods and people in the most economic manner. The fragmentation of transport today is costly. A shipper should be free to turn his goods over to, say, the Land-Sea-Air Transport Co., rather than having to negotiate separately with airlines, railroads, truckers.

What the railroads need is much less Government involvement in freight operations and much more Government involvement in passenger operations. That may seem like an odd coupling, but it would be far more sensible than the country's present inequitable transportation policies, which have led to delays, debts and delinquencies.

STATEMENT OF HON. JACOB JAVITS, U.S. SENATOR FROM NEW YORK

Mr. Chairman, I would like to thank you for this opportunity to appear before your Committee to discuss legislation to extend emergency financial assistance to our nation's railroads. In doing so I would like also to commend the Committee for holding these hearings. I am aware of the chairman's interest in railroad matters, since it is this Committee which reported out and passed through the Senate S. 3706, the National Rail Passenger Bill. That bill constitutes the most important piece of rail legislation in many years, and should go a long way toward alleviating some of the structural problems being faced by railroads today.