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Railroad King: New Style

THE LATEST bargain-counter sale of the Van Sweringen railroad empire was made on April 24. Two days afterwards, at the Waldorf Astoria Hotel in New York, the buyers became the subjects of a favorable publicity boom which possibly came to an end in exactly thirty days, on Capitol Hill in Washington. The subjects of the publicity were Robert R. Young and Frank F. Kolbe, New York Stock Exchange brokers who bought control of the $3,000,000,000, 23,000-mile railroad system. Young is the dominant partner. According to Senator Wheeler's testimony in the railroad investigation in Washington, Young's contribution to the amount paid to George A. Ball, Muncie glass-jar manufacturer, for the controlling common stock was $255,000–control of these 3,000 millions for $85 per million.

Young and Kolbe are forty, affable, mindful that they are dealing with TNT of high finance, and mindful of their public relations. The cultivation of these relations was one of their biggest achievements. Two days after they signed the contract to buy, the newspapers were invited to a “reception,” as press reports later described it, at the Waldorf Astoria. The reporters came and met Mr. Young, Mr. Kolbe, edibles, drinks and press releases.

The newspapermen formed a favorable opinion of their hosts. The new super-executives of the Alleghany Corporation railroad system expressed full approval of government regulation and deep devotion to the public good. One of the press releases was by Mr. Ball, the seller. It furnished some biographical notes.. Young, it said, was a “product” of Texas, Kolbe of Michigan; Kirby, their silent partner in the scheme, was from Pennsylvania. That Young had come to the city of Wall Street and of financial power years before, and had been associated at one time or another with the duPonts and General Motors, was information that inquiring Senators developed later.

Nine days after this first meeting with the reporters, Young and his associates paid their money and deposited in their strongbox the control of railroad corporations whose lines stretch from the port of New York to the Rocky Mountains, from Virginia tidewater to Canada, form the Great Lakes to the Gulf of Mexico.

Washington higher-ups were visited by these men or their agents shortly before they bought their large slice of the financial government of the country. High executives of General Motors who were to share in the purchase went along to see Senator Wheeler, chairman of the Railroad Investigating Committee. The General Motors group, Young testified later, thought there was nobody in the country who could run these railroads so well as they could; he had privately reported that there were political reasons why the purchase of this empire should be known as a General Motors deal; but Wheeler evidently told them there would be a full investigation, and the General Motors people dropped out promptly, because they did not “desire to stand the gaff of a Washington investigation.”

Withdrawal of this money support did not impeded Young's climb up the holding-company ladder. He had already written a letter to the son of a very, very rich man names Kirby, resident at Wilkes-Barre, Pennsylvania. This letter glittered with sales talk telling the junior Kirby that there might not be enough left of this purchase “to go around” but that it might be possible to let Kirby in. Upon receipt of the letter, Kirby telephone Young long-distance almost immediately. Before Kirby got through, he had put up the lion's share of the money, while Young pocketed the control.

Despite these incidents, Young and Kolbe made almost as favorable an impression on the Washington correspondents as they had ten days earlier on the New York financial reporters. The partners vied with Senator Wheeler in their eagerness for reform. They say “no object in getting control of these railroad systems off into holding companies.” They agreed that widows, orphans and banks all get “gypped” by holding companies. Kolbe indicated that he was not in favor of putting control of such an empire into the hands of a few individuals. Young agreed with Senator Wheeler that there ought ot be a law to prevent control getting into one man's hands on so comparatively slender an investment as that by which Young now controls the Alleghany system. He and Kolbe repeatedly told of their intention to dismantle the holding companies with the greatest practicable dispatch. Both agreed that a government department like the Interstate Commerce Commission should have the power to supervise the dismantling process.

Even when Young missed his cue, he was quick ot correct any impression that he was lacking in devotion to reform. Such an occasion arose when Senator Wheeler demonstrated from Kolbe's own correspondence file that the Alleghany common stock had no property values behind it–in other words, that Young's control of the empire was based on securities that were the ghost of departed values, not so different today from what used to be called watered stock; if Young got anything out of his revamping of the holding company, it might possibly have to be at the expense of its other security holders. Kolbe struggled valiantly to repel the Senator's contention,which had such implications. Finally Young came to his partner's rescue. He blurted out that the railroads have not been permitted to charge shippers enough and that in consequence “the railroad investor has been most badly and sadly persecuted.” Tis disinterment of long buried error caused as much amazement as would the appearance of a dinosaurus today. Young, quick on the trigger, said that he had used the wrong word when he talked of persecution. But he reiterated his complain about the rate structure, and with evident concern called the Committee's attention to the fact that the railroads were facing wage increases.

Young and Kolbe were particularly urgent in proving that their minds and their hearts were free of any interest or desire to control the empire. Some of Kolbe's memoranda and letters showed that he had discussed the questions of control with the Van Sweringen bankers, J.P. Morgan and Company and First National Bank of New York, and with Donaldson Brown of General Motors; but Kolbe assured the Senators that these gentlemen, like Messrs. Young and Kolbe, were not interested in control. In fact, so they both testified, they intended to deprive themselves of they voting control over the railroad system by dismantling the holding companies. Wheeler confronted Kolbe with proof that he had frequently expressed much interest in control and had even suggested the possibility of using, for this purpose, a voting trust–a financial gadget especially abhorred in Congress. Kolbe indicated that he had interested himself in the subject only because it seemed to be of interest to people other than himself and his associates.

Finally, the Senator produced a letter written by Young from Florida to his partner in New York, two months before they bought the kingship of the empire. In this letter Young said: “If the thing cannot be handled more or less as you and I dictate, then I cannot see the point of locking ourselves up in it...Either this is 100-percent a Young, Kolbe and Company controlled situation, or I would rather not 'play ball.'” Young sought to prevent unfair constructions of these words. He said he wanted to get rid of the top holding company; it was not a good investment to leave his wife and daughter when he died, he preferred to bequeath to them the minority railroad shares he would get when he wiped out the holding companies. Kolbe added that he wanted to get rid of these obnoxious holding companies, so that the fruit of his labors would be “an absolutely free and independent [railroad] system with its own stock widely distributed in the hands of the public.” All this created a sensation at the hearing and the welcome tidings were widely heralded throughout the press.

Three weeks later the Senate Committee, with Senator Committee, with Senator Truman of Missouri in the chair, recalled Young to Washington. The Committee's lawyers had examined the law books and concluded that the Interstate Commerce Commission has authority to unite Young's strangle-hold on thousands of miles of railroad. A suggestion was put to him which may be summarized substantially as follows; You, Mr. Young, have an indirect ownership of less than one percent of the securities of these railroads; the public owns the other 99 percent; but you have a strangle-hold control of a type you yourself deplored a few weeks ago; the difficulty might be solved if the Commission exercised its power to deprive you of the voting control over the railroads. Young thought the suggestion very ill advised. He finally objected that here is already too much government in business. 

In the course of warding off the concrete proposal that put to the test the broad declarations Young and Kolbe had made at their previous appearance, Young pursued a difficult course. He reaffirmed some of those declaratoins. But he said a good deal that appeard to be in the nature of departures from the unequivocal pronouncements of three weeks before. He said that in many instances holding companies performed a useful service, that holders of stock of railroad companies got nothing but gain as a result of control of those roads by the Alleghany holding company. As for a statues to deal with holding companies like Alleghany–he would consider it most unfortunate if additional legislation were passed; it would only hinder him in getting the railroads out of the control of the holding  companies. The best interests of the public were served, he said, by letting him and his associates, with their good intnetin and their desire to follow the views of the Senate Committee, go forward, unrestricted by regulation. He must have reflected in the intervening weeks on his previous complaints about the rate structrue and his evidence about impending huge wage increases. Now he spoke of the desirability of using his control to effect economies and to reduce rates paid by shippers and raise wages paid to labor. But this, he said, would be delayed for years if holding-company legislation were enacted. He feared also that there might be no possibility of reducing freight rates or increasing wages if the Interstate Commerce Commission persisted n its ruling that a grouping of railroads could not have the Commission's approval in cases where the roads are controlled through a small minority interest. Above all, while adhering to his previously stated preference for stock of railroads rather than holding companies, Young wanted to be allowed to hold fast for this time being to the imperial control he bought in April for $255,000. Finally he complained that the felt tired  and fuzzy. It was a hot day in Washington. Perhaps, in the heat and fatigue, beliefs that he may have endeavored to exorcise from his mind since becoming a great financial figure were flocking to the surface and finding their way into a Finally he complained that he felt tired and fuzzy. It was a hot day in Washington. Perhaps, in the heat and fatigue, beliefs that he may have endeavored to exorcise from his mind since becoming a grat financial figure were flocking to the surface and finding hteir way into a permanent printed record of the government. One wonders, in the event that Mr. Young finds himself in holding-company jams as did the Van Sweringens before him, whihc of these two conflicting selves will determine the politices he imposes on the public's investment in his $3,000,000,000 empire.

In resolving this puzzle, the public fortunately has the help of George A. Ball, who has already made his mark in the affair Van Sweringen for shrewdness, courage and conscience. Mr. Ball bought the empire at the rummage sale in Muller's securities room on Vesey Street, New York City, in 1935, and within eighteen months had a book profit on his top holding-company common stock of over 70,000 percent. Then, by forming a charitable and religous holding company controlled by himself, his wife, and his daughter, and transferring hte stock to it, he rid himself of both income and inheritance taes. Then, in selling the empire, he was on guard against adventurers trying to "dig up something"; as his Muncie, Indiana, financial adviser told the Senate, Ball proceeded “very deliberately and very carefully and very properly in the public interest,” and this led him into the arms of Mr. Young, who passed the character test as a “reputable” person person to control this railroad network. Ball was with Young at his debut at the Waldorf Astoria and issued a press statement which might servce as evidence that legislation adverse to holdin gcompanies is not needed while YOung is the holding company king. To be sure, the unsympathetic might argue that Ball's statement was biased, because such legislation might cause Young to throw back on Ball's hands a block of 1,200,000 shares of Allenghany stock optioned to Young by the Ball charitable and religious corporation; as Young has already told the Senators, he did not want to buy this block outright and stick his neck out by investigating additional money, until he saw which way Congress was going to proceed with respect to railroad holidng companies. This indicates that Ball's family corporation may benefit by getting the money for this stock, if Congress and the public accept Ball's character testimony as a reason for letting Young and his holding companies alone; but the Ball profit on these shares would not be much more than 1,300 percent, not a very attractive rate to one who has in the very same affair already experience a book profit of 70,000 percent. It will therefore be a mark of understanding of this railroad king who just abdicated and of the king who has taken his place, to note what the former broadcast in commending his sucessor to the American public from the statesman's suite at the Waldorf Astoria:

“Mr. Ball stated” (this is what the newspapermen read as they munched their appetizers and sampled hte cocktails) "the acceptance of the offer of these gentlemen passes into strong and capable hands the ownership of these important properties. He [Ball] is impressed with the sense of public responsiblity possessed by these gentlemen and believes that the interest of the holders of securities of these properties, as well as the public, will be well served."