Mr. RICHARDSON. Yes; it is.

The CHAIRMAN. And that you want to avoid-you know also from observation, and I believe you said it a while ago, that where you do something that causes resentment against any action, even though you might impliedly have force behind it, there will always be ways found to evade?

Mr. RICHARDSON. Yes.

The CHAIRMAN. But where the conditions are developed by reason of personal friendship and relationship between those who want to accomplish a common purpose, the achievement is permanent and lasting; is that your observation?

Mr. RICHARDSON. That is true; that is my belief.

Mr. GIVENS. Mr. Chairman and members of the committee, the next speaker is Dr. Robert H. Montgomery, professor of economics, University of Texas, Austin, Tex. Dr. Montgomery will present certain trends in national economics that reflect the necessity for larger participation of the Federal Government in the financing of public schools. He will show the major effects of increasing corporate ownership and concentration of wealth and its control, and show the relative effects of Federal and State taxation on competitive conditions of production and the relationship of these factors to Federal participation in the support of public schools.

STATEMENT OF DR. ROBERT H. MONTGOMERY, PROFESSOR OF ECONOMICS, UNIVERSITY OF TEXAS, AUSTIN, TEX.

Dr. MONTGOMERY. Mr. Chairman, gentlemen of the committee, I need not emphasize that I am in favor of the principle of the bill you are considering. I have been in educational work for a quarter of a century. I believe it is a function of the various governments, local, State, and Federal, to provide a reasonable approximation of equal educational opportunity for all the children of the Nation.

As

However, my interest in this bill goes much deeper than that. an economist I am primarily interested in an entirely different implication of the bill. I believe it is the major function of government in our democracy to provide a workable economic system. It is obvious to all that this is the most difficult problem our Nation has ever faced. The amazing complexity of modern industrial life requires the formulation of intricate social, political, and economic policies, and the creation of control devices far more extensive than has been necessary during the past century. Some of this formulation of policy and creation of control devices must be undertaken by the Federal Government.

I believe it is universally recognized at present-even by Maine and Vermont-that the inequitable distribution of wealth-and even more serious, the inequitable distribution of money income-is one of the major causes of the horrible depression from which we are slowly recovering.

Almost every discussion of this question, however, runs on the assumption that it is the vertical inequalities-inequalities as between individuals, and groups of individuals within the same geographic areas in the distribution of money income which are so devastating. While this is undoubtedly the most serious phase of the problem, the horizontal inequalities of money income-that is, inequalities as

between the various geographic areas of the United States-is only slightly less significant.

We have developed to an appreciable degree the customary set-up of an economic empire. The fact that we are all living in one contiguous territory has tended to obscure the colonial-empire relationships. Certain great industrial and financial centers have assumed tremendous importance in the control of the economic life of the outlying communities.

I have often remarked that Texas is the largest-and incomparably the richest foreign colony owned by Manhattan. The mere fact that we are under the same flag, that we exercise certain rights of political citizenship, and are enormously proud of our heritage of independence, of liberty, and of individual opportunity in Texas, cannot obscure the further fact that our economic, political, and social lives are to an appreciable extent dominated by our colonial status. It is of little significance that we have incomparably the world's richest deposits of oil, natural gas, and sulphur, so long as the ownership rights in this natural wealth is vested in giant holding companies in the financial centers, and so long as the profits flow to those centers. If we are to have a satisfactory and smoothly functioning economic system money income must be so distributed in the colonies that we may be able to buy the products and services of the industrial and financial centers. In any great free-trade area, under our traditional economic order, money income will tend to flow into the great financial centers from the outlying raw-material-producing areas. We must devise means for pumping this money back into the colonies if the system is to function. Obviously the State governments are not adequate for this task. It is the job of the Federal Government.

That is a painful conclusion for a States' rights Democrat. But if I am faced with the necessity of choosing between losing our States' rights to the Federal Government or to the investment bankers of New York and Pittsburgh, I will deliberately choose the Federal Government.

I should like to make these generalizations specific by giving you a picture of a half dozen of our largest and most profitable industries in Texas.

Take first the case of our electric light and power industry: It would not be an exaggeration to say that so far as control and profitmaking ownership is concerned the industry in Texas is owned more than 95 percent by northern and eastern interests. In fact, so far as voting, profit-receiving stock is concerned, there is none in Texas, with one or two infinitesimal exceptions, but directors' qualifying shares. These shares aren't "owned"; they are held during good behavior. This means that the control of one of our richest industries, and for practicable purposes every dollar of profits of the industry, belong to New York-or Chicago.

One specific case, involving by far the largest company in the State, will indicate what I mean. The following figures are taken from the Federal Trade Commission Study of Public Utilities, Volumes 23 and 24. Texas Power & Light Co., subsidiary of Electric Bond & Share, was organized in 1912. The properties which were purchased at that time cost the company, according to its own books, $2,390,000. One million dollars' worth of 7-percent preferred stock was issued. Notes and loans and other evidences of debt accounted for $1,520,

791.82. In other words, these non-profit-making, nonvoting securities accounted for $130,791.82 more than enough to pay for the properties. The $8,000,000 of common stock which was issued at that time was all pure water. So far as the records of the Federal Trade Commission indicate, not one dollar has ever been put into the company by the overhead holding corporation behind this stock.

In 1923 American Power & Light bought the common stock of Southwestern Power & Light-both of these being in the Electric Bond & Share family of holding companies-for $2,925,154.80. I do not know whether any actual money changed hands. This is simply the bookkeeping fiction representing the transaction. Texas Power & Light was the principal operating property owned by Southwestern Power & Light. The Federal Trade Commission reports the earnings of American Power & Light on this common stock issue of Southwestern Power & Light for several years. The lowest earnings reported were 41.52 percent per year; the highest, 51.86 percent; the average for the period being 46.69 percent. Of course, every dollar of this money flowed through the tortuous channels of the holdingcompany labyrinth to some well-known eastern banks.

On the basis of the amount of electricity of the various categories consumed in Texas last year, Texans paid $23,000,000 more than we would have paid had we enjoyed the rates prevailing in the Tennessee Valley. Even larger savings would have been shown had we enjoyed the prevailing rates of certain other public or private companies. That is more than the total State ad valorem tax paid in Texas last year. As all Texans know, we would have to resort to astronomy to discover a larger figure than that. That $23,000,000 would provide Texas the best public school system in America.

Nor is that all, nor by any means the most striking illustration of the results of foreign ownership. Texas has almost a complete monopoly in sulphur. For a decade we produced above 98 percent of the American supply. Two companies controlled that productionboth, of course, foreign owned and closely related by consanguinity, if not by affinity. The financial stories of those companies read like a tale from Pushing to the Front.

According to its own books, Texas Gulf Sulphur Co. had investments in its company in Texas at least, it had common stock outstanding to the amount of $6,350,000 in 1921. Entirely aside from the unnumbered millions which have been "plowed in" since that time, and which are now claimed in fee simple by the common-stockholders, the company has during the past 16 years paid in cash dividends on its common stock over 100 percent per year-a total of $103,952,500. The company has 800 employees in Texas.

A fair division of these profits by the State, say, on a 50-50 basis, might mean much to the school children of Texas.

Texas also owns the world's greatest reservoirs of natural gas. I should say, the world's greatest reservoirs of natural gas are within the boundaries of Texas. The pieces of paper representing ownership lie in other jurisdictions. We not only produce and sell for domestic and industrial consumption over 600,000,000,000 cubic feet of gas per year, for some years we have blown into the air almost as much Án argument between the porters on our two rival crack trains in Texas was won by the unanswerable logic: "Why, boy, that Texas Special kills more people than the Sunshine Special carries!"

more.

Texas wastes more gas than any other State in the Union produces. That is another tragic consequence of the foreign ownership and control of the industry. But it is not part of the present story.

There are 81 gas pipe lines serving the industry from Texas. Forty of these, all very tiny ones, are more or less owned in Texas. The other 41 handle Texas gas-in the interest of Delaware.

The 20 largest lines, all foreign owned, handle over 91 percent of the total production. The Loan Star Gas Corporation of Delaware owns six of these and does an annual business of 32 percent of the total; Electric Bond & Share Corporation of New York owns five and does 37 percent of the business. Last year only five of the Texas companies paid dividends, a total for the five of $39,410.92. The foreign-owned lines paid common-stock dividends of $3,767,225.61. The total of 40 Texas companies showed a net gain from operations of approximately $414,000; the foreign-owned lines showed such gains to the amount of $26,133,000.

The public-school systems of Delaware and New York may be more successful in tapping these sources of revenue than is Texas.

Incomparably the greatest natural resources of Texas at the present time is oil. Texans are prone to grow lyric on the subject. It is quite true that Texas produces almost 40 percent of the United States output; over 17 percent of total world supply. It is also true that the east Texas field alone, according to Government tests, has a present potential capacity to produce over 117 times the total American output.

We

Last year the value of Texas oil was over twice the value of her cotton crop and you may remember we are not an inconsequential cotton producer. The value of oil at the well was greater than the total value of all agricultural products, including livestock, and Texas ranks first in the Union in the production of agricultural crops. have over half a million individual farms. Över 2,700,000 people live on those farms. The oil industry employs, in Texas, in all capacities including the lobby at Austin-approximately 135,000 men. According to the 1936 Texas Almanac (published by Dallas News), it contributed almost $150,000,000 in pay rolls to Texas. It apparently dropped somewhat more than that on the Delaware shell

game.

As in the case of natural gas, we have become entirely too efficient in producing oil. We are in danger of being drowned in a veritable flood of it—and I am still paying 20 cents a gallon for gasoline.

Of course, we are doing what we can to protect ourselves. The last proration orders-February 5, 1937-permit the best wells in east Texas to run 1 minute and 33 seconds per day. The average well in the field is permitted to produce 1 hour per month. That is slightly less than one-tenth of 1 percent of potential output. If Secretary Wallace's farmers should learn to prorate, I'm afraid Delaware might have to eat some of her holding companies. A banquet of class A common stock, with a dash of first-and-refunding-golddebenture sauce might not be so bad, at that.

If one should peek behind the curtains it is just possible that he might find the "Unseen Hand" which, Adam Smith assured us, directs the economic affairs of men. Our colonial status is obviously shifting scenery for the drama. But that is only one side of the story.

It is a bit difficult to get satisfactory figures on the ownership of oil wells. There are still a number of individual producers, but their number is undoubtedly decreasing. We have more adequate figures on pipe lines and refineries, by far the more profitable phases of the industry.

There are about 140 oil pipe lines serving Texas fields, almost all of them foreign owned. The 18 largest companies handled, last month, 74.46 percent of the total run. This is apparently the most profitable segment of the industry. In his annual message to the legislature, January 13, 1937, the Governor cited one of these foreign-owned lines which made a net income of $8,800,676. He said:

This company paid the State of Texas only $95.77 for the privilege of operating in Texas during the year beginning May 1, 1936. (Pipe-line companies and railroads are required to pay only one-fifth as much franchise tax to the State as are other corporations. Of course in addition these companies pay ad valorem taxes to the State.) The Humble Pipe Line Co. (owned 100 percent by Standard Oil of New Jersey), Magnolia Pipe Line Co. (owned 99.9958 percent by SoconyVacuum Oil Co. of New York), the Sinclair-Prairie Pipe Line Co. (owned 100 percent by Consolidated Oil Corporation of New York), the Shell Pipe Line (owned 100 percent by Shell Union Oil Co. of Delaware), and the Texas Pipe Line Co. (owned 100 percent by the Texas Corporation of Delaware), reported total profits in 1 year of $41,010,822. The total franchise taxes paid to Texas by these companies for the privilege of operating within our State was $5,647.99. Yet, the representatives of these same companies, appearing before this legislature to protect their interests, opposed an increase in the franchise tax law and say we ought to have a general sales tax to make the average man "tax conscious" and to make him appreciate his Government. I think they ought to show appreciation to the government of the State which has probably contributed more to their prosperity than any other in the Union.

* * *

I think the Governor should get a medal for his commendable restraint of statement.

In the same message our Governor said:

For years now the Legislature of Texas has enacted practically every conservation statute and enforcement measure desired by this industry; not only to prevent waste but to stabilize the business, to make it profitable and prosperous to insure to those engaged in it a generous return upon their investment.

Just how generous this return has been, the Governor explains:

*

Two years ago, I advised the legislature that 20 pipe-line companies reported to the secretary of state a total net profit of $78,000,000, an average of 25 percent in a single year upon their investment. (Remember, that was for the year 193233.)

The situation has not changed much in the meantime. According to reports made to the Interstate Commerce Commission, eight companies, all but one of them operating within the State of Texas, reported the highest net incomes.

When we turn to the refining section of the industry, the same situation prevails. There are 207 refineries in Texas. The 13 largest, again all more than 99.9 percent foreign owned, handled 82.73 percent of the total. If we included all the foreign owned, this figure would certainly be above 95 percent.

The story of electricity, gas, sulphur, and oil is repeated in the case of the railroads. There are 16,660 miles of railroad lines in Texas. Over 99 percent of the ownership shares are held by foreign holding companies. These lines are worth almost a billion dollars. Operating revenues during the past 10 years have varied between $114,000,000 (1934) and $245,000,000 (1926, 1927, 1928, and 1929). Operating expenses in 1934 were $90,000,000. Net revenues were $24,200,000. In 1926 to 1929 net revenues averaged above $64,000,000