that confronts us, from Maj. Ray's findings.

Now, Mr. Ryan's connection with the railway becomes interesting
at this point. Mr. Ryan is a director on the Milwaukee Railway and
has been for years. Mr. Ryan is on the executive conmiittee of five,
and has been for some years, of the Milwaukee Railway. Mr. Ryan
is the president of the Montana Power Co., as has been shown in the
statement I have introduced, the companv which electrifies the entire
western division of the Milwaukee Railway, known as the Puget
Sound Division, with large remunerative contracts. Mr. Ryan
undoubtedly has much to do with directing the policy of the Milwaukee
Railway and Mr. Ryan was appointed on Majr 20, 1918, Director of
the Aircraft Production that controls the pohcy of that bureau and
controlled the character of railway built by the Grovemment.

Mr. Ryan has testified, as stated yesterday, that he and his prede-
cessor, Mr. Potter, were practically one. They were both related in
large copper interests. They were both in the Guaranty Trust Co.,
which, by the way, is the transfer agent of the Chicago, Milwaukee &
St. Paul Railway, the road of which he is a member of the executive
committee. Mr. Potter was director from February, 1918, to May 20,
1918, when Mr. Ryan was appointed.

Mr. Stettin ius was called in by you to sign the approval. Mr.
Stettinius and Mr. Ryan, I understand, were both assistant secretaries
of war ?

Secretary Baker. Not at that time.

Mr. Frear. He was not Assistant Secretary of War at that time?

Secretary Baker. Mr. Ryan succeeded Mr. Stettinius as Assistant
Secretary of War. Mr. Stettinius was Second Assistant Secretary of
War.

Mr. Frear. The contract was made in the East, according to the
statement of Mr.

Secretary Baker. Oh, there is a little more than that.

Mr. Frear. I am going to read the whole letter.

Secretary Baker. But let me state the fact, so it will be dear*
The contract was originallv negotiated in the West by Gen. Disque,
and he brought the recordf of his negotiations and tne contract as
he proposed it East in order that it might be approved here and
executed here. It was taken over to the Aircraft Division, of which
Mr. Ryan was the head, and he at once said he would have nothins^
to do with it because of his relations to the Milwaukee Railroao.
He brought it to me with the statement that this was a contract
upon which he could not only not pass but could not advise; that it
was a very large thing and reciuirea careful examination.

I sent for Mr. Stettinius, wno was a man of large affairs, accu&*
tomed to dealing with large affairs, put it in his hands, and told him
in Mr. Ryan's presence, that Mr. Ryan was related to the Milwaukee
Railroad and could have no sort of relationship and that I excused
him from having anything to do with it, and I asked Mr. Stettinius
to take up the relation at that point.

The contract which was ultimately authorized was the Disque con*
tract as he brought it from the West, modified by the changes which
Mr. Stettinius negotiated in it. I think that is it.

Mr. Frear. That is right. The contract was brought East for
approval. Why did Seims, Carey & Kerbaugh have that contract!

Secretary Baker. I can not answer that; I do not know that.



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AYIATIOlir. 97

Mr. Frear. That is a very interesting question at this particular
point, why they were given the contract to Duild that railway at that
particular place and in that remarkable manner. That was in April,
1918, as I now remember; that first contract was in April.

Secretary Baker. I thmk it must have been in May, because Mr.
Ryan became Director of Air Service in May.

Mr. Frear. The very first negotiations and the final contract was
made while Mr. Ryan was in the Air Service 1

Secretary Baker. Yes.

Mr. Frear. In fairness to all the parties I will read into the
record now Mai. Howes's statement. He was a major, I believe,
was he not? He was in the InteUigence Bureau of the War Depart-
ment in the West?

Secretary Baker. I think he was, sir.

Mr. Frear. And he was making an investigation out there of con-
ditions so as to protect the Government, and he was one of the
officers under the Intelligence Bureau of the War Department?

Secretary Baker. Yes, sir.

Mr. Frear. And he had with him Lieut. Kerrigan, of the same
bureau, who made independent investigations with others out in
Washington. After he had made certain mvestigations this telegram
was sent from Portland, Oreg. :

Portland, Oreo.,
Received November 23, 10.25 a. m., 1918.

Code.
MiLSTAiTF, WaMngton,

(Fersoiud and confidential.)

Lambennen of the Northwest unanimous in demanding Federal investigation of
lumber situation. Their principal contentions are: That John F. Ryan was director
Milwaukee Railroad; that he was instrumental in giving cost-plus contracts Seims,
Carev, Kerbaugh Corporation for building railroad across Washington Peninsula,
which tapped holdings of the Lacey interests and the Milwaukee Land Co.; that
Sawyer, former chief engineer of the Milwaukee Railroad, was made major in Spruce
Production Division and is building the road which joins the Milwaukee at Joyce,
Wash. Ryan approved the lending of $6,000,000 to the Seims, Carey, Kerbaugh
Corporation and tne copy of the mortgage is on tile in Clallam County, Waeli. , approved
bv Assistant Secretarv of War Crowell. This road according to Kerbaugh nas cost
about $12,000,000 and taps no spruce untU it travels over 40 miles, whicn brings it
into the holdings of Laceys and the Milwaukee Land Co. J. J. Donovan, of Bloedel
Donovan Lumber Co., formerly owned stock in Port Angeles and Southern Railroad,
which was bought over by the Milwaukee. He is also a director in the United States
Spruce Corporation and close friend of J. D. Rjran. He holds contract with Seims,
Carey, Kerbaugh to cut part of the 500,000,000 feet of spruce which company has
contracted to log.

That was the contract that Gen. Disque put up to the loggers, but
their contract was only for 250,000,000 feet, just one-half of that.

Secretary Bakeb. The demand for increased spruce production
was growiug all the time.

Mr. Freak. Now, just let me say, by way of parenthesis, that I do
not care to introduce all the testimony tnat Maj. Ray had of the
various parties, because we are trying to confine this to one matter.
But Mr. Donovan wrote that he had no interest in this matter,
although he was one of the directors of the Spruce Production Cor-
poration.

(Continuing reading:)

He built mills to handle side cuts from this milling and has contract which will net
him profit of at least $10 per thousand. Seims, Carey, Kerbaugh built $2,000,000
mill at Port Angeles, Wash., while liunbermen contend it was unnecessary and use-



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98 WAB EXPENDITURES.

leas without building of million dollar breakwater on Sound. No spruce yet milled
from this project. Also built mill at other end of railroad, costing about ll, 000, 000,
and no spruce has been milled from this. These two mills were built on coet-plos
contracts at Government expense and are so located that, in conjunction with the
railroads which have been built, these men will be able to control liimber industry,
and Carey contends they are in the game to stay.

Carey was one of the contractors on the Warren spruce production
contract, and their contract amounts to substantially $25,000,000 for
cutting spruce, part at the rate of $100 and part at $60 per thousand.

(Readmg:) •

In Grays Harbor district Disque gave Alex Poison, of Poison Logq:ing Co., contract
in March this year to build road which would tap Quiniault Reservation with
200,000,000 feet Government-owned spruce.

That is interesting, because it may have a further direct bearing
on the matter, and we are anxious to have it considered in all its
phases. Mr. Poison was at Grays Harbor and asked for a short
railway to reach 200,000,000 feet of Government forestry spruce.

(Mr. Frear here exhibited a map and pointed out the location of
various places referred to.)

Mr. Frear. Poison was given the contract, and that was to touch
200,000,000 feet of Government-owned spruce, but the complaint of
Poison was that he could not get the material with which to build a
logging road, although it was given to the Seims, Carey, Kerbaugh
Co. for a transcontinental railroad. That is a controverted matter,
regarding Poison and, I am frank to say, one to which I have given
no consideration. It has not been investigated, but it should be and
has a bearing on the necessity for the building of this expensive Gov-
ernment road.

(Continuing reading:)

Hutchinson was sent by Disque to supervise building of 6 miles of this road —

And they had a great deal of trouble. Poison, as I remember,
claims that Hutchinson was holding them up, particularly in the
matter of driving piles, building bridges, etc.
i^ (Continuing reading:)

And started in May. This was never completed as Disque would not give neces-
sarv equipment. Poison had remainder of road graded and ties and rails ready.
Poison contends that if allowed a free rein he could have completed the 6 miles of
road by July 1, and would have tapped Government timber in the Quiniault Reser-
vation. On the other hand. Seims, Carey, Kerbaugh, were given all equipment
necessary for tapping privately owned timber. In the Newport, Oreg., district —

That is where two railways were built out from Newport north
and south.

(Continuing reading:)

The Warren Spruce Co., working on cost-plus contract, received all equipment
and men necessary, tapped privately owned timber, and spent $5,000,000, but de-
livered no spruce on these cost-plus contracts.

Preliminary investigation indicates that railroads are attempting to dominate
lumber industry of Northwest at Government expense and in collusion with Govern-
ment officials and Army officers. Indications of huge graft in large transactions.
The continued investigation of which will involve large people and calls for commis-
sion of great power. Any further work we might do at present mieht jeopardizo the
larger investi^tion which will be necessary to prove these contentions. This situa-
tion very senous and calls for careful consideration. Wire instnictiona at onoe.
Time important factor.

Howes,
Military Intelligence Ojfieer.



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AVIATIOK. 99

That telegram was dated November 23, 1918. On December 3,
10 days later, Mr. John D. Ryan, address 42 Broadway, New York,
«ent the following letter to you, apparently having received a state-
ment of the charges from you as made by Mr. Efowes. This is his
answer, and it takes up charges so far as they relate to him, and that is
all he is concerned in and an that I care to read into the record here.

Secretary Bakeb. I am perfectly familar with it; you need not
read it for my sake.

Mr. Lea. i our purpose is to insert the whole letter in the record ?

Mr. Frear. Yes; insert all this in the record.

(The letter referred to- is here printed in the record in full:) ^

John D. Ryan, /^^

42 Broadway, '
New Yofk^ December Sy 1918,
To the Secretary op War,

Washington, D. C.

Sir: I have before me copv of a telegram addressed to Military Intelligence and
fdgned Howes, that I believe m fairness to myself, Gen. Disque, ancL others, who have
haid to do with matters in the Spruce Production Division of the Bureau of Aircraft
Production, and later in the Spruce Production Corporation, should be answered by
me with a plain statement of the facts, as far as I know them, imd as they relate to the
charges made by this representative of the Military Intelligence Bureau.

I uiink it is necessary to go into the charges at some lei^:tJi, and for the purpose of
answering them as specifically as possible I am paragraphing the tel^ram and number-
ing the charges and answering them where I can by number.

Allegation No. 1: As to whether the lumbermen of the Northwest are unanimous in
demanding Federal investigation of the lumber situation, I have no information, but I
do know that Gen. Disque tel^raphed me immediately upon the publication of the
Humes' report which recommended an investigation of the Spruce Production Divis-
ion, that in justice to himself and the whole organization, the investigation ahould be
made and immediately.

That I was a director of the Milwaukee (Chicago, Milwaukee & St. Paul Railway)
-everybody knew, and you will recall, when Disque and Seims-Carev-Kerbaugh
people came on to Wadiington with a contract which had been negotiated bv Disc^ue
and signed by the proper official of the Government in the Spruce Production Division,
which provided that it was to go into effect when a contract was entered into between
the Government and the Chicago, Milwaukee & St. Paul Railway for the building of
certain railway extension to tap areas in which Siems-Carey were to operate, that I
went to vou and stated that as I was a director and member of the executive committee
of the Mfilwaukee Railway I could not act in any capacity, even advisory, and would
have nothing at all to do with it, whereupon you referred the matter to Mr. Stettinius,
and in my presence told him that I could not act, and that he was to negotiate it,
which he did . I never even saw the contract for the building of the railway, which wa .
afterwards made between the War Department and the Siems-Carey- Kerbaugh Cos
direct, as the railroad administration did not approve the building of the line by the
Milwaukee Co., but I understood that the contract was signed either by yourself or
Assistant Secretary Crowell.

(2) Allegation. No. 2: Answering the charge that I was instrumental in giving cost-
plus contracts to Siems-Carey-Kerbaugh for building a railroad across Washington
Peninsula, which tapped holdings of the I^acey interests and the Milwaukee I^nd Co.,
which company is owned by the Milwaukee Railroad, I will say that as to the railroad
contract, I have answered above. As to the contract for the production of spruce, a
contract with Siems-Carey-Kerbaugh Corporation was made by Disque in April.
My official connection with the aircraft work began on May 20, on the signing of the
Executive order creating the Bureau of Aircraft Production. When I saw the contract
I did not think the Government was properly protected, and referred it to Mr. Stet-
tinius, with the request that he negotiate a new one to take its place. After he had
spent several days upon it and made certain recommendations he sent it back to me
with the statement that as the Milwaukee Railroad was out of the matter entirely.
and the Government was building the railroad itself, he saw no reason why I should
not act in the matter of the spruce production contract. The original contract was
dated, I think, April 18. The new contract to take its place was negotiated by the
attorneys of the Aircraft Board and Mr. C. F. Kelley, of New York, whom I called in
as counsel, to get the benefit of his experience and advice in order to better protect

147155— 19— VOL 1 8

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100 WAR EXPEISTDITURES.

the Government's interests^ A reference to these two contracts, the one which had
actually been signed over a month before I had anything to do with the aircraft work
and the one that took its place, will enable anyone properly qualified to judge whether
or not the Siems-Carey Co. secured any advantage through my connection with the
negotiations.

(3) Allegation No. 3: I never knew or heard of Sawyer, formerly chief ens;ineer of
the Milwaukee Railroad, until I went to visit the operations about the Ist oi August;
he was then an officer in the United States Army.

(4) Allegation No. 4: The negotiations with the War Credits Board for a loan to the
Siems-Carey-Kerbaugh Corporation were carried on by their own representatives with
the War Credits Board direct, and I had no connection with them. I think formal
approval of the loan was given by yourself or Mr. Crowell, but I am not certain as to
this.

y (5) Allegation No. 5: As to the statement that "the road has cost about $12,000,000,
jACCording[ to Kerbaugh," I am not able to answer, because I don't know what Ker-
pa^gh said about it; but the actual cost (and the road is finished) was $3,800,000,
including all work preparatory to complete operations. The expenditures for logging,
road extensions, mills, and all other operations in connection with the SiemchCarey
contract aggregate to date about $3,200,000, the work has been stopped arid negotia-
tions for the cancellation of the contract are being carried on. From my observations
at the time of my visit to the work, I have no doubt that investigation by properly
qualified engineers will prove that the work has been done at reasonable coat underthe
circumstances, and, in my opinion^ the performance is one that could not be excelled
as to time, and time was the very important factor in the whole operation.

(6) Auction No. 6: I never met J. J. Donovan but once in my life priM* to my
visit to the Spruce Production Division, and that was about two years before on a
railway train returning to New York from Pittsburgh after a conversation of the
National Foreign Trades Council which we both attenaed. I had no social, pereonal,
or business relations with him, except on that one occasion. He was selected as a
director of the Spruce Production Corporation upon the recommendation of a large
number of men whom 1 thought were patriotically endeavoring to help the Govern-
ment in its efforts to meet a very great need of the Army.

As to whether Donovan holds subcontract with Siems-Carey-Kerbaugh to cut part
of the spruce contracted to be furnished by said company, I have no knowledge.

1 have no knowledge as to whether or not he (Donovan) built a mill to handle his
part of the contract.

(7) All^:ation No. 7: As to whether the mill built at Port Angeles, Wash., by Siems-
Carey Co. under their contract with the Government was unnecessary and useless,
competent persons should investigate and report. My own opinion is that it wae
absolutely necessary and had to be done if we were to get the spruce that would have
been required if the war had not ended as early as it dia. One of the largest saw mills
in the world is located at Port Angeles and Siems-Carey tried to buy it but could not
do so at a reasonable price.

No spruce has been produced from any of these operations as it was all dependent
on the building of the railroad, which was completed about the time of the mgnmg
of the armistice.

The mill at the other end of the railroad (at Lake Pleasant) was provided for in the
Siems-Carey contract and necessary to carry it out.

(8) Auction No. 8: These two mills were built on cost-plus contracts as stated.
As to their location so that ''these men will be able to control the lumber industry
and that Carey contends that they are in the ^me to ptay," I have to say that any
one or two mills would have great difficulty in controlling the lumber induetr>' of
the Pacific Northwest, and I do not see where they would nave the advanta^ over
an^rone else in the district. Carey stated at the beginning of j;he negotiations in
which I had part that they did not expect to ever secure any profit from the contract,
except to the extent that they were able to amortize and reduce the cost of the plant
to the Government and take it over on an appraisal that would enable them to engage
in the lumber business. That was, I believe, the chief incentive in their making
the contract and never disguised as far as I know.

(9) Allegation No. 9: I spent the greater part of a long day in going over the Poison
operations, much of it in company;, and frequently alone, with Alex Poison. lie made
no statement to me that would indicate that he had been hampered by Disoue in
his work of getting his railroad finished, and both Disque and myself impressea upon
him in every way that we could the necessity for his getting the job completed as
soon as possible. If he had any complaint to make of the nature stated in this tele-
gram I am sure he would have made it to me then.



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AVIATION. 101

(16). The facta regarding the Warren spruce contract can be determined upon in-
vestigation. I did not see their operations and the contract was entered into long
before I had anything to do with the work of the Spruce Production Division.

(17), (18), (19). Can only be answered after sucn investigation of the charges as
should and I hope will be made.

While I feel it is entirely unnecessary, as far as vou are concerned, for me to enter
any denial of the knowledge of graft, large or small, in connection with these opera-
tions, I want to enter on the record my emphatic statement that I have no such knowl-
edge and do not believe, as a matter of fact, in the existence of any such graft, and I
am certain it will be proven upon investigation.

I interviewed a very great number of men who were directing the most important
lumber operations in the Pacific Northwest at the time of my visit there in July and
August of this vear. With the exception of one or two who had attempted to secure
contracts and failed for reasons which seemed entirely satisfactory to me when ex-
plained, I heard no comment that was unfavorable as to the conduct of the Spruce
Production Division and its affairs.

The necessity for producing an article that had never been secured in anything like
the quantity required and for getting it in the time that it had to be produced made
it necessary to enter into these large contracts, and I am certain that persons qualified
to pass upon the whole question will bear me out in the statement that the work was
well conceived and carried out and that the Government had every protection that
could be afforded by an organization of able, honest, competent men who were well
equipped to cany out the undertaking.
Respectfully, yours,

John D. Ryan.

Mr. Fbeab. Four days after the letter was received from Mr.
Ryan — ^no official action appears to have been taken until after he
had made his official explanation ?

Secretary Baker. That is not the fact.

Mr. Freab. So far as the record shows.

Secretary Baker. Let me add to the record. I received a copy
of the Howes telegram; it is dated the 23d, as I remember. On tne
27th of November I sent the telegram with this memorandum to the
Chief of Staff:

War Department,
Washington, November 21, 1918.
Memorandum for the Chief of Staff.

The Ins|)ector General investigated this spruce situation, and in a report dated
some time in July covered all the featiu-es of the situation as it then existed.

I think this ought to be put in the hands of the Inspector General with directions
to send every competent man to the Northwest to investi^te the things here referred
to, and also to bring down his report on the whole situation to the present time. It
may be important for the Inspector General to know, in conducting this investigation,
that the contract referred to in this memorandum as having been made by Mr. Ryan,
a director of the Milwaukee Railroad, was in fact made by Mr. Stettinius, for the
reason that Mr. Ryan, being a director of the Milwaukee Railroad, declined to partici-

gate in any way in the matter; and, as Mr. Stettinius was then Second Assistant
ecretary of War, I placed the whole matter in his hands and asked him to supervise
the negotiations, which he did.

Newton D. Baker,
, Secretary of War.

That was on the 27th of November. The Howes telegram with
allegations with regard to Mr. Ryan was called to his attention by
me, and he sent me a letter in reply, which is the letter you have
introduced in the record. On the 7th of December, 1918, I made
this memorandimi for the Inspector General.

Mr. Fbeab. That is what I was about to read.

Secretary Bakeb. I will read it if you will permit me.



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102 WAR EXPENDITURES.

• War Department,

Washington, December 7, 1918.
Memorandum for the Inspector General.

I hand you herewith letter to me from the Hon. John D. Ryan, late Second Aasistant
Secretary of War and Director of Air Service. Attached to Jfr. Ryan's letter is a copy
of a dispatch sent to the Chief of Staff from Portland, Oreg., in November. Mr. R3ran b
observations are addressed to the statements made in this tel^mm.

Your office made an investigation of the Spruce Production Division some time in
May or June; I recently directed the Chief of Staff to have that investigation continued
ana brought down to date. The inclosed papers are sent in order that they may be
put into the hands of the member of your force who is continuing the spruce investiga-