32Br ■ ' ■ ■ a 1 ■ ■ ■ THE UNIVERSITY OF ILLINOIS LIBRARY 385 Acl2r Return this book on or before the Latest Date stamped below. University of Illinois Library L161— H41 THE RAILROAD PROBLEM A COLLECTION OF PAPERS ON VARIOUS ASPECTS OF THE RAILROAD PROBLEM AND PRESENTING MANY POINTS OF VIEW AND CONTENDING SUGGESTIONS CONCERNING ITS SOLUTION REPRINTED FROM THE PUBLICATIONS OF THE ACADEMY OF POLITICAL SCIENCE IN THE CITY OF NEW YORK The Proceedings of the Academy Vol. 8, No. 4, January, 1920; Vol. 10, No. I, July, 1922 The Political Science Quarterly Vol. 36, No. 3, September, 1921 THE ACADEMY OF POLITICAL SCIENCE KENT HALL, COLUMBIA UNIVERSITY, NEW YORK 1922 3*5 TABLE OF CONTENTS Part One RAILROAD LEGISLATION 1. RAILROAD REGULATION: GENERAL PRINCIPLES PAGE Solving the Railroad Problem 1 T. W. Van Metre The Senate Committee Railroad Bill 6 Albert B. Cummins The House Committee Railroad Bill 28 Schuyler Merritt The Legislative Program of the Interstate Commerce Commission 36 Balthasar H. Meyer The Relations of Shipper and Carrier 46 Frank H. Dixon Objects of Railway Legislation 54 Frank W. Noxon The Scope and Functions of a Federal Transportation Board 60 Emory R. Johnson ''* The House and Senate Railroad Bills 66 Richard Waterman Why Railroad Regulation has Failed 70 Harry T. Newcomb An Engineer's Point of View 74 H. Buel The Regulation of Water Carriers 79 R. A. Hiscano iii " ' >6 j y TABLE OF CONTENTS PAGE 2. RAILWAY EARNINGS AND CREDIT The Railroads and the Investor 82 Thomas Reed Powell The Revenue Needs of the Railroads 87 Howard Elliott Railroad Legislation 97 Alfred P. Thorn Relation of Valuation to Investments 107 Thomas W . Hulme Reconstruction of Railroad Credit 112 John E. Oldham Pending Congressional Legislation as Affecting Owners of Railroad Securities 120 S. Dairies War field The Price of Private Ownership 130 Pierpont V. Davis Essentials of a Sound Policy as to the Investor 135 William L. Ransom What Warren S. Stone Thought in 1911 146 Slason Thompson Railway Credit and the Interstate Commerce Commis- sion 150 Charles Whiting Baker 3. THE RAILROAD LABOR PROBLEM The Human Factor in the Railroad Business 152 Henry R. Seager Pending Railway Legislation 156 Timothy Shea Relations of Railroads and Their Employees 165 W. G. Besler The Adjustment of Labor Controversies 178 W. N. Doak Labor and the Democratic Control of Railroads 184 Frederic C. Howe Some Practical Aspects of the Railroad Problem 191 Ivy L. Lee Discriminations 195 William Church Osborn TABLE OF CONTENTS V PAGB 4. THE RAILROADS AND THE PUBLIC The Importance of the Public Interest 198 Edwin R. A. Seligman The Railroads and the Public 201 Francis H. Sisson The Objections to an Immediate Resumption of Private Operation 213 George Foster Peabody Relation of Public Ownership to Democracy and Social Justice , 218 Albert M. Todd Government Ownership the Only Solution 248 W. P. Boland Nationalizing the Railroads 252 Calvin Tom kins APPENDIX TO PART ONE Report of the Annual Meeting Committee 263 Samuel McCune Lindsay Part Two RAILROADS AND BUSINESS PROSPERITY 1. INTRODUCTION Railroad Regulation under the Transportation Act. . . . 269 T. W. Van Metre 2. LABOR PROVISIONS OF THE TRANSPORTATION ACT Railroad Labor and the Labor Problem 279 Henry R. Seager Functions and Policies of the Railroad Labor Board 283 Frank H. Dixon Labor Policies of the Transportation Act : (a) From the Point of View of Railway Management. . . . 293 C. B. Heiserman (b) From the Point of View of Railroad Employees .... 303 W. N. Doak (c) From the Standpoint of the Public Group 313 Henry T. Hunt v i TABLE OF CONTENTS PAGE 3. RAILWAY POLICIES AND THE GENERAL WELFARE The Farmers and the Railroads 324 Henry C. Wallace Transportation Act of 1920 338 Daniel Willard The New Basis of Rate-Making 348 Walker D. Hines 4. FREIGHT RATES AND BUSINESS REVIVAL How Railroads Adapt Themselves to National Condi- tions 355 Albert Shaw The Transportation Cost in a Basic Industry — Steel Products 359 Charles R. Hook How the Railroads May Render Maximum Service 363 William J. Cunningham What Railroads are Doing to Increase Economy and Efficiency of Operation 371 R. H. Aishton The Transportation Factor in the Price of Coal 37+ /. D. A. Morrow APPENDIX TO PART TWO The Semi-Annual Meeting, 1922, of the Academy of Po- litical Science 387 Samuel McCune Lindsay Part Three 1. The Problem of Railroad Control 389- Emory R. Johnson [" Bound at end of Volume."] 2. Practical Tests of the Transportation Act A. M. Sakolski FOREWORD The publication of this volume containing all the papers on the railroad problem published by the Academy during the past three years, and its special distribution as a source of public reference, has been made possible through the generosity and public spirit of a small group of citizens, most of them railway executives or persons interested in railroad management or investments. It is hardly neces- sary to say that many of the papers do not present the views of any of these gentlemen nor of any group of railway executives or in- vestors. It is their belief, however, as it is that of the officers and directors of the Academy who planned the program of the meetings at which many of these papers were originally presented, that it is wise statesmanship to present to the public all the facts and all points of view that are worthy of a hearing and the most varied sug- gestions for solutions of great public questions, in order that public opinion, which is the court of last resort and which forms slowly before reaching final conclusions, may be both enlightened and broadly informed. The railroad question, which is of such vital importance to the economic life of the country and affects its basic industries, will not be settled piece-meal as particular difficulties, whether strikes or threatened strikes or controversies over rates and public regulation, may be solved. A comprehensive national policy must be developed and consistently followed until America has a sound system of transportation under whatever plan of ownership, operation and control that will give the American people adequate service to meet the needs of their growing industries and the nation adequate protection for purposes of defence. All of the papers contained in this volume have been copyrighted by the Academy of Political Science in the publications in which they originally appeared, but the Academy will gladly grant permis- sion to reproduce part of them or all of them in any legitimate way that will increase their educational usefulness. The papers contained in Part One of this volume are taken from the Proceedings of the Academy, volume 8, number 4, January 1920, which were edited by Professor Thurman William Van Metre of Columbia University; they cover the series of addresses and papers presented at the annual meeting of the Academy, November 21-22, 1919, at which the subject of " Railroad Legislation " was discussed in four sessions. vii Vlll FOREWORD Part Two of this volume is taken from the Proceedings of the Academy, volume 10, number 1, July 1922, the volume entitled " Railroads and Business Prosperity ", and edited by Professor Van Metre and Professor Parker Thomas Moon. It is a series of ad- dresses and papers presented at the semi-annual meeting of the Academy, April 28, 1922. Part Three contains two papers taken from the Political Science Quarterly for September, 1921, edited by Professor Moon. SOLVING THE RAILROAD PROBLEM T. W. VAN METRE Assistant Professor of Transportation, Columbia University A DISTINGUISHED railroad president said in a recent address, "The railroad problem has not changed, nor is it shrouded in mystery. It is this: railroad earnings and credit must be created sufficient to support the existing rail- road investment and attract the additional capital the transporta- tion business requires in the public interest." At first thought one is inclined to say, "If the railroad problem is so simple why are we having all this hubbub and confusion about solving it?" Second thoughts, however, with their usual disagreeable habit of transforming simplicity into complexity, inform us that the rail- road problem, as expressed by the distinguished railroad presi- dent, is the problem of every other business, and of every indi- vidual in the world. It is the old problem of making both ends meet. There is no mystery involved in the mere statement of this universal problem. But when we attempt to solve it sim- plicity vanishes and mystery enters; our simultaneous equations have altogether too many unknown quantities. It is generally recognized that in creating the earnings suffi- cient to support the existing railroad investment and attract new capital three results will be achieved : ( 1 ) The public will re- ceive reasonably adequate and efficient service from existing transportation facilities; (2) labor will have reasonably adequate wages and satisfactory working conditions; (3) investors will obtain a reasonable return on their invested capital. Before we can devise a program to bring about these results it is necessary to make certain inquiries. What is the reasonably adequate and efficient service which the public has a right to expect from exist- ing transportation facilities? What are reasonable wages and working conditions for railroad labor? What is reasonable re- muneration for railroad investors? The railroad problem begins to leave the realm of simplicity. Let us go farther. Who shall answer these questions? Upon what facts shall the answers be based ? And after these questions are answered, what machinery shall we devise to translate the answers into effective action ? In view of the complexity of the railroad problem it is amaz- [513] 2 RAILROAD LEGISLATION [Vol. VIII ing how many infallible solutions have been presented. It is but fair to note that the author of each "plan" declaims with patriotic fervor, that his plan is best because it is the only one in which the public interest is the paramount consideration. There has never been a time in which the public interest has been so completely indentified with so many strongly opposed private interests. Notwithstanding the extensive discussion of the railroad prob- lem during recent months, little progress has been made toward a satisfactory solution. There have been no frank and specific replies to the questions which must be answered before a satis- factory program of regulation can be adopted. What answer do we have from investors, for instance, to the questions con- cerning the return on capital? It has been suggested by certain groups that rates should be made to yield a return of six per cent on property investment. What is the property investment in railroads? Railroad property accounts for the years preceding 1908 are quite worthless. Physical valuation will not show the value of investment. Capitalization does not show it. Some people are, by implication, urging the "validation" of present railroad capitalization, asserting that the water injected into rail- road securities in times past has long since been absorbed through the process of putting "earnings back into the property." Even if this were admitted to be true, the question at once arises as to how we should consider these reinvested earnings in the regula- tion of rates. Should we finally agree upon the investment value of the rail- roads, and decide that rates should be made to yield a return of six per cent on this value, we should have the problem of equaliz- ing the earnings of "weak" and "strong" roads. The suggestion that the strong roads give up all their earnings in excess of six per cent, arouses bitter opposition among the officials and stock- holders of the strong roads. They unanimously urge that capi- tal receive an "incentive" in the way of adequate return. What is an adequate return ? At least six per cent. Very well, here is a virtual guarantee of six per cent, with the understanding that all excess earnings be returned to the public treasury. But the con- fiscation of earnings above six percent, would destroy "incentive." This incentive is a tender flower. It is hard to escape the con- clusion that the chief stockholders and managers of the strong roads desire rates to be made high enough to insure adequate [514] No. 4] SOLVING THE RAILROAD PROBLEM 3 returns for the weakest roads. It is pleasant for them to contem- plate what such rates would mean. "The strong roads," they say, "should be allowed to earn well above any minimum so that in lean years the public will not be asked to pay increased rates." Present and past experiences with railroad companies and street car companies hardly justify confidence in statements of this na- ture. Owners of street railway monopolies, when making ex- orbitant profits out of a five-cent fare justify their returns because of the great "risk" assumed. When the risk overtakes them their refuge is not the surplus of fat years, but a "flexible" fare. All classes of labor are now alert and suspicious. The wages of railroad employees have been raised again and again during the past four years, but the leaders still declare wages "inade- quate." Veiled threats of strikes and hints regarding "conspira- cies" on the part of railroad managers to reduce wages when pri- vate operation is restored serve to warn us of a constantly im- pending danger. Efforts are being made to pass anti-strike laws, and the laborer wants to know if the Government has any more right to commandeer underpaid labor than it has to require the unproductive investment of capital. Labor leaders denounce an anti-strike law which does not contain a "bill of rights," a labor code, which will insure to labor a reasonable wage. But the nearest approach which a labor leader makes to defining a reasonable wage is his never failing assertion of the inadequacy of the present wages being paid. Labor frowns upon all talk of making future reductions in wages commensurate with possible future reductions in the cost of living. What labor has gained, that will labor hold. Perhaps the leaders have a vague idea of getting something more than a minimum in order that they will not find it necessary in "lean years" to ask for increased pay. There is little doubt that a satisfactory solution of our present railroad problem must be based upon some definite conception of what is a reasonable return to capital and to labor. Though it will probably never be possible to satisfy these two interests, some way must be found to appease them. In return the public must demand efficient and honest service from both capital and labor. We apparently never get tired, though we have abundant opportunity, of being told that the transportation system of the United States is the most efficient and economical transportation system in the world. In fact it is constantly repeated that all business activities, except the post-office, are carried on more ef- [515] 4 RAILROAD LEGISLATION [Vol. VIII ficiently in the United States than in any other country. We need to be awakened. How can anybody having a part in the operation and management of the rail-and- water terminal facili- ties of New York City boast about the efficiency of our trans- portation system? Moreover, the waste, inefficiency and in- competence displayed in New York have their counterparts in virtually all the other great terminals of the United States. If machinery is not created to bring about by compulsion the elimi- nation of waste and inefficiency in our railroad terminals the pub- lic will be cheated of its due. Had the railroad managers used existing equipment with all possible efficiency in 1917 the Gov- ernment would have remained out of the railroad business. Another feature of the reasonably adequate and efficient serv- ice which the public has a right to demand is the development of cheap water transportation, especially along the sea-coasts, and the coordination of rail and water carriers. We talk to-day about increasing production. One of the greatest economic sins committed in this country has been the deliberate efforts of rail- road interests to decrease the production of transportation by employing unfair methods to destroy water competition. Such sabotage deserves the strongest condemnation and it should not be allowed to continue. It is not impossible that our attempts to solve the railroad problem will eventually result in government ownership of rail- roads. Though most students of transportation do not look with favor upon government ownership of railroads in the United States there are none who will deny its possibility and few who deny its probability. The promise of satisfactory legislation in the near future is not bright. If the roads are turned back to their owners without provision for the adequate protection of la- bor, capital, and the public, government ownership is inevitable. Government ownership will probably not come by the adoption of the Plumb Plan. Nor will government ownership mean that the nation has turned to Socialism. If government ownership comes it will be an expedient, a measure of last resort, the only feasible way out of a troublesome situation. While government ownership is to be deprecated it is not to be feared. A great many men are exhibiting genuine concern about the rule of ninety- eight million people by two million. In so doing they cast most unpleasant reflections upon the intelligence of the ninety-eight million, of which they are themselves a part. [516] No. 4] SOLVING THE RAILROAD PROBLEM 5 Whether we are to have government ownership in the near future depends entirely upon the ability of Congress to frame a law which will make private ownership and operation possible. It is impossible for Congress to enact a law which will satisfy all private interests. It would be unwise for Congress to enact a law which would completely satisfy any single private interest. And if the diverse interests involved in the settlement of the railroad problem do not soon adopt a spirit of concession and conciliation, and evince a willingness to have their cases tried on their merits, without the introduction of so much prejudiced testimony, any law which Congress may pass will create such dis- content that private ownership will be immediately endangered. LS17] THE SENATE COMMITTEE RAILROAD BILL ALBERT B. CUMMINS* U. S. Senator from Iowa, Chairman Senate Committee on Interstate Commerce I THINK no one realizes more completely or fully than I do the magnitude and the difficulties of the task of railroad regulation. There are in this country something like 260,000 miles of main-track railway. These systems of railways serve 100,000,000 people and furnish them with their chief means of transportation and communication. It is obvious that any system of transportation in a commercial, civilized country is the basic fundamental industry of that country, for without adequate facilities for communication and transportation and without a service rendered for reasonable compensation the growth and development of the country is impossible. The problem that we have before us is vastly more complicated and intricate than is presented in the transportation problem of any other country in the world. This is due to the extent of our country, the variety of its production, and the dissimilarity of conditions under which business is carried on, as well as the dissimilarity of conditions under which transportation is fur- nished. I believe that transportation is a governmental function. A single reflection upon the conditions throughout the world as well as in our own country will demonstrate that the furnishing of transportation to a commercial people is a governmental function. Aside from those in the United States, substantially all of the railways of the world are owned and operated by the govern- ments of the various countries. I might qualify that by saying that Great Britain has not yet become the owner of her railways, but her policy at this time is one that is the equivalent of govern- ment ownership and operation. While I believe transportation to be a governmental function, I am nevertheless of the opinion that the policy of private owner- ship and operation of railroads should be continued in the United States. The only reason that I am in favor of private ownership and private operation is because I believe that better and cheaper transportation can be furnished to the people of this country * This article is an abridgment of the speech delivered by Senator Cum- mins in the Senate, as printed in the Congressional Record of December 4, 1919. It was prepared by the Editor with the consent of Senator Cummins. [518] No. 4] THE SENATE COMMITTEE RAILROAD BILL 7 through the instrumentality of private ownership and private operation than can be furnished to the people of the country through direct Government operation ; but there is nothing in- consistent with the best forms of government in Government ownership and operation of our systems of transportation. The Government has the right to select the agencies or instrumen- talities which will most certainly render to the people the service they require, and, if the Government believes, as I believe, that the services can be rendered and will be rendered more ade- quately and more cheaply through private corporations under strict public supervision it has the right, of course, and it is its duty, of course, to select such agencies for the purpose of render- ing the service which all the people require. Private operation of railways cannot be continued as a perma- nent policy unless there is a radical change in our system of regu- lation. There is but one course which will insure successful private operation. Our Interstate Commerce Commission has been a faithful, intelligent body of men. They have made mis- takes now and then, which I have not hesitated to criticize ; but, on the whole, I think they have attempted to do their duty as they have seen their duty. It has been, however, utterly impossible for the Interstate Commerce Commission to establish a body of rates in the United States that would enable the railway systems of the Nation to maintain themselves. It has been utterly impossi- ble for any body of men to make a system of rates that will sustain the weaker railroads of the country without giving the stronger railroads an income excessive and intolerable in its extent; and there lies the great, fundamental obstacle in our system of rate making. The Interstate Commerce Commission can no more give to each railway of the United States the return to which it is fairly entitled than it can annihilate distance or overcome any other law of nature ; and for that reason, when the Government took possession of the railroads, some of the railroads were earning enormous and excessive incomes, while other railroads were struggling against adversity, and were utterly incapable of ren- dering to their communities the service to which those communi- ties were fairly entitled ; and it was obvious, I think, to the stu- dents of the subject, long before the Government took possession, that we must adopt some plan that would remove this inherent, fundamental difficulty. According to the decisions of the Supreme Court of the United [519] 8 RAILROAD LEGISLATION [Vol. VIII States, and according to the views of every other tribunal in all the world of which I have ever heard, they have this general idea with regard to the regulation of public utilities: That is to say, if a public utility is fairly constructed, if it is properly and effi- ciently managed, it has a right under the Constitution to earn a fair return upon the investment, upon the value of the property which renders the services — not upon the value of the property as determined by a capitalization of its earnings under a given body of rates — but it has a constitutional right to earn, as against regulation, a fair return upon the value of the property — that is, its investment — if it has been honestly constructed and is ef- ficiently operated. The Supreme Court of the United States has declared that doctrine over and over again. It is idle for us to attempt, even if we were to desire to attempt, to escape the principle which the courts have laid down. It is a just principle ; it is fair and honest ; and I, for one, do not desire to escape it. In the case of a railroad that is earning, we will say, 1 per cent upon that fair investment under honest management, why is it not earning more than 1 per cent ? It is not earning more than 1 per cent for two reasons : First, our regulating tribunals have determined the rates upon which it shall do business. We have interfered with its liberty in the transaction of its business to that extent; but if we have not interfered directly we have attached those rates to some competitor which can do business upon, we will assume, the body of rates which I have premised, and that renders the unfortunately situated property incapable of earning more. Now, I believe that any such system is not only unfair but it is unconstitutional as well. We are agreed that we can not raise the rates upon the weaker properties so that they will be self-sustaining, because that would give to the stronger properties, which move 70 per cent of the business of the United States, an income so excessive that it would not be tolerated for a single month. Therefore that solu- tion must be discarded. We can not give to the stronger proper- ties the rates which would return for them no more than a fair interest upon the value of their property and that alone, because that means death to the weaker properties which must compete with them in traffic, and, of course, upon the same terms, so far as rates are concerned. So we must inquire further. We must find some other way in which we can maintain the general trans- [520] No. 4] THE SENATE COMMITTEE RAILROAD BILL 9 portation system of the United States and promote the welfare of our people. We must find some other way in which to do it How can we accomplish it ? You may inquire as you will, you may study it as deeply as you may, but you will finally reach the conclusion that it can only be done through consolidation. There are various kinds of con- solidation. The problem can be solved by Government ownership because that is complete consolidation. If the Government owned and operated all the railroads of the United States it would. I take it, establish charges for transportation which would pay the cost of maintenance and operation and the interest upon whatever indebtedness might be created in acquiring the proper- ties. It would then be compelled either to raise the rates and charges or to appropriate from the Treasury, if our past history is to be accepted as a lamp for our guidance in the future, some- thing like a billion dollars a year in order to construct such addi- tions, betterments, and enlargements as the progress and growth of the country would demand. That is one way in which this problem can be reached, and it is a perfectly logical way in which to reach it, because it then reduces the transportation of the United States to a common level, and the United States becomes responsible for furnishing facilities in every quarter of the country. There are two kinds of consolidation which may be pursued in private ownership with continued private operation. The first is complete consolidation of all the railway properties of the United States in one corporation. That is a plan which has some advantages. There are unquestionably some advan- tages in complete unification, complete control over all the rail- roads of the United States as a single transportation facility. The plan adopted by the Senate Committee, however, is consoli- dation into comparatively few systems. The bill provides that they shall be consolidated in not less than 20 nor more than 35 systems. I think it ought to be not less than 16 nor more than 30 or 35 systems, but that probably does not affect the merit of the proposal itself. I am in favor of comparatively few systems because it will permit the play of competition in service, and, although you will regard me as exceedingly heterodox and possibly as unobservant of the history of the past, I say competition in rates also. [521] 10 RAILROAD LEGISLATION [Vol. VIII This suggestion which has gone abroad over the country and which everybody has received and apparently accepted that there is no competition in rates under the regulation which we have provided is not well founded. I am in favor of several systems so related to each other that they can carry traffic for substantially the same cost as com- pared with the value of their property, because it does permit, it invites, it commands that honorable rivalry in business which in my judgment "is the mainspring of success in every enter- prise. I am looking toward advances of socialism with extreme regret mainly because I believe that that theory of Government destroys the initiative, the energy, the progress of mankind. I want to preserve in the railway service all of those moving forces which can possibly be retained. I do not attach so great importance to the competition or rivalry so far as rates are concerned as I do to the rivalry in service. The latter begins with a desire to please the people who either ride upon trains or whose property is transported from one place to another. It means attention, it means courtesy, it means a concern for the public mind that could not be secured in any other way than through the opportunity of the public to pass from one service to another. It means infinitely more when we come to consider the ease with which one patron is served and the ease with which the desires of another may be denied ; the furnishing of cars promptly, the movement of cars speedily, the effort made in every quarter, through every em- ployee, to do the work at hand in the most efficient manner in which it is capable of being done. This is the reason the committee has decided that it would be better to consolidate the railroads of the United States into not less than 20 nor more than 35 systems, in order to accomplish, first, the possibility of imposing a given body of rates upon the carriers with the outcome that each of the systems would earn substantially the same net return as compared with the value of the property employed in the service ; and, second, in order to give this great business, this overpowering business, the same motive for efficiency and excellence that we observe, and hope we always will observe, in every other great venture. There can be little question of the practicability of a division of the railway properties into not less than 20 nor more than 35 systems that will accomplish the purposes I have described. The [522] No. 4] THE SENATE COMMITTEE RAILROAD BILL 11 committee has not acted without the utmost consideration on that question and without all the information that it could secure. The committee — and I speak more confidently of my own con- victions — knows that it is practicable to divide the railways of the United States into not less than 20 nor more than 35 systems, so that tested by the business of the three years before the war — and that is the period to which we must all resort in order to ob- tain information upon that subject — the net earnings of each system compared with the value of the property rendering the service, I care not how the value of the property is ascertained — will be so nearly equal that the difference will be negligible. I venture the prophecy that if the provisions of this bill shall ever go into effect the governmental body which is appointed to make the division and to carry out the provisions of the bill will be able to divide the country into 20 systems, and there will not be the difference of one-quarter of 1 per cent in the earnings, the net income, of the several systems as compared with the value of the properties as fixed by the Interstate Commerce Commission. Then, if we pursue the policy of private ownership, we will have a body of railroads upon which the Interstate Commerce Commission can act, doing justice both to the people and to those who have invested their money in the properties. Then the In- terstate Commerce Commission can make rates that will pay to the carriers, as nearly as human foresight can provide, just enough to make a fair return upon the value of the property. I have pointed out at some length the views of the committee — and they are my own views as well — upon this fundamental pro- posal, because it is the heart of the bill. If it is not thought de- sirable to make this advance toward the regulation of these pub- lic utilities, my judgment would be that it is not advisable to pass the bill at all, for if the roads are to be returned under the regula- tions which formerly existed, believing, as I do, that private op- eration under such conditions is impossible and that it will end in utter collapse, I will necessarily find myself advocating the as- sumption upon the part of the Government of the duty of owning and operating our transportation facilities. How is this consolidation to be accomplished? The bill pro- poses to create a Transportation Board, which is to undertake to divide all the railways of the United States, with some immate- rial exceptions, into not less than 20 nor more than 35 systems. [523] 12 RAILROAD LEGISLATION [Vol. VIH The discretion between 20 and 35 is vested in the Board by section 9 of the bill, which reads as follows: Sec. 9. It is hereby declared to be the policy of the United States in the exercise of its authority to regulate commerce among the States and with foreign nations and its other constitutional powers, that the rail- ways of the continental United States shall, as soon as may be practicable, and in the manner hereinafter provided, be divided in ownership and for operation into not less than 20 nor more than 35 separate and distinct systems, each of said systems to be owned and operated by a distinct corporation organized or reorganized under this act. In the aforesaid division of the said railways into such systems competi- tion shall be preserved as fully as possible, and wherever practicable the existing routes and channels of trade and commerce shall be maintained. The several systems shall be so arranged that the cost of transportation as between competitive systems and as related to the value of the prop- erties through which the service is rendered shall be the same so far as practicable, so that these systems can employ uniform rates in the move- ment of competitive traffic and under efficient management earn sub- stantially the same rate of return upon the value of the railway properties involved in the comparison. This might be called the charter of the new system. It is fur- ther developed in section 10 by providing that the Transportation Board shall make this division and then give public notice to all who are interested of a hearing upon it, and at that hearing all who may be interested either from the capital standpoint or the labor standpoint or the shipping standpoint will be heard, and after that hearing is concluded then the Board adopts a plan, whatever plan may seem to it wise, and if that plan of division is approved by the Interstate Commerce Commission it becomes final, save as it may be modified upon subsequent application by anyone who may present a good cause for reconsideration in that respect. For a period of seven years the consolidations are voluntary. If any railway company desires to organize a Federal corporation under the provisions of this bill, a new corporation can be or- ganized. If, on the other hand, a corporation already organized desires to reorganize so as to become a Federal corporation, it may do so under the terms of this bill ; but the consolidation that takes place during the seven years must be either through the medium of a corporation organized under the terms of the bill or through a corporation reorganized under the terms of the bill. We have made practically the same provision for reincorporating State corporations that was made long ago for the reincorporation of national banks, turning a national bank from a State insti- tution into a Federal institution. One or the other of these two things must precede any consolidation which takes place under the bill. [524] No. 4] THE SENATE COMMITTEE RAILROAD BILL 13 I may say a word with regard to the seven years. The only reason for postponing compulsory consolidation for a single moment, in my judgment, is that the work of the Interstate Com- merce Commission in valuing the railroad properties may be completed. It is said that this work will have been finished in the course of two or three years. It may, however, be five years before it is finally and fully done; and inasmuch as these incorporations, whether reorganiz- ing or originally incorporating, must be based upon the actual value of the railroad properties, it was quite essential that some time be given to the Interstate Commerce Commission to com- plete its work. In the case of a voluntary consolidation, it would be the duty of the Interstate Commerce Commission at once to go forward to the ascertainment of the value of the property immediately concerned in the voluntary consolidation, and to complete that particular part of the work at the earliest possible moment. And this leads me, now, to suggest an additional reason for the value which I attach to the consolidation. All of us know that there has been a great deal of controversy, very much suspicion, infinite distrust among the people with re- spect to the value of railroad property as compared with the capi- talization. Constitutionally we are unable to determine the value of railroad property, or even to indicate or declare the elements which a judicial tribunal shall consider in determining that value. Nevertheless, it is of the highest importance that in some way or other the feeling on the part of the people that they are called upon to contribute a revenue which is to be distributed upon un- founded capital shall be removed. It can only be removed in one of two ways. It must either be removed by ascertaining that the present capitalization is not greater than it should be — a con- tingency which does not meet my view of it — or it may be re- moved by reducing the capitalization to the real value of the property upon which the people are called upon to pay a return. This bill provides that the Interstate Commerce Commission shall ascertain the value of this property as the consolidations take place, and that the capitalization of these new corporations which are brought into existence in the manner I have described shall not exceed the value of the railroad property ; and once this prin- ciple is adopted and once these consolidations shall have taken place, the terror which we all have in mind, known as the un- earned increment, can no longer disturb the American people. [525] 14 RAILROAD LEGISLATION [Vol. VIII I want as much as anyone can want that the people shall be called upon to pay only upon an actual value ; and while I know that we can not determine for the past years what value is and what elements it shall contain, for the future we can; and if these consolidations are carried into effect the future is safe, so far as unearned increment is concerned and so far as values are con- cerned. We will have that matter settled for all time. Section 6 of the bill provides that the territory and the rail- roads of the United States shall be divided by the Interstate Com- merce Commission into rate-making districts, as many as the Commission thinks desirable. Having established the districts and having ascertained the value of the property in a given dis- trict, the Commission is directed to make rates or to approve rates that will as nearly as may be return an aggregate net op- erating income for all the railroads of that district equal to Sy 2 per cent on the value of the property in that district. The com- mittee believes that Sy 2 per cent fairly represents the policy of Congress with respect to a return upon railway property. Orig- inally, as I introduced the bill from the subcommittee, instead of a Sy 2 per cent rate, the provision was for a fair return upon the value of the property, but it was believed by the majority of the committee that it would be better for Congress to declare the policy rather than to transfer it or commit it to any regulating body. So for the first time in the history of railway regulation it is suggested that Congress shall declare what it regards as a fair return upon the value of property rendering a public service, and that fair return, according to the provisions of the bill, is Sy 2 per cent upon the value of the property involved. This Sy 2 per cent does not relate to capitalization; it does not relate to capital stock ; it does not relate to outside investments vast in their extent which some of the companies own and hold for profit. It relates only to the property which renders service to the public. The bill also gives to the Interstate Commerce Commission authority to increase that basis by one-half of 1 per cent, if it so desires to do, solely for the purpose of creating a fund for expenditures for what are known as nonproductive improve- ments and which are not under any circumstances to be capital- ized, but which, in substance, will be held by the railway compan- ies in trust for the public. Now, let us see what Sy 2 per cent will do. Five and a half [526] No. 4] THE SENATE COMMITTEE RAILROAD BILL 15 per cent upon the value of the property in a given rate-making district does not mean that each railroad shall have S l / 2 per cent upon the value of its property. It means that one railroad will earn 8 per cent upon the value of its property, another railroad will earn 3 per cent or 5 per cent, some of them 2 per cent, some of them possibly, as high as 10 per cent. That arises from the disparity in the earning capacity of the roads. When you put a given body of rates upon the territory lying between Chicago and New York, we will say, rates which must be used in common by the New York Central, the Pennsylvania, the Baltimore & Ohio, the Erie, the Chesapeake & Ohio, and so on, one of those roads will earn very much more than $y 2 per cent while another will earn very much less than Sy 2 per cent. That is the insoluble problem under present conditions. We can not escape it in a moment ; nothing can remove it except the consolidation of which I have spoken. However, until that consolidation takes places we must deal with it as best we can. That brings me to another feature of the section to which I have been alluding and which I intend to discuss just as briefly as possible. The bill proposes that any railway company which receives an operating income during any year of more than 6 per cent upon the value of its property shall divide equally the excess between 6 and 7 per cent between a company reserve fund and a general railroad contingent fund. The first portion belongs to the company itself, the latter belongs to the Government of the United States. The first is to be used by the company whenever its operating income falls below 6 per cent. It is to be accumu- lated from year to year until it reaches 5 per cent upon the value of the property. After that time the company retains one-third of the excess above 6 per cent and pays to the Transportation Board or to the Government two-thirds of the excess. The ex- cess above 7 per cent goes one- fourth to the company reserve fund and three-fourths to the Government. The Government con- tingent fund has no limit and is to be used by the Transportation Board to advance the general transportation interests of the United States. However, it is not given so free a hand as my remarks might indicate, for it is provided in the bill that the pro- motion of the general transportation interests must be effected either by the purchase of equipment and of transportation facili- ties to be rented or leased to the weaker railroad companies, or it must be used by loaning to the weaker companies sums of [527] 16 RAILROAD LEGISLATION [Vol. VIII money to be expended in the purchase of facilities to render the service which the people require. That is the best that the com- mittee could do in this transition period to equalize the spread in the earnings of the companies. We were constantly impressed with the idea that we must accompish in some way the maintenance of the weaker com- panies. We know that, judged by the ordinary standards of credit, when they go into the markets of the country they will be unable to borrow the money necessary to keep their properties in that condition necessary for economical and efficient use. So we propose to take from the larger railroad companies a portion of their excess earnings above 6 per cent and devote them to in- creasing the facilities in the hands of the companies which are unable to purchase or construct them for themselves. I regard it not only as one of the most vital but most equitable features of the bill, as much and bitterly as it has been attacked. I will say one word with regard to the attacks upon that fea- ture of the bill. Singularly enough, it is assailed from two quar- ters. The railway executives, representing the railroads, attack it bitterly on the ground that it is not only unjust but unconstitu- tional, and some very enthusiastic citizens of the country who have no interest in railways attack it on the ground that it is an approach toward socialism or communism and ought not, there- fore, to be fostered, encouraged, or adopted. A moment's consideration may not remove doubt with regard to its constitutionality, for I can not hope to remove a doubt in a moment that has been instilled by so distinguished an authority as an ex- Justice of the Supreme Court of the United States; but I at least can point out the path along which the committee traveled in reaching the conclusion that the provision was and is constitutional. Ex- Justice Hughes has rendered an opinion in which he says that that part of the bill is unconstitutional because it takes prop- erty from its owner without just compensation. Ex-Senator Elihu Root, occupying an equally commanding position at the bar of the country, is just as confident that it is constitutional. The lawyers have ranged themselves, a great many of them, upon one side or the other of this question; but I am bound to say that so far as they have been organized up to this time, a de- cided preponderance in number, at least, will be found upon the side of the committee, which holds that the provision is constitu- [S28] No. 4] THE SENATE COMMITTEE RAILROAD BILL 17 tional. To me there is no question about it. I do not want to disparage the learning of any man, certainly not his intelligence, but to me the proposition that this provision is unconstitutional means the destruction of all regulation. If it is true that we can not limit the earnings of a public utility, a common carrier, we might as well abandon our efforts to protect the people in any sys- tem of regulation. I have no question at all with regard to either the justice of the provision or its constitutionality. We have pursued this narrow, cramped, and restrictive policy long enough. If Con- gress is not able to lift itself above the murky prejudices of former years, and examine transportation from a national stand- point, and establish those regulations which are necessary for the welfare of all the people, we must either go at once to Gov- ernment ownership and operation, or leave the railway com- panies untrammeled and unrestricted to impose on the people of the country for their service just such charges as they may think best. Section 24 of the bill relates to the issuance of railway securi- ties. For years there has been a constant and general demand that in some way or other the Federal Government shall under- take the supervision of the issuance of railway securities. A bill to that end passed the House at one time and was reported favorably by the Committee on Interstate Commerce of the Sen- ate. However, it did not receive consideration in the Senate, and therefore never became a law. But I think there is no real opposition to a provision which confers upon the Interstate Commerce Commission, or some other Federal agency, the super- vision of the issuance of railway securities, in that way relieving the railway companies of the regulation of 40 of the 48 States of the Union. Section 34 is an enlargement of the car-service act, which it is unnecessary for me to comment upon at any great length. The car-service act passed in 1917 was intended to give to the Govern- ment a larger function with respect to the movement of commod- ities, the movement of trains, the supply of cars, and all matters pretaining to the general disposition of our commerce. In this section too, we have attempted to give the Government the right to prevent construction of new lines. The very difficulties we have heard urged so often have arisen at times because railroads have been constructed where and when they ought not to have [529] 18 RAILROAD LEGISLATION [Vol. VIII been constructed. So we have given to the Interstate Commerce Commission, in connection with the Board, the jurisdiction to prevent the construction of new lines where obviously the con- struction would simply impose another burden upon the public without adding anything to the public welfare. We have also given to the Government wider and broader power with respect to furnishing adequate and safe facilities, so that the Commission or the Board can command railroad com- panies to equip their lines with proper facilities and to procure the necessary cars and engines to transact their business with promptitude, all the while, of course, conditioned upon the power of the companies to comply with the demands or the commands of the Government. It would be idle to require a company that could not secure the money with which to do it to buy additional cars or additional engines, or anything of that kind. We have rewritten in section 37 what is known as the long- and-short-haul clause. That will give rise undoubtedly to some discussion. We have not adopted the positive, rigid, long-haul provision. We still permit, under section 37 of the bill, some discretion on the part of the Interstate Commerce Commission. We have said to the Interstate Commerce Commission that it could grant the privilege to any company to charge more for a shorter than for a longer distance in the same direction, but that in doing so the rate for the longer distance must be found by the Commission to be a compensatory rate. A compensatory rate, I assume, means a rate which will en- able the railway company charging it to defray the cost of maintenance and operation and that will also bear its just share of the return upon capital. Another modification that we have made in section 4 of the in- terstate commerce act is that where there are two competitive land lines, one longer than the other, that under no circumstances must the longer line charge more to an intermediate point not far- ther from the origin than the haul on the short line than it charges for the competitive point. It must not charge more for the same distance than the rate charged on the short line. That, I think, will correct a good many injustices that have occurred in the application of the law as it exists. We are all familiar with what is known as the anti-pooling section of the Interstate Commerce Act. That section now reads : Sec. 5. (as amended Aug. 24, 1912). That it shall be unlawful for any [530] No. 4] THE SENATE COMMITTEE RAILROAD BILL 19 common carrier subject to the provisions of this act to enter into any contract, agreement, or combination with any other common carrier or carriers for the pooling of freights of different and competing railroads, or to divide between them the aggregate or net proceeds of the earnings of such railroads, or any portion thereof ; and in any case of an agree- ment for the pooling of freights as aforesaid, each day of its con- tinuance shall be deemed a separate offense. That is the law at the present time. The change that is pro- posed in this section of the act to regulate commerce is to insert after the word " that " the words : Except upon specific approval by order of the commission as in this section provided. Then there is added the following: Provided, That whenever the commission shall be of the opinion, after hearing, upon application of any carrier or carriers, by railway or water, subject to this act, that the division of traffic or earnings between any such carrier or carriers will be in the interest of better service to the public, economy in operation, or otherwise of advantage to the con- venience of commerce and the people, and will tend to equalize earnings between the said carriers and will not unduly restrain competition, the commission shall have authority, by order, to approve and authorize such division of traffic or earnings between carriers under such rules and regu- lations, and for such consideration as between said carriers and upon such terms and conditions, and for such length of time, as shall be found by the commission to be just and reasonable in terms. The commission may from time to time, for good cause shown, make such supplemental orders in the premises as it may deem necessary or appropriate, and may by any such supplemental order modify or set aside the provisions of any previous order as to the extent of the division, or as to the rules, regulations, terms, conditions, or consideration currently moving in respect of any such divisions so theretofore approved and au- thorized. The same procedure as to filing of applications and serving of notice of hearing upon proper State authorities with opportunity to be heard shall be had as is provided in section 24 of this act relating to "securities." It is apparent that this provision is not only an important one but is a radical departure from the policy which we have hereto- fore pursued. It is intended in this way to give to the Interstate Commerce Commission the authority, practically, to unify the railroads of the country prior to the consolidation which is pro- vided for in the bill. All of us have observed that the one great advantage of Government ownership is the unification which may take place and the ability on the part of common carriers to choose that route for the traffic which is most economical and which will best serve the public interest. It was thought by the committee that, at least in the transition period — and this has no limitation in point of time — but especially for the transition period, the commission should have the power to control the rail- way companies in the respect I have just mentioned. For years there has been a conflict between the jurisdiction [531] 20 RAILROAD LEGISLATION ' [Vol. VIII of the Federal Government and the jurisdiction of the State governments with regard to the adjustment of rates. All know that the Constitution of the United States confers upon Congress the authority to regulate commerce among the States and with foreign nations. Obviously, this authority is limited to the regu- lation or control of interstate commerce and matters that are in- separably connected with or incident to interstate commerce. The Supreme Court of the United States has had occasion in at least three separate cases to discuss the subject. Many are familiar with what is known as the Shreveport de- cision. In that series of cases it was alleged that the State of Texas had established rates for intrastate traffic — that is, for the movement of traffic from one point in the State to another point in the State — which discriminated against the rates which the Interstate Commerce Commission had established for the move- ment of traffic from points beyond the State into the State, and the particular community which complained and which gave the name to the case I have mentioned was Shreveport. It complained that it could not do business with the State of Texas in competi- tion with rivals located in the State, for the reason that the busi- ness men within the State were shipping freight at a much lower rate, comparatively, than the Interstate Commerce Commission had found to be reasonable from Shreveport into the State. I need not follow that case in all its phases; but it finally reached the Supreme Court of the United States and the Supreme Court held that the authority of the Federal Government as it could be vested in the Interstate Commerce Commission extended to the removal of a discrimination between the interstate rates and the intrastate rates, but no authority had been given by Con- gress to the Commission to declare what the intrastate rate should be in comparison with the interstate rate. The committee has attempted simply to express the decisions of the Supreme Court of the United States. We have not at- tempted to carry the authority of Congress beyond the exact point ruled by the Supreme Court in the cases to which I have referred ; and the only thing we have done in the matter has been to confer upon the Interstate Commerce Commission the authority to remove the discrimination, when established in a proper proceeding before that body — an authority which it does not now have. As it is now, al lthat can be done is for the Com- mission to go forward from time to time and condemn and enjoin [532] No. 4] THE SENATE COMMITTEE RAILROAD BILL 21 the State rates until they finally reach the level which, in the judgment of the commission, is no discrimination. Section 44 of the bill deals with the problem of the length of time that the commission may suspend rates which are filed by the carrier. As the law now is, each carrier has a right, and is re- quired, if it desires to change the rates, to file its schedule of rates with the Interstate Commerce Commission. The Commission can then, upon summary investigation or inquiry, suspend those rates pending an investigation. Under the law, as it is, it has the authority to suspend them for 120 days, and then it was given the authority if it did not finish the inquiry within that time, to extend the time for another period of six months. The latter period has been shortened in this bill to a period of 30 days. The reason for that is this: In the first place, the Interstate Commerce Commission has been overworked. There is no body of men in the employ of the Government, or exercising govern- mental functions, upon which so great a weight of labor has fallen as the Interstate Commerce Commission, and it is utterly impossible for it to fulfill its full duties as the law now is. But we have undertaken in this bill to create a new governmental function known as the Transportation Board, and we have given to that board many of the important duties which are now per- formed by the Interstate Commerce Commission, and endeav- ored in that way to relieve the latter body of some of its labor; and we hope that we have accomplished that purpose to such an extent as that the Commission will be able promptly to de- cide all the matters which are brought before it. Broadly speaking, we have left with the Interstate Commerce Commission what might be described as semi or quasi judicial powers, rate making in all its phases, the valuation of railroad property in all its aspects, accounting absolutely necessary as an incident to rate making and to valuation. These are in the main the great branches of labor which are left with the Interstate Commerce Commission. The purely administrative duties, those duties which have to do with the physical operation of the rail- way properties, are transferred to the Transportation Board. I desire to mention briefly section 45. It is entirely new, and it is an effort to coordinate land and ocean traffic. We have not given to the Interstate Commerce Commission any authority to regulate or control or to fix rates for what is known as port-to- port traffic, whether inland or exterior, and we do not propose to [533] 22 RAILROAD LEGISLATION [Vol. VIII do so. Everybody understands that we can not put upon ocean traffic or coastwise or coast-to-coast traffic or even upon river traffic the same regulations that are very advisable with regard to land traffic. We are now hoping to enlarge our foreign business. We are endeavoring to make it as easy as possible for the business men of America to ship their goods anywhere throughout the world. The Shipping Board is trying, I think faithfully, to establish a series of ocean routes with boats having regular sailings and regular routes as well. The great corporations of the country, the great producers, such as the United States Steel Corporation or other corpora- tions of that character, are able to maintain their agents every- where, which serve as a medium of information to such shippers, and they know when the boats sail and where they go and what the rates are, and are in every way able to reach a foreign country or foreign countries in the most convenient way. That is not true of the small shippers of the land. They do not know when these boats sail and where they go. They do not know what the ordinary rates are upon these ocean-going ships. Section 45 provides that every ocean-going steamship company and every coastwise or coast-to-coast company with a regular route and with regular sailings shall file with the Transportation Board a schedule containing the dates of the sailings of its ships and the routes over which its ships travel, together with the ordi- nary rates which are charged for transportation. These sched- ules are required to be filed with the transportation board, and they are then given to the land carriers, the railroads, and the railway companies are required to maintain that compilation of information in every office designated by the Transportation Board. It is the thought of the committee that the Board would designate the important or the^ chief centers of production and of shipment. Then any man who has a shipment destined for some foreign port, for Liverpool, Hongkong, Melbourne, or for San Francisco or New Orleans, even though he may not be able to maintain a commission man at the port or any other of the conveniences which the great shippers enjoy, may take to any railroad office in the country his shipment and deliver it to the land carrier, and the land carrier must issue to him a through bill of lading. It then becomes the duty of the land carrier to deliver the shipment [534] No. 4] THE SENATE COMMITTEE RAILROAD BILL 23 to the boat in whose care it is consigned, and the land carrier must absorb in the charge for the land carriage the cost of trans- fer from the railway train to the boat. In that way we will have established all over the United States a system which I think will tend to increase largely our export trade and coast-to-coast trade. The part of the bill which I have reserved for final considera- tion is that which proposes that the Government shall adjudicate the disputes which may arise between employees of railway com- panies and the corporations, and which forbids a conspiracy or combination for the purpose of preventing the movement of com- modities in interstate commerce. I venture to say that no provision in any bill submitted to Con- gress in recent years has been more generally discussed through- out the country than the one to which I have just referred. There are some very extravagant praises for it ; there are some very unjust denunciations of it. I look upon it as a vital part not only of this bill but vital part of our policy in the future so far as the basic industries of America are concerned. The committee has endeavored to find a solution of one of the most complicated and difficult problems ever presented to a legislative body. I am not prepared to affirm that the committee has discovered the only solution, and I am sure its members will be very glad to receive any suggestions that may make the arrangement which we have provided for more just or more efficient; but I speak for sub- stantially every member of the committee, a very large majority of the committee, when I say that it is our profound conviction that the civilization of America — I was about to say the civiliza- tion of the world — can not continue, can not endure unless or- ganized society can find some plan to preserve industrial peace and order. To me the thought that to accomplish justice for those who may be interested in any dispute it is necessary to either freeze or starve the American people is unthinkable and intoler- able. I have always, I believe, entertained for men who worked not sympathy — for men who work need no sympathy — but I believe that I have always held for them the keenest interest in the struggles in which they have been engaged and the most sanguine hope of their ultimate success in obtaining the justice to which I believe they are entitled. But that does not settle this controversy. The committee recognized that transportation is the basic in- dustry of the Nation. It may not be more important from one [535] 24 RAILROAD LEGISLATION [Vol. VIII aspect than many others, but none of the others can be conducted or carried on without transportation. Leave New York without transportation for two weeks and thousands of people will either starve or freeze, according to the season ; indeed, they may do both. What I say of New York is true of Philadelphia, of Chi- cago, and of every great center of population. We cannot contemplate that situation with any complacency at all. If we. can not find some way in which to avoid a contin- gency of that kind, then our boasted and vaunted institutions are mere shadows, and we should escape from them as speedily as possible. There must be some way in which a democracy can ad- minister justice to all its citizens, which will render them so far content that they will be willing to carry on their vocations with reasonable regularity and continuity. I was the author of a somewhat famous statement or declara- tion in what is known as the Clayton anti-trust law that the labor of a human being is neither a commodity nor an article of com- merce. I believed in the truth of that statement profoundly then, and I believe in it now with even deeper conviction. The labor of a human being is not a commodity ; it ought not to be dealt with as a commodity ; it ought not to be judged as a commodity ; for it is a part of human energy that may solicit and ought to receive the same high consideration from the world, from every legisla- tive body, as all other energies of the mind or the body. But I am just as much opposed to Mr. Foster dealing with human labor as a commodity as I am opposed to Mr. Gary dealing with it as a commodity. It is just as fatal to the welfare of the United States to allow the American Federation of Labor to deal with labor as a com- modity or as an article of commerce as it is to allow the National Association of Manufacturers to deal with it as an article of commerce or as a commodity. This declaration, for which I make no apology and of which I am as proud as I am of any other act of my life, means that labor is to be lifted above the rules which apply to mere inanimate things; it means that the laborer is a man and entitled to all the rights of a man, and that he should no more sell himself to a labor union than he should sell himself to a manufacturer. It applies to both and all with equal force and strength. I do not want to be understood that I am opposed to labor unions. On the contrary, I think they are an essential part of [536] No. 4] THE SENATE COMMITTEE RAILROAD BILL 25 our industrial organization. I do not believe that we could long survive in peace and in order without labor unions. I think the gathering together of men in every occupation is not only defensible but I think it is highly beneficial and helpful in the maintenance of law and order. The laboring men in any par- ticular enterprise or in any particular calling have just as much right to come together and work to promote their own interests and lift themselves up, if they can, in the great scale of human society as have the men of capital or the men of the professions, the men who labor, as it is said, with their minds instead of with their hands. I do not want it to be understood that there is in this bill or that there is in my mind any antipathy, any hostility, anything but admiration for labor unions. I believe also in collective bargaining. There is no escape from collective bargaining. It is the decree of this age from which we ought not to attempt to escape. This bill is founded upon the necessity for labor unions, so far as the provisions to which I now have reference are concerned. It could not operate without the presence of labor unions. This bill recognizes collective bar- gaining; it can not be administered efficiently without collective bargaining. It is said — it has been said to our committee — that this pro- vision of the bill contravenes the natural rights of man, and is therefore unconstitutional. It is a very common thing to hear it said that this manacles the workingman, puts shackles upon his limbs, and reduces him to involuntary servitude. Nothing could be more wicked than an assertion of that character. This bill does not interfere with the rights of any employee of a rail- road company or any official of any railroad company, because this bill applies equally to every person who serves a common carrier, if the common carrier is subject to the act to regulate commerce. The bill does not prevent, interfere with, or embar- rass any man who desires to leave his employment. He can quit, or a hundred of them or a thousand of them can quit whenever they desire so to do. But I am not willing to allow the statement to go unchallenged that it is a fundamental and a constitutional right that every man can enjoy to quit his em- ployment whenever he pleases. That is not true. This bill does not interfere with his right at all; but a soldier can not quit whenever he desires. He can not cease his em- ployment. An engineer upon a railway train can not quit when- [S37] 26 RAILROAD LEGISLATION [Vol. VIII ever he may desire to quit. He can not leave his engine and his train so that human life would be imperiled, or so that prop- erty, even, might be injured. A physician or surgeon can not quit his employment whenever he may desire to quit, either morally or legally. He can not leave a dangerous operation half per- tormed because it is his pleasure no longer to continue the work of his profession. I am mentioning these things simply to show that it is not true, broadly and fundamentally, that every man in the world can quit what he is doing at any moment he chooses to quit. The human right — and I am now speaking of the in- dividual right rather than the group right — is subject to higher considerations than his pleasure. This bill punishes only a combination or agreement between railway employees, and when I use the word " employees " I mean all the employees of the corporation, whatever their rank may be. Even if I were to grant that the individual right to cease employment or quit is perfect and complete, I could not grant that the right to enter into a combination or conspiracy to accomplish a purpose inimical to the welfare of society is a natural or constitutional right. This bill does not control the individual, but it controls the combination, the agreement, and it declares that if two or more persons, being employees of a carrier subject to the act to regulate commerce, shall enter into an agreement or a combination to suspend or prevent the move- ment in interstate commerce of commodities on which we are all dependent for life and for health for the purpose of enforc- ing some demand or claim against their employer, that such persons shall be guilty of a misdemeanor and shall be punished accordingly. What right have I, who may believe I have a just claim against you, to enter into a conspiracy or combination or agreement with some other man or with some other men to deprive you of the necessaries of life until you yield to the demand which I have made upon you? It is monstrous. It cannot be defended in any court of morals. A course of that kind cannot be defended in any court of civilization and progress. The bill provides what it believes to be impartial tribunals for the adjudication of all disputes between the carriers and their employees. These tribunals, the details of which I shall not discuss, have jurisdiction of all the disputes which may come up from time to time between the railway corporations and their [538] No. 4] THE SENATE COMMITTEE RAILROAD BILL 27 employees. Remembering that we have provided a tribunal which we believe to be a just, fair, and impartial tribunal for the adjudication of all controversies of the character I have de- scribed, I hope that this thought will be in every mind, that we are substituting the justice of the Government of the United States for the justice which wage workers have hoped to secure through the strike. We are simply exchanging one instrumen- tality for another. We are offering an opportunity to secure justice which does not involve this awful sacrifice, which does not involve the wreck and ruin of industry, of homes, and of character. We are offering to do in controversies out of which railway strikes may arise just what our courts of justice have done for centuries with respect to controversies between man and man. Hitherto we have not regarded it as necessary that our Government should undertake the adjudication which is here provided for, and I have been very slow and very reluctant to go forward to that duty. But I perceive, and I have long per- ceived, that it is necessary, if we are to have regularity and continuity of employment. Therefore I am willing, on the part of my Government, to undertake to do full and complete justice, so far as wages and working conditions are concerned, to those who enter into employment of this character. I believe, and believe from the bottom of my heart, that the laboring men of America will be more apt to secure justice or approach perfect justice through the intervention of these tribunals for the settle- ment of their disputes than they have ever been able to secure through the medium of the strike. [539] THE HOUSE COMMITTEE RAILROAD BILL HON. SCHUYLER MERRITT, M.C., Member House Committee on Interstate and Foreign Commerce AFTER sitting for three months with the Interstate Com- merce Committee in' hearings which, when printed, occu- pied between three and four thousand pages, and after spending several weeks shaping the Esch Bill in Committee and passing it through the House, I had the pleasure of a call from the President of the Academy of Political Science, who did me the honor to ask me to summarize and characterize the bill in a twenty-minute address at the Academy's annual meeting. I immediately thought of the old and well-known story of the colored gentleman who was asked for a loan of ten dollars. He said, "Boss, I thank you for the compliment, but I haven't got the money." I think before I even attempt to summarize the bill which has been passed by the House it is only justice for me to pay tribute to the sub-committee of the House, headed by Mr. Esch of Wis- consin, who is also the Chairman of the full Committee, for their labors in this field. Mr. Esch has been a member of the Inter- state Commerce Committee for many years; he has taken part in all the great measures which have been passed in recent years to regulate the railways of this country. He is a man of great ability, with a judicial and honest mind. And if, as I believe, the labors of himself and his Committee have resulted in some contribution to a proper solution of this question, Mr. Esch is entitled to and should receive the appreciation of bodies like this and of the whole country. s Those of you who are old enough — not many, I think — will remember that when a conservative deacon in the church of Henry Ward Beecher reproached him for something startling or daring which he had said during a sermon, Beecher replied, "If you only knew some of the things I didn't say you would praise me instead of blame me." And so I think that whatever you may criticize in the bill which we actually have passed, you will at least praise us for some things that we have not passed. You will agree that we did well in not putting anything into the [540] No. 4] THE HOUSE COMMITTEE RAILROAD BILL 29 bill which even looked toward public ownership. The Com- mittee, from testimony and from independent study, became convinced that in all the states which had public ownership, such for example as Australia and France, where the conditions were not different from ours, the service was poorer, was more expensive and was tainted by politics. Nor was the Committee much influenced by the very long and able presentation of the plan called the Plumb Plan. This plan, as you know, contem- plated the purchase of all the railways of the United States by the Government and turning them over to be operated by the mem- bers practically of the four great railway brotherhoods. It was called in some of the literature that was put out an experiment or possibly a demonstration in democracy in the ownership and control of the railways. I agree that the Plumb Plan would be the embodiment of democracy in ownership be- cause all the bills for buying the railroads amounting to some eighteen or twenty billions of dollars would be footed by the public. But, when it comes to the control, which is to be vested, under that plan, in fifteen directors, two-thirds of whom are to be elected in one way or another by the approximately two million employees of the railroads, that seems to me to be a case of in- troducing into this country the Soviet on a large scale, because you have two million people, something less than two per cent of the population, electing the directors to run the property which is bought by all the people. That property controls the entire industrial life of this country. In addition to that, you will perceive that these two million men would be both employers and employed, and, if anything could tend to expense and to demoralization more than that, I do not know what it is. If I should characterize the Plumb Plan in a large way, I should say that it was a plan for two per cent of the population to elect a board of fifteen men to control the industrial life of this country, and secondly, a plan to drive brains out of running the railroads. I say that last, because you can see what a tremendous amount of wire pulling and politics would occur at once among the two million men on these roads to elect people to run them. As it happens, the estimated wealth of the State of New York, the entire State of New York, is just about the same amount as is invested in railways to-day, and the number of voters is just about the same in the State of New York as would be in the [S4l] 30 RAILROAD LEGISLATION [Vol. VIII railroads under the Plumb Plan. Some of you know how much politics goes on in the effort to run the State of New York. But I do not think it would be a circumstance to the politics that would go on in the effort to run the railways, because the prize would be so much greater and the power would be so much greater. I think we can all agree that a book which President Hadley wrote thirty years ago contained a prediction which cir- cumstances have shown to be very true in connection with state- owned railways and to be still more true with the relation to railways run under this Plumb Plan. President Hadley in his book said that the state is more likely to tax industry than to foster it, that state management is more costly than private man- agement, that the political danger would be very great, that politics would tend to corrupt the railway management and the railway management would tend to corrupt politics. I should not have taken even this amount of time to speak of the Plumb plan were it not for the fatal facility which so many people have for being deluded by pleasant sounding words, and the fatal habit which they have also of failing to examine the real effects of the plan covered by these words. So, for those reasons, as well as others, it seemed to us that our duty and the work before us was to retain, so far as we could, that far-sightedness, that efficiency, and that business ability which had made the railway system of the United States the greatest system with the lowest rates and the best system to serve the people that the world has ever seen. Now, in its structure, the bill which has passed the House of* Representatives takes up three phases of the matter. First, the actual return of the roads; second, the necessary period for reestablishment of personnel and ordinary operation of the roads under their owners, and, third, the question of their continued operation. v In the beginning, the Committee felt bound to take into ac- count the reasons why this problem exists. They could not take up the problem as if the roads were in the hands of the govern- ment by negotiation or through the will of their owners. They had to consider the problem as it exists, which is, that the roads were taken over without the consent of their owners, by operation of law. During the period of operation by the government many hun- dreds of millions of debts were incurred by the government on [542] No. 4] THE HOUSE COMMITTEE RAILROAD BILL 31 behalf of the roads, without the consent of the owners, without their advice and at war prices. Now, this, it seemed to the Com- mittee, and I think it would seem to any fair man, makes a very strong equitable claim against the government on behalf of the roads, and practically forces the government, during this period of reconstruction, at least, and to the extent that the debts were incurred during war service, to act as banker for the roads. That involves, of course, funding in some form the debts which the roads will owe to the government on settlement and the bill provides (without troubling you with too much detail and too many figures) that the debts on account of capital expenditures shall be repaid in fifteen years, payments to begin in five years. I may say, in passing, that this particular clause was the object of a great deal of controversy in the House and the bill as finally amended into its present form is not in this respect, as many think, and I am one of them, quite so generous to the roads as it should be. And, when I say generous to the roads, I mean in the interest of the proper solution of the whole question. It may be proper for me at this point to make a comparison with the Senate committee bill whose refunding provision is more generous to the roads than the provision which the House passed. Therefore in the bill which finally passes the Senate and comes to conference, there may be a favorable modification. Of course that is in the future and I cannot tell. The other debts of the roads are to be paid to the government in demand notes secured by such collateral as may be available. Then there is a provision that if, owing to their needs or the conditions of the money market during two years after the roads are returned, they find themselves short of funds, there is created a revolving fund of two hundred and fifty million dollars, from which the Presi- dent in his discretion and under proper safeguards may make loans to the roads. And finally, to give the roads time to turn about, and to recover their organizations and go on their normal way, the guarantee of the standard return is continued for six months after the roads are taken over. That takes care of the transition period, it is hoped. Then comes the question of continued operation; and while I do not pretend to know the Senate Bill as intimately as I do the House Bill, at this point the two bills separate widely. It was strongly urged before the Senate and before the House that a Transpor- tation Board be created which should be a body apart from the [543] 32 RAILROAD LEGISLATION [Vol. VIII Interstate Commerce Commission, and which should take cer- tain of the executive duties of the Commission, but apart from that and more important than that, this Board was to take a broad view of the transportation needs and the transportation facilities and service of the United States without regard to par- ticular roads, and to consider what was to the interest of the United States by way of proper transportation facilities. The Board also was to consider what operating revenues were neces- sary adequately to support such service. It was to make certain recommendations to Congress and to the Interstate Commerce Commission and the Commission was to make rates based on facts and recommendations which were to be put before them by this Transportation Board. That is substantially in the Senate Bill, but the House of Representatives, and its Committee, has been and is averse to adding to the great number of Boards and Committees now in Washington transacting the business of the United States. A board created by Congress differs from almost everything else created by man. You all know that most human creations con- tain within themselves the forces of decay and the great diffi- culty is to keep them alive, but when you create a board in Wash- ington it seems to contain the seed of eternal life and growth, and the difficult thing is to kill it. So we thought that we would rather stick to the evils that we know about than to create others that we knew not of. Our effort was to increase the powers and perfect the means of operation of the Interstate Commerce Com- mission. We tried to profit by the knowledge and experience which have come during the war from unified control, so we have given to the Commission enlarged powers by way of unifying terminal facilities and the use of rolling stock, etc., so that the greatest benefit can be had from facilities which now exist. We have gone quite far; if you had been in the House and heard the oratory of the representatives of some states you would have thought we had gone too far, in extending the powers of the Interstate Commerce Commission over all rates, both state and interstate. Those of you who are lawyers know the Shreveport case. We have put that case into statute law and extended it, I think the lawyers believe, somewhat beyond the Supreme Court decision. If I can put my hand upon it I will read a portion of the act. I do not want to take too much of your time, but the matter is important. Great difficulty, confusion and loss has been [544] No. 4J THE HOUSE COMMITTEE RAILROAD BILL 33 experienced by railroads because state commissions made rates for intrastate business far below interstate rates. The low state rates caused loss to the roads and threw an undue burden on interstate business. It is now provided that if any road thinks it is discriminated against by a state commission, it can bring a complaint before a joint session of the Interstate Commission and the State Commission involved and then the act goes on as follows : "The Commission shall have authority, after full hearing, to make such findings and orders as may in its judgment tend to remove any undue advantage, preference, or prejudice as between persons or localities in intrastate commerce on the one hand and interstate or foreign commerce on the other hand, or any undue burden upon interstate or foreign commerce, which is hereby forbidden and declared to be unlawful, and such findings or orders shall be observed while in effect by the carriers parties to such proceeding affected thereby, the law of any State or the decision or order of any State authority to the contrary notwith- standing." That paragraph will commend itself to the lawyers present, I think, as a very beneficial part of the act and one which is very far reaching. Another provision of our act which I think good, is this, that after these rates are established by law as fair and reasonable, every road can make all the money and all the profit it can out of these legal rates, and what is better, keep it after it has made it. It was urged by a large and influential body of gentlemen, and very ably argued that rates should be estab- lished to produce a definite percentage of return on the value of the property used in transportation. Our Committee felt, and the House acted upon its recommendation that if that were done, it would go far toward removing incentive and toward removing initiative, efficiency and the necessity of economy. Then we thought further that if after a road by good management had made a certain percentage of profit, it would certainly not be any incentive to further effort to take away from it the extra profit it might earn by economy and good judgment and foresight. However much the act which we framed may be criticized in some of its details, it has these broad features, that it gives the . Interstate Commerce Commission power to control the roads, it gives the Commission power and modifies to that extent the anti- trust laws, to permit combinations and pooling so that the entire [S45] 34 RAILROAD LEGISLATION [Vol. VIII system of railroads in this country can be treated as a whole and used as a whole for the benefit of the commerce of the whole country. In addition to that, it does not destroy competition of service, it does not take from a carrier the earnings which it can get from good service, economy and efficiency and from wise foresight in making extensions or combinations. I have left to the last a subject which is perhaps the most difficult of all, and that is the question of labor on the railroads. The provision which is in the bill that passed was put in as an amendment. The provision which the Committee reported to the House was not one which, in the current phrase, had "teeth." It was really a mild form of compulsory arbitration. But that was defeated, and the present clause put into the bill. That was done in the haste of debate, under what is called in the House, the five- minute rule, so that extended debate and examination were hardly possible. I cannot help feeling that if the provision which is in the bill could have been debated and could have been understood, it would hardly have been passed. This bill on its face would look like a bill for conciliation and arbitration, but if it is ex- amined critically, it will be found that if disputes which arise are not settled by certain boards created by the bill. — if it comes to a point where the men cannot agree with the carriers, — that the only way to get that dispute before the final board of appeals created by the bill is by the consent of the officers of the brother- hoods. In other words, it is compulsory arbitration if the brotherhoods want it, and is nothing if they do not want it. There is no possible way for the roads to get any of the disputes before these boards without the consent of the brotherhoods. That is one thing that seems to me to be one-sided. There is another section of the bill which provides that the wage rates and other arrangements which have been made under the stress of war shall remain at their present level until the employees will agree that they may be lowered. That, you see, is introducing into this Bill the worst feature of the Adamson Act, only raised to the nth power. I cannot believe that even the men themselves when they come to understand this will feel that that is a fair arrangement. It seems to me before this bill becomes a law that those parts of it at least must be examined carefully and modified to the extent of making them equally fair to both sides. I think perhaps that what I have said indicates what [546] No. 4] THE HOUSE COMMITTEE RAILROAD BILL 35 you all knew before I said it — that this railway question is one of the most difficult and intricate questions which has ever come up for settlement in this country. I doubt if anyone who has not sat for months in a committee room listening to representatives of carriers and shippers and representatives of the employees, all the way from Maine to Texas, and from New York to Alaska, can appreciate how complex and how far reaching these questions are. I doubt if any other question can more truly be said to touch every man and woman in this country. What we were impressed with, and most agreeably impressed with during all the hearings was the broad spirit which was shown by all representa- tives of all interests before the Committee. They all appreciated that the problem was not local, was not confined to them or to their interest, but it had to do with the erecting in this country of a great transportation machine, and you know, and they know, that in order to make that machine an efficient machine, it must be supported. Without sufficient rates to make reparation for wear and tear and to create a credit basis for extensions and new roads to meet the growth of this country, the machine will be overloaded and break down. Therefore the influence of this great Academy and of all thinking people must be exerted to the end that the country will view the question in a broad way. And you must see to it that men in Congress and elsewhere are im- pressed with the importance, not of criticising what has been done in the past, not of trying to make this generation suffer for the sins of the past generation, but of considering facts as they are and doing all we can to help this great transportation system, be- cause if that is prosperous, the whole country will and must be prosperous. I can truly say to you that the Interstate Commerce Committee of the House and I believe the House itself, approached this ques- tion in that spirit and the result of its efforts, I think, is a con- tribution to the solution of the question. [S47] THE LEGISLATIVE PROGRAM OF THE INTERSTATE COMMERCE COMMISSION BALTHASAR H. MEYER Interstate Commerce Commissioner BEFORE outlining .what has been called the legislative program of the Interstate Commerce Commission I wish to offer two preliminary observations. First, to speak of a legislative program of the Interstate Com- merce Commission is to use figurative language. We are not a legislative body. We do not legislate. We therefore have no legislative program in the accepted sense of the term. We are an arm of Congress. We are responsible directly and solely to it. It is not our function to prescribe public policy but rather to conform our actions to the public policy prescribed by Con- gress. To the extent that we exercise administrative discretion within the limits of the act to regulate commerce, that discretion is exercised in the direction of what we construe to be the inten- tion of Congress. However, we are required from time to time to make recommendations to Congress. Section 21 of the act to regulate commerce reads, in part, as follows: * * The Commission shall, on or before the first day of December in each year, make a report, which shall be transmitted to Congress, * * * This report shall contain such information and data collected by the Com- mission as may be considered of value in the determination of questions connected with the regulation of commerce, together with such recom- mendations as to additional legislation relating thereto as the Commission may deem necessary. * * * In addition to recommendations made in our annual reports we have occasionally sent special reports to Congress making recommendations on particular subjects. The most noteworthy of these were the reports submitted in December, 1917 and 1918, respectively. In common doubtless with others, I have been asked many times to suggest a "permanent solution of the railroad problem." I have invariably expressed my inability to do so. I do not believe any man can offer a permanent solution of the railroad problem. There is no such thing as a permanent solution. The problem is permanent, not the solution. This is the second pre- liminary observation that I wish to offer. [548] No. 4] THE LEGISLATIVE PROGRAM 37 The railway itself as we now know it may not prove to be as permanent an institution as we are accustomed to think it to be. Even though time should demonstrate it to be such, it does not follow that legislation governing the use of the railroad and prescribing relations between owners and users and workers can be permanent. Perhaps no lesson in history has been more forcefully and repeatedly brought home to every thinking man than the changing character of our .institutions. One of the highest functions of the legislator and the administrator is to adapt these institutions to the conditions of time, place and cir- cumstance. Having accomplished this adaptation, all has been done that can be done. This applies to railways and the railway program as much as it applies to taxation, education, suffrage, police regulations and all other matters governing or affecting the conduct and well-being of citizens. A legislative program for railways which is the best that competent men can elaborate for to-day is not necessarily the best to be applied five or ten years from now when conditions may be different. Scarcely a session of Congress or of a state legislature passes but what some statute relating to railways is enacted because new conditions require new laws. Congress has found it necessary to conduct extensive hearings and undertake fundamental changes in laws relating to railways about every 10 years or oftener ever since the conduct of railways has become a national problem. Nat- urally legislators look to the future and attempt to adjust legislation to future requirements as fully as possible; but gen- erally it is impossible to foresee requirements and contingencies five or ten years hence. I speak at some length of this for the reason that it can help no one to labor under the delusion that any man or body of men can work out a real, permanent solution. The statutory structure must constantly be readjusted to the social and economic structure. Laws generally follow, not pre- cede, economic and social changes. They should follow changes as closely as possible. Some times they follow with painful slowness so that by the time they are finally written upon the books the changes which they were designed to meet have been superseded by other changes which they cannot meet and which themselves require still further changes. From this point of view the best "permanent" solution is that which is most adaptable to changing conditions. I am here referring to legislation relating to the general conduct of the railways. When we contemplate [549] 38 RAILROAD LEGISLATION [Vol. VIII questions of rates and service we see that which is ever changing and ever present. No matter what legislative and administrative changes are made, questions of rates and service remain. In general and in principle they are always the same. Whether Congress adopts the Cummins plan, the Esch plan, the Lenroot plan, the Plumb plan, the Railway Executives' plan, the Warfield plan, the Chamber of Commerce plan, or any other plan or com- bination of plans, problems of rates and service will demand consideration on their merits and in their varied aspects of changing industrial and social conditions and interests. Coming now concretely to the legislative program of the Inter- state Commerce Commission I wish to cite briefly from our annual report to Congress in December, 1918: While we do not deem the present conditions and moment opportune in which to recommend concrete proposals for legislation, we may indi- cate certain lines of inquiry which must be pursued in order to reach sound conclusions. Whatever line of policy is determined upon, the fundamental aim or purpose should be to secure transportation systems that will be adequate for the nation's needs even in time of national stress or peril and that will furnish to the public safe, adequate, and efficient transportation at the lowest cost consistent with that service. To this end there should be provision for (1) the prompt merger without friction of all the car- riers' lines, facilities, and organizations into a continental and unified system in time of stress or emergency; (2) merger within proper limits of the carriers' lines and facilities in such part and to such extent as may be necessary in the general public interest to meet the reasonable demands of our domestic and foreign commerce; (3) limitation of railway construction to the necessities and convenience of the govern- ment and of the public, and assuring construction to the point of these limitations ; and (4) development and encouragement of inland water- ways and coordination of rail and water transportation systems. This statement was followed by an enumeration of various plans which we thought might be brought to the attention of Congress. Next we described considerations which required attention if the policy of private control and operation or public ownership and operation, respectively, were to be adopted. Not long after our annual report had been submitted to Con- gress we were asked by the Committee on Interstate Commerce of the United States Senate to submit "available data and other information bearing on the railroad situation in the country." Responsive to this request we submitted a statement outlining our views in more detail than had been done in the annual report. These views were predicated upon the continuance of private ownership and operation under regulation, and were approved by every member of the Commission as it was then constituted ex- cept one. The statement was framed upon the outline in our [SSO] No. 4] THE LEGISLATIVE PROGRAM 39 annual report relating to private ownership, for by this time we had decided to favor that alternative. Its contents are indicated as follows : If the policy of private ownership and operation under regulation is continued, the following subjects will require legislative consideration: (1) Revision of limitations upon united or cooperative activities among common carriers by rail or by water; (2) emancipation of railway opera- tion from financial dictation; (3) regulation of issues of securities; (4) establishment of a relationship between Federal and state authority which will eliminate the twilight zone of jurisdiction and under which a harmonious rate structure and adequate service can be secured, state and interstate; (5) restrictions governing the treatment of competitive as compared with noncompetitive traffic; (6) the most efficient utiliza- tion of equipment and provision for distributing the burden of furnish- ing equipment on an equitable basis among the respective carriers ; (7) a more liberal use of terminal facilities in the interest of free move- ment of commerce; and (8) limitations within which common carrier facilities and services may be furnished by shippers or receivers of freight. Some time after we had received the request from the Senate Committee, a similar request was made by the Committee on Interstate and Foreign Commerce of the House of Representa- tives. We met these requests as fully as possible. In addition to the formal statement we submitted statistical data and other information, supplemented by extensive oral testimony most ably presented by our senior colleague, Commissioner Clark. The above in brief is what has been called the legislative pro- gram of the Interstate Commerce Commission. As previously stated, a number of other plans have been brought to the atten- tion of both houses of Congress. It is not for me to say what Congress ought to do. Both the Senate and the House com- mittees have worked strenuously for many months. They have heard what we have had to say respecting our suggestions and what others have had to say about their respective plans. Both committees have reported bills to their respective houses. The decision now rests with Congress. It will do what it conceives to be in the best interests of the whole country. I now wish to offer some observations with respect to the legislative recommendations stated above within the time limits imposed by your program. Fortunately others will deal with various important related subjects which I cannot even mention. First of all, our recommendations are based upon experience and past development. They have grown out of that which has been, and therefore have their roots in the past. To illustrate, from the beginning of railway history, individual lines have been extended through construction, purchase or lease into systems; [SSI] 40 RAILROAD LEGISLATION [Vol. VIII and through a continuing process of construction and consolida- tion great systems have been developed. We favor a continuance of that character of development within the limits and under the guidance of the statute, whereas in the past that development has taken place largely outside of the law. We have not deemed it necessary to work out special regulatory provisions relating to the so-called poor or weak roads as con- trasted with the so-called strong or affluent roads. Railroads have in the past earned varying rates of profit. We see no reason why they should not continue to do so in the future. In view of well understood imperfections in the investment in property accounts of carriers it has been generally impossible to know just what different carriers' earnings have been on the real investment. When the necessary facts are available I expect they will show that in some, if not in many, cases the so-called weak road is actually making more money on such business as it does than many of the strong or supposedly affluent roads. This feature of the railroad situation has been practically ignored. Our recommendations do not lead to a hybrid system of rail- roads in the United States. There will result from them no such linking of private and public finance and accounts that it will be difficult to know what is public and what is private and what the true results of operation may be from the standpoint of both public and private interest. Personally, I have a strong aversion toward all plans that propose to weave together public and private interests in such a way that a clear-cut accounting representing either is practically impossible. Rather than accept some of these plans I should deem it the part of wisdom to enter upon govern- ment ownership and operation outright. I do not believe the time has come for this country to enter upon public ownership of railroads. I believe that what we have recommended will meet the present situation much more effectively and with less danger of failure than government ownership. However, if the country should be driven into government ownership it will undertake it with courage and vision and make it a success. It can be done. I do not wish to see it forced upon the country at this time. Our recommendations do not assume to be a panacea for all the difficulties in the world of transportation. It is a practical program which rests upon experience and observation. I am well aware that various apparently simple plans have their sup- [552] No. 4] THE LEGISLATIVE PROGRAM 41 porters. If a simple plan will accomplish that which is sought, it is preferable to a plan less simple. That requires no argument. However, I do not believe that any one who will analyze ob- jectively the entire transportation situation in this country to-day will find a state of affairs that lends itself to treatment under a simple uniform rule. This great country is full of mountains and valleys and plains, rivers and lakes, big cities and little cities, energetic people pursuing many different paths which cross and recross one another in an infinite variety of ways. Such a country cannot be placed under the yoke of a simple formula such as would conceivably be possible if the entire continent were to be emptied of its houses and their occupants and the entire history of this nation reconstructed by settling the continent anew under the guidance of such a simple rule, and in those parts of the continent where the railroad under such a rule would permit them to go. Our cities are where they are. It is an inhuman policy that would through the agency of transportation wipe some of them out as completely as if an earthquake were to swallow them. Our railroads are where they are. Excepting those, few in number, that ought possibly to be scrapped, operating arrange- ments and rates should be such that they can continue to serve their respective communities with increasing efficiency. We have not asked to be relieved of so-called "prosecutor" functions of the Commission. We have been criticised with great persistence for performing the functions both of the prosecutor and the judge. This is a purely captious and theoretical criticism. Any one at all familiar with the conduct of our work will realize how impossible it is as a practical matter to have these so-called prosecuting functions influence the members of the Commission in arriving at a judgment in rate questions. The records of the courts will show that not only have railroad officials and em- ployees been indicted, fined and imprisoned as a result of in- vestigations made by us, but shippers have been indicted, fined and imprisoned because of matters brought to the attention of the respective courts by our agents assisting United States attorneys. During certain periods, the number of shippers thus punished has been greater than the number of railroad officials similarly pun- ished, yet I have never heard any one complain that the Com- mission could not be fair to shippers because it is instrumental in prosecuting shippers for defrauding the railroads. If Con- gress should deem it wise to take from us these alleged prosecut- [553] 42 RAILROAD LEGISLATION [Vol. VIII ing functions and place them elsewhere, well and good; but such a transfer of function can have no possible effect on the per- formance of our official duties especially in rate matters. One of the most important subjects regarding which we have recently made recommendations, following similar recommenda- tions for many years before, is the regulation of the issuance of securities. A temporary commission, known as the Railroad Securities Commission, made a report upon this subject in 1911. That report proposed a plan of regulation which centered about effective publicity based upon active administrative supervision. I was a member of the Securities Commission and joined in its report and recommendations. Our recommendations to Congress differ from those made by the Securities Commission, and it is pertinent to ask how I can consistently join my associates in the present program. The answer is simple. The conditions of time, place and circumstance, to repeat an expression used earlier in this paper, were different in 1911 from what they are in 1919. One of the main reasons for opposing in 1911 the kind of ad- ministrative control of the issuance of securities which we now advocate was the lack of proper information as a basis for action. The field work of inventorying the properties of carriers and of compiling their financial histories and accounts has been prac- tically completed. Although much remains to be done in valua- tion, what has already been done alone justifies a different legis- lative program respecting the issuance of securities to-day from what would have been wise ten years ago, I am, therefore, heart- ily in favor of this feature of our program even though it differs from that which I favored nearly ten years ago. If there are any who have doubts regarding the necessity for regulating securities I call their attention to a single feature showing that not everything which has been undesirable in con- nection with securities has-been discontinued. About ten years ago a certain important railroad was planning extensive new construction and the acquisition and reconstruction of other properties. These plans have more recently been completed. In that connection the general counsel of the carrier in question addressed its president in a long and carefully framed letter from which I quote only a few sentences : The amount of consideration to be paid for these lands is in our hands to fix within reasonable limits. * * * Of course, the value of the stock and bonds in this connection means market value, but because our companies will own the stock, at least, if not the bonds, the par [5S4] No. 4] THE LEGISLATIVE PROGRAM 43 value is very apt to be taken as the actual market value. * * * A full capitalization of the entire legitimate cost of the road is to some extent a protection to our large earnings. * * * Therefore, the cap- italization should be fixed at a sum large enough to eat up in interest and dividends, at a reasonable rate of interest and dividends, the probable earnings of the company. * * * The regulation of the issuance of securities is in itself a large and important task. It has, therefore, been proposed to increase the present membership of the Commission by two. This leads me to make a few observations regarding the size of the Com- mission. In 1917 the membership was increased from 7 to 9. The same act which increased our numbers also provided for power to act through subdivisions. We organized three sub- divisions composed of three members each and designated as Division 1, Division 2 and Division 3, respectively. More re- cently we organized one additional division known as Division 4, composed of five members, made up of members who also serve on other Divisions. The less important cases are heard and dis- posed of by Divisions of the Commission, whereas formerly the entire Commission was required to sit in argument and in con- ference on all cases. Many of the important cases and all appli- cations for and proceedings upon rehearing are still being heard by the full Commission. Only these cases, together with all important questions not directly connected with cases which come before the Commission, are given consideration in conference of the full Commission. This has afforded us substantial relief. While every month there are cases to be heard by the entire Commission, ten for instance, during the present month, there are many days on which only three members of the Commission are required to sit, leaving the other members free for other duties. During the vear immediately preceding the creation of subdivisions, we sat in conference and argument for about 220 days. Subdivision has facilitated the conduct of all business which can be disposed of by a Division. On the other hand, the increase in numbers from 7 to 9 has retarded the conduct of some business which requires the consideration of the full Com- mission. An exchange of views among 9 men and arriving at a decision takes more time than in the case of 7 men. It is now proposed to add two additional members. This further enlarge- ment is necessary because undoubtedly a new subdivision must be created to deal with the question of securities, although funda- mental matters will doubtless receive the consideration of the entire enlarged Commission, at least during the formative period. [555] 44 RAILROAD LEGISLATION [Vol. VIII Suggestions have been made for a commission of from 15 to 25 or 30 members. Such a commission is an impossibility. It could not be a commission in the sense in which a body of five or seven men is a commission. It would be a convention of men. Three men are sufficient to dispose of the less important matters and matters which merely follow previous decisions of a larger body. Five men generally afford all the points of view and de- liberative judgment which important questions require. Seven men certainly furnish it ; and seven is to my mind the maximum number of commissioners who, acting as a whole, can constitute an efficient administrative and regulatory body. One of the problems of the future relating to our internal organization there- fore is the problem of reducing the number of things which the entire Commission of 11 or more members must consider sitting as a body, and increasing the volume of business which may be handled by a subdivision. I cannot refrain from referring to one element of regulation as it unfolds -itself in the future, which is entirely new. Two years of Federal control have initiated into the public service a great body of men who theretofore had been accustomed to take only the point of view of private officials of private companies. With their peculiar experiences and traditions behind them, these men assumed the duties and responsibilities of public officials with the advent of Federal control. They have been compelled to consider not only the private company standpoint but also the public point of view. They have been obliged to act as judges between conflicting public and private interests. They have come to appreciate the position of a disinterested party in controversies affecting such conflicting interests. When these men return to private employment with their respective companies they will be different men from what they were before Federal control. Their recent experiences and observations should make them much more efficient in handling the public aspect of their com- panies' business and without sacrificing legitimate private in- terests they will contribute a point of view and lend a support to the work of the Interstate Commerce Commission which would have been impossible otherwise. Finally I cannot refrain from interjecting a thought which although somewhat foreign to the title of this discussion, is nevertheless most intimately connected with the institution with which we are dealing. I have previously indicated that our [SS6] No. 4] THE LEGISLATIVE PROGRAM 45 program is bottomed upon the past; that it represents growth; and that in a word it is evolutionary and not revolutionary. Up to very recent times the word revolution has been a part of the vocabulary of American citizens only in describing events of 1776 and what is associated with that date. Unfortunately this word has now obtruded itself upon us, not with the thrilling thoughts and visions of 1776, but we have been compelled to asso- ciate it with sinister things that threaten to undo much of what was accomplished in 1776. It is impossible to discuss at this time what these words suggest. As a citizen, however, I wish to be permitted to express the view that while there are many things that should be changed, while there are many wrongs to be righted, any man who in these United States of America to- day talks or thinks revolution is a traitor to our country and an enemy of mankind. [SS7] THE RELATIONS OF SHIPPER AND CARRIER FRANK HAIGH DIXON Professor of Railway Economics, Princeton University THE problem of railroad regulation and rehabilitation pos- sesses this characteristic — not unusual in problems of an economic character — that from whatever angle one ap- proaches it, one is drawn inevitably into the discussion of its every phase. So closely associated and interdependent are all the interests involved that it is almost impossible to consider one phase without taking into account all the others. The railroad problem from the standpoint of the shipper is in the last analysis, the same problem from the standpoint of the public, and hence what I shall say this morning may appear to wander somewhat widely from the specific topic set for discussion. I take it that the general topic has in mind problems of service and of rates as applied to the mass of commodities transported for the public. It is the problem of freight service. What I propose to do as an opening for the morning's discussion is to state what in my judgment are the outstanding considerations in the relation of the shipping public to the transportation agencies. In any attempt to solve the present railroad problem, we shall have to take account, among other factors, of two more or less conflicting interests that must be protected and harmonized, — private capital that owns the machine and is assuming responsi- bility for its operation, and the shippers who are using this machine for the transportation of their freight. What may each require of the other? I am assuming that one of these two interests will be the private railroad corporations rather than the government, because I have been able to discover little evidence of a desire in this country at present for railroad nationalization. Notwithstanding the very evident growth of liberalism and even of radicalism in this country, the activity of socialistic writers and speakers, the intensive campaign of the railroad brotherhoods, there is scarcely a remote possibility that Congress, representing the people, will give a moment's serious consideration at the present time to government ownership and operation. The ques- tion of government versus private ownership and operation is [5S8] No. 4] THE RELATIONS OF SHIPPER AND CARRIER 47 not one of principle, but one of expediency merely. The public should entrust the performance of its transportation service to that agency, whether public or private, that will best perform it. And it is because so large a proportion of the public to-day believes that private capital can give this service more efficiently than can the government, that the agitation for government own- ership has made so little headway. I think we may safely pro- ceed in our discussion upon the assumption that private capital is to be given another opportunity to show what it can do to fur- nish this country with efficient transportation. Looking at the question, then, first from the standpoint of the shipper, what may he reasonably require of the railroad trans- portation system, — not of an individual railroad company, for that is not my point of view, but of the aggregate of railroad corporations that stand prepared to handle his freight ? What the shipper requires may all be summed up in the one word service. Frequently this demand is embodied in the words, efficient service at reasonable rates, but I have intentionally omitted this latter requirement because I question whether by and large the shippers are seriously concerned as to whether the rate structure as a whole is high or low. There was a time earlier in our history when our transportation facilities were not as generous or as flexible as they are now, and when discriminations between large and small shippers were more common. In those days, the ship- per felt more directly the burden of the rate, and found it more difficult, if not altogether impossible, to shift it to other shoulders. To-day I venture the generalization that in the large proportion of instances, the burden of the rate is passed on to the consumer, and disappears in price, where it is lost from view forever. What we are more apt to hear to-day, especially from organized bodies of shippers, is the argument for adequate rates. This de- mand, which has become more articulate during the last few years, is based partly upon a realization by the shippers that this is the only way to get the service they require, and partly upon a consciousness that this adequacy, when obtained, will not seri- ously deplete their own pocket-books. Where the shippers' interest in rates does appear is in such matters as the equaliza- tion of burden upon different commodities, and the equalization of market opportunities for different producing sections and manufacturing centers, — in other words, in the relativity of rates. If service is the one thing the shipper requires, let us attempt [559] 48 RAILROAD LEGISLATION [Vol. VIII to analyze it into its most important elements. The first and immediate need, which in a way comprehends all the others, is for a greater unification of the facilities of transportation on the one hand, and on the other hand, a greater unity in the agencies that regulate the operation of these facilities and the charges im- posed. Such unification is necessary in order that the rate struc- ture may be simplified and standardized, and the inequalities and the injustices eliminated, that spring from the mass of tariffs filed by hundreds of railroad corporations and passed upon by over two score of regulating commissions. That great progress has been made toward fairer relations, no one can deny who has followed the history of regulation in this country for the past two decades, but the problem is far from having reached the stage of complete solution. The conflict of state and federal jurisdiction in the matter of rates is a serious hindrance to the accomplishment of the desired end. My own feeling is that exclusive jurisdiction in rate matters should be entrusted to the federal commission. We have had sufficient illustration of the ability of the state commissions, when they wish, to throw an in- terstate schedule completely out of line. Such action on their part may be of immediate advantage to a local industry or two, but for the body of shippers of the country as a whole, such a policy is unfair and burdensome. Leaving the regulation of intra-state rates exclusively to state commissions does not solve the problem for there are few such rates that do not in these days have their interstate implications. Conferences between state and federal commissions may act as a palliative, but such conferences are not likely to take place until the trouble has reached an acute stage. Efficiency in service demands a smooth running machine all the time, and this can only be attained through unified regula- tion in the hands of a central body. Equitableness in rates requires again that not only shall regu- lation be centralized, but that the units of transportation shall be reduced in number, and thrown into larger systems. How many systems there shall be or of what their constituent elements shall consist, I do not here undertake to say, but would merely express the view that they should follow well-established lines of traffic and should be guided in their construction by commercial rather than geographical considerations. A regional grouping would have no economic justification. I do not care to enter here into the legal difficulties associated with the actual processes of con- [560] No. 4] THE RELATIONS OF SHIPPER AND CARRIER 49 solidation, nor to discuss the relative desirability of voluntary and compulsory consolidation, beyond venturing the opinion that vol- untary consolidation would not succeed, and that sooner or later compulsion would have to be resorted to if the end were to be attained. Such consolidations along commercial lines would result in eliminating as independent factors the so-called weak roads, by absorbing them into systems with their more prosperous competitors. There would thus be removed much of the economic waste of roundabout hauls, much of the instability in rate struc- tures, much of the inequality in transportation charges as between different commodities and different lengths of haul. The prin- ciple of rate-making which declares that in an industry with a large fixed plant any earnings on traffic over and above the out- of-pocket expenses of the haul justify the rate, is sound if prop- erly applied, but it has been carried so far in many instances that it has resulted in enormous waste, and the American public has paid in transportation charges for millions of miles of un- necessary and unjustifiable haulage. The shipping public has a right to demand that so far as it is humanly possible, this wastage should cease, and there is no better time to take the evil vigorously in hand than now, when the whole transportation problem is being studied with an earnestness and a sincerity never before displayed in our history. Consolidation should be effected in such manner as to create large systems covering well- defined traffic routes, and designed to handle the business of the country in the most direct manner, unobstructed by the selfish requirements of any individual railroad system. I do not per- sonally think that competition should be eliminated. There may come a time when such competition will no longer be of impor- tance; but with adequate oversight to prevent misuse of the competitive privilege, I see no reason why we cannot anticipate that competition between these consolidated systems will work to raise steadily the standard of service offered and thus accrue to the advantage of the public at large. The oversight to which I refer would consist in giving to the Federal Commission powers sufficient in addition to what it now possesses over rates and service, to ensure the most complete and most economical utiliza- tion possible of road, equipment and terminals without regard to private corporate ownership. Whatever has been accomplished during the period of unified government operation in the direction of joint use of terminals, direct routing, elimination of unneces- [S61] SO RAILROAD LEGISLATION [Vol. VIII sary switching, and the like should constitute a starting-point for a program of extensive amelioration. The very serious physi- cal problem of joint terminals in the populous centers of the country should be tackled with the aid of the best engineering talent, and the pressure of public opinion should be brought to bear upon municipalities where such terminal problems exist, to seek an early solution. For the problem is in no sense a local one. The situation in St. Louis or Chicago or Kansas City is a vital one for every shipper and every consumer in the country. Among the added powers that should be conferred upon the Federal Commission is the power to prescribe minimum rates. It is vital to the solution of the entire problem of relativity that a railroad corporation should be prevented from demoralizing the rate structure by a policy of rate reductions, which while temporarily bolstering up its own earnings and benefiting its local shippers, is causing the country at large an economic loss by throwing the burden on other traffic and by depriving routes better located of the opportunity of handling the business. Ship- pers have come to realize, if the general public has not, that specific rates may be too low as well as too high. But more than this, in order that the shippers and the public may realize to the full the benefits of an adequate system of transportation, shippers should demand that greater utilization be made of our agencies of transportation other than rail, — particularly the facilities offered by our natural waterways. For the realization of this end, it is necessary that there be constructed such connections between water and rail systems and such facilities of transfer, as will remove existing obstructions. This policy should be urged wherever water carriage is economi- cally justifiable. The public should not allow its waterways to remain idle unless it has satisfied itself by expert investigation that its best interests require an abandonment of water trans- portation and a concentration upon rail. Certainly it should not sit idly by and lose the use of its waterways merely because the physical connections with rail have not been perfected. Turning to the other side of the question, what have the rail- road corporations in their turn a right to require of the public? This can be stated in a sentence, although it would require far more time than I have at my disposal to discuss the statement in all its implications. Private capital invested in railroads has a right to require a return on its investment in the property devoted [562] No. 4] THE RELATIONS OF SHIPPER AND CARRIER 51 to the public service that shall be sufficient (1) to cover costs of operation efficiently expended, together with taxes and other public obligations; (2) to cover the interest on obligations the proceeds of which have actually been invested in the property; (3) to cover a dividend upon an honest stock capitalization at a rate high enough to ensure that the capital needed for develop- ment can be obtained, which means not alone enough to pay the dividend in any one year, but in addition the accumulation of suf- ficient reserve to satisfy the public that its dividends will be continuous; and (4) to accumulate a surplus sufficient to keep its property up to the standard of service demanded by the public, such surplus to remain uncapitalized. Of course this statement opens up a wide field of controversy, involving questions as to the validity of the railroads' property accounts, the status of federal valuation and its usefulness when completed, the fundamental question as to what constitutes the value upon which the railroads are entitled to earn, the extent of existing capitalization, and the like. We can only hope that out of the arguments and disagreements of the experts, and the decisions of commissions and courts, some agreement may eventu- ally emerge on fundamental conceptions of value and capitaliza- tion and rate of return that will supplant our present haphazard methods of rate determination. I cannot discuss these questions here, but can only say that there seems to me to be no insuperable obstacle to reaching a reasonable degree of approximation as to the value of the property upon which the railroads are entitled to earn, a value that can be adjusted and modified later in the light of more complete data and more thoroughly established principles. We must make a start sometime; most of our diffi- culties are due to the fact that we have dallied so long. With the purpose of restoring railroad credit and of insuring to railroads an adequate return upon their investment, two pro- posals have been made, both of which offer strong claims for enactment into law. To insure an adequate return to capital in- vested in the industry, it is proposed that Congress should adopt a rule of rate-making as a guide to the Interstate Commerce Commission, the object of which being to make clear that the discretion of the Commission in making rates goes beyond a nar- row consideration of the reasonableness of the specific rates under review, and embraces an examination and consideration of the general financial condition of the carrier, to the end that it may [S63] 52 RAILROAD LEGISLATION [Vol. VIII be assured earnings adequate for the service needed by the public. Instead of being confined to the function of guardian of the shipper against the imposition of an unreasonable rate, the Commission is to become the protector and promoter of trans- portation service as a whole. It would clarify the powers of the Commission, remove all doubt as to the limits of its authority, — a doubt that has revealed itself more than once in divided coun- sels in the Commission itself — and greatly strengthen public con- fidence in the determination of the government to assure to rail- roads adequate earnings. The other proposal, which aims directly to bolster up railroad credit, is that of a government guarantee of a minimum return upon railroad investment. This suggestion has usually been asso- ciated with one for the taking by the government of excess earn- ings over a certain maximum, to be used for the benefit of the transportation service as a whole. In this form, the proposal has met with determined opposition from railroad executives, first on the economic ground that all incentive to efficiency will thereby be removed, and second on the legal ground that such a commandeering of earnings resulting from rates declared reason- able by the Commission would be confiscatory and unconstitu- tional. Time does not permit me to enter upon the discussion of this question, which after all is only indirectly related to the topic of this morning. My own conviction is that a government guarantee will be found to be necessary if railroad credit is ever to be restored to a healthy status, and I see no reason why such a guarantee cannot be made sufficiently elastic to prevent the destruction of private initiative. In conclusion, I would merely add that if adequate earnings are assured to the railroad corporations, the public has a right to expect that the transportation business of the country will be so conducted that the public interest will be the predominant in- fluence in the determination^of any question of policy, and will not be held to be merely coequal with that of the private capital employed. We have reached the point in our political and eco- nomic development where we are ready to demand that a public service be operated exclusively in the interest of the public, and private capital must be made to appreciate clearly that it is in- vesting in this public business under this restriction. After two years of government operation, private operation is again to be [564] No. 4] THE RELATIONS OF SHIPPER AND CARRIER 53 placed on trial. Nothing short of a whole-hearted acceptance of the principles of public service and their every-day application to railroad administration and operation will save this country from the doubtful experiment of government ownership. [S6S] OBJECTS OF RAILWAY LEGISLATION FRANK W. NOXON Secretary of Railway Business Association I HAD the privilege on November 17th in St. Louis at the American Mining Congress of hearing an address by the Editor of the Railway Age, Mr. Samuel O. Dunn, which contained some very extraordinary and very startling statistics. Mr. Dunn, covering the ten years ended 1915, showed what had been the growth of traffic, what had been the growth of facilities for handling the traffic. He undertook to estimate how far short the provision of facilities had been in comparison with the growth of traffic during those years, what had been the growth of traffic since, what might be reasonably expected to be the growth of traffic in the next three or four years, what it would cost to make up the arrearage of provision accumulated in the ten years ended 1915, and from now on to provide for facilities for new growth. Equating his figures with some view, both to the changed purchasing power of the dollar and also to the increased use of facilities per unit, larger use of cars, tracks, etc., and then, having made his computations in general, making a very generous deduction for possible error, he figured that in the next three years, at least six billons of dollars of new money must be found to make increase in facilities keep pace with the probable growth of traffic. He remarked that we are hearing on all sides a demand that production be increased. He said, "You cannot increase production in the United States, if you do not provide transportation facilities on an enormous scale with which to do that business." He told the story about a man who had listened to these figures. The man said, "We will do this business by auto truck." Mr. Dunn said, "How will your manufacturers of auto trucks get their materials? How will you build the pikes on which the trucks are to run, if the railroads cannot carry the cement?" We have had at this meeting two papers, coming from two distinctly different sources. First we had the voice of the econo- mist, coming out of the still air of delightful studies, and, from his detached point of view, giving you his impressions of the [566] No. 4] OBJECTS OF RAILWAY LEGISLATION 55 panorama. Dr. Dixon, I think I may say by way of condensa- tion, let you see that somebody — he said the railways — must have "one more chance." One more chance to do what? I think he left no question in your minds that he meant one more chance to serve the public adequately. Whether this one more chance is to be one more chance for the regulators or one more chance for the railways, or for both, we may set aside for a moment, and compare that background from which Dr. Dixon speaks and from which his recommenda- tions proceed, with the recommendations in the paper from Interstate Commerce Commissioner Meyer. I wonder if there was any one in the room who at any point in that discussion, admirable and competent as it was, could detect the slightest anxiety concerning whether facilities were to be adequate in the future. You noticed that, in the enumerated list of recommen- dations made by the Commission, there was something about adequacy of facilities; you heard no statement to the effect that facilities had been inadequate and, least of all, did you hear any acknowledgment that one factor in a restoration of railway de- velopment must be the government and its policy. We have before us first a bill which was passed by the House of Representatives on November 17th and now goes into the hop- per for conference. We have, second, a bill introduced on the 23rd of October by the full Senate Committee, which presumably will be in due course passed by the Senate and, in turn, join the House bill also in the hopper of conference. Do those bills have as their background an acknowledgment that provision of facili- ties in the past few years has been inadequate; that the main purpose now of legislation must be a resumption of railway de- velopment through a rehabilitation of railway credit, and that the government has a function in that matter? Are you pre- pared to approach the consideration of those measures from that point of view and test them by that yardstick ? Do they do it or do they not? The other night in the new Willard Hotel, returning from my day's labor at about 11:30 p. m., I found two friends of mine seated at a table in the dining room engaged in very violent dis- cussion. I said, "What are you talking about?" They said, "We are talking about the railroad question." I said, "What phase of it?" One of them said, "This man says there are thirty- seven plans, and I say there are only thirty-six." [567] 56 RAILROAD LEGISLATION [Vol. VIII I happen to be the servant of an association- which gives its entire time to this matter and which hasn't any plan ; one, I think, of the very few associations which have no plan. I think even the indefatigable Mr. Waterman in his chart has been unable to detect that the Railway Business Association has a plan. There is something more important than that, and it is that we have reached the stage now when numbers of associations and individuals who have felt inclined to support one or another of the plans or of the leading provisions in those plans, have come to see that the function now is to drop plans and try to see whether we cannot be sure that Congress in one way or another accomplishes the purpose that underlies some of the plans. What does this House bill mean to do ? A court, in considering what was intended to be done by a legislature, will always give very great weight to a provision introduced but rejected. If a legislative body refused to do a thing which was asked of it, the court will usually hold that the legislature did not mean to do that thing at least. I ask you to hear two sentences which were contained in the bill as it came from the House Committee : The Commission shall be charged with the duty and the responsibility of observing and keeping informed as to the transportation needs and the trans- portation facilities and service of the country and as to the operating revenues necessary to the adequacy and efficiency of such transportation facilities and service. In reaching its conclusions as to justness and reasonableness of any rate, fare, charge, classification, regulation, or practice, the Commission shall take into consideration the interests of the public, the shippers, the reasonable cost of maintenance and operation, including the wages of labor, materials, and taxes, and a fair return upon the value of the property used or held for the service of transportation. The House cut those two sentences out. I have studied this bill from beginning to end. I can find no other place where the idea involved in those two sentences stands. The House of Representatives goes to conference without having said those things. v Your court also would consider debate ; it would consider quo- tations from reports, in determining whether it was the purpose of the legislature to do a certain thing. Accompanying the report with which this bill was brought in, there was a statement pre- pared by Interstate Commerce Commissioner McChord, in which he said that there was a decline in railway credit but that the Interstate Commerce Commission was not in any way responsible for this, and the general tenor of that appendix to the Committee report was that, whoever might be to blame, there was no remiss- [S68] No. 4] OBJECTS OF RAILWAY LEGISLATION 57 ness on the part of the Government in its policy and no need for a change of policy. In going back still farther, when Interstate Commerce Com- missioner Clark, Chairman of the Legislative Committee of the Commission, appeared before the House Committee, he was asked by Chairman Esch whether he would think it advisable to include in the bill which, in its first draft was written by the Commission, that the Commission should take into consideration in the regulation of rates the cost of capital. To which Repre- sentative Clark replied he would have no objection to having that go in, because the Commission always had and always would consider the cost of capital, and its course would not be changed in the least if those words went in. We have in the Senate bill two passages, both occurring on page thirteen of the draft I have in my hand. One is: "No carrier subject to the provisions of this act shall be authorized to receive and retain for the transportation services rendered such proportion of the rates and charges collected by it as may yield in the aggregate more than a reasonable return upon its property investment," a reasonable return, of course, being the return which the court will compel a Commission to permit, a return below which a Commission is forbidden to depress rates. "In changing or modifying rates," etc., "and in viewing them from the standpoint of their effect in producing revenue," etc.,. "the Commission shall initiate, modify or adjust rates," etc., "as nearly as may be so that the railway carriers as a whole allocated to each district and subject to this act shall earn an aggregate annual net operating income equal as nearly as may be to five and one-half per centum upon the aggregate value as deter- mined," etc. Here we have a provision which explicitly recognizes that a return must be made upon the securities. It is evident that the purpose here is a restoration of railway credit. Unfortunately, the phrase which I quoted first from this bill seems to negative that and, from other parts of the bill, there are other confusing conflicts as I read it. It may well be that in conference a clarifi- cation of these various provisions will result. But what is behind this Senate Bill? What is in the debate; what is in the report that accompanies the bill? What we have there is the explicit acknowledgment by the full Senate Commit- tee that, to quote as nearly as I can their language, the regulatory [569] 58 RAILROAD LEGISLATION [Vol. VIII system has failed in the past, because it has not recognized that one of the essential elements, one of the essential aims of govern- ment regulation of rates is to attract capital. Now, I wish to submit to you in the two or three minutes which I hope I still have, a sentence or two which it seems to me Congress ought to embody in substance in any legislation it passes. To supplement the present federal policy which by the terms of the law is wholly one of restriction, by enacting that rates shall be such as to yield revenue sufficient in the average year to provide necessary expenses and the credit basis so that the average railway may secure adequate improvements and extensions. Some of those concerned will tell you the Commission will do that anyway. Well, then, what harm is there in saying that they are required to do so in the law ? You cannot regulate investors. The investor will buy securities in accordance with his judgment as to whether the rate of return is more attractive to him than from an investment he can get somewhere else. If there is in these bills nowhere that declaration of policy that rates shall be adequate for that purpose, why not say it? To require that the regulatory authorities from time to time investigate and estimate for a reasonable period in advance the transportation needs of the country and report to Congress or to the public their findings as to such needs and their estimate of the amount of revenue that will in the average year assure approximate accomplishment of such necessary development. It is said that the Commission considers this, that, and the other. This recommendation is that it shall not only consider past performance, as has been done in connection with the large-scale cases for the last nine years — statistics of the past, in order to determine what shall be the revenue for the future; but, inas- much as the individual companies must make their budget not for what has passed over the dam, but for the future, just so the Commission shall make a budget of the aggregate needs of the country in advance, and th^t it shall be in form, that it shall be a tabulation, that it shall be made public, that in a way the Com- mission signs the pledge that it will carry out these purposes which we say are necessary if the legislation is to succeed. Carrying that still further in the point of detail, to prescribe that in esti- mating the net income required in order to attract capital in the amounts found by the regulatory authorities to be necessary, such authorities shall have the power and duty to ascertain and announce from time to time the rate of return which, under changing market money conditions, it is necessary to allow. In other words, and this is all I have to say, if you put in that bill a rate, whatever the rate, which is prescribed as the rate of [570] No. 4] OBJECTS OF RAILWAY LEGISLATION 59 return which is to be permitted, you also say that the Commission is authorized and required to permit not only that minimum rate, but such additional rate as may prove by experience and ascer- tainment necessary in order actually to attract capital for the improvements and extensions which the business of the country requires. [S71] THE SCOPE AND FUNCTIONS OF A FEDERAL TRANSPORTATION BOARD EMORY R. JOHNSON, Dean of the Wharton School of Finance and Commerce, University of Pennsylvania SO far as I can recall the suggestion that there should be a Federal Transportation Board originated in a conversa- tion with Mr. Harry A. Wheeler, at that time — and it was less than a year ago — President of the Chamber of Com- merce of the United States. I think he said that he had been discussing this question with certain gentlemen in Chicago who had been greatly impressed by the usefulness of the Federal Re- serve Board and felt that there should be established in the field of railroad transportation a board similar in character to that which had been so successful in the field of currency and banking. There had been before Congress and before the country the proposition made by the railway executives that a Secretary of Transportation should be provided for, with a position in the President's cabinet, and that this Secretary of Transportation should have general charge of the executive or administrative regulation of railroads and should, among other things — and that was particularly desired by the railway executives — ascer- tain the financial needs of the carriers and report those needs to the Interstate Commerce Commission, which, by statute, should be required to establish rates that would meet the needs thus certified to the commission. That suggestion of the railway executives met with no favor in Congress or with the public, and it had to be abandoned, but at the same time it was very clear that laws for the compre- hensive regulation of the railroads in the future must be enacted, and that that regulation would necessarily require for its enforce- ment the exercise of extended executive functions. The ques- tion then came sharply before Congress and before the people, who were thinking about it, whether these new and difficult func- tions of administrative regulation of the railroads should be en- trusted to the already largely over-worked Interstate Commerce Commission or should be entrusted to a new federal agency. The bill that has passed the House is built upon the idea that it [572] No. 4] THE SCOPE AND FUNCTIONS 61 is wiser to extend the functions of the Interstate Commerce Com- mission than to create a new board. The bill pending in the Senate, however, starts upon the assumption that it is desirable to provide for the executive regulation of railroads by the estab- lishment of a Transportation Board and the whole bill is built upon that theory. What ought to be done with this phase of regulating the rail- roads? I think I should stop just a moment to say that the suc- cess of the whole venture of regulation of the railroads must necessarily hinge largely upon the machinery that is provided to give effect to the laws that may be enacted. When England began regulating railroads about the middle of the last century, dependence was placed upon the courts for the enforcement of the laws. Shippers were expected to resort to the courts to secure their rights under the statutes. Regulation made no headway in England, nor did it in this or other countries, until machinery for the enforcement of the regulatory laws was provided. The Interstate Commerce Commission was effective in this country for the purpose for which it was created, and any- thing that I may have to say in support of a Federal Transporta- tion Board is said with no idea of criticizing the Interstate Com- merce Commission. Whether there should be a new board or not was considered in a statement which Mr. Wheeler made when he presented to the House Committee on Interstate and Foreign Commerce a program of legislation that had been adopted by the National Transportation Conference. Mr. Wheeler said, "It is believed that the Interstate Commerce Commission ought not to be bur- dened by the addition to the tasks it now performs of a large number of administrative duties. Should the commission as con- templated become the authority for the sole regulation of all railroad rates, rules and regulations affecting interstate com- merce, its duties will necessarily be enlarged. To require the commission to exercise the administrative functions contemplated in the proposed plan of remedial railroad legislation, would be to the detriment of the public interest because it would seriously interfere with the prompt action of the commission as a body for the regulation of rates, the task for which it was especially created and for the performance of which it is peculiarly adapted." It will be interesting to review just by title the additions to [573] 62 RAILROAD LEGISLATION [Vol. Vm the duties of the Interstate Commerce Commission which the bill passed by the House of Representatives proposes to make The commission, of course, is to continue to regulate rates, not only as it has in the past, but in a larger way, because it is to determine rates on traffic within the states, for the most part, as well as rates on interstate traffic. The new duties which it is proposed to give to the commission, as enumerated - in the House Bill and as summarized by Mr. Richard Waterman in a comparative statement he has prepared for the Railroad Committee of the Chamber of Commerce, are as follows: (1) To keep itself informed as to the transportation needs, facilities and services of the carriers. (2) To authorize the unification, consolidation or merger of two or more carriers whenever the commission finds such con- solidations to be in the public interest, and to authorize the pool- ing of traffic, earnings and facilities. (3) To exercise jurisdiction over the use, control and supply, as well as the movement, distribution and interchange of loco- motives and cars, and also the supply, movement and operation of trains. (4) To prohibit the extension of present lines, or the con- struction or acquisition of new lines by any carrier until it has obtained from the commission a certificate of public necessity and convenience. (5) To require the construction of docks and rail connec- tions between rail and water carriers. (6) To provide, when necessary, for the redistribution of traffic and for the joint use of terminals. (7) To exercise exclusive jurisdiction over the issuance of securities by carriers. (8) To order a carries to install automatic train stops or train-control devices. (9) To exercise other important regulatory powers belonging to the Federal Government. I submit, without argument, that that is a rather large layout of additional duties. The service of about two years which I had the privilege of performing on one of the State commissions, and the knowledge which I gained there of the difficulty which a State commission has in keeping abreast with its work, convince me that a body of nine — or as it is proposed, eleven commission- [574] No. 4] THE SCOPE AND FUNCTIONS 63 ers, constituting the Interstate Commerce Commission — could not successfully perform in addition to the duties of rate regula- tion this long list of executive tasks. Now if a Transportation Board be created, what specific func- tions shall be given it? I will enumerate them briefly without much elaboration. First, the Board should determine and announce the grouping or consolidation of railroads to be in the public interest. We are going to have in the near future, I hope — in the distant future certainly — a greatly reduced number of railroad systems. Con- solidation is to come about. The House Bill provides for it by voluntary action of the carriers. The Senate Bill provides for it by voluntary action for a period of seven years and thereafter, if necessary, by the exercise of compulsion on the part of the Federal Government. That grouping and consolidation of rail- roads with the incidental tasks it imposes will involve a large amount of work on the part of any regulatory body. Second, the Board should have the authority to require, if com- pulsion is found to be necessary, the railroad companies, as a precedent to the formation of railroad consolidations, to become Federal corporations either by organization of new companies under Federal charters or by changing from State to Federal corporations. A problem of compulsory incorporation of rail- roads with the shifting from State to Federal corporations is here in question. Third, the Transportation Board should be given authority to pass upon the public necessity for the expenditures of capital, in excess of a minimum amount stipulated by statute, by all carriers engaged in interstate commerce. This power should be so ex- ercised as to prevent unnecessary duplication of line or terminal railroad facilities and as gradually to bring about the unification of railroad terminals and to accomplish that degree of coordina- tion of the rail, highway and water transportation facilities that may be found to be in the public interest. The unification of our railroad transportation system in the future can be brought about, to a large extent administratively by the authority that con- trols expenditures. Fourth, the Board should administer whatever general rail- road contingent fund the statute may authorize or require the carriers to accumulate. The Senate Bill, which was influenced largely by the program of legislation worked out by the National [575] 64 RAILROAD LEGISLATION [Vol. VIII Transportation Conference, provides for a company reserve fund to be built up by each railroad company and for a general contingent fund to be managed by the Transportation Board for the purpose of developing railroad and other transportation facilities. Fifth, the Transportation Board should act as a referee in cases of disagreement resulting in a deadlock of any of the boards which it- is proposed shall be entrusted with the adjust- ment of wages, hours of employment and other conditions of railroad labor. The scheme of adjustment of wages and working conditions by dual boards has been explained by Mr. Doak. 1 It is now in operation. When there is no longer a Director General of Railroads, sorrfe authority must be selected to settle deadlocks that may arise in any board. Sixth, the program of legislation which the National Transpor- tation Conference worked out, and which meets with my ap- proval, and with the approval of every man I have talked with about it — provides that the Board of Directors of these feder- alized railroad corporations which are contemplated shall contain at least two representatives of the employees and two of the public. That is to carry out specifically the idea of trusteeship which the chairman emphasized in his opening remarks. I be- lieve it will be very helpful to the railroads and of benefit to the public. Seventh, the Transportation Board should be authorized and required to inquire into the practices of railroad management and to propose measures for preventing abuses therein. We have had within recent years a good many unfortunate examples of ir- responsible management of railroads and we are not so far from that past history as to be certain that when we return to private ownership unjustifiable exploitation may not again be possible. I believe that abuses should be prevented by the searchlight of investigation and information. Eighth, the general duty' of a transportation board should be not only to bring about the healthy development of railroads, but the coordination of railroads with waterways and with high- ways in order that this country may have in the not distant fu- ture a well-rounded, coordinated national transportation system. One other power has been recommended for this board and urged in certain quarters with a good deal of force, and that is 1 See pp 1-78 [S76] No. 4] THE SCOPE AND FUNCTIONS 65 that the new board should be responsible for the finances of the railroads in that it should determine what the financial needs of the carriers are and certify those needs to the Interstate Commerce Commission. My own view of that matter has always been, from the time it was first brought to my consideration, that it would be unwise to take away from the Interstate Commerce Commission any of its responsibility for the maintainance of revenues ade- quate for the carriers. The Commission is the authority that passes upon the rates. It should feel the responsibility of de- termining what the revenue needs of the carriers are and of pro- viding the rates therefor. If some other authority, outside of the Commission, is responsible for determining the revenue needs of the carriers, the Commission will perhaps not act with that degree of responsibility that it ought to feel ; and then also, it is quite possible that this division of authority and responsibility between the two boards might develop undesirable friction be- tween the two authorities. Lastly, what kind of a board should this be? Not a large board — five members are better than more because its purposes are to be executive. One objection — and it is a strong objec- tion — to investing executive functions with the Interstate Com- merce Commission, is that it is too large a body for effective ad- ministrative or executive work. While I would not take away from the commission the limited executive functions it now exercises — because most of them are related to rate-making and those that are not related to rate-making are not difficult to ad- minister — I do not think it would be wise to vest executive func- tions in a body of nine or eleven men. Boards at best are apt to be long, narrow and wooden, and while the Interstate Com- merce Commission is by no means wooden, nor has it been nar- row, it is long, and its processes would be slow. What is needed is quick, intelligent, effective executive action on the part of a board with a maximum responsibility for the development of a national transportation system. [577] THE HOUSE AND SENATE RAILROAD BILLS RICHARD WATERMAN, Secretary Railroad Committee Chamber of Commerce of the United States WHEN Dr. Lindsay asked me to present at this meeting a summary of the railroad legislation that is now be- fore Congress and to compare the two bills, I asked for leave to print. That is what they usually do in Washington. So I have prepared a printed chart showing in parallel columns the important provisions of the Senate and House bills and have asked your chairman to hand a copy to each member of the Academy who attends this meeting.* Before discussing the pending bills I am going to refer briefly to some of the steps that have been taken by the House and Sen- ate Committees in preparing them. Each of these committees has held public hearings lasting for many months. At these hear- ings thirty or forty different plans for railroad legislation have been laid before the committees and later printed in full in the reports of the hearings. Examination of this testimony shows that almost every witness who came before the committees em- phasized in one way or another four essential features of the railroad problem which may be stated as follows : 1. If the country is to grow, the railroads must grow. 2. Growing railroads require a constant stream of new capital. 3. This capital can only be attracted on the basis of good earnings. 4. Good earnings, of course, mean adequate rates. When the time came to introduce legislative measures for the consideration of Congress, seven bills were drafted, of which two were read into the committee record, and five were actually in- troduced and referred to the Interstate Commerce Committees. These two committees, after considering all of the plans and all of the bills, reported out two separate bills that differ in many important particulars. In my chart I have compared the bills point by point. Dr. Lindsay asked me to read the comparison into the record, but as you have it in hand, I am simply going to read a brief summary of the comparison. * Reproductions of Mr. Waterman's Charts appear on pp. 75a-75b and 10Sa-10Sb.— Ed. [578] No. 4] THE HOUSE AND SENATE RAILROAD BILLS 67 The Esch bill, H. R. 10453, was passed by the House of Rep- resentatives November 17, and at once sent to the Senate. The Cummins bill, S. 3288, was reported to the Senate October 22 by the Committee on Interstate Commerce and will probably be taken up for consideration at the opening of the regular session of Congress December 1. An examination of the chart shows that while the two bills have many points in common, there are certain very important respects in which they differ. Ownership and Operation Both bills provide for the return of all railroads and transporta- tion systems to corporate ownership and operation on the last day of the month in which the act is approved. Consolidation and Competition The Senate bill provides for the consolidation of all railroad properties in accordance with a plan to be promulgated by the proposed Transportation Board and approved by the Interstate Commerce Commission, into twenty to thirty-five separate com- peting systems, each owned and operated by a distinct federal corporation — consolidation to be voluntary if accomplished within seven years, and thereafter to be compulsory. The House bill provides for the consolidation of any two or more carriers and for the pooling of their traffic, earnings and facilities to whatever extent the Interstate Commerce Commission indicates will be in the public interest. Federal Incorporation The Senate bill provides that all railroads shall be required to organize under a federal charter; while the House bill opposes federal incorporation. Capital Expenditures and Security Issues Both bills provide for exclusive federal regulation and control of railroad security issues and capital expenditures — the Senate entrusting this regulation to the Transportation Board, and the House to the Interstate Commerce Commission. Adequate Revenues and Credit Both bills recognize the necessity for providing the railroads with revenues that will be adequate for their needs and will re- sult in restoring their credit. [579] 68 RAILROAD LEGISLATION [Vol. VIII Both bills provide for a continuation of the rates that are in effect at the termination of federal control, until they are changed by competent authority. The Senate bill requires the commission to divide the country into rate-making districts; but the House opposes this step, be- lieving that rate making based on average conditions of carriers within a given region would be an impossible task. The Senate bill proposes a new rule of rate making that makes it mandatory on the commission to fix rates that shall be not only just and reasonable, but also adequate ; but the House bill leaves the commission free to define its own rule of rate making. Both bills provide for a continuation of the present plan for the valuation of all railroad properties by the commission. The Senate bill provides for the creation of two kinds of re- serve funds, viz., a company reserve fund drawn by each road from its own excess earnings to support its own credit; and a general contingent fund drawn by all prosperous roads from their excess earnings to support the credit of the railroads of the country as a whole. The House bill provides for the creation by the Government of a $250,000,000 revolving fund from which carriers may obtain, during the first two years of resumed private operation, loans bearing 6% interest and maturing in five years. Both bills provide for equalizing the revenues of the poor and the rich roads by means of consolidation effected under gov- ernmental authority. Both bills provide that for six months after federal control ends the Government shall guarantee to all railroads an operating in- come equal to the standard return for the same period paid dur- ing federal control. Both bills provide for funding the debt of the carriers to the Government, although under very different conditions. Wages and Working Conditions Both bills provide for the continuation of the general plan for the adjustment of labor disputes that has been in effect during the period of federal control. The Senate bill provides for the creation of three Regional Boards of Adjustment to hear and determine disputes other than controversies relating to wages and working conditions ; and the creation of a Committee of Wages and Working Conditions to [580] No. 4] THE HOUSE AND SENATE RAILROAD BILLS 69 have jurisdiction over all controversies respecting the wages and the working conditions of railroad employees. In addition the Senate bill declares that railroad strikes and lockouts are un- lawful. The House bill provides for the creation of three Boards of Adjustment to hear and decide disputes between the railroads and certain classes of their employees, and three Appeal Commissions to consider appeals sent to them by the three Adjustment Boards. Federal Agencies of Regulation Both bills provide for the exercise of many new regulatory functions by the Federal Government — the Senate bill creating- a new agency to exercise the new functions, and the House bill entrusting all of the new functions, as well as the old, to the In- terstate Commerce Commission. The Senate bill provides for the maintenance of the Interstate Commerce Commission with its rate making, valuation and ac- counting functions ; and also for the creation of a Transportation Board to plan and supervise railroad consolidations, to regulate security issues and capital expenditures, to serve as a final board of appeal in labor controversies, to exercise certain executive and administrative functions now exercised by the Interstate Commerce Commission, and to perform many other important federal regulatory functions. The House bill establishes no new agency for railroad legisla- tion but provides for the maintenance of the Interstate Commerce Commission with two additional members and with authority to exercise all of its present functions and many new ones. [581] WHY RAILROAD REGULATION HAS FAILED H. T. NEWCOMB Lawyer, New York THE situation of the railways of the United States at the present moment, as developed in these discussions during the last few days, is very easily summarized, and in very few words. On two days' notice, at the end of 1917, the owners of the prop- erties were expropriated in the face of a great national emer- gency which, under the conditions then existing, undoubtedly made that expropriation necessary. For the two years that have ensued they have been managed by public officers and with this result, that the Government of the United States has sustained a heavy loss each year through the insufficiency of the revenues to make up the expenses which the Government incurred ; a thou- sand millions of dollars have been added to the wages-expense of the railroads ; wages have been raised as though there were a bottomless pocket from which to draw the funds necessary to meet them. The properties have been — owing to exigencies that probably could not have been avoided — undermaintained, and are no longer in the excellent condition in which they were when taken over. All expenses of operation have gone up, not only through wages, but through the greater cost of all the materials and supplies necessary for operation. Now that the railways are to be handed back to the owners and, under these conditions, they ask a guarantee for the short period of six months in order that they may have time to adjust themselves to the new conditions and to develop and restore the efficiency which they had before their organizations were destroyed, before the properties were taken out of the hands of their proper officers, those selected by the security owners. This guarantee is more necessary in the interest of general industrial stability and public welfare, than in that of any railway or any group of investors in railway securities. It seems to be admitted, without qualification, that most of the regulation which we had up to the end of 1917, when this hap- pened, was not wholly successful. My friend, Professor Johnson, suggests that we should have a transportation board. I take it [582] No. 4] WHY RAILROAD LEGISLATION HAS FAILED 71 that this board is to regulate the Interstae Commerce Commis- sion. I wonder who would regulate the transportation board and how soon regulation of the transportation board would be- come necessary? "Big fleas have little fleas to bite 'em and so on ad infinitum." We commenced this form of regulation in 1887 with a very modest attempt; a law depending principally on publicity, de- claring the principles of the common law that there shall be no unjust discrimination and no excessive rates ; forbidding pooling, that is attempting to enforce competition, and enacting, as perhaps its most rigorous provision, the "long and short-haul" clause, but partly subject to dispensing power on the part of the- Commission and not en forcible at all except under substantially dissimilar circumstances and conditions. Of course that statute, as everybody knows, was a compromise. No one really wanted an Interstate Commerce Commission at that time. The advocates of drastic regulation proposed a meas- ure which would contain hard and fast rules that would have to be obeyed, and the Commission was inserted as a compromise between those who wanted very drastic regulation and those who did not want any regulation at all. That act was amended in 1889 ; in 1891 ; in 1893, when we obtained the act which permitted the United States to compel testimony from persons who claimed that their testimony might be self -incriminatory. In 1903 we had the Elkins Law and the Expedition Act; in 1906 the Hepburn Law which, for the first time, conferred real rate-making power upon Federal officers, and in 1910 we obtained the regulation which finally made operation of the railroads dur- ing an emergency impossible — the statute giving the Interstate Commerce Commission power to suspend changes in rates, thus making it impossible promptly to adjust rates to changed con- ditions. That act, of course, had its natural result. The fall in the value of money which had commenced in 1896 and gone forward very rapidly up to 1914, the beginning of the war, became very rapid in 1914, and much more rapid after 1915, and rate schedules to which the railroads were tied partly by statute and partly by custom, became totally inadequate under the situation thus de- veloped. The money which they received was measured in de- preciated currency and was insufficient, and the act of 1910 made it impossible for them to correct that situation. [583] 72 RAILROAD LEGISLATION [Vol. VIII Consider this contrast. Our fathers went through the Civil War, a war which for four years made drains upon the man and money power of this Nation infinitely greater than anything that happened to us during the twenty months of our participation in the European war, months that succeeded our period of wonder- ful prosperity while not engaged in the great war. Yet during the Civil War no railroad not in the immediate track of hostilities had to be or was. taken over by the Government. There was then infinitely greater need for railways for the prompt movement of troops. There was infinitely greater need of going to the money market and getting the last cent that market could supply, but it was not necessary to take over the railroads. Has any one any doubt why it was necessary in 1917 to take them over? Because, although the power of the President of the United States could take these properties into the hands of the Government, the power of the President of the United States could not direct the Interstate Commerce Commissioners to grant a speedy and rapid increase in rates and thus to permit precisely the sort of adjust- ment that was made all through the Civil War. During the Civil War period the railroads adjusted their rates, almost daily, to the depreciated value of the currency in which they were paid. During the war through which we have just passed, no such power existed and in order that the Government of the United States might have ready recourse to the money markets, in order that failures of railroads to pay interest on their bonds should not create a situation which would make it impossible for the United States to borrow — it would greatly increase the difficulty of financing the war — it was necessary to take them over. They weren't taken over for any other reason at all. There was no question of inefficiency. At the end of 1917 the railroads were carrying more freight and carrying it better and performing all the services for which they existed with higher efficiency than at any other time in the history of those properties. There was no reason for the expropriation of their owners except the financial reason. Now the question is, whether we are to go back, at this period, to the same form of regulation which we have had, which pro- duced those particular results and which, if we go back to it, will leave the railroads forever in the condition of being unable to respond to any great national emergency, not through any lack of efficiency on the part of the men who operate the railroads and [584] No. 4] WHY RAILROAD LEGISLATION HAS FAILED 73 have direct responsibility for their operation but because the Government of the United States has tied those men hand and foot and they are unable to make the price adjustments which every other business industry — except the regulated industries in this country — is able to make. For thirty years I have lived in the midst of this regulation, a close and a constant witness of the misadventures of the legisla- tive attempts which I have very briefly attempted to review. Every failure and every inadequacy of that legislation has been an argument for more legislation along the same line. No failure, no inadequacy, has ever been advanced as an argument for abandoning the plan, or for changing or modifying the plan, but every failure has been an excuse for more action, and more drastic action, along the same precise line. Thus every false step has led to another equally false and, continuously, we have gone further in a wrong direction. Therefore, without forgetting any aphorism that you may think applicable, I wish now to ask whether mistakes must forever be reasons for more mistakes? [S8S] AN ENGINEER'S POINT OF VIEW HILLHOUSE BUEL Industrial Engineer THE subject of railroads is possibly as interesting as any subject that we have to deal with, because it is one of the three major divisions of our activities, namely, produc- tion, distribution and consumption. It, therefore, enters into all the factors of our lives. Government Operation I have been interested in following the different bills that have been presented in Congress, and the different comments that have been made upon them. The remarks in regard to the Plumb Plan bring out the question of government ownership or control. I would like to say just briefly that government ownership, operation or control, while it might operate satisfactorily in an autocracy, if your autocrat were wise, will not work out satis- factorily in a democracy such as we have to-day. Although we may change our democracy in the future, under our present form of democracy, we woud find that government ownership would impose upon us a paternalism which would destroy incen- tive, paralyze initiative, and retard progress. In the second place, the officers would be appointed/ not for their experience and ability, but on account of their influence and usefulness to the prevailing party. This could only lead to inefficiency. It is not the way we solve economic problems. Faulty Organisation Recently we have had an illustration of improper organization at Washington in the National Industrial Conference. To start with, the conference was improperly composed. The men were not selected on account of their special fitness to solve economic problems. Secondly, the conference was improperly organized and its methods of procedure were opposed to economic law. It was organized into two or three conflicting groups that were to oppose each other and to arrive at their conclusions by arbi- trary determinations, compromise, barter or the numerical pon- derance of a mere vote. [586] No. 4] AN ENGINEER'S POINT OF VIEW 75 Solving Economic Problems Now, economic problems are not solved by guess work, and they are not solved by a mere vote. If you want to know how many peas there are in a pod, you do not call a conference and take a vote on it. Economic problems should be solved by ac- curate and thorough observation as a basis for exact and scien- tific determinations. When you constitute these different bodies that are to solve your economic problems with properly chosen engineers — transportation engineers, industrial engineers, and production engineers, managers who have had successful expe- rience in the operation of their different activities, and your va- rious operatives that cover the successful operations in yo'ur dif- ferent departments — when you have brought together a body or staff of such material, you will have a fair chance first, to see that the situation is properly observed as a prerequisite for your future determinations, and second, that you have the men quali- fied to make the careful, exact determinations necessary for sane, workable, economic operations of the transportation units. A Comparison To the gentlemen who stated that "we are the only country in the world that does not own its own roads," I wish to answer first, that his statement is a bit broad, and second, that a com- parison of the growth and development of our railroads and our country with the other countries of the world would seem to com- mend our system over all others. I sincerely trust we will have the good sense not to destroy or impair that incentive which, in a brief one hundred years, has made us in production and prog- ress the giant and premier country of the world." Much has been said in support of consolidating and regrouping the railroads under a board, something of zoning by public offi- cials, and much more about the expenditure of capital, the equali- zation of revenues with the contingent fund and refinancing. To these issues I want to reply briefly. Wise and Unwise Consolidations It has been my experience that consolidations are commonly effected, wittingly or unwittingly, with total disregard of what functions can or cannot be consolidated with good results. The provisions advocated and those embodied in bills now pending or heretofore submitted to Congress if enacted or made effective would ultimately disorganize and greatly impair the entire trans- [587] 75a r THE Chamber of Commerce of the United States has prepared the accompanying chart to show in con- venient form for, comparison by busy men seven- proposed plans for railroad legislation. In all probability one of these plans will be enacted into law before the Proposed Plans foi A Summary Secretary, Railroad Committee Cham President returns the railroads to their owners on Ji uary first. The Transportation Conference plan is proposed by i National Transportation Conference which was h under the auspices of the Chamber of Commerce of I Senate Committee Plan The Cummins Bill S-2906 pre- sents the recommendations of the sub-committee of the Senate Com m l ttee on I nter state Com- merce. |t provides for; — Commerce Commission Plan. The Esch-Pomerene Bill H. R. 4378 presents the plan proposed by the Interstate Commerce Com* mission. It provides for:— Railway Executives Plan The tentative draft of a laid before the House Com mil by T. D. Cuyler, President of Association of Railway Exfl. tlves, provides for;— Ownership and Operation Ownership and operation of all the railroads Id the United States by 20 to 36 separate competing systems. Ownership and operation of all railroads by private corporations under broad federal supervision. Ownership and operation of railroads by private corporatl under a broad national con' and a unified system of govs ment regulation. Consolidation and Competition Consolidation of all railroad f properties Into 20 to 36 systems n accordance with a plan pre- viously adopted by the Railway Transportation Board and ap- proved by the Interstate Com- merce Commission— consolidation to be voluntary If accomplished within seven years, and if not* compulsory. Consolidation of existing rail- road systems when approved by the Interstate Commerce Com- mission. Consolidation of existing U Into strong competitive systt wherever found to be In the p He Interest; and also provla for Joint use of equipment t terminal* when In the public tereet Federal Incorporation Federal Incorporation of all rail- roads with a requirement that each corporation shall include in Its Board of Directors two repre- sentatives of classified employees and two representatives of the gov orn ment. Opposition to federal Incorpora- tion as a complicated, protracted and probably unconstitutional method. Provision for permissive fl oral incorporation of all Interst I carriers. Security Issues and Capital Expenditures Exclusive regulation and con- trol by the Interstate Commerce Commission of the Issuance of railway stocks and bonds and of the purposes to which the pro- ceeds thereof may be applied. Full control by the Interstate Commerce Commission over stock and bond Issues and over the ex- penditure of the proceeds. Exclusive national control t the issue of securities and the a penditure of new capital — 1 1 control to be exercised by | Federal Transportation Board Adequate Revenues Initiation of rates by carriers subject to the approval of the In- terstate Commerce Commission. Requirement that the Inter- state Commerce Commission shall divide the country Into rate dis- tricts and the carriers Into rate groups for rate making purposes. Regulation of all rates that af- fect interstate commerce by the Interstate Commerce Commission under a statutory rule providing that In making rates for the sev- eral rate groups the Commission shall take into consideration the Interest of the public, the ship- pers, the wages of labor, the cost of maintenance and operation. In- cluding taxes and a fair return on the value of the property. Regulation of rates by the In- terstate Commerce Commission under the provisions of the Act to Regulate Commerce with, amendments shortening the pe- riod of suspension of rates, au- thorizing the Commission to de- termine the division of rates between carriers, to consider the cost of service principle In fixing rates, and to exercise other broad powers affecting the general rate structure. Initiation of rates by the c rlera. Exclusive regulation of rai by the Interstate Commerce Co mission with the aid of Regto I Sub-commissions under a sta I tory rule prescribing that I level of rates shall provide re I nue sufficient to pay wages 1 1 other expenses of operation 1 1 a fair return on the value of I property used in the public si v'-*e and to establish and ma I tain a credit sufficient to attr I the new capital necessary to m i the public need for transport tion facilities. Certification by the Fede I Transportation Board to the | terstate Commerce Commlse I of the amount of opuaUns re| the tcarrlers nues needed enable them functions. by to perform til { Wages and Working Conditions Creation of a committee of wages and r-^orklng conditions (four employees and four repre- sentatives of the companies) to settle disputes; with appeal to the Transportation Board in case of deadlock. Declaration that decisions of the Board, I. e., of the Govern- ment, shall be final, and that railroad strikes and lockouts are forbidden. (No declaration.) (No declaration.) Federal Agencies of Regulation Continuance of the Interstate Commerce Commission with en- larged powers to regulate rates and security. Issues. Creation of a Railway Trans- portation Board with five mem- bers appointed by the President to perform many important ex- ecutive and administrative func- tions, including some now per- formed by the Interstate Com- merce Commission. Maintenance of the Interstate Commerce Commission with all of its present powers and in ad- dition authority; to regulate car- riers by water; to control con- solidations, joint use of facilities and the pooling of freight earn- ings: to authorize additions, ex- tensions, and the construction of new lines; to adjust conflicts be- tween federal and state jurisdic- tions; and to control security is- sues and capital expenditures. Maintenance of the Interst Commerce Commission with I thority to regulate rates and continue Its present valuatl and accounting functions. Creation of a Federal Trai portatlon Board composed three Commissioners appoint by the President and chari with the general oversight fn the point of view of the pub Interest, of all transportatl< This board would be co-ordlni with the Interstate Comraei Commission and would relieve of all functions except rate re* latlon. valuation and accounUi [587a] I 75b ilroad Legislation hard Waterman mmerce of the United States d States, and included in its membership promi- men belonging to every important interest affected ransportation — commercial, industrial, agricultural, ial, labor, governmental, economic, civic and social, fundamental features of this plan, printed below in black-face type, have been approved by a referendum vote of the business men of the country. Certain a< *- ditional features of the Conference plan, printed below in light-face type, are in harmony with the remainder of the plan, but have not yet been submitted to a referendum vote ispoi tation Conference Frellnghuysen Bill S. 2998 is the pian proposed by tlonal Transportation Con- held by the U. S. Cham- Commerce:— rship and operation of ail railroads in sne United by federal corporations I comprehensive system of ment regulation. nidation of existing rail- 'Into strong competitive i under conditions pre- by the Federal Trans* n Board; with provision after five years the con- on planned by the Board welt advanced, the Board quire their completion. Warfield Plan The tentative draft* of a bill laid before the House Committee by S. Davles Warfield, President of the National Association of Owners of Railroad Securities: — Ownership and operation of all of the railroads of the country by the existing railroad, companies. Permission to consolidate exist- ing railroads when found by>the Interstate Commerce Commis- sion to be compatible with the public Interest. Amster Plan The Uenroot Bill S. 2889 pre- sents the plan proposed by Na- than L. Amster, President of the Citizens National Railroads League. It provides for:— Ownership and operation bf all railroads by one privately owned and privately operated railroad company with full public control. Complete consolidation of all railroad companies into a single national corporation thus putting an end to competition. Valuation at which each rail- road is acquired to be determined by averaging original cost less depreciation, reproduction cost less depreciation and net earn- ings over last ten years capital- ized at 6%. Plumb Plan The Sims Bill H. R. 8157 pre- sents the plan proposed by Glenn E. Plumb, and endorsed by the Railroad Brotherhoods. It pro- vides for: — Ownership of all railroads by the United States Government. Operation of ail railroads as a single system by a corporation composed of railroad employees. Consolidation of all of the rail- roads Into a single national sys- tem; and elimination of all com- petition. al Incorporation of all ex- allroad companies and of v consolidated companies i requirement that each J company shall be man- 12 directors of whom 8 elected to represent the Iders, 2 to represent the les and 2 to represent the il Interests in the terrl- *ved by the system. Opposition to federal incorpora- tion on the ground that It Is un- necessary, is probably unconstit- utional and would Involve end- less litigation. Federal Incorporation of the National Railway Corporation with a board of eleven directors, including one director represent- ing the Interstate Commerce Commission, one the State Com- missioners, two the employees. two commerce and Industry, two the farmers and three the stock- holders. slve federal regulation of Ital expenditures and the issues of all railroads In Interstate commerce. Supervision by the Interstate Commerce Commission (in con- junction with the six Regional Commerce Commissions), over issue and sale of securities and over the expenditure of proceeds. Complete supervision by the In- terstate Commerce Commission of the Issuance of all securities and the expenditure of the pro- ceeds. tlon of rates by the car- ibject to the approval of erstate Commerce Com. atlon of all rates that af- erstate commerce by the te Commerce Commission h statutory rule providing « rate structure shalt be d to yield a net return m the aggregate fair f the roads In each traffic iof the country. Mon of an individual con- fund by each road to sup- i own credit; and of a contingent fund main- toy contributions from ail ous roads to support the t all railroads. Initiation of rates by the car- riers; and consideration of pro- posed changes In rates before the schedules are filed with the Commission) by rate committees composed of representatives of the railroads and the shippers. Maintenance of a general rate level by the Interstate Commerce Commission under a statutory rule prescribing that rates shall as nearly as possible produce not less than 6<% on the aggregate property Investment account of the railroads grouped in each of the three classification terri- tories; each railroad receiving as much of the 6<% as its efficiency in operation may secure for it under competitive conditions. Distribution of the excess earn- ings of each road. 1/3 to the road and 2/3 to be divided equally between labor and the public. Initiation of at) rates by the Corporation. Regulation of rates by the Interstate Commerce Commission under a statutory rule providing that rates shall be at least adequate to produce revenues sufficient to pay alt proper operating expenses and fixed charges, to pay maximum dividends on all outstanding stock and in addition to produce a* sum not exceeding 2^> of the par value of all outstanding stock. Government guarantee uf a 4% dividend on all stock issued by the Corporation; payment of a maximum dividend of 6<& when earned: and distribution of all earnings in excess of 6% — 10°?* to labor. 30% to the public for improvements and retiring out- standing stock and 30% to the stockholders. traent of wages, hours and other conditions of of employees by boards |ng of equal numbers of itatlves of employees and of the railroads, with ap- case of a deadlock to the Transportation Board as Authorization of each Regional Commission to act as a Board of Conciliation or Arbitration In all controversies between the car- riers and the employees in its re- gion. Its decisions being subject to reviiw by the Interstate. Com- merce Commission. Appointment from time to time of advisory boards composed of equal numbers of representatives of the employees and of the Cor- poration to investigate demands relating to wages, hours of labor or working conditions and pub- lish their findings r.nd recommen- dations which, however, shalt not be binding on either side. enance of the Interstate ce Commission with all of snt powers and with cer- dltlonal powers over rates. on of a Federal Trans- n Board of five members »d by the President to i the development of a system of rail, water Ihway transportation, to ■ Into and propose meas- preventing abuses there- in upon the public neces- capital expenditures and ate security Issues. Continuation of the Interstate Commerce Commission to control and regulate rates, adjust wages and perform other regulatory functions belonging to the fed- eral government. Creation of six Regional Com- merce Commissions to exercise concurrent Jurisdiction with the Interstate Commerce Commis- sion. Formation of the National Railways Association, a corpora- tion managed by nine Interstate Commerce Commissioners and eight representatives of the rail- roads to furnish a great clearing jT^Js^^o^j^a^roadoperatlon^^^ Maintenance of the Interstate Commerce Commission with all of its present powers' and In ad- dition authority to regulate se- curity Issues and cVpltal expen- ditures and to exercise other broad regulatory functions. Creation of an Efficiency and Economy Board of five members appointed by the President — four from a list submitted by the na- tional engineering societies and one nominated by the employees —to study facilities and service and to devise and recommend Improvements In physical equip- ment and In operating methods. Federal incorporation of the National Railways Operating Corporation for a term of 100 years with a board of 15 direc- tors — 5 named by the President. 6 elected by the operating offlclais and 5 elected by the classified railroad employees. Issue of all railroad securities by the United States Government Expenditures of all capital funds for railroad purposes by the United States Government. Initiation of all rates by the National Railway Operating Cor- poration. Regulation of ail rates by the Interstate Commerce Commission. Payment of deficit (if any) by the United States Government. Distribution of surplus earn- ings (If any) after operating ex- penses are paid and fixed charges are met. including the Interest on outstanding government se- curities — Vt to the government and % to the railroad employees. Determination of wages by the Board of Directors of the Cor- poration. Adjustment of disputes between officials and men by boards to which the operating officials elect 5 members and the men 5 mem- bers; with appeal to the Direc- tors In case the Board falls to reach an adjustment Maintenance of the Interstate Commerce Commission with Its present rate-making powers. Creation of the Railway Board of Appraisement and Extension composed of the nine Interstate Commerce Commissioners and three other members selected by the Directors of the Corporation to determine the amount of com- pensation to be paid to the pres- ent owners of the roads ari the amount to be paid for new exten- sions and improvements. [587b] 76 RAILROAD LEGISLATION [Vol. VIII portation system, would greatly retard and impede industry and commerce and only result in heavy loss to the whole country. Our experience during the war with uneconomic overconsoli- dations and over-centralizations attempted without a proper knowledge of the fundamental principles of economic organiza- tion and distribution of functions, should cause us to pause be- fore we plunge headlong into other top-heavy consolidations, which are not, as a prerequisite, squarely founded on scientific economic determinations of all factors involved. We have seen war organizations that worked well in large cities break down with costly results when applied by the same officials to the country as a whole, because they did not understand the funda- mental principles of organization and economic adjustment of functions. Consolidations should be limited to normal exten- sions and combinations which have an economic value, preserving all proper economic competitive factors. A contrary course would prove most costly and unwise. Economic Co-ordination It is, however, vitally essential that the transportation units of the country be properly co-ordinated. By this is meant not the consolidation of all the roads, but the relating of the several units so that they will function to the common advantage while preserving their individual identity and several operation. So related, they would avoid destructive competition while stimulat- ing a wholesome competitive rivalry, encouraging genius and ef- fective economics, and furthering development and progress. Properly adapted and applied this would result in direct benefit and profit to the roads, to the employees and to the entire indus- trial and commercial interests of the country. This can be done. Rates The statement that "the sorrect solution of rates is to have them made by public officials" is unsound and ill advised. Shoes should be made by shoemakers and rail rates by rail rate- makers experienced in railroading. Nor should they be ar- rived at by compromise, barter or the mere ponderance of a vote. The Governmental administrative body, with examiner and public service functions, should have one or two experienced rail rate men in its body and should see that the making and administration of rates conform with the law. The statutes should be expressed in terms of principles, limitations and self- [S88] No. 4] AN ENGINEER'S POINT OFIVIEW . 77 determinate ratios and worded so as to preadvise the roads what their obligations and duties are. The provisions for the public service functions of the administrative body should grant author- ity to meet situations, emergencies and needs which the statutes fail to cover. Distribution of Revenues Much has been said in approval of the contingent fund plan and the equalization of revenues as expressed in Section 6 of Senate Bill 3288. I am obliged to take issue with the proponents of these provisions. Of all the pending legislation, if enacted and enforced, this section, which proposes to distribute certain earnings of profitable roads to the unprofitable roads, would in time only wreck the transportation system of the country and cripple industry and commerce. Roads now efficient would be- come inefficient and inefficient roads only less efficient. The sec- tion as it now stands fatally violates all economic law. It, in fact, provides a system of forcing accounts to meet deficits — but another sample of super-accounting for self and public deception. It is economic error to penalize efficiency or to put a premium on inefficiency. Experience teaches that what does not conform to economic law cannot endure. This is axiomatic. Economic Solutions There is a solution to this problem and this section of the Sen- ate bill can be amended to conform to the law. First. It should provide for a standard wage scale, cost of operation, rates and dividends in limitation of ratios and per- centums as a result of an exhaustive engineering survey. Second. It should provide a margin in rates to meet fluctua- tions, the balance resulting going to the Government as a tax and thus finally returning to the consumer. Third. It should provide that any savings or increased bal- ances resulting from any efficiencies or economies that shall be effected shall be distributed one-third to the shareholders in the form of increase to dividends ; one-third to the employees and management, effecting the saving and one-third to the Govern- ment on earned sums until such time as it can be applied in a permanent reduction of rates. By 1 thus preserving proper incen- tive for greater effort and efficiency, substantial economies will be encouraged and inventive genius stimulated. This is good business. [589] 78 RAILROAD LEGISLATION [Vol. Vm Plans to Refinance It has been stated here by a gentleman who stands high in financial circles that "the $6,000,000,000 needed to refinance the railroads of the country cannot be raised by any conceivable plan." In taking issue with the speaker, I wish to state that I might refer him to half a dozen or more gentlemen who can pro- vide a suitable plan for this accomplishment and that my own work on this problem some months ago crystallized in the con- crete form of an outline and chart, which I am able to state is well adapted effectively to finance the railroads on a safe and sound basis and impart a high standard of security to their paper. Arbitration The provision in pending legislation looking to make arbitra- tion compulsory is both amusing and unwise. Unwise because it will not work. Amusing because it is just the opposite from what it should be. The act should specifically provide that no rates, no wage scales, no time schedules and no operating factors shall be or become a subject for arbitration or bargaining. That these elements shall be fixed only as the result of exact, scientific determinations of accurate and thorough surveys made by a competent staff of engineers constituted for that purpose. It is time we removed the solution of these problems from the realm of guess work, bargaining, barter and compromise. When we do so, all individuals and groups concerned will profit most greatly. Present Needs What the railroads need is not copious legislation and mul- tiplicity of boards, but rather the enactment of a few simple measures and some good straight work by those who will untie their knots and map out the working details of plans that will carry into effective operation the proper relating of their several activities. Conclusions In conclusion I wish to urge that the pending bills and legisla- tion be amended before enactment in line with these suggestions, — and that steps be taken by those in a position to act, to form and provide for a staff of engineers and experienced railroad men who shall take up the solution of these problems and work out detailed plans to carry solutions into effective operation. [590] THE REGULATION OF WATER CARRIERS R. A. HISCANO General Manager, Catskill Evening Line, New York IN the past three years there has been considerable attention directed to our waterways, and this is due to the growing re- alization of the need for additional transportation facilities. Recent experience has plainly indicated that the railroads of the country can not entirely take care of the country's traffic, and for . many reasons extension of the railroad systems is not possible, particularly in the more densely settled sections of the United States. We then come to the question of what can the water lines do to furnish the additional means of satisfactorily handling the country's tonnage. In order to form some basis for the plan of the more inten- sive use of the rivers, lakes and canals of the United States it is necessary to consider the position the water lines occupied sixty years or more ago. At that period the bulk of the tonnage was shipped by water and the rail lines were not the mainstay of the shipping or traveling public. As you all know, gradually the railroads extended and as they grew the water lines declined. Now many reasons have been advanced which explain why the waterways each year continued to be less and less used, but I think the first and most important cause was the smaller scale on which a navigation company was operated. It was usually an individual organization dominated by one man whose financial means were necessarily limited. In fact, this condition still ex- ists today to a great extent. Now a one man company could not always keep abreast of times and so, when the equipment wore out, no attempt was made to renew it or to continue the service. Gradually as the water lines in a section retired, others were discouraged from attempting to enter the field. The second reason was the unceasing warfare waged by the railroads, who, with their extensive organizations, were able by cut-throat rates, competing service, rebates, etc., to g a 3a "S«« "^-k-S .^ o £"8*8 > 3 t, w Q, 4) ttJ ■ ■«« iill ' ftfSf- i - C°r -S S m fi o-S ra 3l3rf fl ®3?l5lfl a„«f ! ■-■^■•^Hiii* i!*- j IfclSli^iilllAi • S fta S 1 ™ S *-S £ §.£ u o-3 <= ' >b\§2*2_ . ** e S a o 0.0*0. c'o.* i 3 A a B 8.. I s °f Si o ** as "»2 "a S~2 C K r § S5? 0^:3 s"5 ■fa 3i:g °£0 ado IT- 03 2 © 5a a g a ;s 11 0) « « Si ^i o a I? !! 9 9 o gal EEfe E85 S"S Iks £•5 3 « © ■as - © Sal til »§ P e* (S IP .8 £8 i ! a 8 1 ■88 3 • g 5? - es 3 SS •3 fii c fc « a U -' C 1 C-O C a! liB = ci K 3«3-s 3 3 a v 3 » II ■gas 5 E - c2§ lis C 1 > Ed* *$: "B8 • O 5>S fit B °§ 8 Jll 00 2° SE J SS CO ~« lis » «5 I- «5 « E »E5 E 3 O ■ O 00 V ■r "O ° % s« ofe fc *£'% a s «> ->>§« ••SS2,; > in u 1 £ ^0 8 §53* & alUS sl^To 122^ C » d . — S w'O — Sri si"ii ei£S« 9 S-o 3 2-* = StE* 5 1^°^ ca c oft do el n 3 o £3 SEI r* ft B ||o *».£ o i ftj 2 a 3 Sa-2 8 = S — T) «, d a i. fc.-- ll v d i! 99 Sl*2 iai 70 6 o_ E ?5 I • El; 58§ >.».■ c ft « 3»x "JC3 5 or "52 Z a§ 1 is ■s ii I G a ca • t s 9 S Ki S "as « ■■8- still fl-2*' 5 c Sib 8-2 = 1- el!-! 33-fil gtlft 5 -«• •3a II I! si o2 8' ■3-3 n i- IS 82 3|I d ■_ ~ 331 II! 5js "ri = 2 S3 '■5- S'-S I* I? Q -s [617a] 105b 8«S II 5s !? * a is t © fj 3' B a E° Is h Pi 5 fi a o» d£ i 6 3e *s si- tu •0 8-; □ Co «-£ mice Eo 6Z2 S58 ■§ 1! is a s3 ■ft ® » if* s< "£ fc ^2 2S^ £s£ 08*0 » a) •0 aO. Sfim ess a «l 0~a a) to £§ 2j S 386 vat. £*o s Bo «- c aJ a- c -IS C £ to o > c gq o"C «J„o -6," ® it ■£2" SetS S 1 - ■ao o££ C 3 IeI 2 a x* . asset -* h rtj* * eg" ISpa ill SK liS i*ih SS5 Willi £H 5 l E 5fl^"| s §:;o is •§*.!>. «"£ E° £ ££& ill a Sell g c tn fie ■Sen l|§ S»e *■•"£:; isll ills ~ - 'ft O B " £1 3 c 'o£ = bo es c .r 8« && £2 2L 0£S 4> (p K til 3|i§ f ^|S2 I S18_ 1^3 IS • U S23»S g£o^ = g— P c £ 5*— C i£, j: til ij I ° s * §1 1 h I _-» ° B 5£'Sfl ie Eg 5 S -Sfs° 2-S., S as 3 2|=§6?ffefe s Si 1 | fi "i I i 1 i 3 * 3 si id*Sii*n* *s. i 1 I E .SfflgS -. I 1 ta^a E 1'5 8 •I esS>3SrfiPSJHfc|ioei H Kg «•» ! jt S> «» " • - s 111 JJ la ll 1 I H J ess 8" « IS eg III 8S« §s.- g5 ^ so e* s^? Sill 'a W&? i| 8 l ill^fsl^S •w - g>.clEs« = &So „aS5 0Si! M S«' D Bi,o ■55 o "=g«- = "o C S — sg° 2 sz*°°«2s°> : Z-o *83 3 4te!« s s s-Iis *I*s|S*hsBsSf^ | £ §^jl"|S5eE|^ 2 e w ■*'H 5 PJ O t. mSf*- h a ^j«^5ts a -iBl;=B ssl||3||5|3 B *|fl1 : c r op y_ t-S o a **»** •3 o I 3 fls si.. B S ~ "5a E »o« I ME C O u 4> 8 .81 3 |Se tl J*- ••a o,-.t« §& fees ^E3 |a 8^-5 H 1 ill J Is s, & 5 £«£l§S •is sfi:® 3 .«s! 1 £ a o oi 05 3 11 flSfl .3 oct I* I** 1 5°-E|SgS5: If |li a lgla-glli| 2 s : * 5 n B « 3*8. =S„ S S^ . 8S5lS s 1^8M|«2i||ii* £S£-5 uo°= « o^5„ESo«o u, Su5 ^ ESS ||!I! liiiifellisll?! tail IsS: 1 tthe term it is the public that really owns the railroads, even though for purposes of convenience and desirability, it may turn over the administration, and perhaps even the control, of these arteries of commerce, to private in- dividuals. Instead of speaking of private owners we should rather speak of the trustees of the public. It is for that reason that I welcome the choice of the term "The Railroads and the Inves- tor." The investor is indeed entitled to a fair return on his in- vestment, but that is a very different thing from saying that the private owner of a railway has indefeasible and exclusive rights [710] No. 4] THE IMPORTANCE OF THE PUBLIC INTEREST 199 to their operation. So that here also you see that the real inter- ests, even from the point of view of the investor, are the public interests rather than the purely private interests. Finally this morning we had the pleasure of listening to the discussion of the relation of the railroads and labor. From one point of view that also represented a class interest, a selfish inter- est. We shall never arrive at a solution of the railway problem if we look at it only from the point of view of the class or the selfish interest. The labor interest, from a higher point of view, is also a public interest. In what can the public be more interested than in such a satisfactory labor situation as to spell not only economy and efficiency in the operation, but also such contentment in the great mass of the workers as will redound to the public ad- vantage in the broadest sense of the term ? But on the other hand if better wages and shorter hours are deemed more important by the workers than continuous and satisfactory service, not only will the public suffer, but in the end also the workers. It is, therefore, for these reasons, that I say we shall never reach a solution of the problem that now confronts us in a more aggravated form than ever before in our history, if we continue to regard it from the separate angles of each selfish and contend- ing interest. We find indeed a homage of lip service rendered to the higher idea by most of the contending parties. The in- vestors say a great deal about their interest in the labor problem ; but if they have to choose between adequate returns on their in- vestments and low wages, there is not much doubt as to what they would choose. And labor does precisely the same thing. In the admirable address of Mr. Shea last night we heard some entirely sincere sentiments about the need of safeguarding the property rights of the investor. But, if it came to a showdown between a return to the capital invested and a satisfactory wage for the worker, there is little doubt as to what the decision would be. What I want to point out in conclusion is that whatever our final answer may be — and I think this afternoon's deliberations will help us to come a little closer to a final decision, because this afternoon we are looking at the question, not from the point of view of any one of these three contending parties, the shipper, the investor or the laborer, but from the angle of the real social- economic aspects of the situation as a whole or the wider interests of the community — we shall see that in final analysis it is always [711] 200 RAILROAD LEGISLATION [Vol. VIII the public that has to pay. If the shipper is charged a high rate, the charges are, in the long run, added to the price of the commodities in the hands of the final consumer. If the investor does not secure an adequate return on his investment, it will necessarily have to be supplemented by some form of pub- lic aid. If the capital is not forthcoming, the railroads will not be built. We shall need, in addition to the twenty billions of capital that we now have, at least another twenty or thirty bil- lions, before our railway system can be declared complete. If this is to be provided by private individuals, and if the investor does not get an adequate return from the rates and fares, it will have to come from the public, either in the shape of a guarantee of interest or dividends, or in the shape of a definite subsidy to make up the deficit. In either case, it is the taxpayer, the public, that will ultimately pay. So again with the laborer. I think that the working men have made one essential and new contribution to the topic. We are all pleading for an automatic adjustment of the rate situation so that the investor will not be prejudiced. We have not yet worked out a plan, under private ownership and management, of an automatic adjustment of the wage question. The fears which, as we have learned, permeate the railway laborers today are all reducible to the lack of any such system of automatic adjust- ment. But if we have such an automatic adjustment, and if wages continue to rise with the cost of living, here again it is the public which must stand the burden. The investor cer- tainly cannot do it. The public has got to do it, either through increased railway rates or through taxation to meet the deficit. And if the Government should finally be compelled to manage the railways, with a consequent probability that the profits of private management would be dissipated through an in- crease of ordinary expenses, we sJkould be confronted by the same situation that we find in other forms of Government enterprise. We must choose between a higher rate to the shipper, which ultimately means increased prices to the consumer, or higher levies on the taxpayer. Accordingly, it is quite clear that after all it is the public interest which is the paramount interest and that all the contending and conflicting demands of supposedly antagonistic classes must be reduced to the higher synthesis of the public interest. From this point of view I think we shall all look forward to hearing the contributions of the day. [712] THE RAILROADS AND THE PUBLIC FRANK H. SISSON Vice-President of the Guaranty Trust Company of New York ONE of the chief limitations of our particular form of democracy is that the course of legislation is too often determined by special interests at the expense of the general interest. An aggressive and well organized support of or opposition to proposed legislation, even though entirely selfish in purpose, in too many instances determines legislative action in matters in which the public interest receives scant consideration. One of the wisest things Theodore Roosevelt ever said was that "the public won't take its own part." In no field of public interest has this been more apparent than in that of transportation. For a quarter of a century the railroad business in the United States has been a battle-ground for conflicting special interests. In- vestor, shipper, politician, and laborer have contended in turn for the privilege of exploiting the railroads for their own advantage, without regard to public considerations. Each in turn has won victories at the expense of the public, which the public has suf- fered much too patiently. With the whole railroad question laid upon the table for fresh determination, it would seem that the time is opportune for the public voice to be heard and the public interest established. It might be assumed that this course of action would be taken by a Congress elected to represent the whole people, but the experience of the past does not warrant this assumption in the process of either legislation or regulation. The marvel of the situation is that, in spite of the conflict which has been waged over the rail- roads, they have continued to serve their public so well, at the lowest cost, with the lowest capitalization, and the greatest effi- ciency of any railroads in the world. Public Stake Paramount Consideration I feel warranted in stating that there is nothing whatever in our own experience with public ownership in this country, or in the experience of other countries, to justify an argument that it would secure better results, so I return to the conclusion that the alternative is private ownership under public regulation, but [713] 202 RAILROAD LEGISLATION [Vol. VIII under a public regulation conducted primarily and as completely as possible in the broad public interest. To obtain that result, it is essential that there may be a larger appreciation of the meaning of transportation in the life of our people and of the high importance of its fair and constructive treatment. The greed of either capital or labor, the ambitions of politicians seeking an issue, the selfishness of shippers fighting to save dimes and losing dollars, the prejudices of theorists — the mistakes of the past and the animosities of the present — should not be allowed to interfere with the solution of the problem. The public stake in this situation is greater than that of any or all of the parties directly concerned and must be protected. Furthermore, the very protection of the public's interest implies justice and fair dealing to all, which cannot be assured by any other policy. I think it may be fairly argued that the future prosperity of the people of the United States is dependent upon adequate and efficient transportation. Without proper distribution both pro- ducer and consumer must suffer. Adequate transportation can- not be obtained without credit, credit cannot be secured without earning power, earning power will not be sufficient without fair rates and just regulation. Or, to approach the proposition from the standpoint of labor, efficient transportation is not possible without competent service, and competent service is impossible without fair wages and working conditions. Fair wages cannot be paid unless warranted by earning power, and earning power would be inadequate with- out fair rates. Again, to approach the problem from the standpoint of the shipper, there will not be adequate or efficient transportation to bear his goods to market unless rates are high enough to com- mand sufficient credit to invite capital, and pay sufficient wages to attract labor. From every standpoint, we revert to the question of rates and, as the determination of that question lies in the hands of the public, through its duly authorized representatives, the correct solution of the problem depends upon the public understanding of it. The chief danger of the situation is that the public, through failure to understand and appreciate the importance of the prob- lem, may permit a solution, in whole or in part opposed to the general welfare, to be worked out under the pressure of selfish interests. [714] No. 4] THE RAILROADS AND THE PUBLIC 203 Roads Vital to Domestic and Foreign Commerce Our railroads should be taken out of the field of exploitation into that of sound economics. They present a business problem to a business people, and should be accorded a solution conceived and worked out in the same spirit as our banking system. To-day this problem assumes even a greater importance than in the past, because of world conditions. The markets of the world lie open to American commerce and industry. If we can produce and distribute our surplus products economically so as to meet the competition of the world, we can continue American prosperity. No factor enters into this opportunity of greater importance than inland transportation. The railroads of this country must be able to furnish the transportation which will assure the pro- duction and movement of American goods, if we are to be factors in the world's trade. Such efficiency will demand many millions of new capital, scientific regulation and operation, and the elimi- nation of the waste and the friction which have been forced upon the railroads by governmental interference. New capital can be attracted only upon the basis of adequate earnings and fair regulation, assuring a return which will make railroad investments and operation attractive. Neither brains nor money nor labor can be commandeered into such service or obtained without fair compensation. The railroads must have more partners and fewer creditors, more friends and fewer class exploiters. Unless the United States safeguards its position by sound business practices, Europe liberated from war and quickened by its necessities, eventually will again command international commerce. A non-political banking system has met our great test. Our next great step in economic progress should be toward a non- political railroad system. Only upon such a basis can we hope to maintain our prosperity through our ability to market our products. I would reemphasize this point. Every farmer, every manufacturer, every laborer, every business man in the country is vitally concerned in efficient transportation as the first necessity of commerce. Most Vital of All Factors But if no other factor were considered by the public, the relationship of the railroad problem to the cost of living should [715] 204 RAILROAD LEGISLATION [Vol. VIII arouse the keenest general interest and force an expeditious, sat- isfactory solution of the problem. Unfortunately, however, there seems to be an insufficient understanding of this vital factor by the majority of our people. The railroad brotherhoods, it is true, have recently attempted to call the public's attention to the connection, but they have distorted the facts to serve their own selfish purposes. In opposing the Esch bill, the brotherhoods allege that it will validate eight billion dollars of "watered" railway capital and compel the companies to pay dividends on "shadow dollars." The spokesmen for three brotherhoods contend that the increase in rates which will be necessary to pay these dividends will "take one billion dollars away from the shippers and add from three to five billions of dollars to what the consumers pay for the necessaries of life." It is significant to note that the leader of one of the four brotherhoods declined to sign the statement in which this absurd assertion was made, frankly stating, according to report, that he did not believe the cost of living would be increased by such an amount. As to the allegation regarding "watered" stock, it is a well known fact that since 1907 the railways have kept their accounts in the manner prescribed by the Interstate Commerce Commis- sion, and that in the twelve years which have elapsed there has not been and could not have been any so-called "watering" of stock. If there had been eight to ten billion dollars of "watering" prior to 1907 it would have been necessary to build the 230,000 miles of railroads constructed up to that time at an average cost of only $22,000 a mile, which was not possible — and the leaders of the brotherhoods know that as well as anyone else. The real fact is that on any fair basis of valuation there is not a dollar of "water" in railroad capital as a whole. We must bear in mind that a very large part of the savings of the people of this country is invested in railroads, directly through ownership of stocks and bonds and indirectly through the investments of savings banks and insurance companies. Rail- road credit, in fact, is at the foundation of all American credit; and railroad credit can be maintained only by allowing the rail- roads living rates out of which a fair return can be paid on the investment. At present the return on property investment de- rived from earnings of the controlled roads bids fair to be only [716] No. 4] THE RAILROADS AND THE PUBLIC 205 about three per cent, which is not only far from fair but actually a starvation rate. It is worth noting, in this connection, that only a half dozen railway stocks now sell at par, and it has not been possible to issue a single share of new stock this year and only a very little in the last five years, although industrial stocks have been issued to the extent of more than a billion dollars. Railway shares which still pay seven per cent dividends are at a discount of from ten to twenty per cent. And under such conditions railways can finance themselves only by borrowing, and then only under ex- ceedingly disadvantageous conditions. Effect of Rates on Living Costs There need be no fear of materially increasing the cost of living by allowing railroad capital a living wage, for increase in freight rates have but a slight effect on the general cost of living, as compared with other factors. This is demonstrated, to cite only one specific example, by the fact that the item of transportation, computed from the shipping of a steer on a ranch to the selling of a pair of shoes in a retail store, enters into the cost of shoes only to the extent of twenty- five cents a pair. So, railway rates cannot be held responsible for the increase in the selling price of shoes which formerly retailed at $5 and now cost $12. The cost of living began its sharpest increase late in 1915. Taking September, 1915, as parity for the wholesale price of all commodities, it is found that in July, 1917, it had reached 187. No material increase in the average freight rate of all com- modities took place until August of 1917. Thus the advance from parity to 187 in the wholesale price of all commodities had taken place with freight rates practically unchanged. Freight rates advanced in August, 1917, and from that time on the in- crease in commodity prices was very gradual, reaching only 197 in February, 1919, an increase of only 12 points over the price in July, 1917. This would indicate that the cost of living gained its greatest headway without any increase in rates, and that this headway was not maintained at the same rate when freight charges became heavier. The average commodity value per ton of freight carried by the railroads in 1919 has been $119, as compared with $56 in 1914. The average freight charge per ton has been $2.80 this [717] 206 RAILROAD LEGISLATION [Vol. VHI year, as against $2 in 1914. The percentage of the carrying charge to the value of a ton of freight has been 2.4 per cent, as contrasted with 3.6 per cent in 1914. But the increase in the cost of the average ton of freight over that of 1914 has been $63, while the increase in the freight charges per ton has been only 80 cents, a mere pittance — and the relation of freight increase to cost increase has been only 1.3 per cent. To sum up, out of the average increase of $63 in the cost of a ton of freight in the five-year period of 1914 to 1919 only 80 cents was caused by increased freight charges. These statistics unquestionably prove the negligible influence which transportation costs exert on commodity prices, and they certainly sustain the contention that a fair increase in freight rates would not materially increase the cost of living. On the other hand, if adequate rates are not granted and the railroads are brought to the verge of bankruptcy, with the im- paired service which such a plight would necessarily entail, the cost of living would inevitably mount still higher, because in- creased production — the only way prevailing prices can be re- duced — would be impossible, due to decreased distribution facili- ties for raw materials ; and even if possible, by virtue of some miracle, it would be in vain owing to the lack of sufficient means for distributing additional products. Government Control a Heavy Financial Burden There is growing agitation for reduced taxation as a means to lower the cost of living, but it is curious that in this connection little thought, apparently, has been given by the public to one of the important causes of heavy taxation, Government control of the railroads. While the net profits derived by the Government from operation of the railroads in September were $3,390,000, the Eastern carriers earned in {he first eight months of this year only $114,000,000, as compared with a standard return, guar- anteed by the Government, of $231,000,000. In other words, the Government must pay the difference, which amounts to $117,000,000. The earnings of the Southern roads, during the same period totaled $50,000,000, as compared with a standard of $89,000,000, making a deficit of $39,000,000 for the Govern- ment. The earnings of the Western roads in the first eight months of 1919 amounted to $163,000,000, or $79,000,000 less than the guaranteed return. The grand total of the deficit of the [718] No. 4] THE RAILROADS AND THE PUBLIC 207 three groups from the first of the year until the end of August was $235,000,000, which must come out of the taxpayers' pockets. The total operating deficit of the roads under Government con- trol at the end of the calendar year is conservatively estimated as likely to be not less than $300,000,000, while the total deficit for the two years of Government operation promises to be not less than $500,000,000. In this connection it is interesting to note that there has been an increase of 11 per cent in the number of employees of the roads under Government control, and an average increase in unit of compensation of 53 per cent. These facts and figures have a far greater significance than merely to show that Government control of the roads has been expensive, when due consideration is given to their bearing on the future of the roads. Organized labor has served notice that it will not consent to a reduction of prevailing wages. The Anderson amendment to the Esch bill was the first attempt to enforce that decree through legislative channels, for that amendment, if enacted into the railroad law which Congress is now framing, would serve to perpetuate the high wage scale put into effect on the railroads as a war measure to meet the high cost of living. The amendment provides for the continuation of the Railway Adjustment Boards, created by Director General McAdoo, and provides that the wages which have been fixed by them shall stand. Furthermore, it provides that these cases in which the existing high wages were fixed shall not be reopened except with considerable difficulty and red-tape procedure favorable to the brotherhoods. The possibilities of these provisions are so obvious as to need no comment. But it is absolutely certain that the railroads cannot maintain the present wage scale when they are returned to private man- agement and the United States Treasury — or, in other words, the money of the tax-payers — is no longer available, unless the roads are permitted to earn rates commensurate with the service rendered. Adequate Maintenance Necessary Furthermore, the carriers must be permitted to earn enough to maintain themselves in proper physical condition. During the period of Government control they have been under-maintained, largely as a result of the war. In the pre-war period normal rail [719] 208 RAILROAD LEGISLATION [Vol. VIII purchases by the railroad companies consumed 3,000,000 tons of steel, and including steel track material, railroad consumption of steel was not far from 4,000,000 tons annually. But to catch up with their maintenance requirements, it is estimated, the roads need 5,000,000 tons of steel for rails alone. It should be borne in mind, also, that orders for new equipment mean more business for scores of industries. So, as the railroads prosper business generally prospers, and, consequently, no busi- ness man can allow the railroads to be injured permanently with- out also endangering his own interests. Hundreds of Millions of New Capital Needed. It is plain that in the next few years hundreds of millions of dollars will have to be invested in the railroads. One authority recently asserted that at least six billion dollars of new capital must be invested in railroad facilities within the next three years, if the roads are to be able to handle the country's commerce sat- isfactorily. Most of the capital must come from the savings of the people, which can be attracted to such investment only on the basis of public confidence in the stability of railway earnings. We should not forget, in this connection, that the railroads will have to bid for those millions in keen competition with many other borrowers who will be able and eager to pay attractive interest rates. All the world urgently needs American capital, and as has wisely been observed, "investors need not, and will not, be mendicants for the privilege of serving the public." In other words, the credit of the railroads must be restored through en- larged earning powers sufficient to enable railway securities to take rank with the best in the American market. The paramount question then is: Will the American people deny to the transportation industry the free operation of those basic principles which have developed all American industry, and upon which future American prosperity depends? Service Based on Reward Efficient service can be secured only by the stimulus of ade- quate reward. This is true in the railroad field, as elsewhere. Neither capital nor labor will support any other programme. Any governmental attempt to own or operate so vast a busi- ness as transportation must assuredly fail through the absence of selfish interest as an incentive to achievement, the lack of stand- ards of efficiency, or suffering through failure to achieve them, [720] No. 4] THE RAILROADS AND THE PUBLIC 209 assured political interference, delay, waste, vacillation, and ham- pering limitations. Political direction of transportation could result only in dis- aster. The public interest demands a transportation system with a credit which will command the funds of investors and not of taxpayers, an operating efficiency stimulated by the hope of re- ward, and a construction programme which will develop the resources of the country. That these results can best be secured under private ownership and private management, subject to unified and sane public regulation, is the only conclusion justified by experience. No theory can disprove the record of facts. The roads must be saved from these dangers which threaten them and saved immediately. Further procrastination threatens the welfare of the whole country. The Challenge of Socialism There is another menace to both the railroads and the country to which the American public must also awake, and that is the proposal of the railroad brotherhoods to nationalize the railroads for their particular benefit. In that proposal, socialism, for the first time in our history, seriously throws down the gage of battle nationally and demands a trial at arms. This challenge, in itself of far-reaching importance in the attempt it makes to control the great service of transportation, is of much greater significance in the definite threat that success in this field will be followed by efforts to secure the nationalization of all industry, or, in other words, a complete socialistic state. The time has come for the citizens of this country, its business men and its laborers, its property owners and its workers, seri- ously to face the issue thus presented, if they are not to see their interests ruined and their property confiscated by economic ex- periments and social hysteria which seem to fill the air. Not since the free silver fallacy arose to threaten American business and progress has so dangerous a programme threatened our prosperity. This bold effort to take possession of one of the nation's basic and most vital industries for the benefit of a single class, and to the assured detriment of all others, frankly discloses the wide spread of socialistic thought in this country and the danger to American institutions which it implies. [721] 210 RAILROAD LEGISLATION [Vol. VIII It is inconceivable that, if the American people as a whole really understood the elements in the problem presented, there could be any doubt about their solving it. The most ordinary common sense, awakened self-interest, and knowledge of human nature and human experience should quickly repudiate the fal- lacies inherent in the proposed Plumb plan. The danger is that public thought will not be quickened to the situation, and, through lack of understanding and organization, legislation may be forced through Congress by means of organized political pressure, backed by abundant funds for propaganda and lobbying, which will work irreparable mischief before the public is aroused to the peril. Interests of All Classes Involved Every element in the body politic has a stake in this situation. The man with money and the man without it are equally con- cerned, and the great middle class, which constitutes the ma- jority, has its all involved. Even the railroad worker, himself, while he would undoubtedly profit temporarily by control of these properties, would in the long run be injured because of the as- sured failure of the plan and the economic chaos which would follow the working out of this programme. Wall Street As Middleman The brotherhood leaders seem to rest under the general false impression that Wall Street owns the railroads and furnishes the money for them. This is true only to the extent that Wall Street acts as the middleman in this situation. The railroads are owned, not by Wall Street, but by the millions of stockholders, bondholders, savings bank depositors, life insurance policyhold- ers, etc., to whom railroad securities have been distributed. Wall Street does not fix the rate for money ; that is fixed by economic conditions, and security offerings are based upon the price at which the public will absorb them — and that law would operate just as surely if the Government were undertaking the financial burden. By what process could the holders of railroad securities based upon mortgages to-day be compelled to exchange these holdings or suffer their confiscation? Indeed, what right would the trustees of fiduciary institutions have to permit such sacrifices? It is absolutely certain that the Government would not have either the power or the right to work out any such financial programme. [722] No. 4] THE RAILROADS AND THE PUBLIC 211 Class Rule and Class Profiteering Stripped of all its fine phrases and socialistic rhetoric, the Plumb plan is simply a scheme for class rule and class profiteer- ing. It provides for government of transportation of, by, and for the railroad brotherhoods. There is no modest restraint of profit-sharing in the plan, because it turns these properties over to the employees on a practically perpetual lease under a scheme of control in which they fix the return to themselves through their power over wages, and under this lease they accept no risk of the business whatever. That is borne entirely by the Government, or stated more fairly, by the public. There is no provision for securing a fair rental for the property, no. effective control of rates by public authority, and the control over wages lies in the hands of a board that the employees would directly control by a two-thirds majority, and completely control by reason of political influence. What the consequence may be of this class control over trans- portation is foreshadowed by the already liberal increases which labor has secured through Government control of railroads, and the large additional advances labor is now seeking. Since 1915 railroad labor has averaged a wage increase of more than 85 per cent; more than $1,000,000,000 has been added to the wage roll under Government direction, and demands now lie before the Government authorities for increases aggregating $800,000,000 more. Only a few days ago the Director General of the Railroads submitted to representatives of the four railway brotherhoods an increased wage scale amounting approximately to $3,000,000 a month. From the broad standpoint of public interest it seems so obvious as to be beyond argument that the control of this great service of transportation should remain in the hands of the public and not be delegated to any selfish class. That mistakes have been made under previous systems of control, or lack of control, constitutes no proper argument for attempting this radical departure from the assured bounds of experience. Only Way Solution Can Be Worked Out The railroad situation to-day presents many real problems, but these problems cannot be solved properly in the interests of any class or under threat and force. Only patient and fair-minded study, from the viewpoint solely of the general interest, can [723] 212 RAILROAD LEGISLATION [Vol. VIII bring a proper solution. The securing of that solution is just as vital to the railroad brotherhoods and to labor generally as to any other interest involved, for after all they are all citizens of the United States, and only as the United States prospers as a whole can they long prosper. Continued prosperity can be based only upon sound economic and political principles, and any ven- ture into other fields must bring disaster to all concerned. The struggle is on between democracy and socialism. In spite of its shortcomings, we have developed in this country a system under which its people have enjoyed the greatest prosperity of any people in the world's history. To-day all the world turns to us for help, and if we jeopardize not only our own powers of service but also our own national future by departing so radically from the system which has made us great we shall be recreant to both our duty and our opportunity. Individual freedom and the incentive to success, which have built this country, cannot be forsaken without pulling down over our own heads the struc- ture we have so proudly reared. It seems unthinkable that such a possibility could even be discussed, and yet here it faces us, not only a possibility, but a probability, unless the intelligence of the country is aroused to meet it. On this question of Government ownership of railroads we stand to-day in the first line trenches for the protection of the private ownership of all property. If this position is lost the whole line will be seriously threatened. Men who believe in American institutions, in property rights, in orderly government, must line up in opposition to this attack, or live to regret the day of their unpreparedness. The railroad problem is the immediate and intimate problem of all of us as citizens, and taxpayers, consumers and producers. If we are not able to solve this fundamental economic question fairly and sanely in the public interest through our duly accredited representatives, we shall have loosened the very cornerstone of our whole economic structure and must be prepared to see it tumble about us carrying disaster to special interest and general interest alike. Democracy faces the test. Can it function effi- ciently in such a crisis or must it learn the lesson through years of experiment and disaster? That is the question of the hour. [724] THE OBJECTIONS TO AN IMMEDIATE RESUMPTION OF PRIVATE OPERATION GEORGE FOSTER PEABODY Banker, New York WE are all indebted to the Chairman for putting so clearly before us the foundation of the discussion this after- noon, which is really the foundation of the whole study we have before us, the interest of the public as being paramount, as being fundamental to the whole question. I wish it were pos- sible that his very succinct expression of that might be put before the minds of the whole public because, as Mr. Sisson has pointed out, the public is indicating very slight interest in this, the most important domestic issue that has ever come before the country. My excuse for speaking on this subject, apart from my interest in public affairs for many years, is that for more than a third of a century I have been actively engaged as a banker and railroad official, in the construction of railroads and the operation of rail- roads and the observance of the conditions in the relation of rail- roads to the public practically, and with reference to the influence in politics, of railroad corporations which, as regulation began to develop more and more, were compelled to be in politics and compelled to be in politics in the most harmful and disastrous way possible, because they necessarily worked more or less under- ground. They worked to influence the election or defeat of this man or that man. We cannot imagine any more harmful way of having the railroads participate in politics than the way of participation through regulation of the private corporations by the government. The railroads have long been operated for profit with public service as a secondary consideration. We all recall, as was suggested to us last evening at the dinner, the well-known phrase of a very prominent man with reference to the public's relations to the railroads just after he had sold thirty million dollars worth of railroad stocks to some people in Great Britain. I have observed in my very considerable relations with rail- roads in every section of this country, Mexico and Canada, that while they do not say so publicly, it is almost of necessity the fact that the operating managers and officials of railroads feel that ._.::_ -'t&etinmc he --. ■ - ;::r- :i± ~ — - " 216 RAILROAD LEGISLATION [Vol. VHI We have had suggested to us by Mr. Sisson's excellent paper the dangers that there will be if we have no increase of rates, and if you observed the detail with which he suggested these dangers you would realize that it is a very complicated proposition that he suggests. Professor Johnson has pointed out to us in a very illuminating and educative way the desirability of having another board of transportation to help regulation. Regulation of a private corporation operated for profit means friction. I have been told by friends in charge of great railroad systems that in the last few years, one-third, sometimes one-half of their time was taken up with attention to the orders from the Interstate Commerce Commission and from the various Commissions in the States in which their roads operated, in order to try to avoid friction, serious friction, financial friction and every other kind. Mr. Sisson has pointed out to you the difficulty of railroads getting credit. I think Mr. William Church Osborn, this morn- ing, was absolutely right in saying that the public has reached the final point of view as regards the use of capital — it had no more money to lend the railroads. That is true. You have heard that six billion of dollars of new capital would be required for the maintenance and extension of the railroads. I think that is a much smaller amount than should be properly spent. It cannot be raised by any conceivable proper development of government relation to privately owned roads, at any reasonable figure. I am confident of that. What is needed by every interest is time to study and develop all the facts as to where this railroad prob- lem is coming out, as to what will happen under certain condi- tions, and then have a public sentiment created that will give us a rightly-informed Congress, that will present a bill that will be discussed far and wide. There are two bills. The Esch Bill has passed the House. The Cummins Bill will pass the S€hate with such amendments as we do not now know of. No one familiar with legislation, no one familiar with such affairs, has the remotest idea that either the present Esch Bill or the Cummins Bill will be the bill finally passed. They will both go to a Conference Committee where in secret, as so much of the important legislation of the United States has been devised, a new bill in very many respects, will come out and there will be but a short time for the public to get any idea of its real thought. People will have no opportunity to have a carefully considered and carefully reasoned opinion [728] No. 4] OBJECTIONS TO AN IMMEDIATE RESUMPTION 217 as to how that bill will relate itself to roads in Illinois and to roads in New England and to roads on the Pacific and to roads in the South. These regions are all different in their conditions. The cotton business is a seasonal business ; the grain business is a seasonal business ; the manufacturing is more or less of a seasonal business in New England. The President then has the problem put before him. Without any clear public sentiment, without any assurance on his part as to how the public will take it, the President is called upon to veto or sign such a bill within a few weeks. It is the most amazing temerity, the lack of interest on the part of the public and the lack of really thorough effort and determination on the part of our great leaders in finance and railroad management, that they should not now ask for time in which carefully to develop the facts as to those details which are of such vital importance to the public. You perhaps have realized already that I am not in favor of a return to private ownership. After some fifteen years of active relation to railroad management in very considerable detail, as I say, I reached the conclusion twenty years ago that it was not possible without too serious friction to have a government-regu- lated railroad system privately owned and with profit making related to it. So I believe we shall not go forward with the real progress in democracy until our transportation system is oper- ated without any profit to labor or to capital, but is operated so that the man who has industry, ingenuity and power and initiative to develop and to increase the production of wealth, shall be as- sured that this wealth, which he is to send here and there in this country and the world, shall be transported properly and quickly and at the cheapest possible rate without any question of prefer- ence to any of his rivals. [720] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY AND SOCIAL JUSTICE. ALBERT M. TODD President Public Ownership League of America WHAT is "democracy," and what is "social justice?" Be- fore specifically defining these terms, let me say at once : "Democracy is the greatest thing in the world." It was that for which America was willing to enter the greatest war of history, not only in her own behalf, but in behalf of the peoples of the entire world. The President proclaimed in all his official statements, in all his speeches, and in all public documents, before and during the war, that we were called to arms to "make the world safe for democracy/' We believed then, as we believe now, that every citizen is rightfully summoned to defend democracy even to making "the great last sacrifice." How nobly and unselfishly our citizens re- sponded to this call is attested by the countless graves of our heroic dead who lie in the soil of a sister republic over the seas, and nearby, "where the poppies bloom in Flanders fields." America's sacrifices for democracy are equally attested by the countless mothers and fathers whose sons will never again cross the threshold to cheer and support their old age; by the wives made lonely in widowhood; by the countless orphaned children never again to be clasped in the embrace of their father; by countless thousands who worked abroad and at home in the Red Cross ; and by those other countless thousands whose services were needed to support the Army and Navy with food, clothing and munitions, on the farms and in the factories; and by those who had passed the age of military service and toil, but who gladly contributed money with which to support the needed services. In view of the pronouncements of our Government, and the noble sacrifices of our people, shall we not recognize democracy as "the greatest thing in the world?" Democracy's Immediate Problems We have won the war so far as overthrowing the menace to world liberty for which a foreign autocrat had inaugurated the [730] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 21Q conflict. We have "made the world safe for democracy" so far as American institutions were endangered by foreign ambition ; yet, we today face a task and a duty no less serious than that which called us to fight a foreign foe. Our duty today is to make such further sacrifices and to take such further meas- ures, and so carefully study the relations of public utilities to government, as shall bring us into actual possession of that democracy for which our country's heroes made their "last sacri- fice," and which we supported by every power we possessed. Democracy is the foundation of all free and just governments. It includes every civic principle which is the basis of liberty, equality of opportunity, and human happiness. It involves so many phases of human welfare that all cannot be included in this discussion. And since this meeting is considering as its special subject, legislation relative to public utilities, especially the railroads, chief attention must be given to this branch of economic democracy. But before concentrating attention upon this branch of the subject, I desire to call attention to our first great present duty which is to remove from their places of power the forces of "special privilege" which have gained control of those functions of government upon which our economic liberty and prosperity depends, so that we may become a nation free in fact as well as in name. The problems which we now face and the duty we must meet were stated just fifty-six years ago so clearly and wisely by our martyred President Lincoln upon the field of a great battle near the close of a war which had forever settled the question of hu- man slavery in this country, which, although it is fresh in the memory of all, is so closely related to our present condition and duty that I cannot do otherwise than recall these immortal words : "It is for us, the living, to be dedicated to the unfinished work which they who fought here have thus far so nobly ad- vanced. It is for us to be here dedicated to the great task remaining before us — that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion ; that we here highly resolve that these dead shall not have died in vain ; that this nation, under God, shall have a new birth of freedom; that government of the people, by the people, for the people, shall not perish from the earth." [731] 220 RAILROAD LEGISLATION [Vol. VIII Not only when speaking on a great battlefield, but, also, in ad- dressing a personal friend by letter, this same great President, whose memory we all reverence and cherish, made another utter- ance equally related to the conditions we face today, saying: "As a result of the war, corporations have been enthroned, and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands, and the republic is destroyed. I feel at this moment more anxiety for the safety of my coun- try than ever before, even in the midst of war. God grant that my suspicions may prove groundless." Is there a single American who has carefully studied the growth of the power of those corporations which control our great public utilities, who does not realize that the prophecy of our martyred President has already become largely true? What really is the republic which the great President feared would be destroyed by the concentration of wealth? A republic is the citizenship who compose it and who have or- ganized a government, as their agency to operate the mechanism of democracy. Though the government continues to exist in its original form, if it becomes corrupted, and is operated in the interest of a class rather than in the interest of all, the re- public is destroyed. There are many thoughtful and genuinely patriotic citizens who are forced to the conclusion that the rail- road power, the money power, and the other forces of special privilege which have been born from these two, are now in con- trol of the government, and that the real republic is rapidly mov- ing towards destruction. In view also of the fact that American citizens who desire peacefully to secure genuine democracy as the reward promised them for the sacrifices they have made, as well as those "whose zeal is not in accord with knowledge," and who advocate force, are alike denounced by "special privilege" upon every possible occasion as "un-American, and anarchistic," I wish to call the attention of the forces of special privilege to the fact that it is they themselves who have been, and still are, sowing the seeds of anarchy, and should our country be drawn into a revolution of force, which God grant may not be the case, those who are seek- ing through corrupt and illegal means to gain economic control of the nation, will be found to be the chief contributing cause. [732] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 221 If, instead of increasing their unjust, political and financial con- trol, they will join the real friends of progress who seek to pro- mote universal justice, the terrible calamity may be averted. In connection with this, and in order that they may cease from their attacks upon democracy, I quote again from the martyred Lin- coln whom they profess to reverence, who said : "This country and all that is within it belongs to the people who inhabit it, and whenever they shall tire of the existing form of government, they have the constitutional right to amend it, or the revolutionary right to overthrow it." I have quoted more fully from President Lincoln than would otherwise seem necessary, were it not that these warnings were evoked by conditions which already he feared and clearly fore- saw, and which since he made these appeals, have verified his fears. His prophecy already has been in part fulfilled, because special privilege has been permitted to secure the control of our great public functions. To restore Democracy, by nationalizing our great public utilities in the interest of the public good, is the great work now before us. Similar warnings were sounded 103 years ago by Thomas Jef- ferson, the illustrious author of the Declaration of Independence, when, in a letter to George Logan, he wrote : "I hope we shall take warning from the example of England and crush in its birth the aristocracy of our moneyed corpora- tions which dare already to challenge our Government to trial, and bid defiance to the laws of our country." Public Otvnership and Democracy "Real public ownership is the essence of democracy. In- stead of dividing men into masters and mastered, it brings men together in a union of interest, and affords the conditions necessary for the highest traits of conscience and character." — Prof. Frank Parsons of the Boston Laiv School, in "Th& City for the People." A highly important element, and probably the first element of democracy, is the ownership by the people, and the administra- tion by their government of all those great public services neces- sary for the general welfare, and especially those which either by nature or by law are monopolies. There can be no more nat- ural and just function of government than the public ownership [733] 222 RAILROAD LEGISLATION [Vol. VIII and operation of those utilities and services which are of uni- versal need for promoting general prosperity and happiness. Among those services are the transportation of our persons, our food, fuel and the various necessities of life both from farms and factories ; the transmission of intelligence by telephone, telegraph, post or by any other method which human genius may in the future devise; the ownership and operation by municipalities, of street railways', gas, electricity and such other services as the citizens of any city may deem best publicly to operate. The principles underlying democracy and public ownership may be divided into two classes. One is connected with ideal government in its relation to civil liberty and equality of oppor- tunity. This we call "democracy," and "political justice." The other relates to providing those material things and services necessary to our welfare and happiness which we call "economic justice." Both are closely interwoven, and together form the sum of human justice which we know as "social justice," a term inclusive of all the relations of mankind in an ideal common- wealth. Liberty and equality are essential principles of justice or "de- mocracy" in its widest sense, as determined by social inheritance ; but to analyze correctly, social relations, a broad comprehension of economic conditions is necessary. It was the desire to study questions of justice and civil liberty which led me many years ago to seek information concerning the great public utilities and their relation to national life and public welfare. Constant and intimate relations for a number of years with the railway, telegraph, telephone, express and various other public utilities had brought valuable experiences in my business rela- tions as manufacturer and shipper. Investigations carried on while a member of Congress added to this experience facts of an official nature. Repeated visits abroad gave opportunity to investigate personally the conditions under which public utilities were being operated in foreign lands under both public and private ownership. The last visit occupied fourteen months in the year 1912-13, during which time fourteen countries were visited. These, together with those investigated during other trips, included Austria, Bavaria, Belgium, Denmark, Egypt, England, France, Greece, Holland, Italy, Norway, Prussia, Sax- ony, Scotland, Sweden, and Switzerland. [734] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 223 Rapid Spread of Public Ownership Abroad All of these countries, sixteen in number, publicly own and operate their telephone and telegraph systems as parts of the postal service. Ten publicly own and operate their entire rail- way systems, four own them in part, while only two (England and Scotland) have been operating their railroads entirely under private ownership. Upon the outbreak of the war, the govern- ment of these two countries took possession of the railroads also, and will assume actual and permanent government owner- ship in the near future. Russia, Japan, Australia, and New Zealand also publicly own and operate their entire railroad sys- tems, while China, Mexico, and the countries of South America own theirs in whole or in part. All of these own their telephone and telegraph systems as well, and many countries own the ma- jority of their municipal utilities. The United States of America is the only nation in the world which does not publicly ozvn and operate its telephone and telegraph systems as government func- tions, and will have the unenviable distinction of being the only civilized country controlled by special privilege, should she alone decide to continue this intolerable system of "invisible govern- ment." This tendency to be ruled by private monopoly led Ambassador Bryce in his American Commonwealth to declare : "In England we have the form of monarchy with the spirit of democracy; while in America there exists the form of democracy with the spirit and essence of monarchy." This statement is unfortunately too true, due to the fact that in England as well as in all the other countries of Europe, public utilities are largely owned and op- erated by the people, their operation being considered necessary and natural governmental functions. Those few minor undertak- ings which are allowed to be privately owned in these countries are considered as public trusts which are required to give im- partial service and make full accounting to the people respect- ing their stewardship. Public Ownership a Natural Government Function and Necessary to Secure Democracy and Justice In America, on the other hand, the private monopolies which own and control the great public utilities have practically become the financial and political masters of the people, for, by means of unjust rates made possible by fictitious capitalization dishonest [735] 224 RAILROAD LEGISLATION [Vol. VIII financing, and illegal practices, they have grown so powerful as largely to control law and government. By secret rates and re- bates they crushed out competition and obtained monopoly. By interlocking directorates and combination of capital they have controlled or defied law and evaded regulation. Through con- trol of much of the press and other means of public education they have influenced public opinion, largely controlling nomina- tions and elections to public office, and ultimately directing the making and administration of law. When a few men thus control the great functions of govern- ment, that equality of opportunity which is fundamental to de- mocracy can not exist. There can be no function of government more natural and necessary to the promotion of general pros- perity and happiness than the public ownership and operation of all those agencies which contribute to the public good and which by their nature are monopolies ; and these include not only the public utilities devised by man, but many of those vast resources of nature which the Almighty placed upon and below the earth for the service of all his creatures. Since our National Constitution was written a century and a quarter ago, human genius has harnessed nearly all the forces of nature in so many ways, that there is scarcely a function in our daily life that is not performed by them, nor a condition of life which they have not revolutionized. Then, we could speak only within the radius of our voices ; now, we speak from ocean to ocean. Then courier, stage, or slow sailing boat carried our written messages ; now, a few seconds suffice to encircle the gjobe. Then, our persons and the products of our farms and factories traveled on land at the rate of twenty miles a day; now, our fastest trains exceed a thousand. As the Creator of the Universe gave to all mankind from the foundation of the world to the end of time, the air, the water the sunlight, the heat, the treasures of the earth with all their powers and possibilities, so it devolves upon the city, the State and the nation to preserve inviolate to its citizens the widest and freest use of these gifts for the common welfare. This cannot be done where private monopoly exists, which permits one man or a group of men to usurp the rights which belong to all. "Liberty — Equality — Fraternity'' When first traveling in the countries of Europe in 1875 to study their social institutions as well as the masterpieces of art [736] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 225 and architecture, and the monuments of antiquity, I observed with interest over the entrances to public buildings and churches in France the words "LIBERTY, EQUALITY, FRA- TERNITY," the impressive motto of the French revolution, forced upon the world by the tyranny of existing autocracy ; and when extending these travels to other countries it was interesting to observe the extent to which applied democracy was enjoyed by the people. In order to secure indisputable evidence of the success of pub- lic ownership with which to disprove misstatements continually being made in the press, I procured during the travels referred to, a large and valuable collection of official reports and- data of an absolutely authoritative nature, besides personally taking over five hundred photographs of the various utilities in operation in many countries. To this collection I added several hundred photographs taken by official photographers. This interesting collection contains street railway tickets from many cities and countries of Europe, with fares of but one cent for moderate distances, and averaging approximately two cents for all distances. These gave superior service, from the receipts of which each city made a large profit applied for reducing taxation or swelling the fund of the "common good." In England the very highest quality of coal gas was being sup- plied under municipal ownership, in some instances at rates as low as twenty-five cents per 1,000 cubic feet. And even at this rate a profit was made, owing to honest and efficient administra- tion. Electricity was everywhere supplied at rates lower than those charged by private companies in America, notwithstanding the fact that in most of these countries there is but little water power. Local telephone calls were two cents, and phones in homes and office cost less than half the American rate. Checking of baggage or parcels for storage at the railway sta- tions was only two cents, as against ten cents in the United States. And all these public utilities were efficiently adminis- tered and gave a profit to the government. That these rates to the general public have not been established at the expense of the employees we demonstrate below. Public Ownership Brings Justice to Labor The rule prevailing in both municipal and national utilities in countries where public ownership exists, is that labor shall be [737] 226 RAILROAD LEGISLATION [Vol. VIII paid not less than the full wages accorded by private companies for like service, nor less than the amount fixed by labor unions. In many countries a minimum wage law exists for government employees upon the railroads, telegraph, telephone systems, etc., and this rule exists in principle under municipal ownership in nearly all cities. Strikes and labor trouble of any kind are so extremely rare as to be almost unknown under public ownership, for the public has no interest nor desire to treat its own "citizen employees" otherwise than with generosity and justice. It desires to receive the best service and is glad to give a full equivalent. The sole consideration under public ownership is to secure to everyone perfect service under just conditions, while under private owner- ship as practiced in America the sole motive is to obtain private profit ; and even where good service is given, the motive remains the same. Under public ownership, laws and agreements are entered into providing for conciliation, arbitration, etc., by which all ques- tions are usually settled quickly and amicably. Employees being partners in the business and enjoying the public service for themselves and their families have no motive to destroy that which tends to their own welfare. The facts already given would seem sufficient to show that a degree of social justice greater than is known elsewhere prevails where public ownership exists, for the public as consumers secure the necessities of life upon terms far more just than could be otherwise possible, while em- ployees receive better wages and better treatment as well. It is highly significant that the employees of our railways are unanimous for government ownership and willing to contribute to help make it a permanent success. Public Ownership in Accord With Our Constitution The greatest statesmen and constitutional lawyers of every democratic country agree in the view that it is not only the right but the duty of government — national, state, and municipal — to perform every function which is necessary to protect and extend the rights, opportunities, and happiness of its citizens. In fact, this was the supreme purpose of the founders of our Republic, and in order to secure and protect these rights they placed at the head of our National Constitution the following preamble : "We, the people of the United States, in order to form a [738] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 227 more perfect union, establish justice, insure domestic tran- quility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and to our posterity, do ordain and establish this Constitution for the United States of America." It must be noted that they sought to provide and secure to posterity — the people of today — all the blessings which accom- pany civil liberty. They hoped to secure for our people do- mestic tranquility, which is impossible under private railway control. The other purposes are incapable of being realized under private monopoly of transportation. Should our present lawmaking power refuse in this great crisis to provide, in letter as well as in spirit, progressive legislation necessary to carry out the fundamental principles of the Constitution, there is left an appeal to the citizenship which our martyred President, Abraham Lincoln, stated in the following words: "This country and all its institutions belong to the people who inhabit it, and whenever they shall tire of their existing government they have the constitutional right to amend it, or the revolutionary right to overthrow it." If, then, this principle that the will of the people should rule has found its advocates among makers of laws and constitutions throughout the centuries when the conditions of society were more simple than now, and when nations have owned and op- erated their own highways, post offices, etc., is it not much more natural, necessary, and just, that these same principles of public ownership should be extended under the present and more com- plicated conditions of society, when the various forces of nature are imperatively called upon to render service? Justice replies "Yes." We are living in an era of evolution and revolution. De- mocracy must triumph over greed. That "invisible government" of private monopoly which sets at nought the will of the people through the combined power of the railways, telegraph, telephone, gas, electricity, street railways, and other public utilities, must be done away with in the name of liberty. [739] 228 RAILROAD LEGISLATION [Vol. VIII The Publicly Owned Railroads of Switzerland — How the Rights of the People Were Safeguarded from the Beginning and Hozv Federal Ownership of the Swiss Raihvays Was Acquired On the 7th of April, 1851, a special commission of the national council itself made an official recommendation providing for the public ownership and operation of the railways under joint government control (national and state). The national council itself refused to follow the vote of this commission, and in July, 1852, declared in favor of private ownership. The ^rights of the people, however, were thoroughly safeguarded both in the fed- eral and cantonal law by abundant provisions limiting the rates of charge and profits, and providing that construction and opera- tion should be carried out with honesty, efficiency, and economy, and that the Government at all times should have access to the records and accounts, which were to be kept in a clear and com- plete manner. The franchises also contemplated, from the very first, the ultimate taking over of the properties by the authorities either cantonal or federal on just terms, whenever the public de- cided either that the profits of the companies were too great, or that public management would insure them better service ; and compelled the companies honestly to advance construction and operation, to give efficient management, and perform the service at just rates; otherwise the nation would at once exercise its rights and acquire the roads for government operation. The government had by the year 1890 acquired rather a large control by purchase of the majority of stock in some of the most important systems. As the terms for which many of the fran- chises had been given to the companies would expire in the spring of 1898, the Swiss people invoked the rights which they had long enjoyed through the system of direct legislation, and by an initiatory petition dema-nded that the council (the mem- bers of which were already favorable to this action), should frame a bill providing for the taking over of the most important railway systems and submit this as a referendum to be voted upon at the forthcoming election. The salient features of this bill were that the government should purchase and take over at the expiration of the franchises, the five important railway systems, approximately 1,700 English miles. The bill thus submitted to the people for their votes in- cluded every provision possible for safeguarding the public in- [740] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 229 terests, including the financing, the accounting, justice to em- ployees and users, and with a system of administration founded upon a highly intelligent and practical basis. An administrative council of eleven members was provided who were to keep con- stantly in touch with the various cantonal governments and give careful attention to the needs of the people. Why the Swiss Took Over Their Railways Under Public Ownership In connection with the bill which the national council had drafted at the request of the voters to provide for public owner- ship of the railroads, the national council issued a message em- bodying the reasons which compelled it to recommend the passage of the bill. Among these reasons were the following: 1. That the unification of the systems under one head would reduce the expense of operation by doing away with useless duplication. 2. Federal operation of the lines being conducted by a single administration could provide for a better trained administrative body than a large number of private companies. 3. Since Prussia, Austria, and other states were enjoying the earnings from their publicly owned railroads which would soon place them out of debt, the Swiss railroads if privately owned could not compete with them in rates, and thus higher charges must be paid by the Swiss people. 4. The federal council also made it clear in this interesting message that continued private ownership was a menace to the political life of Switzerland, because the profits accruing from the roads left the country in the form of dividends to foreigners rather than contributing to the extension and improvement of their own railways. 5. Higher wages, reasonable hours, and better living condi- tions would be enjoyed by the railway employees under govern- ment ownership. Upon this subject the message also says: "Private companies, as a rule, pay high salaries for the per- formance of certain functions, and to make up for these expendi- tures they economize upon wages of common employees, who, since they are very numerous, occasion the great bulk of ex- penditures." [741] 230 RAILROAD LEGISLATION [Vol. VIII Public Ownership Submitted By Referendum to the Popular Vote and Accepted By An Overwhelming Majority The vote on the proposition for the national acquisition of the railway system was taken on the date fixed by law, February 20, 1898. It called out an unusual number of voters. Out of 734,000 citizens having the right to vote, 570,000, in round num- bers, exercised that right. This is the largest proportion of votes ever cast. The purchase law was accepted by a majority of over 200,000, the votes standing 386,634 for, to 182,718 against. The result showed an overwhelming majority in favor of national ownership. My investigations of the practical working of this national system of railways extending over twenty years, lead to very de- cided convictions respecting the efficiency of this system in com- parison with our own deplorable lack of efficiency. Permit me to give details respecting rates, quality of service, etc. Swiss "Abonnement" Tickets and Regular Fares and Quality of the Various Classes of Service The Swiss federal railroad administration issued until after the beginning of the present war, "Abonnement" (special season) tickets, good for unlimited travel on all the federal lines (1,701 miles) and on all the steamers of the Swiss lakes (Geneva, Zurich, Lucern, Neuchatel, etc.) : 1st Class 2nd Class 3rd Class Two weeks $13.50 $9.65 $6.80 One month 21.25 14.50 10.60 Three months 52.11 36.67 26.05 Six months 81.56 56.94 40.53 One year 129.31 90.71 64.66 Respecting the quality of service of the various classes : The native Swiss ride almost entirely (except the wealthiest) in the third class. It is clean, sanitary, and comfortable, but lacks upholstery. The second class is used largely by the wealthy Swiss and foreign tourists, including Americans, except the very wealthy, and in some cases those who desire to appear wealthy. It is practically equal to the first class in America. The first class is but very little different from the second, and in many cases [742] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 231 the first and second are precisely the same, the only thing which distinguishes them being the label. Both classes are often in the same car, divided with a partition, but the "poster" showing the class is often changed as circumstances require. I usually used the second class. This ticket gave me the right to travel at pleas- ure for six weeks, twenty-four hours daily if I desired over these highly expensive roads, for $28.00, less than seventy cents per day ! There were always reputable, intelligent and delightful people to meet, and the atmosphere seemed entirely democratic. For regular journeys the rates per mile one way were as fol- lows : First class, 3.2 cents ; second class, 2 cents ; third class, 1.6 cents. The three classes averaged 2.3 cents per mile for single jour- neys, and for round trips about 1.5 cents per mile each way. Fifty-five pounds of hand luggage are allowed to be carried free in the passenger cars. As has been already mentioned, the Swiss railways, owing to the country being almost entirely mountainous, and abounding with many chasms, requiring bridges at dizzy heights, and con- struction of countless tunnels being necessary, the actual cost of construction of the road is many times greater per mile than in any other country. Marvelous engineering feats have been accomplished in the construction of these roads, which have never been executed elsewhere in the world. Among these are wonderful "corkscrew" tunnels in which the trains, after crossing a chasm or canyon over a very high bridge, move around within the mountain, in spirals like those of a corkscrew or coiled springs, in order to make grades that will permit their emerging 200 or 500 feet or more at a point directly below or above the entrance, depending on the direction in which they are going. One of the most famous of these is a double corkscrew, shaped like the figure 8. Of the well known tunnels, the St. Gothard is nine miles, and the Simplon (double track), is twelve miles in length, the two costing $21,000,000. There are over 1,000 tunnels on the Swiss Federal System. The Higher Cost of the Swiss Railways and the Loiver Fare With the unparalleled difficulties of construction in the Alps, the actual cost of the Swiss railways must have exceeded five times that of the average of the American roads, and had they been promoted and financed under American methods the rates [743] 232 RAILROAD LEGISLATION [Vol. VIII of fare would naturally be five times as great as they now are. But under the honest building and management that the Swiss law required, the fares for regular trips average practically the same as in America, while the "season" tickets are only a frac- tion of the charges made in our country. When the government finally took the roads over, about 1,700 miles, it paid for them approximately $199,000,000, or $117,000 per mile on the average, including a large mileage of tunnels and bridges averaging $1,000,000 per mile. A suggestive account of the purchase of these lines by the Swiss Government was prepared for the Musee Social of Paris, by its Swiss correspondent, Mr. Horace Micheli, a translation of which may be found in Volume III, No. 6, December, 1898, of the American Economic Association. Attention here is called to the protection the Swiss people enjoyed in taking over their railroads under public ownership through the constitutional and democratic right of "direct legislation," with the "initiative and referendum." COMPARISON OF SWISS DEMOCRACY WITH AMERICAN RAILWAY AUTOCRACY "Division of the New World" — Two Railway Presidents Aptly Calling Themselves "Cortes" and "Pizarro," Believing They Had Secured the Control of the American People, Pro- posed a Division of America Between Them In the investigation of the records of the Louisville & Nash- ville Railroad Co., letters were discovered between Milton H. Smith, president of the L. & N. Road, and Samuel Spencer, president of the Southern Railway, giving vent to their fullness of joy in having (as they thought) obtained control of America, as had Cortez and Pizarro, of the natives, four centuries ago. This aptly illustrates the illimitable ambition of railway financiers. The following from the letters of these two railroad presidents is extracted from pages 369-372 of the evidence and report of the Interstate Commerce Commission covering their investiga- tion of the Louisville & Nashville Railroad system. "A letter from President Smith, of the Louisville & Nashville Railroad, to President Spencer, of the Southern Railway: [744] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 233 (Personal and confidential) On Pennsylvania Railroad Train No. 21, Samuel Spencer, Esq., February 22, 1896. President Southern Railway, 60 Broadway, New York City. Dear Sir : Pizarro. — How shall we divide the new world? Cortez. — I will take North America and you can have all of South America, except , and neither of us will do any- thing to the Isthmus without notice to and cooperation of the other. Pizarro. — While Patagonia is not a very large or important part of the world, yet, perhaps, it is as much as I can tote. Refer to typewritten report of our interview at Kenesaw, Ga., on October 28, 1894, and to the interviews and corre- spondence that have taken place since that date, and to that portion of our interview of this morning relating to the future of certain railroads that are or may be tributary or competitive with roads controlled by the L. & N. R. R. and the Southern Ry. May it not be well to review the subject and perhaps make our understandings more specific? Your affairs, since our interview in October, 1894, prog- ressed with rapidity, and without, so far as I know, encoun- tering serious difficulties. You have acquired the G. S. & F., the Atlanta & Florida, and the Central Railroad has been re- organized in accordance with your plans. I do not recall now what has been done with the Macon & Northern, nor what has been done with the G. M. & G., Macon & B'ham, and one or two other roads, altho I believe you told me that your inten- tion was to allow the Macon & B'ham to be abandoned. The Paducah, Tenn. & Alabama and Tenn. Midland Rds. have been disposed of as anticipated. The L. & N. will not compete for the control of the B'ham, Sheffield & Tenn. River Rd., provided you will acquire it, should it become necessary to do so to prevent its extension into Birmingham, or will not per- mit it to get into a position where it may become a disturber. The L. & N. Rd. will not compete for the control of the Mobile & Birmingham with the expectation that you will acquire it. * * * I have advised Mr. Belmont of our agreement that neither party will acquire the property of the Marietta & North [745] 234 RAILROAD LEGISLATION [Vol. VIII Georgia Railroad Co. without the consent of the other. You may, therefore, freely communicate with him upon the subject, and I assume he will do likewise. Yours truly, (Milton H. Smith), President." "Letter from Samuel Spencer, president of the Southern Rail- way, to M. H. Smith, president of the Louisville & Nashville Railroad Co. New York, February 29, 1896. Mr. M. H. Smith, President L. & N. R. R., Louisville, Ky. Dear Sir: Your letter of the 22d instant. Pizarro. — Since our last conversation, the division of the New World between us has made some progress. Cortez. — Yes ; you seem to have acquired Patagonia, and I have secured a considerable part of North America which touched my former territory, but it seems to me you have acquired a considerable neck of the Isthmus which is the con- necting link between us. Was it understood that connecting links which touched both of us should be a matter of consulta- tion before acting or not? Pizarro. — * * * I agreed that it is desirable to renew the subject and, if practicable, to make our understanding more specific. The principles on which I think this under- standing should be based are : (1) That neither the L. & N. nor the Southern shall acquire lines in the territory of the other, and that lines connecting with or touching one and not the other shall be regarded as in the territory of the one which they connect or touch. (2) That neither will acquire lines allied by former owner- ship, lease, or otherwise, to the other, and which at the moment are not controlled by reason of pending reorganizations or other cause. (3) That neither will acquire lines which connect with or touch both, either directly or thru subordinate or controlled lines without previous consultation and, if possible, agreement. (4) That neither will foster the construction of new lines or the completion of unfinished ones into the territory of the other, but when questions with reference to such lines arise, we shall proceed by agreement with each other, if possible. [746] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 235 Will you please consider this and say if such a declaration of principles is satisfactory? * * * Yours very truly, S. Spencer, President." The above correspondence disclosing the policy and purpose of our railway executives absolutely to control America is so clearly expressed as to need no comment. American Railway Exploitation Under Private Ownership The promotion, financing, and administration of American rail- roads marks a dark but impressive and instructive chapter in our country's history. It is a record of a nation's shame, which can only be fully atoned for when the American people shall have supplanted the "invisible government" of private financial au- tocracy with real and living democracy, by owning and operating for the common welfare all those natural functions of govern- ment necessary for the common good. Then only will America enter into her destiny and enjoy the fruition of the labors and hopes of its people. Further experimentation with regulation under the false notions of the necessity of private control, com- petition, initiative, etc., must be stopped in the interest of the public welfare. It is an unpleasant task to bring before the public view the manner in which government, the press, and politics have been corrupted, and the rights of citizens, both political and economic, imperiled or destroyed ; yet it is due to the American people that they know the truth, and thus be able to select and apply remedies that shall be safe and sufficient for all time, to protect and ad- vance justice and democracy. As our country now faces the problem as to who shall own and operate the railways in the future — private interests for private profit, or American citizens for the common good — whether the railways shall control the people or the people con- trol the railways — and since the determination of this question by Congress will be largely based on the manner in which these public agencies have been recently administered, it is important that the history of private operation during the past 20 years be known. While facts of recent occurrence will be most largely con- sidered; yet it is also important to view the foundations laid many years ago on which modern railroad financing and admin- istration have been built. [747] 236 RAILROAD LEGISLATION [Vol. VIII Promotion of Pacific Railways About 1850 the government decided to make extensive surveys for a railway system to be built to the Pacific coast. After these surveys had been made at the expense of the nation, a private corporation known as the "Credit Mobilier" was formed for the purpose of privately controlling the vast system of railway trans- portation planned by the government. The giving over of these rights to this corporation marks the first widely known chapter in the dark history of American promotion and financing of railways. The history of this event is recorded in two congres- sional reports of investigations covering more than 1,300 pages. The first known as "The Poland Report" (report No. 77 of Select Committee of House of Representatives to investigate alleged "Credit Mobilier," Feb. 18, 1873, 42d Cong. 2d Sess.) ; and the "Wilson" report, No. 78 of "Select Committee of House of Representatives to make inquiry of the affairs of the Union Pacific Railroad Co., the Credit Mobilier of America, etc." These disclose most important facts relating to the reckless manner in which members of Congress were bribed or influenced by promise of profit to turn over the building and ownership of these lines to a private corporation. The investigation showed that one prominent Congressman who afterwards became Presi- dent of United States and two others who were nominated for the Vice Presidency were implicated in the transactions, as well as others. Time and space do not permit the recital of details, and it may be sufficient for the present to quote briefly from the conclusions reached by the investigating committees mentioned. I quote from the "Poland" report : "But such is the tendency of the times, and the belief is far too general, that all men can be ruled by money, and that the use of such means to carry -public measures is legitimate and proper. In a free government like ours we cannot expect the people will long respect the laws if they lose respect for the lawmakers." The building of the Pacific railroads has passed into history, leaving its dark blot on our national escutcheon, only to be effaced as time rolls on, bringing with it forgetfulness. The later period, though not so notably corrupt in its flagrant and open bribery of government officials, has been equally wicked from the standpoint of its effect upon the economic welfare of our [748] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 237 people. One of the outstanding examples of this period is the work of the late E. H. Harriman, who starting as a small broker, by the manipulation of money and securities, without building any roads or doing any other constructive service to mankind, amassed a fortune estimated at about $250,000,000. Such is a brief review of railway promotion in the earlier days. We will now rapidly survey the methods used in more recent times by some of the chief bankers and railway financiers of America whose influence now extends over the entire world in controlling money, credit, and monopolies in all lines of manu- facturing and commerce, as well as railroads in the United States. Recent Refined Methods of Railway Financing and Administra- tion — History of a Nation's Shame During the years from 1912 to 1915 various complaints were made by shippers and the public to Congress and the Interstate Commerce Commission respecting certain illegal practices of five important systems of railways and their resulting inefficiency of service and unjust rates. Accordingly the Interstate Com- merce Commission, partly on its own initiative and partly in compliance with resolutions of Congress, made investigations, and issued their official reports of findings, in the years 1913 to 1917, respecting the unlawful practices and financial transactions of five railway systems comprising approximately one-third of the country's entire mileage. The systems investigated by the Interstate Commerce Commission and reviewed herein, are: The New York, New Haven & Hartford Railroad Co., report No. 6569; date July 11, 1914. The Louisville & Nashville Railroad Co., report No. 4788; date February 9, 1915. The Chicago, Rock Island & Pacific Railroad Co., report No. 6384; date July 31, 1915. The St. Louis & San Francisco Railroad, report No. 5933, January 20, 1914. The Cincinnati, Hamilton & Dayton Railroad Co., and the Pere Marquette Railroad Co.. report No. 6833 ; date March 13, 1917. These investigations were made with the most painstaking care possible, covering long periods of time, in which special agents of the commission were employed to secure information and to investigate the books and accounts. Officers of the com- [749] 238 RAILROAD LEGISLATION [Vol. VIII panies were summoned before the commission and several thou- sand pages of testimony were taken. The findings of the com- mission were published in their official reports mentioned, and disclose, among others, the following facts : The evidence secured by the commission shows that every railroad company investigated knowingly falsified its accounts, partly in order to hide expenditures of large sums for controlling politics and elections and influencing legislation and the admin- istration of laws; falsified the accounts respecting capital, ex- penses, and profits, so that the commission, in many instances, was unable to find for what purpose vast sums were expended; and in many cases the books and accounts were burned by the directors in order to hide, in so far as possible, various illegal transactions. Many of these acts were done, as the records conclusively show, by directors who are well known as among the world's most powerful financiers; yet even though many records were willfully destroyed, the commission was able to secure sufficient evidence in many cases to disclose the names, dates and facts. In order to place these various illegal practices in systematic order before you and our people, to demonstrate the unregu- latable character of this private control of a natural monopoly, and to refer readily to official evidence and the findings of the commission, they may be briefly classified as follows : 1. Extravagant speculations and purchases of worthless se- curities in the interests of the directors; peculations from the stockholders' money by illegal devices, accompanied by the falsi- fying of books and accounts and their later burning by the directors. 2. Illegally spending the stockholders' money and property to corruptly influence politics, the press, and public opinion, and to secure secrecy respecting their acts. 3. Acts to secure a monopoly against the public interest by the violation of the laws of many States as well as of the nation. 4. The organization by the railway directors of "fake" cor- porations, with "dummy" officers to hide the identity of real pro- moters, and shield them from prosecution. 5. The voting to themselves by the directors of extravagant salaries, in addition to which large sums were taken by some of these officials without warrant of law. As the corrupt practices, falsifying of records, etc., are com- [750] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 239 mon to all the railroads investigated, the New Haven system investigation will suffice for all. All the extracts from the com- mission's report are taken verbatim from the records. No. 6569. — In re Financial Transactions of the New York, New Haven & Hartford Railroad Co.— July 11, 1914. "REPORT OF THE COMMISSION TO THE SENATE OF THE UNITED STATES "By the Commission : "The Commission has the honor to submit the following report in compliance with the resolution of the Senate dated February 7, 1914: "Scope of the Investigation "Public hearings were held extending over a period of 60 days of almost continuous session. Witnesses in a position to have knowledge of the transactions under scrutiny were examined. In the search for truth the Commission had to overcome many obstacles, such as the burning of books, letters, and documents and the obstinancy of witnesses who declined to testify until criminal proceedings were begun for their refusal to answer questions. The New Haven system has more than 300 subsidiary corporations in a web of entangling alliances with each other, many of which are seemingly planned, created, and manipulated by lawyers expressly re- tained for the purpose of concealment or deception. "The result of our research into the financial workings of the former management of the New Haven system has been to disclose one of the most glaring instances of maladministration revealed in all the history of American railroading. In the course of the investigation many instances were uncovered of violation of the laws of different States. As pointing to violations of State laws, we have turned over the evidence concerning local occurrences in New York City to the district attorney for the proper district, and the testimony relating to irregularities in Massachusetts and Rhode Island have been laid before the proper authorities of those States. The Com- mission has also furnished the Department of Justice with a complete record of the testimony. "The difficulties under which this railroad system has labored in the past are internal and wholly due to its own mismanage- [751] 240 RAILROAD LEGISLATION [Vol. VIII ment. Its troubles have not arisen because of regulation by governmental authority. Its greatest losses and most costly blunders were made in attempting to circumvent governmental regulation and to extend its domination beyond tlv 1 limits fixed by law. "The subject matter of this inquiry relates to the financial operation of a railroad system which, on June 30, 1903, had a total capitalization of approximately $93,000,000, of which $79,000,000 was stock and $14,000,000 bonds. In the 10 years from June 30, 1903, this capitalization was increased from $93,000,000 to $417,000,000, exclusive of stock premiums, or an increase of $324,000,000. Of this increase approximately $120,000,000 was devoted to its railroad property and was expended for betterments and equipment. This leaves the sum of $204,000,000, which was expended for operations outside of its railroad sphere. Through the expenditure of this sum this railroad system has practically monopolized the freight and passenger business in five of the States of the Union. It has acquired a monopoly of competing steamship lines and trolley systems in the section which it serves. The financial operations necessary for these acquisitions, and the losses which they have entailed, have been skillfully concealed by the juggling of money and securities from one subsidiary corporation to another. "Significant Incidents "Marked features and significant incidents in the loose, extravagant, and improvident administration of the finances of the New Haven as shown in this investigation are the Boston & Maine despoilment ; the iniquity of the Westchester acquisition; the double price paid for the Rhode Island trol- leys; the recklessness in the purchase of Connecticut and Massachusetts trolleys at prices exorbitantly in excess of their market value ; the unwarranted expenditure of large amounts in 'educating public opinion' ; the disposition, without knowl- edge of the directors, of hundreds of thousands of dollars for influencing public sentiment; the habitual payment of un- itemized vouchers without any clear specification of details; the confusing interrelation of the principal company and its subsidiaries and consequent compilation of accounts ; the prac- tice of financial legerdemain in issuing large blocks of New [7S2] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 241 Haven stock for notes of the New England Navigation Co., and manipulating these securities back and forth ; fictitious sales of New Haven stock to friendly parties with the design of boosting the stock and unloading on the public at the higher 'market price' ; the unlawful diversion of corporate funds to political organizations; the scattering of retainers to attorneys of five States, who rendered no itemized bills for services and who conducted no litigation to which the railroad was a party ; extensive use of a paid lobby in matters as to which the directors claim to have no information ; the attempt to conceal utterances of the press by subsidizing reporters; payment of money and the profligate issue of free passes to legislators and their friends; the investment of $400,000 in securities of a New England newspaper ; the regular employment of politi- cal bosses in Rhode Island and other States, not for the pur- pose of having them perform any service but to prevent them, as Mr. Mellen expressed it, from 'becoming active on the other side' ; the retention by John L. Billard of more than $2,700,000 in a transaction in which he represented the New Haven and into which he invested not a dollar; the inability of Oakleigh Thorne to account for $1,032,000 of the funds of the New Haven intrusted to him in carrying out the Westchester proposition ; the story of Mr. Mellen as to the distribution of $1,200,000 for the corrupt purposes in bringing about amend- ments of the Westchester and Port Chester franchises ; the domination of all the affairs of this railroad by Mr. Morgan and Mr. Mellen and the absolute subordination of other mem- bers of the board of directors to the will of these two; the unwarranted increase of the New Haven liabilities from $93,000,000 in 1903 to $417,000,000 in 1913; the increase in floating notes from nothing in 1903 to approximately $40,000,000 in 1913; the indefensible standard of business ethics and the absence of financial acumen displayed by emi- nent financiers in directing the destinies of this railroad in its attempt to establish a monopoly of the transportation of New England. A combination of all these has resulted in the present deplorable situation in which the affairs of this railway are involved." Pages 35 to 41 of the report give a history of the celebrated transaction in which 18 miles of railroad in which Directors J. P. Morgan, Sr., William Rockefeller, and some promoters who [753] 242 RAILROAD LEGISLATION [Vol. VIII were their friends, were interested, was unloaded by them on the railroad company at a meeting kept secret from the rest of the board of directors, at which meeting President Mellen pre- sided. This property proved to be more than worthless to the stockholders, having been operated at an annual loss of over $1,000,000 annually, and for which their directors forced them to pay the vast sum of $36,434,173.25. The principal accounts respecting this transaction were kept in the office of J. P. Morgan & Co., in such a manner as to hide the purposes for which moneys were received or expended, under the title of "Special Account No. 2." Part of the accounts were kept by another banker interested in the transaction named Oakleigh Thorne, respecting whom the commission report says : "It appeared during the progress of this investigation that the personal records of Thorne which might have shown all the details of these disbursements had been burned by him in January, 1912." This transaction is all the more sensational since Mr. Mellen. "president" of the road, was not permitted by the directors who robbed it to the extent of millions of dollars, to know who got the money, or, as he personally wrote in the records, when smarting from the rebuffs of Mr. Morgan : "It seems that as president of the road, I should be entitled to know who got the money for the truck turned over. C. S. M." The New York, Westchester & Boston Raihvay Co. The following is from the report : "The enormous sum of $36,434,173.25 was expended for a road only 18.03 miles in extent, which is being operated at an annual loss of approximately $1,250,000, and which will have to increase its earnings four and one-half fold before it can pay its operating expenses Tind fixed charges. It is incon- ceivable that this enterprise could have been entered into by the New Haven as a result of the mandates of good judgment and proper railroading. "The Westchester acquisition was planned and executed by a special committee of the board, consisting of directors Mor- gan, Rockefeller, and Miller, with President Mellen as chair- man. The vote appointing this committee 'on proposed com- petition between the Connecticut State line and Harlem River, with power,' does not disclose an intention to authorize the [754] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 243 buying of charters and promotion securities and the building of a new railroad, much less one at a cost of $36,000,000. It is ambiguous and was evidently intended to conceal a secret purpose. The full board was not taken into the confidence of those directors who wanted these securities purchased, and no report was ever made by this committee placing the situa- tion as they found it before the board. * * * "The report of this committee, however, was unanimously 'approved, ratified and confirmed' at the meeting of the board of November 8, 1907, at which the following directors were present : Mellen, Rockefeller, Morgan, Milner, Thayer, Brooker, Brush, Warner, Cheney, Miller, Skinner, Barney, Taft, Whittemore, Elton, Hemingway, Robertson, Robbins, and Parker. "After this meeting of the board at which this undetailed report was ratified, Mr. Mellen went to see Mr. Morgan, and requested more information as to the expenditure of the amounts. According to Mr. Mellen's evidence, Mr. Morgan asked him if he knew who wrote the report, and upon Mr. Mellen's reply, 'Yes ; Mr. Stetson wrote it,' Mr. Morgan asked him, 'Do you think you know more than Mr. Stetson?' Mr. Mellen admitted he did not, and apparently acquiesced, but took the precaution to write upon the back of his report, while still smarting under the humiliation of the interview with Mr. Morgan, the following words: " 'The trouble with this is there is nothing to show who got the money for the truck turned over. I don't like the looks of it, but I don't see why the matter should not be made plain. If I had the stock and sold it, I should expect others would state they bought it of me; but that don't seem to have been the disposition here. I never have known the first thing about who originally held the securities, what they were sold for; and no one thought that I was entitled to know. Perhaps I am not. I would feel better if there were at least a disposition to let me know something more than appears in the record. "'(Signed) C. S. M.'" [755] 244 RAILROAD LEGISLATION [Vol. VIII Dummy Companies Formed to Hide the Identity of Railroad Officials as to Their Complicity in Illegal Acts and Frauds on the Stockholders The following is from pages 45, 60 and 61 of the official report : "Dummy Companies" "The frequency with which dummy corporations and dummy directors appear in this record leads to the conclusion that some one high in the counsels of the New Haven had an obses- sion upon the subject of the utility of such sham methods. The directors of the Billard Company confessed that they were dummies and knew nothing of its operations. Why men of respectability and standing as these appear to be should lend their names as dummies passes comprehension. "In the organization of one of the steamship companies the young lady stenographer was made president ; and a youth of 21 years of age by the name of Grover Cleveland Richards was selected as treasurer of another company. "Clerks and irresponsible persons were drawn upon to sup- ply the demand for dummies in the financial joy rides by the management of the Netv Haven. "Mellen's stock in the New England Investment & Securi- ties Co. was held by James B. Brady, who testified that he was merely a dummy for Mr. Mellen. Director Skinner's stock in this same company was held by a relative and a bookkeeper in his office. Thus, throughout the entire story of deception, the New Haven management vainly endeavored to hide the true facts behind these dummy individuals and dummy cor- porations. "As a matter of law, such devices are feeble and puerile, but if the master financiers behind these New Haven transac- tions could use these sham methods and thus give their in- dorsement to the availability of such crooked schemes to cover the true substance and fact of financial transactions it indi- cates a low state of financial morality. No condemnation can be too severe to apply to the frequent use of these companies by the New Haven." The methods used by this railroad company, the evils result- ing therefrom, are summarized by the Interstate Commerce Com- mission in their report from which the following quotations are made : [756] No. 4 J RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 245 "Evil of Interlocking Directorates "A system of interlocking directorates has grown up and flourished in the past few years which has brought about com- binations and intercorporate relationships not conducive to the public welfare. On the New Haven board of directors there was a representative of the Pennsylvania Railroad, which rail- road owned 35,000 shares of New Haven stock ; there was a rep- resentative of the New York Central, which owned 35,000 shares; there was a representative of insurance interests that owned 35,000 shares, and a representative of an express company that had a contract with the railroad ; there were directors who were also directors of the Standard Oil Company, the United Steel Corporation, the Pullman Company ; in fact, every other interest seemed better represented on the New Haven board than the average stockholder's interest. "There are too many ornamental directors and too many who have such childlike faith in the man at the head that they are ready to indorse or approve anything he may do. "The handling of bank deposits and security sales of these corporations are massed in a few hands, carrying with them a power and domination over large amounts of banking capital as well as the control of great railroad systems. These and other evils as the result of interlocking directorates are now well recog- nized and known, and they have been emphasized by the disclos- ures of this investigation. New Haven Monopoly Corrupt "This investigation has demonstrated that the monopoly theory of those controlling the New Haven was unsound and mischiev- ous in its effects. To achieve such monopoly meant the reckless and scandalous expenditure of money; it meant the attempt to control public opinion; corruption of government; the attempt to pervert the political and economical instincts of the people in insolent defiance of law. Through exposure of the methods of this monopoly the invisible government which has gone far in its effort to dominate New England has been made visible. It has been clearly proven how public opinion was distorted ; how of- ficials who were needed and who could be bought were bought; how newspapers that could be subsidized were subsidized ; how a college professor and publicists secretly accepted money from the New Haven while masking as a representative of a great Ameri- [757] 246 RAILROAD LEGISLATION [Vol. VIII can university and as the guardians of the interests of the people ; how agencies of information to the public were prostituted where- ever they could be prostituted in order to carry out a scheme of private transportation monopoly imperial in its scope. Directors Criminally Negligent "It is inconceivable that these wrongs could have gone on with- out interference if the members of the board of directors had been true to the faith they owed the stockholders. A number of directors appear in many instances to have voted without knowledge and to have approved the expenditure of many mil- lions without information. According to the testimony of some of the directors they merely approved what had been done by some committee or by some officer of the company. The direc- tors' minutes reveal that it was largely a body for ratification and not authorization, as the law intended a board of directors should be. None of the directors would have been so careless in the handling of his own money as the evidence demonstrated they were in dealing with the money of other people. The directors actively or passively acquiesced in the efforts of the Mellen-Mor- gan-Rockefeller regime to extend the domination of this corpora- tion over the whole transportation field in New England. "If these directors who were faithless to their stewardship were held responsible in the courts and at the bar of public opinion for the failure to do those things they should have done, the lesson to directors who do not direct would be very salutary. "Directors should be made individually liable to civil and crimi- nal laws for the manner in which they discharge their trust. A corporation can be no better or worse than those who operate it. It should be just as grave a crime to plunder stockholders or the public through a railroad corporation as it is to personally rob an individual. Subsidiary Corporation Condemned "It was found in the investigation of the New Haven system that there were 336 subsidiary corporations, and the books of the New Haven road proper reflect only a small part of the actual financial transactions of the railroad. Many of these subsidiary corporations served no purpose save an evil one. They were used to cover up transactions that would not bear scrutiny, and to keep from the eyes of public officials matters that were sought to be [758] No. 4] RELATION OF PUBLIC OWNERSHIP TO DEMOCRACY 247 kept secret. The commission should have the power to examine, not only the books, records, papers and correspondence of inter- state carriers, but of subsidiary companie c as well. Remedy in Public Conscience and Lazvs "The insuring of honesty throughout the management of the great railroads of the country is a most important question be- fore the people today, and only when through exposure of wrong- doing and an awakened public conscience, coupled with effective laws, this result is produced, may railroading be placed upon the high level that it should occupy. The revelations in this record make it essential for the welfare of the nation that the reckless and profligate financiering which has blighted this railroad system be ended, and until this is fully done there will be no assurance that the story of the New Haven will not be told again with the stockholders of some other railroad system as the victims." Government ownership of our railways is desirable; it is prac- ticable ; and it is the only democratic and just solution of the railway problem, the great emergency of American reconstruc- tion. Please allow me in closing to quote from the statement I sub- mitted last February before the Senate Committee on Interstate Commerce : "If the ideals which we are seeking prevail, service, not profit — democracy, not autocracy, will rule. What we sow today we shall reap tomorrow. We look forward to the time, which we hope may be in the near future, when through the patriotism of our citizens and the continuing heroism of our soldiers, the victory which has come to our arms will here at home consummate an industrial peace that shall be wise and just to all, as one of the first fruits of the great sacrifice America has made in this world struggle. Among the fruits of such peace, those who believe in equality of opportunity, civil liberty and democracy, hold as highly essential the public ownership and operation of our rail- roads, our public utilities, and our natural resources, for in this way alone can control be 'of the people, by the people, and for the people.' " [759} GOVERNMENT OWNERSHIP THE ONLY SOLUTION W. P. BOLAND. Scranton, Pennsylvania AFTER having heard many diverse views on the railroad situation I realize more than ever the need for positive action with respect tc our great transportation lines. It is the greatest problem now before the people of the Nation and will, I believe, become one of the leading, if not the central element in the national campaign soon to engage the attention of the country. We must approach this proposition in a definite way. It is a business matter, entirely understandable and abso- lutely within the compass of the universally recognized principles of commerce and trade. We are not dealing with a mysterious or even uncertain situation. Direct and positive action, taken by men whose training and business capacity fit them for such work, will solve the railroad problem to the advantage of the people of the United States by making the railroad the servant of the people, rather than subject the Government to the service of the agencies owning the railroads. The time has arrived for us to correct the abuses, now and for some time manifest in the railroad service of the United States. The railroad system of to-day is approximately the collective result of all the work performed in this connection since the first railroad train was moved in this country. The men who formed these different branches of railroads now practically merged, in a physical sense, into one great railroad system, had but limited capital. Their energies made the present system possible and in eliminating many of these men from our railroad service unfair treatment was accorded them. People's Interests Paramount We have the railroad system. Let us work now for the gen- eral welfare of the people of the Nation. The proposition is too big to be successfully handled by any group or groups of private capitalists. It is Nation-wide in scope, requirements and service, and no agency but the National Government itself can hope successfully to meet this railroad emergency and do justice to the people. [760] No. 4] GOVERNMENT OWNERSHIP THE ONLY SOLUTION 249 There are so many conditions associated with the railroad situa- tion that one agency in which the people have absolute confidence must take charge. That agency is the Government. Take for instance two railroads entering New York — the Lackawanna and the Erie. The Lackawanna operates about 985 miles and the Erie operates 2,465 miles. It is fair to assume that there is two and one-half times the population tributary to the Erie and de- pending upon that road for service that there is to the Lacka- wanna. These people will in the very nature of things be the innocent sufferers of any evil results which may follow the manipulation of the affairs of either road. You and I may be living in Elmira, N. Y. We may be build- ing automobiles and want to sell our product to the people of Scranton or New York. We apply to the Interstate Commerce Commission for a rate and the first thing the members or agents of the Commission look at is the fixed charges of the company and then a reasonable return on the service rendered. Both roads parallel in the district I refer to. The construction cost is about the same, the equipment the same, but you will find in 1916 an interest charge against the Erie of $4,699 a mile, and you will find an interest charge against the Lackawanna of but $7 a mile. Cannot Compete How can the Erie, with its interest charges nearly 700 times as great as the Lackawanna's, meet the competition of the better financed road? Is there an agency in this country today which can solve this unfortunate railroad problem but the Government? I am giving you now a sample of railroad financial divergence which has duplicates in all parts of the country. It was contribu- tory negligence on the part of the Government to allow these things to exist and have the railroads of the Nation made the plaything of a gambling Wall Street to the great prejudice of the business interests of the Nation and the people of the country generally. You cannot reduce wages on the Erie sufficiently to meet Lackawanna competition; and materials and operating expenses on both roads must remain approximately at the same figure. Because of these conditions you put a charge on the shipper that forces him out of business and you penalize all the people. This condition must be met by Government ownership and proper regulation of rates and charges. [761] 250 RAILROAD LEGISLATION [Vol. Vffl The interest of the people — the Government — are always para- mount. When liquor men abused the rights conferred upon them by the government, licenses and privileges were revoked. The railroads violated their charter rights, inflated their capital and otherwise heaped fraudulent burdens upon the people and forced the Government to take them over. The Government is not taking this property without compensation, but these manipulators of railroad properties insist on having the valuation fixed at the amount of these inflated values or higher. Capitalisation Comparisons We know that the Erie has a capitalization of $182,240 a mile and the Lackawanna a capitalization of about $42,000 a mile and the Great Northern about $42,000 a mile. There is no establish- ment on earth able to handle such a widely diverging transporta- tion problem but the Government. The Government must handle this situation — readjust charges on an honest basis and wipe out useless and ruinous railroad competition. Where five railroads extend from Chicago to St. Louis two might do the work, with increased equipment, dividing that now in use by the additional three roads and the waste in superfluous management and other such charges eliminated. Under such conditions rates could be reduced and wages increased, allowing a fair return to every honest in- vestor or making the Government returns with Federal owner- ship in effect entirely secure. The Lehigh Valley parallels the Central Railroad of New Jer- sey from Wilkes-Barre to Bethlehem and then both roads use the Reading tracks to Philadelphia. We should eliminate two of these roads, divide the equipment and cut down unnecessary over- head charges. Agencies interested in this needless competition, bankers, money lenders, mo«ey gamblers, some lawyers and others, are the elements responsible for this condition. They made the railroads a means to improper ends to the prejudice of the people of the country. This manipulation and juggling of great transportation properties, with the business disturbance and cost to the people, was and is the great crime of this Nation and is responsible for much of the present industrial unrest and com- mercial instability. Under the so-called Government control of railroad properties nothing has been more palpable than the efforts of those in charge of the roads to so befuddle the situation as to discredit Govern- [762] No. 4] GOVERNMENT OWNERSHIP THE ONLY SOLUTION 251 merit participation in this work. There is a persistent effort under way all of the time thus to force these roads back into private hands. The present is no sample of the kind of service which would follow Federal ownership. Competent men would be put in charge. We are a business people and can handle our rail- roads. In fact the same practical men who handled these roads for the private owners could do similar work for the people, but along more efficient lines, under Government ownership. Government ownership of all public utilities is coming. Sin- ister agencies may through fraud, trickery and artifice delay it, but it is the logical way to handle our transportation problem and it will come. [763] NATIONALIZING THE RAILROADS Consolidation Accomplished, Competition Ends, and With it Private Ownership CALVIN TOMKINS Ex-Member Inland Waterways Committee, National Railroad Administration MUCH has been written about the desirability of private versus public ownership and operation of the railroads, but there has been little discussion of what may be termed the natural history of railway development and its neces- sary consequence ; viz., the nationalization and unification of the entire transportation system of the country. • For more than a year there has been a continuous search for an acceptable way to return the roads to their former owners, but no way of doing so has thus far been found. It is time to ask whether force of circumstances may not compel us to nationalize as other nations have done in spite of a popular wish not to do so, and in spite of temporary makeshifts like government guarantees of profits and like the pending Senate and House bills, which, while pretending to return the roads to private ownership, in reality only make the gesture of doing so. The railroads of the country were developed by its most ex- perienced minds through a process of intense competition which consciously had one end in view ; viz., the consolidation of many roads into a few systems. For fifty years progress was made in this direction — and unconscious progress toward one system. We have reached the conclusion of this process of natural selection under government auspices, because the war precipitated that re- sult, which was inevitable in any event. Prior to the war, the Sherman Law, which was intended to prevent the consolidation of systems, operated to promote their bankruptcy, because of a policy of starvation which increased expenses without permitting a corresponding increase of revenue. This accelerated absorption of the weaker by the stronger roads. The war demonstrated the defects of the Sherman Law which was scrapped in 1917, and the railroads placed under one federal control for war purposes. [764] No. 4] NATIONALIZING THE RAILROADS 253 From the beginning, the railroad history of the country has been a record of exploitations, absorptions, expansion and bank- ruptcies, and then the same processes repeated over and over again, the units being larger each time. It was the lack of guar- antees and the risks incurred which made railroad service in the United States so cheap at the expense of the investor. The sys- tems were in truth gradually consolidating themselves under a regime of most intensive competition. The law of natural selec- tion, operating freely, brought to the front the kind of men who developed our railroads and attained such remarkable results in so short a time, culminating in the greatest railroad system of the world. The competitive conditions which produced men like Vander- bilt, Huntington, Hill and Harriman, admittedly no longer exist. How then is it possible to reinstate competitive railroad organiza- tion? Are not the proposed " regional systems," to be equipped with " regional directors," in supposed " competition " with each other, merely camouflaged semblances of the older order of real things which has passed away ? Are not the proposed " zones " comparable to the several floors of a single department store, each with its respective floor manager in charge? Is not all this ma- chinery a mere pretense which may obstruct rather than facilitate the operation of a national system already unified ? The government, by general consent, determines freight rates, wages, hours, schedules, routing, joint operation of terminals equipment and ticket offices, safety devices, issue of securities, uniform accounting, and, most important of all, credit — and there is general agreement that these governmental powers should be perpetuated. It is also cooperatively developing water transpor- tation. Aside from the purchase of supplies (a most dangerous function under a government guarantee of profit), what is there which can be delegated to private initiative? The genius of the old time leaders was not exercised under such conditions. The objective for which they consciously and unconsciously competed has been achieved, and it follows that railroad competition is now as much a thing of the past as they are. Private competition, having achieved consolidation and admin- istrative unity, the old order naturally ends in monopoly either public or private, which is without initiative except as it shall be motivated by the government. Is it not then reasonable to an- ticipate the nationalization of the railways of the country as a [765] 254 RAILROAD LEGISLATION [Vol. VIII single administrative unit without prospective profit for anyone, and for the sole purpose of providing public transportation? In truth, the present issue really is: — How can we substitute for the existing system of mixed government and private con- trol without responsibility, a genuine policy of responsible gov- ernment ownership and operation? In short, how shall the old owners be bought out and the new machinery set up? All of the suggestions which have been made for a return of the properties to their owners contemplate a government guarantee of freight rates sufficiently high to provide for interest, dividends and the attraction of new capital. In other words, the demand is for a prospective private-service profit with a govern- ment guarantee behind it; and this in spite of the fact that real competition which should be the quid pro quo for such a bargain no longer exists and cannot be resuscitated. Since, as already noted, the government is to permanently assume the essential attributes of ownership, it follows that if the properties shall be returned to their former owners for op- eration, a guarantee of profits must be assured before resump- tion of functions can safely be undertaken by them. This will be necessary since they are to take orders from the government as to how they shall operate, what they shall get and what they shall give — except as such instructions may be modified by their power to influence the government and by the power of organ- ized labor and public opinion to influence both them and the government. In all essentials they will be " dummy " operators without responsibility but assured of profits. This outcome, if effectuated, will be as absurd as it will be unpopular and fugitive ; for there is no reason to think that Congress will be any more considerate of the rights and privileges of private railroad owner- ship after the war than it was during the ten years preceding it. Public patience indeed tolerated poor service at comparatively high rates as a public necessity during the war and reconstruc- tion periods. But the railroads were then, and are now being operated as a Government function, and whenever they cease to be so operated the former antagonism against private privileges and even private rights will reassert itself, both in and out of Congress. Except as a figure of speech, the railroads have al- ready been irrevocably nationalized — but not paid for — and what the owners are demanding under verbal cover of a return to pri- [766] No. 4] NATIONALIZING THE RAILROADS 255 vate ownership is in reality the delegation of agency powers to operate and speculate, with assured profits and no risk. Is not a government promise that rates shall be kept sufficiently high to recompense invested capital and to attract new capital less desirable than will be a valuation of railroad properties ac- companied by a definite guarantee of interest upon them, or an exchange of railway securities for government bonds? The Fed- eral Government must in the end hold the bag under all recom- mendations which can be made. Why then should it be asked for anything more than a direct interest payment or an exchange of public bonds for private securities? A guarantee of interest is a simple, direct obligation of the government easily understood, and, if once undertaken, not likely to be avoided. The delegation of the power to initiate rate- making on a basis sufficiently remunerative to provide for all contingencies and to include a profit in addition, will be a more complicated obligation for the government to enter into and one which is much more likely to be avoided by Congress in def- erence to popular opposition to high rates and special privilege. Profits are elusive and will be attacked and must be defended. Interest payments on railroad securities transmuted into govern- ment bonds are definite obligations. Have not security owners been wrongly advised to demand that the legal basis for rates shall be their vested interest in the roads regardless of changed conditions? Whether the object of this demand is really the establishment of profitable rates, or is intended to establish indirectly by statute a basis of value for subsequent expropriation, the consequence of either motive will be to raise a dangerous provocative issue against railroad security owners who will be accused of attempting to create fictitious profits and values by legislation. Since the physical valuations of railroad properties thus far re- ported by the Interstate Commerce Commission are unexpectedly liberal and since the present government guarantees also afford a reasonable basis for expropriation — from the security owners' standpoint, is not the present time more propitious for appealing to Congress to take over the roads than after a protracted, un- popular and doubtful struggle to obtain largely increased rates shall have been gone through with? Director General Hines has stated that rates will not be increased during the period of federal control. Is there any reasonable ground for the belief that what [767] 256 RAILROAD LEGISLATION [Vol. VIII has been denied during the period of public operation for public use, will be permanently acceded to during a possible period of private operation for private profit ? When private competition — that is initiative — stops, private profit should also stop, because no equivalent service is rendered in exchange. All that investors can then reasonably ask or expect, is to get back the just value of their investments after having organized service. Profits in Excess of Wages and Interest Not Available for Either Labor or Capital The railroad employees' demand for lower living costs or higher pay and the truthful though stultifying admission that higher pay necessarily implies still higher living costs, have served to focus the attention of the country upon the necessity for promptly deciding what shall be done. Perhaps it is as well that the impasse into which the railroad problem has brought us should be broken through in this rough maner since apparently little progress towards solving it otherwise was being made. The interdependent relationship between wages and prices is evident. The working people are the great mass of the population. They are the body of consumers who in fact pay the high com- modity prices which are in part occasioned by their exaction of a living wage. If wages go up, living expenses go up; and the wages of transportation workers intimately affecting as they do the cost of all commodities are the most potential of all factors to raise or depress prices. They may in fact be regarded as the keystone of the cost-price structure. Do not the brotherhoods spoil their argument for government ownership by coupling with it a demand for a contingent operatives' profit? Wages must be adjusted at least to the point of restoring purchasing power, but operative profiteers, whenever they show themselves, will be just as objectionable to the farmers, factory workers, city dwellers and voters of the country as are stock exchange and safe deposit ( ?) profiteers. A government-ownership issue will doubtless be introduced into the next campaign, but it is safe to say it will not prove popular if accompanied by a class-profiteer- ing plan. The increased expense of operating the railroads, apart from higher material and labor costs is in part the consequence of inefficient functioning and in part the result of a conscious and unconscious sabotage, which permeates the service because no [768] No. 4] NATIONALIZING THE RAILROADS 257 one's status has been established and the system itself is believed to be temporary. Indeed, we do not now have government op- eration, but instead a quasi-private, quasi-public operation, one of the recognized objectives of which is to discredit the govern- ment and so bring about a return to the old order of things. As to a division of prospective profits between operators and security owners, to serve as an incentive to efficiency, the answer is that there is small likelihood of profits where there is not re- sponsibility for losses and, if there shall be profits, the operatives will demand them all and probably will get them to the exclusion of the holders of securities and the public. The promise of such profits will also serve as an incentive to conspiracy between own- ers and operatives and to still further demands for larger profits out of the public. Since it is admitted that the government will hereafter exercise the essential functions heretofore left to private initiative, since it must undertake compensation to owners for their properties, and pay the highest going wages for their operation, why should it be called upon further to burden itself with profits either for owners or for operatives ? Terminal Integration and Highway Competition Improved highway transportation and unified terminal ope- ration at interior transfer cities and at seaports, made necessary by the stress of war conditions, has so completely demonstrated the advantages of integrating transportation functions, that it is probable that integration will be extended and will not be reserved. If so, how will it be possible to unscramble the ter- minals at the great cities? If the terminals are be used jointly why not the roads? It has become the general custom to short-haul commodities between points of origin and destination by motor trucks over the public highways. The advantages of this as compared with the former railway service involving three hauls and two addi- tional transfer handlings needs no comment. Railroad revenues have suffered severely as a consequence of this change, and they will continue to suffer. Private Rail Profits and Public Waterways Incompatible Improved waterway transportation has not yet been permitted to exercise its full influence upon railway communications since [769] 258 RAILROAD LEGISLATION [Vol. VIII the Federal Government functioning in its present dual capacity as guardian of the public interest and also as trustee for the security owners, cannot with justice permit unrestricted water competition to take effect. Under pre-war conditions the railroad policy of the country was deliberately and necessarily planned to prevent the most effective utilization of its vast inland and coastwise water carrying systems. As long as the government shall continue directly or indirectly to administer the roads under guarantees of profit instead of acquiring them, its necessity for maintaining railroad revenues with which to meet its guarantees and also its obligation to return the roads to their owners properly safeguarded, compel it in part to pursue the same policy of discrimination against water and in favor of rail transportation which characterized the relations of the railroads to the waterways for fifty years prior to the war. That policy was one of destructive compe- tition successfully directed to the elimination of water trans- portation except as a potential influence upon freight rates. No satisfactory joint use of rail and water carriers in such a manner as to realize the full benefits of both services can be had while the two kinds of transportation shall continue to be antag- onistic to each other — one private, the other public — or so long as there shall be an obligation to consider the profit and loss account of one system apart from the whole. A single federal control is necessary to reconcile these rival interests. Such con- trol should be complete over the railroads both as regards owner- ship and administration, and at the beginning, at least, directive over the water routes. The great water routes of the country are the Panama and West Coast route with its potential joint railroad utilization; the Atlantic coastal route with its similar rail connections ; the Great Lakes route with its double water outlet via New York and Montreal and its utilization for combined rail and water service ; the Erie Canal system ; the Mississippi and Ohio River system ; the Black Warrior system and the Chesapeake and Delaware system, including its possible extension north to Boston and south of Norfolk. The two ocean systems have been effectively utilized as all- water carrier routes, the Great Lakes system has been eminently so developed, and combined water and rail service on these three routes has been as effective as the railroads would permit. Trans- [770] No. 4] NATIONALIZING THE RAILROADS 259 portation on the other routes, while indirectly tending to lower railroad freight rates, has not been materially advanced because of the obstructive policy which the rail carriers and the govern- ment itself for the time being, have of necessity been compelled to adopt toward the water carriers in the attempt to maintain the profits of private rail ownership. While all-water transportation over these routes has been minimized, it has also been made economically impossible to develop the best system of combined rail and water service by which communities away from the water could obtain the advantages of linking the cheaper but restricted water service with the ubiquitous railroad service. There has never been a fair or satisfactory basis for pro-rating Combined water and rail shipments. United States railroad rates are com- paratively low near and along the waterways and comparatively high traversely to, and away from, them. If railway, highway, and waterway transportation and terminals shall be modernized and used jointly for the benefit of the whole country in conjunc- tion with a fair basis of pro-rating between rail and water car- riers, then railroad transportation cannot be conducted as a seg- regated business. In this connection, it is urgently recommended that the report of the Inland Waterways Committee of the Railroad Administra- tion, which has submitted to the Director General in the summer of 1918, be now published and studied in its relation to the rail- way problem. Until a national cooperative policy between land and water carriers shall have been established, there can be only one safe policy for waterway development; viz., to consider the great inland waterway routes as arms of the sea, upon which trans- portation shall be freely competitive and unrestricted as to rates and conditions of service. Public funds for physical improve- ments of channels, locks and terminals must be continuously demanded and also the most favorable conditions for interchange of service with railroads to cities not accessible directly by water must be insisted upon. Only by the cultivation of an imperative public demand for these factors of success can waterway trans- portation be safeguarded against the adverse attacks of private railroad interests. The Government has begun to equip the Mississippi River and the Erie Canal with modern fleets which are already in com- petition with the railways and can under-bid them for coarse [7711 260 RAILROAD LEGISLATION [Vol. VIII freights. On both of these inland waterways the Government now controls transportation. What then will be the consequence of divesting itself of the control and operation of the railroads? How can it hope to reconcile a public competitive waterway policy, with a private gainful policy of operating the railroads? The Government fleets will be expanded, private boat owners will claim the advantages accorded the Government boats, and the coast-wise traffic will develop a similar conflict of interests, and the clashing of these interests will be disastrous for all, if the Government shall separate the administration of the water- ways from that of the railways. It will be to the interest of American seaports to establish a short-haul movement from the point of origin to the nearest water route leading to such ports whether it be an inland waterway route or a coastal route. No universal rule can here be applied other than to say that instead of giving preference as heretofore to the long rail haul, wherever economies can be shown, a com- bined rail and water service to the seaport should be made pos- sible. For instance, southern cotton, coal, lumber and other coarse freights should more generally be forwarded to the New England mill district via a rail haul to the coast and thence, by water to the New England factories which are for the most part located within motor truck distances from tidewater. Through its control of the eastbound grain business at Buffalo, the Government is now in control of traffic on the Erie canal, because the east bound grain movement is the dominating factor in canal policy. The United States Railway Administration con- trols this New York State waterway by this means, just as effect- ively as it controls the traffic through the Panama canal. The automatic influence which the Erie canal formerly exercised over railroad freight rates is consequently now vested in the United States. The Government has in this matter assumed a heavy responsibility which will be greatly complicated if the railroads even temporarily go back to private operation. Is it probable that the public opinion of the country will tolerate a discontinuance of highway, waterway, railway and seaport ter- minal integration in order to conserve the profits of an out- grown, non-competitive private system of rail transportation? The economic movement of food, fuel, and raw materials to and from our growing municipal centers and the conduct of [772] No. 4] NATIONALIZING THE RAILROADS 261 our exports to the sea in competition with foreign rivals is opposed to such a policy. The prospective separation of terminal charges from the line haul in order to conserve badly needed railroad revenues and to stimulate local enterprise in modernizing terminals, is in con- flict with such a policy. The best use of our waterways and their progressive utilization to avoid the otherwise heavy expense of additional railroad con- struction necessary to meet the expanding needs of the country's commerce, is out of line with such a policy, as is the declared unwillingness of railroad operatives to live and work in peace- ful cooperation under private ownership. "Private Operation" a Myth The average stockholder is more careless of his vote than is the average citizen. There never has been a stockholders' man- agement in the popular, democratic sense. What we have here- tofore had through proxy representation, has been in the first in- stance control by speculative promoters for development purposes followed later by exploitive bankers' control. What the country now needs and is preparing to get, is technical control exercised through actual management and modified by popular opinion as expressed through Government representation. Since the departure of the great competitive organizing owners, the roads have been run, are being run, and will continue to be run, by expert operatives, from the track boss up through the engineering and accounting staffs to the President of the road and the Director General ; and the sooner this fact shall be recognized by the Government, the public and by security owners, the better for all concerned. The quality now most needed to bring about efficient operation, is esprit de corps in an operation staff composed of representatives of the Govern- ment, representatives of the official and classified services and representatives of the owners until these latter shall have been expropriated. Such a staff will in time generate efficiency — not indeed equal to that which existed before competition ended, nor as bad as politics alone can otherwise make it. Efficient service rendered to the public, not for bonuses and tips, as has been proposed, but for just wages and salaries, in a distinguished and honorable public service is what the operatives [773] 262 RAILROAD LEGISLATION [Vol. VHI and the country require and may ultimately expect from the staff. Absolute safety founded on a just basis of values is what the security owner most needs — in other words, a Government bond — and if he delays much longer to press for this, in the hope of securing the elusive chance of speculative profits, based on politically delegated control over rate making, he is likely to miss his market. Director General McAdoo's recommendation that Government control shall be extended over a period of five years — carrying with it the tacit implication of perpetuity — is still the common- sense indication of the way out. By temporizing, and by camouflaging novel facts at variance with American experience, it soothes susceptibilities, and affords the needed opportunity for gradually bringing about a change in our institutions which otherwise would be regarded as revolu- tionary. Within the five-year period a national policy can be worked out, fair to all interests, and which will prevent the otherwise inevitable exploitation of owners, operatives and the public. The country may not, however, proceed directly or indirectly to nationalize its railway system. As a resultant of the influences at work, this may finally be accomplished through a series of transmigrations camouflaged as quasi-private ownership schemes, such as those now pending in Congress. Organization of this kind will, however, tend to make Government control more com- plex and burdensome in deference to a public opinion which will resent any Government assurance of private profit. Coinci- dently, organized labor will not function harmoniously under any semblance even, of private operation, and rates for service will fluctuate with changing political conditions. The weak points of private and public operation will be accentuated and the advantages minimized by all such attempts at mixed control and divided responsibility. During such an interregnum devel- oping experience will continue to point the way to the one inevi- table conclusion — viz., complete Government ownership, opera- tion and responsibility. (In this article I have not referred to the influence of inflation of Gov- ernment credit upon railroading. This is a most disturbing factor as it is in every branch of commerce and industry, but its principal con- sequence is to accentuate and make more exigent conditions which would otherwise have worked out the same results more slowly). [774] APPENDIX REPORT OF THE ANNUAL MEETING COMMITTEE The Committee planned for the Annual Meeting of the Acad- emy (39th Year) a two-day national conference on the subject of Railroad Legislation. The conference was held on Friday and Saturday, November 21-22, and consisted of four sessions and a dinner meeting, with the following sub-topics : 1. The Railroads and the Shipper. 2. The Railroads and the Investor. 3. Railroad Legislation (the dinner meeting). 4. The Railroads and Labor. 5. The Railroads and the Public. The aim of the Committee was to focus attention, as far as possible, upon the two pending Congressional proposals for rail- road legislation, namely, the House and the Senate Committee bills, and the problems of railroad legislation connected directly with those two proposals. With the first edition of the program of the conference there was sent to every member of the Academy and to those invited to attend the conference a copy of a chart prepared by Mr. Rich- ard Waterman for the United States Chamber of Commerce Committee on Railroad Legislation, giving a summary of the seven different plans for railroad legislation which had been sub- mitted to Congress. At the conference itself Mr. Waterman pre- sented a digest, in parallel columns, of the two Congressional Committee proposals. Naturally many aspects of the general problems of railroad legislation not directly involved in the two Congressional proposals came in for their share of discussion by the speakers on the program. This is particularly true of the general discussion of governmental ownership and operation. Dr. Albert Shaw, Vice-President of the Academy, who had ex- pected to preside at the opening session, was unfortunately pre- vented from being present, and Professor T. W. Van Metre, of Columbia University, very kindly took his place. Professor Van Metre also gave the sub-committee on program very valuable expert assistance and has kindly consented to edit the volume of Proceedings in which the papers and report of the discussion at this meeting will be published. [775] 264 APPENDIX [Vol. VIII Professor Thomas Reed Powell, of Columbia University, pre- sided at the second session. Mr. Thomas W. Lamont, Vice- President of the Academy, presided at the dinner meeting, at the beginning of which Professor Lindsay, President of the Academy, made a brief general statement concerning the pro- gram of the conference. Professor Henry R. Seager presided at the third session and Professor E. R. A. Seligman presided at the fourth and closing session. At the dinner meeting, in addition to the speakers on Railroad Legislation, the following gentlemen were invited to be guests of honor : The Right Hon. Viscount Edward Grey, British Ambassador to the United States. Representatives from the delegates to the International Trade Conference : M. Eugene Schneider, Chairman of the French Economic Mission to the United States and Chairman of the Creusot Steel Works; former member of the Chamber of Deputies. Sir Arthur Shirley Benn, M.P., Chairman of the British delegation. Commander Engineer Ferdinando Quartieri, Chairman of the Italian delegation. M. Florimond Hankar, Chairman of the Belgian delega- tion. Commander Giorgio Mylius, President of the Italian Master Cotton Spinners and Weavers Association. Professor Albert H. Janssen, of the University of Louvain and Director of the National Bank of Belgium. M. Eugene Loizeau, Engineer, assistant to the Director of the Credit Lyonnais. Edward A. Filene, Boston, Chairman of the United States Chamber of Commerce Committee to the International Trade Conference. Representative delegates to the International Labor Confer- ence: Professor Ernest Mahaim, Belgium. M. Arthur Fontaine, France. The Right Hon. G. M. Barnes, M.P., Great Britain. G. H. Stewart Bunning, Great Britain. Mgr. Dr. W. H. Nolens, Holland. Baron Mayor des Planches, Italy. Professor Adelfor G. Posada, Spain. Dr. Nicholas Murray Butler, President of Columbia Univer- sity. [776] No. 4] APPENDIX 265 Mr. Jose Fidele Lagos, "La Prensa," Buenos Aires, Argentine Republic. Professor Graham Wallas, University of London. Dr. Carl Kelsey, Acting President of the American Academy of Political and Social Science. Major George Haven Putnam, English-Speaking Union, New York. Owing to changes in the program for the official entertainment of the Prince of Wales in New York City on the evening of November 22nd, Lord Grey was unable to be present, and for the same reason several of the delegates to the International Trade Conference were prevented from being present, but Commander Mylius, Professor Janssen and M. Loizeau were present to rep- resent their colleagues of the International Trade Conference. No member of the International Labor Conference was able to leave Washington at that time because of the fact that their conference was endeavoring to complete its program in the month of Novem- ber and required their daily and hourly presence in Washington. The following greeting of the President of the Academy to the members of both of these conferences was therefore given at the closing session of the annual meeting instead of constituting a part of the program of the dinner meeting, as originally planned by the Committee. Dr. Lindsay, in closing the final session of the annual meeting and the national conference on Railroad Legislation, after thank- ing the speakers and those who had participated in the discus- sion throughout both days, said : It was the intention of the Academy at the dinner meeting last night to depart from the program on Railroad Legislation for the brief space of half an hour to greet and hear from the foreign delegates to the Inter- national Trade Conference and the International Labor Conference. Un- fortunately the time did not permit and the arrangements did not quite permit us to carry out that part of the program. We wanted to give expression at this annual meeting to what is doubtless in the minds of every member of the Academy, of our interest in these new beginnings in international co-operation that are so significant and so full of promise for the future development of our industries and for the future develop- ment of our economic life as reflected in this railroad problem that we are discussing. There are two important international conferences re- cently assembled in this country: the International Trade Conference, and the International Labor Conference which is still sitting in Washing- ton. Unfortunately for us the latter organization is so burdened with its labors which it wishes to bring to a happy conclusion this month that [777] 266 APPENDIX [Vol. VIII they are sitting long hours and its members are unable to leave Wash- ington for even one evening's diversion in New York. We invited some half dozen of them — representative members of that conference — to be guests of honor at our conference. They all expressed the keenest interest in our meeting and sent very warm greetings, but unfortunately no single member of the conference could get here for the meeting last night. The International Trade Conference has been in session at Atlantic City. It has adjourned and its members, about sixty in number, rep- resenting economic missions from France, Italy, Great Britain, Belgium and other countries, have been touring the country and have just returned to New York. They arrived here at a very late hour Thursday night. They were almost overwhelmed by the hospitality that the Merchants Association had planned for them during the two or three days they are to be here in New York. It was very difficult for any of them to attend this conference. Three of their delegates, however, were present last night and I think we owe them an apology for the fact that the hour was so late when the railroad discussion was finished that there was no opportunity to express this greeting then or to hear from them. One of the leading members of that conference is the Chairman of the French delegation, Mr. Schneider, the head of the Creusot Steel Works, a very broad-minded, statesman-like business man. He was very eager to be at our meeting last night and wanted to say a few words to our con- ference concerning their mission to the United States. He sent as his representative Mr. Eugene Loizeau, the assistant to Baron De Morais, the Director of the Credit Lyonnais. He was at the dinner last night and was prepared to have said a few words on the mission of the Inter- national Trade Conference to this country, had there been time. There was also with him Professor Janssen of the University of Louvain and Commander Mylius of the Italian delegation. There were also present Mr. Filene of the United States Chamber of Commerce and Mr. Farquhar, who were active in arranging for that conference. I do not think we ought to let this annual meeting adjourn without saying a word of greeting to both of those conferences and to express to them the thought that undoubtedly represents the very large majority of opinion of such gatherings as this— that the United States means to do its part in the international affairs of the world, and although there are political com- plications which our foreign friends may have great difficulty in under- standing—I refer first to our friends who are here and also to the far greater number who have never been here and who will be still less able to understand— why we hesitate, why we have thrown away this oppor- tunity, why we seem to fail to grasp the greatest opportunity that has come to any nation in the world. America is not going to lose that opportunity entirely. We were very slow rising to the occasion and doing our part in the great conflict. Many of us were very impatient at the slowness of the government leadership and the slowness of public opinion generally throughout the country in rising to our duty and our opportunity in that matter, but we did finally assert ourselves in that [778] No. 4] APPENDIX 267 conflict in a way that has given America cause for just pride. I believe that in this new era of international organization of public affairs we will find a way — just how it is going to be found I do not know — but I believe that we will find a way of coming in, even at the eleventh hour, and doing our part. I think we can assure our friends of these two great conferences, the beginnings of what will undoubtedly be a series of world conferences (many of which I hope will find it to their interest and pleasure to meet in this country), that we will find a way of taking our proper part and lending help and counsel and reaping the benefits of joint counsels in a better and more orderly arrangement of world affairs and in the guarantees of permanent peace. In addition to the papers and addresses printed in the volume of Proceedings and the more or less extensive remarks of some of those who took part in the informal discussion and who have been good enough to expand their remarks into brief papers, which are also published in this volume, the following persons took part in the informal discussion: At the first session on Railroads and the Shipper, Mr. M. H. Winkler, of Winkler and Rogers, New York City ; at the second session on Railroads and the Investor, Mr. S. E. Heberling, of the Switchmen's Union of North America, Buffalo, New York; Mr. George Scoville Ham- lin and Mrs. L. C. Zicarelli, of New York City. At the dinner meeting, Mr. Thomas W. Lamont, of J. P. Morgan and Co., presided, and in his introductory remarks referred forcibly to the very great importance of the railroads and the proper solution of the railroad problem as the basic factor in the economic life and prosperity of the United States. At the fourth session Hon. Herbert C. Pell, Jr., Congressman from the 17th New York District, spoke extemporaneously on the objections to govern- ment ownership and operation of railroads and the desirability in any solution of the railroad problem under government regu- lation of giving the railroads a fair chance to make all the profit consistent with the highest standards of public service which the government ought to supervise and enforce. Mr. Pell also pointed out how the members of the conference and educated public opinion generally could apply the information gained in a conference of this character and exert real political influence on Congress in shaping the railroad policy of the government. Mr. Frederick J. Lisman, of New York City, and Mr. Arthur B. Farquhar, of York, Pa., took part in the informal discussion of this closing session of the conference. The arrangements for the Conference were greatly facilitated [779] 268 APPENDIX [Vol. VIII by the work of the members of the Annual Meeting Committee who served on special sub-committees to look after various details of the plans for the Conference. The Committee wishes to acknowledge with special thanks the very valuable services which Mr. James T. Grady, chief of the Bureau of Publicity of Colum- bia University, rendered the Academy and the conference as chairman of the. Press and Publicity Committee. The efficient services of Messrs. H. Feldman, C. B. Austin and LeRoy E. Bowman on the committee of ushers deserve special mention and grateful thanks. ANNUAL MEETING COMMITTEE SAMUEL McCUNE LINDSAY, Chairman Ex-Officio IRVING T. BUSH NICHOLAS MURRAY BUTLER R. J. CALDWELL THOMAS L. CHADBOURNE, JR. JOSEPH P. CHAMBERLAIN STEPHEN C. CLARK C. A. COFFIN CHARLES PHILLIPS COOPER FREDERICK CUNLIFFE-OWEN robert w. Deforest JOHN HAYS HAMMOND A. BARTON HEPBURN CHARLES E. HUGHES OTTO H. KAHN HANS KALTENBORN THOMAS W. LAMONT ADOLPH LEWISOHN ROSWELL C. McCREA V. EVERITT MACY DWIGHT W. MORROW AMOS R. E. PINCHOT GEORGE A. PLIMPTON WILLIAM L. RANSOM MRS. CHARLES C. RUMSEY JACOB G. SCHURMAN HENRY R. SEAGER E. R. A. SELIGMAN ALBERT SHAW WILLIAM R. SHEPHERD FRANCIS H. SISSON MUNROE SMITH HENRY L. STIMSON OSCAR S. STRAUS THEODORE N. VAIL FRANK A. VANDERLIP T. W. VAN METRE ANNUAL DINNER COMMITTEE THOMAS W. LAMONT, Chairman NICHOLAS MURRAY BUTLER R. J. CALDWELL SAMUEL McCUNE LINDSAY FREDERICK CUNLIFFE-OWEN OSCAR S. STRAUS FRANK A. VANDERLIP [780] RAILROAD REGULATION UNDER THE TRANSPORTATION ACT T. W. VAN METRE Associate Professor of Transportation, Columbia University THE annual meeting of the Academy of Political Science held in New York, November 21-22, 1919, was devoted to a discussion of railroad legislation. At that time it was clear that the period of Federal operation of railroads, which had begun late in December, 1917, was approaching an end, and Congress was wrestling with the problem of formulat- ing a new policy of railroad regulation. It was apparent that there was to be a radical departure from the policy in effect at the time Federal control began. For several years the opinion had been gaining in strength that the system of railroad regu- lation established by the laws passed in 1887, 1906 and 1910 was faulty in principle, and there was an insistent demand for comprehensive changes. But while there was almost uni- versal dissatisfaction with the old methods of regulation, there was a wide divergence of view as to what the new railroad policy should be. Congress was deluged with " plans ", each plan representing, for the most part, an effort to protect the interests of the group which proposed the plan. At the meet- ing of the Academy in 1919 the leading proposals with respect to railroad legislation were fully discussed. The published proceedings of the meeting x constitute a record of the views then held by legislators, railroad managers, shippers, capital- ists, labor leaders and prominent economists. The Trans- portation Act of 1920 showed evidence of the influence of many of the interests represented at that meeting. The Transportation Act has now been in effect twenty-six months, and the Academy has obtained, from the same interests which took part in the discussion of 1919, an appraisal of the influence of the law upon the transportation business of the United States and upon the many other economic activities with which the railroads are closely related. What have been 1 Proceedings of the Academy of Political Science, January, 1920. 269 270 RAILROADS AND BUSINESS PROSPERITY the chief results of the Transportation Act? Is the policy embodied in that law superior to the policy which preceded it? Does the experience of the past two years warrant a belief that we have a reasonably satisfactory system of railroad regulation? Or should the Transportation Act be amended? And if so, in what particulars? Among the many changes which the Transportation Act made in the railroad policy of the Federal Government there were three of outstanding importance. First, the law con- tained a rule of rate-making for the guidance of the Interstate Commerce Commission, that body being directed to establish a level of rates " so that carriers as a whole (or as a whole in each of such rate groups or territories as the Commission may from time to time designate) will, under honest, efficient and economical management and reasonable expenditures for maintenance of way, structures and equipment, earn an aggre- gate annual net railway operating income equal, as nearly as may be, to a fair return upon the aggregate value of the rail- way property of such carriers held for and used in the service of transportation." The enactment of this rule of rate-making, while something new in Federal legislation, was nevertheless little more than the recognition of a right which the carriers presumably had always possessed. Of much greater signi- ficance was the provision of the law designed to meet the prac- tical problem arising from the application of such a rule of rate-making. A body of rates which would yield a fair return to the carriers as a whole would permit many carriers having exceptional advantages in the way of rich traffic territory, favorable conditions of operation, and well located terminals, to obtain a return " substantially and unreasonably in excess of a fair return." The recognition of this fact led to the adoption of a principle before unheard-of in Federal law, the recapture or recovery by the government of a portion of the income of those carriers whose earnings might exceed an amount deemed to be fair and reasonable. It was originally the plan of the Senate to meet the situation created by the unequal earning capacity of strong and weak roads by com- pelling the consolidation of the railroads of the country into a few great systems, which might employ uniform rates on competitive traffic and, at the same time, earn substantially the RAILROAD REGULATION 271 same rate of return upon the value of their property. In the final draft of the bill, however, the compulsory feature of the consolidation program was eliminated. The second important feature of the Transportation Act rep- resented an effort to bring into effect a unified, national system of rate regulation, to replace the dual system of state and Federal control. The exercise of mutually exclusive powers by state and federal authorities had long been a fruitful source of controversy, and in many instances conflicting policies of regu- lation had resulted in the creation of those unreasonable dis- criminations the prevention of which had been the chief pur- pose of regulating the railroads. Under the Interstate Com- merce Act, as amended in 1920, when the Interstate Commerce Commission finds that rates imposed by state authority cause any undue discrimination against interstate or foreign com- merce, it may prescribe rates which will remove the discrim- ination ; and such rates must be observed by the carriers, " the law of any State or the decision or order of any State authority to the contrary notwithstanding." The third outstanding feature of the Transportation Act was the provision for the establishment of machinery to deal with labor difficulties on railroads. The law did not make strikes illegal, but it declared it to be the " duty of all carriers and their officers, employees, and agents to exert every reason- able effort and adopt every available means to avoid any inter- ruption of operation of any carrier growing out of any dispute between the carrier and the employees or subordinate officials thereof." The act directed that all disputes be considered, and if possible, decided, by conference between representatives of the carriers and of the employees directly interested. For the adjudication of disputes not capable of being settled by conference it authorized the creation of Railroad Boards of Labor Adjustment, and established the Railroad Labor Board. The Adjustment Boards were designed to deal with all disputes not involving wages. Because of differences of opinion be- tween employees and managers as to how these Boards should be constituted — whether they should be local, regional or national — they have not been established. The only official labor tribunal to come into existence by virtue of the Trans- portation Act was the Railroad Labor Board, consisting of 272 RAILROADS AND BUSINESS PROSPERITY nine members appointed by the President, the members being divided into three equal groups, representing respectively labor, management and the public. The Board was authorized to state what in its opinion constituted reasonable standards of wages and working conditions for railroad labor, being directed to take into consideration the cost of living, the scales of wages in other industries, the hazard of employment, and other relevant circumstances and conditions. The Act did not pro- vide that the decisions of the Board should be binding, and it prescribed no means by which the orders of the Board could be enforced. Many other changes in the system of railroad regulation were made by the Transportation Act. Among the leading changes in policy was the reversal of the attitude of the govern- ment toward the practice of pooling, the fifth section of the Interstate Commerce Act being amended to permit carriers, under the supervision of the Interstate Commerce Commission, to pool both traffic and earnings. The traditional attitude of the government toward railroad consolidation was also modi- fied. Whereas consolidation had previously been regarded with disfavor, and not infrequently declared illegal, the Interstate Commerce Commission was now directed to prepare a plan for the consolidation of all the railroads of the United States into a limited number of competitive systems ; and provision was made that after the Commission had completed its work the carriers might voluntarily enter into consolidations con- forming to the Commission's final plan. The long-and-short- haul rule of the fourth section of the Interstate Commerce Act was amended, though the general principle adopted in 1910 was retained. The Cummins amendment governing the estab- lishment of rules with respect-to the liability of the carriers for lost and damaged freight was again modified, to give added protection to shippers. The long-continued agitation for Fed- eral regulation of railroad capitalization at last bore fruit, the new law requiring carriers desiring to issue securities to obtain the approval of all proposed issues by the Interstate Commerce Commission. Unwise and unnecessary extension of railroad facilities was guarded against by requiring companies contemplating the construction of new lines to secure from the Interstate Commerce Commission a certificate of public con- I ■ ■-.'-■ RAILROAD REGULATION 273 venience and necessity. Likewise it was provided that the abandonment of existing railroad facilities could not take place without the consent of the Commission. The membership of the Commission was increased from nine to eleven. In addition to receiving the new powers previously mentioned, the Commission was authorized to' establish mini- mum as well as maximum rates ; it was given a larger degree of control of car service, and authority to direct the routing and distribution of traffic in times of emergency. It was empowered to require a carrier to permit the use of its terminal facilities by other carriers, to prescribe equitable divisions of joint earnings, to< direct the routing beyond the lines of initial carriers of traffic not routed by shippers, and to exercise a closer supervision over railroad accounts and records. In one respect the authority of the Commission was curtailed, the time of suspension of proposed changes in rates being reduced from 120 days and an additional period of six months to 120 days and an additional period of 30 days. In addition to establishing a new system of railroad regu- lation the Transportation Act made provision for the adjust- ment of the financial relations of the railroads and the government, gave to such carriers as chose to accept it a guaranty of net earnings for the six months following March 1, 1920, equal to one-half the annual rental paid by the gov- ernment during the period of Federal control, and appropriated $300,000,000 out of which railroad companies might secure loans during the first two years of private operation. The twenty-six months that have passed since the enactment of the Transportation Act have witnessed a trial of virtually all those provisions of the law which marked a departure from the former railroad policy. While conditions have not been such as to permit a thoroughly adequate test of the law, there has been sufficient experience to make possible an estimate of its merits and defects. Public interest has centered naturally upon the events con- nected with the three most important features of the Act, those having to do with the application of the rule of rate- making, the regulation of state rates by Federal authority, and the work of the Railroad Labor Board. The operation of other portions of the law has not, however, been attended with 274 RAILROADS AND BUSINESS PROSPERITY insignificant results. The Interstate Commerce Commission made exceedingly effective use of its increased powers over car service during the months immediately following the termination of Federal control, when the freight business of the railroads was unusually heavy. The regulation of the issuance of securities by the Commission has done much, on the whole, to allay the fear of a recurrence of the financial operations which in past years brought disaster to owners of railroad stocks and bonds. The Commission has published its tentative plan of railroad consolidation, following the plan prepared, at the Commission's direction, by Professor William Z. Ripley of Harvard University. New forms of bills of lading for domestic and export freight have been adopted, defining more clearly the exact nature of the legal obligations of carriers and shippers. The promulgation of numerous or- ders suspending and cancelling railroad tariffs providing for reductions in charges indicates that the Commission is making use of its new power to establish minimum charges. One of the first important duties which confronted the Com- mission, under the terms of the Transportation Act, was to endeavor to establish a level of railroad charges sufficiently high to give the carriers a fair rate of return. The law stipu- lated that for the two years following March 1, 1920, the Com- mission should take as a fair rate of return a sum equal to 5*/2 per cent of the value of the carriers' property, to which might be added, in the discretion of the Commission, one-half of one per cent, to provide for additions and improvements. Late in July, 1920, the Commission ordered a horizontal in- crease of interstate freight rates and passenger fares. Four rate territories were designated, an Eastern, a Southern, a Western, and a Mountain-Pacific. In the Eastern territory the increase of charges for the transportation of freight was 40 per cent, in the Western district 35 per cent, and in each of the other two regions 25 per cent. A twenty-per-cent in- crease of passenger fares was authorized, and a surcharge of 50 per cent imposed upon Pullman fares, the proceeds to go to the railroad companies. After the authorization of the increase of interstate charges the railroad companies asked the various state railroad and utility commissions to authorize equivalent increases upon RAILROAD REGULATION 275 intrastate traffic. In some states the applications of the carriers were granted, in some they were denied with respect to pas- senger fares and granted with respect to freight rates, and in other states the application met with refusals to permit any increase of a substantial nature. The carriers appealed to the Interstate Commerce Commission to order an increase in intra- state charges, where such increases had been denied by state authorities, upon the ground that the disparity between inter- state and intrastate rates resulted in an undue discrimination against interstate commerce. The Commission acceded to the request of the carriers, and in a series of notable. decisions ordered an increase of intrastate rates and fares corresponding in general to the increases which it had previously author- ized on interstate business. A number of states challenged the power of the Commission to increase the general level of intrastate rates. In a test case involving the order made with regard to rates in Wisconsin the Supreme Court upheld the action of the Commission, vindicating its right to alter intra- state rates, not only when there was discrimination against a particular person or locality, but when it should find state rates so low, compared with interstate rates, as to prevent the carriers from earning from their intrastate business a reason- able proportion of the revenue to which, under the terms of the Transportation Act, they are entitled. Of equal importance with the rate-making activities of the Interstate Commerce Commission has been the work of the Railroad Labor Board. For some time before the Trans- portation Act was passed there was much unrest in the ranks of railroad labor. Prices had advanced immoderately since 1915, and while the United States Railroad Administration had been generous in its treatment of labor, the workers felt that the advance in the rate of compensation had not been com- mensurate with the increase in the cost of living. Local dis- turbances seriously impeded the operation of the railroads during the closing months of Federal control, and a general stoppage of work was averted in the spring of 1920 only be- cause of the prospect of a speedy consideration of the wage situation by the Railroad Labor Board. Immediately after the Board was organized it undertook a settlement of the wages question, and on July 20, 1920, it rendered a decision granting to all classes of railroad labor a substantial increase 276 RAILROADS AND BUSINESS PROSPERITY of wages, retroactive to May 1. By this decision the annual outlay of the carriers for wages was advanced twenty-two per cent. In the fall of 1920 the railroads found it necessary to take steps to reduce expenses. The business depression which had begun in the summer caused a marked decline in the volume of railroad traffic, and the increased rates granted by the Interstate Commerce Commission fell far short of supply- ing the fair return of six per cent authorized by the Trans- portation Act. The Labor Board was asked not only to authorize a reduction of wages, but to abrogate the working rules and agreements which had been inherited from the Railroad Administration, and which the carriers asserted to be the cause of large annual losses. In 1921 the Labor Board authorized a twelve-per-cent reduction of wages, and it also ordered new working agreements to be adopted to replace those put into effect during the period of Federal control. During the short time of its existence the Board has been exceedingly active, handing down numerous decisions affecting the entire railroad service, and issuing many orders with respect to dis- putes on the lines of individual carriers. One of its most noteworthy achievements was the effective part it took in averting the threatened railroad strike in October, 1921. The operation of the Transportation Act has evoked a great deal of criticism. It was unfortunate that the law had its earliest trial during a period of business depression. It was particularly unfortunate that the large rate increases granted by the Interstate Commerce Commission came at a time when the general level of commodity prices, and especially of the prices of farm products, was steadily declining. While there is little ground for the belief that the increase of transportation rates contributed in any marked degree to the business de- pression, it was inevitable that in many quarters the new rates should be held as the primary cause of the hard times. There have been many demands for the unconditional repeal of the entire rule of rate-making, and there has also been an unfor- tunate tendency to encourage interference with the work of the Interstate Commerce Commission by legislative and execu- tive officials. The work which the Commission has done in the readjustment of rates believed to be unreasonably high and the recent partial revival of business have done much, how- ever, to still the criticism of the rate-making provisions of the RAILROAD REGULATION 277 Transportation Act. So far there has been no recapture of excess earnings from individual carriers, though the Com- mission is now preparing to undertake this work. It is highly probable that the railroads affected will challenge the constitu- tionality of this feature of the law. The carriers of trunk line and of central freight association territories have already called into question the legal right of the Commission to order a general readjustment of the divisions of joint earnings. The invasion by the Federal Government of the right previ- ously exercised by states to regulate intrastate commerce has been more sharply criticised than the rule of rate-making, and an attempt is being made to modify that portion of the law which, according to the Supreme Court, gives the Interstate Commerce Commission authority to adjust the general level of intrastate rates in accordance with the needs of the carriers for revenue. Senator Cummins has said that it was not the intention of the framers of the law to give to the Commission such sweeping power, it being thought that the law would permit the Commission to modify intrastate rates only in cases where the disparity between state and interstate charges re- sulted in discrimination against particular individuals or par- ticular localities. The chief criticism of the Transportation Act has been in connection with the provisions for the adjustment of labor troubles. The Labor Board has met with a comparatively small measure of public approval, and it has not been looked upon with great favor either by the railroad managers or by the railroad employees. Railroad labor unions have achieved a position of much strength in recent years by virtue of the Adamson Law and because of the deferential policy of the Railroad Administration. They have a feeling of confidence in their power to- bring to a successful issue a contest with the railroad managers, and consequently they are inclined to regard with disfavor the creation of arbitration tribunals of any character. Because of the business depression the rail- road managers have a large measure of confidence in their ability to dictate terms to their working forces in case of a strike, and many of them feel that the Labor Board is an im- pediment to the speedy readjustment of wages and working rules which in their opinion the present condition of the trans- portation industry justifies. The difference of opinion be- 278 RAILROADS AND BUSINESS PROSPERITY tween railroad executives and the Board as to the scope of the Board's jurisdiction has tended to prevent the new tribunal from exercising the influence that was expected. The public, on the whole, has been impressed with the fact that the scale of wages of railroad workers has not declined so rapidly as the scale of wages of workers in other industries, and feeling that high wages have been largely responsible for high rail- road rates, it has been inclined to condemn the Railroad Labor Board for failure to bring about a more expeditious reduction of railroad expenses. The effective action of the Board at the time of the threatened strike in October, 1921, tended, how- ever, greatly to increase its prestige, and gained for it many more friends than it had previously possessed. Perhaps the greatest pretext for criticism of the Labor Board, both by the carriers and by the public, has been the fact that the control of railroad wages has been entrusted to one administrative body and the control of rates to another, without specific provision for close cooperation between the two. The demand for the unconditional abolition of the Labor Board has not been so urgent as the demand that the Board be abolished and its functions vested in the Interstate Commerce Commission. It is not improbable that the Transportation Act will be modified in the not distant future, though with the partial recovery of business and the gradual improvement of the financial position of the carriers the opinion is unquestionably gaining strength that it would be well to leave the law un- disturbed for a time in order to see how it will function under more nearly normal conditions of business than have prevailed during the past two years. At any rate it is not to be ex- pected that the law will be changed as extensively as its sever- est critics desire. It must be^remembered that if the law is amended merely so as to eliminate its three most important features the country will be thrown back upon virtually the same railroad policy that existed in 1917. One has only to remember the almost universal condemnation of that policy to understand how unwise it would be to return to it. What- ever has been the criticism of the Transportation Act there are few who will not admit that the policy which it embodies is superior to the former railroad policy. The general accept- ance of this fact affords strong basis for the belief that there will be no hasty and ill-considered changes. RAILROAD LABOR AND THE LABOR PROBLEM HENRY R. SEAGER Professor of Political Economy, Columbia University THE primary purpose of the Academy of Political Science is educational. It was founded in recognition of the fact that there is a large and growing body of Ameri- cans who wish really to understand both sides of the questions that concern us as citizens. As a contribution to our educa- tional program these meetings to discuss the Railroads and Business Prosperity are especially significant. They are a deliberately planned follow-up of the similar meetings which the Academy held in November, 1919, on Railroad Legislation. At that time, as you will all recall, Congress was wrestling with the problem of the terms on which the railroads should be turned back to their owners. The sessions of the Academy then held dealt with every important phase of that subject. Senator Cummins explained the virtues of his bill. Repre- sentative Merritt told why the House bill, the Esch Bill, was a better measure. An interstate commerce commissioner, rail- road executives, railroad labor union officials, spokesmen for shippers, for the stockholders and for the public, and the in- evitable professors, were all given opportunity to present their views. There resulted a volume of Proceedings which contri- buted greatly to the enlightenment of our members, of the public, and even of Congress, as the good features — I will say nothing of the others — of the Transportation Act of 1920, which soon followed, clearly demonstrated. Today we come together to appraise that measure in actual operation. As two years ago, so today, we are still confronted by the railroad labor problem as the most difficult aspect of the whole railroad question. I have been asked to relate the problem to the labor problem in general. The relation seems to me so obvious that I need take but a few minutes of your time to characterize it. The railroads have long been recognized as a business " af- fected with a public interest ", a " public utility ", as the phrase 279 280 RAILROADS AND BUSINESS PROSPERITY goes. This means that while their business is not government business it is also not strictly private business. In recognition of its quasi-public nature we began thirty-five years ago to subject the charges they might impose and the quality of service they must render to regulation through the Interstate Com- merce Commission. Just as the railroads occupy a middle ground between public business and private business, so rail- road employees occupy a middle position between public em- ployees and private employees. We have been very slow in realizing just what this implies. For many years we placed sole reliance on mediation and voluntary arbitration to adjust railroad labor disputes. Even the Transportation Act, while creating the Railroad Labor Board, is vague in its definition of the powers of this Board and provides no adequate sanction for the enforcement of the Board's decisions. This deliberation in recognizing the quasi-public nature of railway employment and extending to railway employees some of the protection as regards certainty and continuity of status and some of the responsibility as regards regularity in the performance of their duties that apply to public employees, reflects the difficulty of the problem. It is well that we are taking ample time to settle the railroad labor problem. It is helpful that the timid steps toward an adequate railroad labor policy in the Transportation Act are being subjected to judicial review, even if some of the decisions seem to weaken rather than to strengthen the labor provisions of that measure. The goal to be aimed at is coming to be more and more clearly perceived by all concerned. As regards the public it is maxi- mum efficiency on the part of the railroad employees and pro- tection against the interruption of railroad service; as regards the employees it is the " just and" reasonable " wages and work- ing conditions prescribed by the Transportation Act, coupled with such participation in the determination of those con- ditions as will call forth loyal and efficient service; as regards railroad executives it is such degree of control over the oper- ation of the railroads as will enable them to do their work efficiently and to secure the most loyal and efficient cooperation of their fellow employees. As regards the owners of railroad securities it is such an adjustment of labor costs to revenues as will afford them a fair and reasonable return on their bona- ride investments. RAILROAD LABOR AND THE LABOR PROBLEM 281 I shall not anticipate the speakers who succeed me by at- tempting to say how this goal is to be attained. But, con- sidering together these different aims, there are two principles which in the future development of our railroad labor policy should, in my judgment, receive clearer recognition. The first is the principle that the operating employees and the shop employees present separate and distinct problems. Con- tinuous service on the part of the operating employees on every division of every railroad system in the country is essen- tial to the public welfare. This is not true of the shop employees of any railroad. In my opinion only harm and confusion have resulted from trying to apply exactly the same method for adjusting disputes to the operating employees and to the shop employees. Operating employees are quasi-public employees in a sense that entitles them, in return for guarantees of continuous service, to a definite and fully protected status. Shop employees are little, if at all, different as regards the importance of the services they render from private employees in the many private plants which do the same work for the railroads in some sections of the country that is done by the railroad shops in other sections. As I am a strong believer in leaving labor questions to voluntary adjustment, under proper safeguards protecting the right of the individual employee to organize, I do not believe that any useful purpose would be served by restricting the right of shop employees to strike should they desire, at any rate, unless and until we come to adopt such a policy for other employees in manufacturing and repair plants. On the other hand, if the operating employees should ever again attempt to exercise the right to strike, which they enjoy, there are clear indications that public opinion would demand its curtailment. Such curtailment would be fair and proper only if it were coupled with the adoption of standards as regards wages and working conditions and con- tinuity of employment that made the use of the strike weapon clearly no longer necessary as a means of securing the just and reasonable conditions, which the Transportation Act prescribes. The other principle is that whatever public authority is charged with adjusting disputes involving the operating em- ployees, it must recognize that it is its duty to seek and find some other and better basis for determining wages and work- 282 RAILROADS AND BUSINESS PROSPERITY ing conditions than reliance on settlements that may be im- posed by railroad executives through their superior power, or that may be wrung from such executives because of the superior power of the organized employees. From this point of view the statement with which the Railroad Labor Board prefaced the first wage decision which it rendered on July 20, 1920, advancing wages for the collective railroad employees of the country, was highly disappointing. It said: " The Board has been unable to find any formula which, applied to the facts, would work out a just and reasonable wage for the many thousands of positions involved in this dispute." The ob- jection to this statement is not that it would have been reason- able to expect the Board to find such a formula after its few weeks' study of the problem but that it implies that no such formula or formulae are to be found. If, instead of contenting itself with such a pessimistic utterance as regards the possi- bility of placing its decisions on a scientific and defensible basis, it had recognized the grounds for distinguishing between operating employees and shop employees, and indicated its determination to seek a proper basis for the determination of the wages and working conditions of operating employees, so that in its decisions rules would in time be laid down which would justify curtailing the right of operating employees to interrupt the railroad service of the country, the public would now entertain a much higher opinion of the Board and much greater confidence in its ability to lead in the solution of the railroad labor problem. FUNCTIONS AND POLICIES OF THE RAILROAD LABOR BOARD FRANK H. DIXON Professor of Economics, Princeton University AS a background for our discussion it may be profitable to recall the more significant provisions of the Trans- portation Act of 1920 relating to labor — that portion enacted under the title " Disputes between Carriers and their Employees and Subordinate Officers ". The fundamental purpose of this portion of the statute is revealed in the first sentence of Section 301, which declares it to be the duty of all carriers and their officers and agents to exert every reasonable effort and adopt every available means to avoid any inter- ruption to operation growing out of a dispute between carrier and employees. Uninterrupted transportation is essential to the life and happiness of the people and it is wholly proper that this thought should be kept in the forefront of any legis- lation concerning labor controversies on the railways of the country. Following this general injunction the specific plan is de- veloped. All disputes must be considered, and if possible, must be decided in conference between authorized representa- tives of those directly interested in the dispute. This initial conference usually would take place on the individual railway, but if the dispute were of wider extent, it might conceivably involve many carriers. Failure to reach a decision in such a conference is provided for by boards of reference to which the controversy may be sent. In the first place, there are the Railroad Boards of Labor Adjustment. These boards may be established by agreement between carriers and employees. They may be limited to a single line, to a group of carriers, or they may comprise the carriers as a whole. They are to be bipartisan in character. Their jurisdiction is an appellate one, and covers only such disputes as involve grievances, rules or working conditions, but not wages. Such a board, when set up, receives for hear- 283 284 RAILROADS AND BUSINESS PROSPERITY ing any dispute not settled by local conference, upon the appli- cation of any carrier or employee organization, or the petition of not less than one hundred unorganized employees. Further- more, this Board either on its own initiative or upon the request of the national Labor Board, may take jurisdiction whenever it is- of the opinion that the dispute is likely sub- stantially to interrupt commerce. Finally, at the apex of the pyramid is the Railroad Labor Board, an arbitration body consisting of three representatives each of labor, the carriers and the public. It takes jurisdiction of disputes concerning working conditions not settled by Ad- justment Boards or concerning which it decides that Adjust- ment Boards have not exhibited due diligence. In case no Adjustment Board has been organized, it takes the place of this subordinate body and receives the dispute on appeal directly from the local conference. So far as wage disputes are concerned, the Railroad Labor Board assumes direct jurisdiction on appeal from the local conference without the intermediation of any Adjustment Board. And it may go further and upon its own initiative suspend the operation of any original decision concerning wages made locally, if it is of the opinion that the decision involves such an increase as will be likely to necessitate a sub- stantial readjustment of the rates of any carrier. Decisions are to be made public by transmittal to the President and to the Commission. If an order of the Board is disobeyed, it may hear and determine the violation and make public its finding. But it has no weapon of enforcement beyond that of publicity. This Board has been in existence for nearly two years, long enough to develop its policy at least in outline and give indi- cation of what are to be its "fundamental guiding principles. Certainly it has had a sufficiently varied experience during its brief and busy life to prevent it from sinking to the level of bureaucratic routine. Catapulted into the midst of a situation seething with discontent and threatened outbreak, the Labor Board was compelled at the beginning to act under pressure and without that deliberation that should characterize the decisions of a judicial body. And working under pressure has been the habit of the Board almost continuously since the beginning. It may have made some mistakes. It certainly THE RAILROAD LABOR BOARD 285 has not met with universal approbation. But its work should be judged with due consideration of the conditions under which the Board was created and under which it has been compelled to work. In the determination of the reasonableness of wages it was under the guidance of Congress, which laid down seven con- ditions that were to' be taken into consideration. Hazard, skill and responsibility were obvious factors, as were character and regularity of employment. Inequalities in previous wage adjustments were certainly pertinent considerations, for until the wage base was determined to be sound and fair, no increases or decreases therefrom could be fairly appraised. But the Board naturally shrank from an investigation that would con- sume much valuable time and carry it far afield, and this factor was given slight attention. Cost of living, which the em- ployees use as an argument for increases when prices are rising and which is taken over by the carriers when the tide begins to recede, cannot by itself determine the fundamental reason- ableness of an existing wage. It merely indicates the desir- ability of an increase or a decrease from some assumed stand- ard which has been only vaguely fixed, and may not have been reasonable in the beginning. It is worthy of note that Mr. Jewell in his recent presentation before the Labor Board in behalf of the shop crafts, challenged the whole social order and based his plea for an increase of existing wage rates upon the necessity of assuring to the workers an American standard of living. The laborer is worthy of his hire, and this hire must procure for him the opportunity to live in comparative comfort without reference to the financial condition of his employer. No mathematical rule has been discovered for the deter- mination of a reasonable wage. But so long as we maintain our regime of private industry, one of the determining in- fluences that must be accepted by any wage-adjustment board is the first-named of the seven conditions listed in the statute, " the scale of wages paid for similar kinds of work in other industries ". Granted that the statistics of wages have been honestly and intelligently gathered and that no manipulation of wage rates has occurred through undue pressure of com- bined capital, the price that must be paid for similar labor in the open market is one of the conclusive factors in determining 286 RAILROADS AND BUSINESS PROSPERITY the reasonableness of a prevailing wage standard. Moreover in connection therewith the Board should adjust wages in harmony with the industrial conditions of each locality. Standardized wages effective over wide areas can with difficulty be defended on any economic basis. Their reason for existence is political and strategic. Testimony submitted by the em- ployees themselves in Chicago recently is a virtual recognition of the need of restoring those differentials between town and city and between one section and another that were largely destroyed during the period of the national agreements. But this wage the carrier should pay irrespective of its financial condition. Mr. Jewell is fundamentally on solid ground in directing the attention of the Board to the standard of living of the laborer and away from the railway's ability to pay. It is not only unfair but also unsound to make the wages of the employees dependent upon the prosperity of the carriers. The public must eventually be made to pay what is necessary to keep capital in business and labor adequately re- warded. But if there is any faltering on the part of the public, it is capital that must bear the brunt, not labor. Of course there are instances, and some of them have been recog- nized by the Labor Board, where railway operation has only been possible through a reduction of the wage standard, but these have been minor instances on small roads, and it is signi- ficant to notice that in the case of the Missouri and North Arkansas, for example, the Board in reducing the w r ages stipu- lated that capital should receive nothing until wages had been restored to standard. Overemphasis has been put upon the relationship of wages and rates — the argument that wages depend upon the ability of the carrier to pay — by the offer of the railways last October to translate all further reductions in wages into rate reductions. Why such an offer was made it is difficult to say. Possibly it was a strategic move to enlist the shippers on the side of wage reductions. But the practical value of the offer was certainly insignificant. The effect in rate reductions of a decrease of ten per cent in wages would be so small that it would scarcely be recognized even if it had immediate effect upon the move- ment of traffic. But all indications point to the conclusion that reductions in rates would not stimulate traffic movement THE RAILROAD LABOR BOARD 287 to any considerable degree. The trouble lies in the business situation. When business picks up, the height of the freight rate will be in large measure forgotten. Those who are insisting that wages depend upon rates are urging the transfer of the duties of the Labor Board to the Interstate Commerce Commission, on the ground that the agency that determines revenues should be in control of expenses. Their arguments are not impressive. To^ be sure, there has been a certain amount of jolting in the machinery and the two agencies have not worked as cooperatively as they might have done. But the combination of the two functions in the one body would not solve any problem. Wages would still have to be considered separately and ought still to be considered ahead of rates if any conclusions of enduring force are to be reached. And, besides, the Commission has enough troubles of its own. A review of the activities of the Labor Board reveals the fact that whereas it was designed as an appellate body to receive only such controversies as could not be settled locally or regionally, which presumably would be few, it has been for most of its life largely a court of original jurisdiction because of the utter failure of the conference and adjustment machinery to produce results. It is probable that the presence of the Labor Board works as a deterrent to quick settlement in con- ference. One of the parties feels that better terms may be secured by appeal and so declines to participate in a local ad- justment, or else makes merely a perfunctory effort toward settlement. The result has been to bury the Board in petty issues with which it should not have had to concern itself. Unsettled controversies of minor character carried over from the federal period occupied much of the time of the Board at the beginning. The failure of the carriers and their employees to get anywhere in the revision of the national agreements threw the burden of readjustment wholly upon the shoulders of the Labor Board. It is true that adjustment boards have been set up in each of the three territories, but thus far they have been confined to men in engine, train, and yard service, and have included only a portion of the carriers. No such boards have been created for settling the problems of the shop crafts, in which the con- 288 RAILROADS AND BUSINESS PROSPERITY troversies over working conditions are much more numerous than in train service. This failure of carriers and shop craft employees to set up adjustment boards is in part due to the attitude of the railways, which are disposed to distinguish between occupations that are exclusively railway in their char- acter, and those that are similar to commercial employment. Shopmen are merely skilled mechanics. They belong to unions associated with the American Federation of Labor which contains men of the same craft employed in other industries. Questions of policy are decided by vote of the entire union membership and railways have resented the idea that rules for railway shopmen should be made by men engaged in other than railway occupations. Nevertheless, it is evident that means should be devised for encouraging and developing the type of local conference and adjustment that the Act contemplated. Sound principles of labor adjustment demand that removal of misunderstandings and elimination of grievances should be undertaken at the bottom and not at the top. Local conference develops a loyalty to the individual operating organization without which effi- ciency is impossible. Such loyalty is peculiarly needed in the railway industry, in which the geographical extent of oper- ations requires the scattering of employees over a wide territory where they are thrown largely on their own resources. It becomes a question whether the Labor Board has used its influence as vigorously as it might to encourage local adjust- ment. Of course it has compelled compliance with the Act, which has required local conference as a preliminary to an ap- peal to the Board. But there is no indication that it has been unwilling to accept these appeals when made. Why has it not followed the practice of The court which sends back for further deliberation a hung jury? Why could it not refuse to hear an appeal because the conference was obviously per- functory? On the contrary, in the present wage hearing, in- stead of passing upon the merits of Mr. Jewell's plea that genuine conferences had not been held, the Board postponed decision on this issue until after all the evidence should have been offered by both sides. I do not mean to argue with re- spect to this specific issue that the preliminary conferences have not been genuine. Upon that I express no opinion. I THE RAILROAD LABOR BOARD 289 am merely insisting that the Board's general attitude does not betoken any solicitude for the preservation and the enlargement of the powers of the local conference. In fact, there is much to lead one to the conclusion that the Board is magnifying its own powers and is extending them into that field which should be the exclusive possession of the railway executives. To discuss this issue in detail would extend this introductory paper beyond its proper limits. The Board's attitude may be understood by brief reference to a few of the more striking cases. In an issue last September in which a carrier discharged a man because he belonged to a union and challenged the power of the Board to interfere in a matter of contract between employer and employee, the Board held that it was required to take jurisdiction of all cases not decided elsewhere, and that it must decide all disputes that were likely to interrupt the operation of the carrier. This all- embracing attitude takes out of the hands of the individual carrier all control of its labor relations when they have reached a stage in conference where disagreement has resulted. For of course any disagreement may conceivably develop into an interruption of traffic. Another illustration of the Board's interpretation of its powers is found in the Erie Railroad case, in which the carrier, after conference with its employees resulting in a disagreement, restored the rates of pay in effect before the Labor Board's decision of July, 1920. The Board held that the road had no authority to decide when new conditions warranted a change in wages, and expressed its somewhat heated views in the following langauge : This position, of course, renders nugatory and vain the elaborate and costly processes established by the Act and applied by this Board. It sweeps aside at the will of one party a decision arrived at after the presentation of evidence and argument by the many parties to the dispute, accepted by all and now obeyed by substantially all carriers. It justifies a disregard of the factors specified by Congress for the ascertainment of just and reasonable wages and substitutes for these factors the financial benefit of the carrier. If valid, the intent of Con- gress that conference, reasonableness and justice should be substi- tuted for power, violence and disorder in the settlement of railroad labor disputes is utterly destroyed and legislation enacted after the most careful consideration rendered ridiculous and even fraudulent. If a carrier may arbitrarily reduce wages decided to be reasonable and set aside rules while a party to proceedings with regard to such rules, no reason appears why railroad employees may not announce an im- mediate intention of abandoning the service in concert unless de- 290 RAILROADS AND BUSINESS PROSPERITY mands for increased wages or more favorable working conditions are at once satisfied, provided a trend toward higher living costs shall have appeared or wage scales in similar industries shall have ad- vanced. Such conduct is highly provocative of interruption to traffic and is not only not consistent with the Act, but is thereby clearly condemned and prohibited. No court has. passed upon this question because the carrier complied with the ruling of the Board, but it is the particular feature of the law to which the most serious objection is raised by railway management. It is clear that under this inter- pretation, management has no power to readjust wages with- out the consent of the employees, and if that is withheld, with- out a hearing and a decision by the Labor Board. It is the contention of railway management that it should have original authority to adjust wages, its action to be subject to review by the Board, which should have power to make its findings retro- active. Without such a procedure, wage-fixing will soon be- come an exclusively governmental function. Finally, there is the case of the Pennsylvania Railroad, which is too familiar to need elaboration here. The Board went further in this instance than in any other controversy of which it has taken jurisdiction, and laid down general rules of procedure which the railway was ordered to follow in choos- ing employee representatives to confer with management con- cerning a plan of labor adjustment. The Board even went so far as to prescribe the form of ballot which the road should use, although this portion of the order was later modified. But it did insist upon certain principles of representation with which the road was not willing to comply. In this respect it apparently exceeded the powers granted it by the statute, for it has within the past fortnight been enjoined by the Federal Court from enforcing its orders against the carrier. The de- cision of Judge Page virtually forbade the Board to interfere with the procedure of the carrier which set up a scheme of employee representation for the handling of local grievances. [I note the prompt announcement that the Labor Board proposes to appeal this decision. This, of course, is quite proper and quite desirable in order that the actual powers of the Labor Board should be clearly denned by a higher court.] However much we may as individuals sympathize with the underlying purpose that inspired the Labor Board — the desire THE RAILROAD LABOR BOARD 291 to permit each employee to be represented by the person or by the organization of his choice, whether this person or organi- zation was local to the Pennsylvania Railroad or not — we must recognize that this position of the Labor Board invades deeply the field of management and is one more step in the direction of robbing the railway executive of that initiative which is essential to efficient operation. I am not one of those who believe that the Labor Board should be abolished. It has much valuable work to do within its proper field. Above all it stands for the settlement of labor problems through the medium of arbitration rather than that of the strike. Uninterrupted transportation, which is at the basis of the present law, is a goal which we must steadily approach. We must accustom the public and labor to the idea of arbitration as a permanent substitute for the strike. Capital and labor should be required to accept service in this industry subject to a limitation upon their freedom of action in the settlement of their disputes. There would have been no jus- tice in incorporating compulsory arbitration into law in March, 1920, and imposing restrictions upon employees just emerging from government employment, into which they had been thrown without their consent — employees long in service with valuable seniority rights and unfitted by age and experience for any other employment. But the public should announce a future policy of compulsory arbitration, with the purpose of realizing it as speedily as conditions permit. The public must assure the contestants that they have a tribunal in which absolute justice will be meted out. Such a tribunal must offer a compensation and a tenure sufficient to attract the most com- petent men the country can produce. It must establish a labor code which assures to labor certain fundamental rights. Such a code the Board itself attempted to lay down last July. This code has not met with universal approval, but it gives at least a basis for discussion. There is not opportunity at this time to discuss the arguments for and against compulsory arbitration. I wish only in reply to those who insist that it is wholly impracticable, to call attention to the influence exerted by the Labor Board and the labor provision of the statute last fall in preventing a nation- wide strike. Notwithstanding the fact that the law contained 292 RAILROADS AND BUSINESS PROSPERITY no sanctions and that the only method of protest left for labor against the decision of the Board was the use of the strike weapon, the strike did not take place. It crumbled because in spite of all explanations and protests, labor could not rid itself of the odium of striking against the decision of a body created by law. for the express purpose of settling disputes of this character. Public opinion refused to endorse lawlessness and the gigantic structure of revolt collapsed like a house of cards. With the rights of labor adequately protected by a code sanctioned by law, and with a competent and high-minded arbitration board, there should be no more inherent difficulty in settling labor disputes peaceably than there is in adjusting the ordinary dispute in courts of law. The cry of involuntary servitude, under such circumstances, is not persuasive. Public policy must guarantee justice to the disputants but it must also protect the people at large from the intolerable burdens of interrupted transportation. LABOR POLICIES OF THE TRANSPORTATION ACT FROM THE POINT OF VIEW OF RAILWAY MANAGEMENT C. B. HEISERMAN General Counsel of the Pennsylvania Railroad ADISGUSSION of the labor policies of the Transpor- tation Act from the point of view of railway man- agement is hardly within the province of a member of a railroad legal department, but I shall address my remarks simply to a statement of facts which will authoritatively set forth the policy of the company which I have the honor to serve, and some phases of the controversy with the United States Railroad Labor Board which led to our appeal to the United States Court at Chicago. Section 301 of the Transportation Act declares it to be the duty of all carriers and their officers and employees to exert every reasonable effort and to adopt every available means to avoid any interruption in the operation of any carrier growing out of any dispute between the carrier and its employees, or its subordinate officials. All such disputes shall be considered and, if possible, decided in conference between representatives designated and authorized so to confer by the carriers, or employees, or subordinate officials thereof, directly interested in the dispute. If any dispute is not decided in such confer- ence, it shall be referred by the parties thereto to the Board, which, under the provisions of the title, is authorized to hear and decide such dispute. In Decision No. 119 the Labor Board assumed to terminate the National Agreements, and called upon the officers and system organizations of employees to designate and authorize representatives to confer and decide so much of the disputes relating to working rules and conditions as it might be possible for them to decide in conference, although no dispute as to rules and working conditions had been referred to the Board under the Transportation Act. To this decision the Board attached and assumed to prescribe sixteen principles to govern 293 294 RAILROADS AND BUSINESS PROSPERITY such conference and required such conference to conform thereto. Principle No. 5 declared the right of a lawful organi- zation to act towards lawful objects through representatives of its own choice, whether such representatives were employees of the carrier or not, and declared further that the carrier must agree to such principle. Principle No. 15 declared that the majority of any craft or class of employees shall have the right to determine what organization shall represent members of such craft or class. Such organization shall have the right to make an agreement which shall apply to all employees in such craft or class. It was provided, however, that no such agreement shall infringe upon the right of employees not members of the organization representing the majority to present grievances either in person or by representatives of their own choice. While not conceding that the Labor Board had at any time acquired jurisdiction over the National Agreements, or that it had any right or power to revive and perpetuate the same, as it did in Decision No. 119, or that it had power to prescribe the principles which it attached to said Decision No. 119, the Pennsylvania Railroad Company endeavored to comply with the said decision and the said principles. Though not recognizing any obligation so to do, our company called into conference its several classes of employees with the view to negotiating with each class, respectively, rules and working conditions to govern and control the relations between it and its employees, in lieu of the National Agreements, which had ceased to exist, and to which our company was in no wise a party. There was upon our lines a labor union in the shop crafts known as System Federation No. 90, which is affiliated with and is a branch of the Railway Employees Department of the American Federation of Labor. The officers of System Federation No. 90 proposed to confer with the company and to negotiate rules in accordance with Decision No. 119 of the Railroad Labor Board. Our company refused to negotiate with such officers, but, while recognizing no legal obligation so to do, offered to negotiate with committees of its employees composed of men actually engaged in its service, regardless of whether the members of such committees were or were not members of System Federation No. 90. LABOR POLICIES OF THE TRANSPORTATION ACT 295 It may be here stated that it has been the policy of our company, since the termination of Federal control, to re- establish with its own employees a harmonious relationship, bearing in mind that honest, efficient and economical operation of its lines can be secured only by close and unrestricted co- operation by the management and its employees. To that end it determined that all classes of employees should have a voice in the administration of matters affecting their welfare through representatives of their own selection, provided that such representatives, whether union or non-union men, should be actual employees. The officers of System Federation -No. 90 declined to cooperate with the carrier in the selection of com- mittees to represent employees with whom the carrier might negotiate rules and working conditions. Thereupon the com- pany, with the cooperation of certain employees in the shop crafts, though recognizing no legal obligation so to do, pre- pared and distributed to such employees a ballot upon which each employee might designate employee- representatives to confer with the company as to rules and working conditions. After the distribution of such ballots the officers of System Federation No. 90 distributed ballots to all such shop craft employees and warned each such employee not to use the ballot furnished by the carrier, and directed each such employee to vote for System Federation No. 90 as his representative for such conference. Our company recognized the result of the election which it conducted, and thereupon entered into con- ferences as to rules and working conditions with the employee- representatives so chosen. Thereafter System Federation No. 90, by Mr. B. M. Jewell, President, Railway Employees Department, American Feder- ation of Labor, filed with the Labor Board an application for decision, complaining that the carrier had refused to negotiate rules and working conditions with the officers of System Feder- ation No. 90 and was proceeding to negotiate rules and work- ing conditions with committees selected in the manner afore- said, and by reason of the premises had violated Decision No. 119, and particularly Paragraph 2 thereof and Principles 5 and 15 attached to the said decision. Thereafter the Board ren- dered its Decision No. 218, in which it said : " Under the au- thority of the Transportation Act as hereinbefore cited, the 296 RAILROADS AND BUSINESS PROSPERITY Labor Board hereby declares that both of said elections on the Pennsylvania System were illegal and that rules negotiated by the alleged representatives selected by either ballot will be void and of no effect, and orders that a new election be held." Thereupon the company made application to the Board to vacate and set aside its said Decision No. 218, expressly deny- ing the right and power of the Board to prescribe principles which must in law govern the carrier and its employees in the making of agreements covering working rules and conditions. Notwithstanding this, however, the company asserted that it had endeavored in negotiations with its employees to adopt and observe such of the said principles as are fundamentally sound and correct. The Board decided that it had acquired full jurisdiction, but it declared " that question is not of prime importance in this case." The Board also declared : " There is no question of the closed or open shop involved in this dispute and no other real matter of principle; the question involved is merely one of procedure." With these propositions the company took direct issue and represented to the Board that if the question was merely one of procedure the Board had no right or power to set up its judgment or opinion against that of the carrier. Dissatisfaction, whether real or fancied, by certain employees with matters of " mere procedure " should not be tortured into a " dispute " within the purview of Sections 301 and 307 of the Transportation Act. It was claimed that no fear need be entertained of " interruption to the operation of any carrier " because of differences between carrier and employees upon questions of " mere procedure." Disputes under the law, refer- able to the Board, are those of substance and real moment. Reduction of wages, real grievances, unfair, unreasonable, burdensome working rules and conditions are the matters com- prehended by the Transportation Act as prolific of " disputes " which might interrupt transportation, to prevent which the Labor Board was created. The company denied the power of the Board to prescribe an election, or any other method, by which the carrier may ascertain who are the authorized repre- sentatives of its employees ; and it averred that it could not accept as advisory the rules and conditions set forth in the Board's decision in the case, especially the form of the ballot LABOR POLICIES OF THE TRANSPORTATION ACT 297 and the franchise qualifications fixed and determined by the Board. The company represented that, as the occasion requires, it will accord franchise rights only to its employees in service, or absent upon leave, and will not concede voting qualifications to men who have been laid off or furloughed and who may be engaged in other occupations or who may never return to the service of the carriers. The company denied the power of the Board to compel a conference or to prescribe with what representatives of em- ployees it shall confer, and it declared that it could not accede to the rule prescribed for ascertaining the representative capacity of the spokesmen for unorganized employees. The Board was advised that there were in the service of the carrier at that time approximately 176,000 employees who were inter- ested in and affected by rules covering working conditions, and that 117,176, or 66.5%, of said employees had expressed, by vote or otherwise as a result of conference a desire to negotiate rules and working conditions through employee- representatives, and that accordingly contracts respecting rules and working conditions had been entered into between the carrier and representatives of 149,918 employees apportioned among the several classes named to the Board. These con- tracts were put into full force and effect, and by their terms the parties thereto acquired mutual rights and assumed mutual obligations. We further represented that since the Board had handed down its Decision No. 218 the company had held conferences with representatives of the several crafts with whom contracts had been made for the purpose of ascertaining whether or not, in the light of the said decision, said employees were satisfied with the manner of selecting representatives and with the rules and working conditions actually agreed to; and that as a result of said conferences the said employees, through their repre- sentatives, manifested their satisfaction not only with the man- ner of selecting representatives, but also with the rules and working conditions embodied in the said agreements. The company thereupon asked the Board to vacate and set aside its Decision No. 218 and to find in pursuance of the Transportation Act: (a) that the company had the lawful 298 RAILROADS AND BUSINESS PROSPERITY right to establish rules and working conditions in the first instance, either with or without first holding conferences with employees; and (b) that the contracts respecting rules and working conditions theretofore entered into by the carrier and its employees in the shop crafts are now in full force and effect without any further action on the part of the carrier and its employees in the said shop crafts. The Board denied the company a further hearing upon any questions other than those involving matters connected with franchise rights and the election, the decision as to which the Board refused to vacate. Another effort was made by the company to settle peaceably its controversy with the Board, and it respectfully submitted a reply to the Board's last decision, setting forth that the said decision was not responsive to the company's application, and it expressly represented to the Board that the company had not denied and was not now denying the jurisdiction of the Labor Board to hear and decide such disputes as fall within the purview of the Transportation Act, but it denied the right of the Board to invade the domain of management and to assert jurisdiction over grievances of whatsoever kind or character in connection with the employment, the discipline and the discharge of its employees. Section 313 of the Transportation Act provides that the Labor Board, in case it has reason to believe that any decision of the Labor Board is violated by any carrier or employee, may upon its own motion, after due notice and hearing to all persons directly interested in such violation, determine whether in its opinion such violation has occurred and make public its decision in such manner as it may determine. Upon our failure to comply with its decision the Board cited our company to appear before it in accordance with this section, and we appeared for the purpose of informing the Board that we could not accept as a lawful decision the declaration of the Board that the election under which the employee-representa- tives were chosen was illegal and that the rules and working conditions agreed upon by such employee-representatives and the management were void and of no effect. This position was taken and maintained by the company because it was of the opinion that the Board had no jurisdiction LABOR POLICIES OF THE TRANSPORTATION ACT 299 over the matter which was the subject of the decision. Con- forming to the letter and the spirit of the Transportation Act, the carrier pledged itself to the principle of collective bargain- ing with its employees by and through the medium of employee- representatives of their own selection, and in good faith and with the cooperation of a large majority of its employees of all classes entered upon a policy which promised good and last- ing results in promoting harmony of action and full under- standing of conditions between employees and management. A minority of employees, represented by System Federation No. 90, were opposed to employee representation and claimed the right to negotiate concerning rules and working conditions through the shop crafts' labor organization. This the com- pany deemed subversive of its lawful right to deal with its own employees without the intervention of individuals or organizations whose manifest object is the denial of the funda- mental right of employer and employee to deal in the first instance with one another respecting wages and working con- ditions in which they alone are directly interested. And, again, the company emphasized the fact that in cases of dis- pute in relation to wages and working conditions it has ever been willing to submit the dispute to the Labor Board and to abide by its decision in full acquiescence in and acceptance of the provisions of the Transportation Act. The company stated that it had not " violated " any decision of the Labor Board in the sense that it had set at nought and refused to comply with the lawful pronouncement of the Board ; neither had it " violated " any provision of the Transportation Act nor " defied " the Labor Board or the Congress which created it. On the contrary, the company has conceded the jurisdiction of the Labor Board to hear and decide such dis- putes as fall within the purview of the Transportation Act, and it is a willing party to several submissions now pending before the Board in the matter of wages and working rules and conditions. The company further stated that in its opinion the Board in its said Decision No. 218 had without warrant of law exercised the functions of an administrative or regulatory body, and as such had assumed to invade the domain of management and to assert jurisdiction over matters solely referable to the func- 300 RAILROADS AND BUSINESS PROSPERITY tions of railway management. The company believed the Labor Board to be under the law creating it not an administra- tive but a mediative body, and it pointed to the fact that the chairman of the Board had referred to the Board at one time as an " impartial mediatory body." We further stated that we strongly deprecated any con- troversy with the Board with respect to the powers or juris- diction conferred upon it by the Transportation Act, and, if compliance with the decision had involved no serious conse- quences, the company in order to avoid any controversy on the subject would have submitted to the decision, notwithstand- ing its belief that the Board had assumed a jurisdiction not conferred upon it by Congress. But the company, in the con- sideration of the question as to whether the directions of the decision should be observed, was obliged to determine whether the system of employee representation which it had inaugur- atd was to be impaired and its usefulness and value largely destroyed, or whether in order to avoid non-compliance with the decision it should, in considering and determining what rules governing working conditions should be established, consult with an organization which, the company believes, advocates (a) the closed shop, (b) the sympathetic strike, and (c) limitation of output, and which had been largely instru- mental in framing rules governing the operation of shops dur- ing the period of Federal control. The company asserted that these rules had reduced the efficiency of shop labor on its lines to the extent of at least thirty-five per cent, and attention was called to the fact that the late Judge Prouty, when a member of the Railroad Administration, after an investigation made by him, publicly announced that upon the Pennsylvania Lines East labor upon that system was inefficient as compared with private operation, the percentage of inefficiency in some cases being as much as 33^%. The company, therefore, respectfully represented to the Board that it should not consider Decision No. 218 as a lawful exercise of its powers and that the carrier should not be held by the Board as having " violated " a lawful decision of the Board ; and the company reasserted its purpose and willingness to comply in all respects with the provisions of the Transpor- tation Act and to submit itself to the jurisdiction of the Labor Board in all matters cognizable thereunder. LABOR POLICIES OF THE TRANSPORTATION ACT 301 Notwithstanding this appeal, the company was informed that the Board was preparing a decision to be published to the world that the Pennsylvania Railroad Company had violated its de- cision and the law of the land. It was the opinion of the com- pany that the purpose and intent of Section 313 is to induce and impel through the coercive force of public opinion com- pliance by any carrier or person affected by an order of the Labor Board with the terms and provisions of the same, and the company deemed it neither equitable nor just that it should be subjected to such coercive influence in respect to any order of the Board which the Board was without authority to make, and that, consequently, the Board should be restrained by an order of court from subjecting plaintiff to the coercive process prescribed by the said provision of the Transportation Act in respect to the order which the Company had declined to obey because the subject matter thereof was not within the jurisdic- tion of the Board. Thereupon, a petition was filed in the United States Court and Judge Landis granted a temporary restraining order to prevent the publication by the Board that our company had violated any legal decision of the Board or had failed to comply with and observe the provisions of Title III of the Transportation Act. The case finally came on for hearing before Honorable George T. Page, United States Circuit Judge, upon defend- ants' motion to dismiss the bill and a so-called answer which denies none of the averments contained in the petition. For the defendants, it was argued (1) that the Labor Board is an administrative arm of the government over which the courts have no jurisdiction; and (2) that the Board had the power exercised by it under Decisions 119 and 218. The court's find- ing on both points was adverse to the Labor Board's contention. The court decided that " the appointment or method of election of conferees under Section 301 was not one of the func- tions delegated to the Board, and therefore it had not the right to make the regulations provided for in Decision No. 218," and it expressed the " opinion that the purpose of Section 301 was to leave to the carrier and its employees full liberty to get together in their own way." The constitutionality of the act was sustained by the court, 302 RAILROADS AND BUSINESS PROSPERITY and in this connection I desire to make it clear that it was and is the declared policy of our board of directors and executive officers not to question the constitutionality of the Labor Board provisions of the Transportation Act so long as the Board exer- cises its functions in accordance with the terms of the act. And in our bill of complaint, we raised the constitutional ques- tion only in the event that the court should find that the Board was acting within its legal powers. If so, it was our claim that the exercise of such power would deprive us of certain constitutional rights. The court sustained our contention that the Board had not properly interpreted the act, and we are satisfied with its finding in all respects. Naturally, we are gratified by Judge Page's decision, not because of any pride of opinion sustained but because it may be known of all men that our company, in objecting to the Labor Board's decision, was actuated by an earnest and well founded desire to protect its legal rights and those of its em- ployees from what we deemed to be an unwarranted assumption of authority on the part of the Labor Board. As in the past, so in the future the Pennsylvania Railroad System will subject itself to the jurisdiction of the Board in strict conformity to the terms of the act, and it will abide by the Board's decisions unless they be of such a character as will necessitate or justify an appeal by the company in an orderly manner to the courts, or to the bar of public opinion. This privilege is enjoyed alike by all carriers and their employees. I desire also to say that no feelings of hostility, personal or official, have been engendered between the Labor Board and our company, and that a fine spirit of cooperation has been displayed by the Board in the taking of steps to secure a judicial and authoritative determination of the legal questions which have been the subject of argument and consideration. LABOR POLICIES OF THE TRANSPORTATION ACT FROM THE POINT OF VIEW OF RAILROAD EMPLOYEES W. N. DOAK Vice-President, Brotherhood of Railroad Trainmen SINCE I last had the pleasure of meeting with you, many changes have taken place in the industrial and economic situation of the country, and indeed it is a pleasure for me to be again honored with an invitation to meet with you and discuss briefly the industrial situation from the viewpoint of one who represents railroad employees. However, in ap- pearing before you on this occasion it is in an individual capacity, and the views presented will be more personal than those represented by my organization or any other. The organization that I have the honor of representing is not now, nor has it been, engaged in any of the disputes or the litigation mentioned by the preceding speaker. 1 The rela- tions between the railroads and the employees in transportation service are very cordial in every respect and there is no question at present regarding the right of the employees' organization to represent the employees in our classes. Consequently, what I shall have to say at this time will be predicated on the fact that no such controversy exists so far as our group is concerned. Also I would have you bear in mind that we consider the employees engaged in conducting transportation as being some- what differently situated from those engaged in other lines of railroad work. And for that reason we feel that probably some special consideration should be given to the employees engaged in this non-competitive occupation as compared with those engaged in a competitive occupation. The public generally has become interested in wages of rail- road employees and in the adjustment of disputes arising be- tween the employer and the employee in the transportation industry. This has been brought about largely by public dis- 1 Mr. Heiserman, see pp. 293-302. 303 304 RAILROADS AND BUSINESS PROSPERITY cussion of these questions through the press and on the plat- form, and many different views have been expressed as to the importance of these problems and as to their proper solution. Extreme positions have been taken by those championing the cause of the employer as well as by those advocating the cause of the employee. Many public utterances have been made that tend largely to exaggeration. It is thought by many that such utterances have been largely prompted either by bias or through misinformation. It is therefore a commendable and a very desirable position that has been taken by your Academy in the discussion of these questions to bring together, as far as pos- sible, the different elements, and obtain the different views, in order that you may have as nearly as possible the position of all. There are those who hold that the labor organizations have gone far beyond the bounds of reason and propriety in their demands for wage increases and are unfair in their position in the adjustment of transportation disputes. On the other hand there are those who hold that the transportation com- panies have been exacting and unreasonable in their demands upon the employees. There is still another group that holds that both the carriers and the employees are unreasonable and unfair, and a large percentage of the public who are not fully informed of the facts believe that both the carriers and the employees are extremists and have gone beyond the bounds of reason and fair dealing. As much as I should like to agree with these different ele- ments, I must of necessity disagree with the large majority of the views that have been advanced and hold to a more reason- able and impartial view, one of justice and fair dealing to both the carriers and the employees. However, to arrive at what is right we should insist upon having the facts, and when the facts are produced then a correct judgment can be had. The one great trouble has been that attempts have been made to solve these problems on the basis of colored facts or half- truths for so long that a prejudiced and biased judgment has obtained in many instances. For instance, there are those who believe that the wage level for train and yard service employees should be based on the pre-war level, and there are others who as persistently contend that wages should be based on the war- time basis or one still higher. There are other who hold that LABOR POLICIES OF THE TRANSPORTATION ACT 305 the cost of living should be the prime factor in determining such questions, and that the wage rate should be based upon a standard of living that would afford only the necessaries of life, or in other words, provide enough food to prevent dis- solution of the body, together with only a meager supply of clothing. Others hold that wages of railroad employees should be based upon the ability of the carriers to pay with a trans- portation rate at the lowest possible level. Still there are others who hold that the American public is only interested in having the lowest transportation rate possible, regardless of the financial ability of the carriers or the living conditions of the employees. These are all wrong, and in my judgment the proper and legitimate position is that transportation rates should be fair and reasonable and afford a fair return on capital legitimately invested ; and on the other hand the wages of the employees should be just and adequate to afford a proper American stand- ard of living, which should not only provide food and clothing but allow for recreation, the education of the children, and give the employee the opportunity to lay aside funds for the care of himself and of his dependents in case of old age or dis- ability. Wage standards and levels should be established in- dependent of and separate from transportation rates. Neither should be dependent upon the other. In the discussion of the reestablishment of pre-war levels, oftentimes the fact is not taken into consideration that if the war had not occurred conditions would have compelled a re- adjustment of the wages of transportation employees upward not later than the early part of 1917, because the wage cycle made such a readjustment imperative. If the European War had not come on and the United States had not been drawn into the World War and things had followed their usual course, an adjustment upward of the wages of train and yard service employees would have taken place about the time the United States entered the war. But with the advent of the European War in 1914, which caused a rapid advance in living costs, an adjustment should have taken place about the latter part of 1916. This was of course accelerated by the entry of our coun- try into the war early in 1917, but no readjustment was made in wage rates until nearly the middle of 1918, and as a matter 306 RAILROADS AND BUSINESS PROSPERITY of fact a complete and proper adjustment was never had in wage rates until long after the close of the war and then, in so far as train and yard service employees were concerned, did not reach a proper level. No sooner, however, was the last adjustment made than a clamor was started to reduce wages. The unfairness and injustice of this situation had an undesir- able effect on the transportation employees because they had not received any advance at the time the other classes of labor received substantial advances, and at no time had the advance in wages kept pace with the advance in living costs. The public mind was unduly and improperly preyed upon by a system of publicity and propaganda to such an extent that substantial justice was withdrawn from railroad employees and an undesirable and unfair estimate of the true situation arose. Naturally, when such agitation became rampant and the public mind became disturbed, as is always the case in such instances, the railroad employees were placed in a most unfair position, and generally speaking the public was ready to condemn them without a knowledge of the facts. Of course, for the time being the railroad employees felt that they were being unjustly and unfairly criticized and that it was impossible for them to obtain equal rights. They did not feel that the reduction in wages handed them by the United States Railroad Labor Board in 1921 was just and fair under the existing circum- stances, but, rather than have trouble and turmoil, they finally bowed to public sentiment and respected the decision of the Board. Encouraged, as it seemed, by success in obtaining one reduction, the railroads immediately sought further reductions. These the employees bitterly and justifiably resisted. This naturally had a tendency toward creating a fear in the minds of the employees that the governmental agency was being unduly influenced by the false propaganda being freely circulated over the country. At the same time there arose agitation for the repeal of state laws, laxity in enforcement of safety laws, and other agitation for inroads into the conditions of employment of the employees, many of which had been in effect for a quarter of a century or more, and the whole agita- tion was based on the false assumption that a reduction along these lines would result in a corresponding reduction in trans- portation rates. Of course such reductions in rates did not LABOR POLICIES OF THE TRANSPORTATION ACT 307 follow, therefore the agitation has fallen flat to a great extent, and the public is beginning to take a more sober view of the situation. The unsoundness of the theory that wages should be based on the ability of the carrier to pay is just as apparent as the falsity of the theory that rates can be fixed on a particular rail- road on the basis of the density of traffic handled on that line, because the financial condition and ability to pay of the various railroads is just as diversified as the density of traffic on the particular lines. So the entire theory that a rate structure can be built up on individual systems or parts thereof on the basis of density of traffic, and on other systems or parts thereof on the small amount of traffic handled, is no more unreasonable or un- scientific than the theory that wages should be fixed on the different systems on the financial condition or ability of the roads to pay. In both instances it has long been recognized by those who have studied the question that a rate structure must be built with the object in view of providing just and reasonable rates in given territories or in the country as a whole, and just so with the wage structure. It must be founded on a just and reasonable wage, irrespective of the ability of any particular carrier to pay this rate. Unfortunately, beginning with the passage of the Adamson Law in 1916 by the Congress and a decision of the Supreme Court of the United States which in substance held that Con- gress had absolute authority over the transportation systems, the railroad labor situation has been the subject of entirely too much agitation and discussion. This has resulted in extreme positions being taken by the various parties interested and has been the cause of entirely too much public alarm and unrest. Despite the much-heralded national peril of disputes on the railroads, there is no more real danger now, so far as a paralysis of transportation is concerned, than there was fifteen or twenty years ago. The plain truth of the matter is, there are certain people who use this question as a pastime and in most instances the matter is exaggerated to the greatest extent. Even if so, there are many worse things that could happen than to have a railroad strike occasionally. For instance, the practice of disseminating false, malicious and misleading statements is worse in its effects than any strike that could possibly take 308 RAILROADS AND BUSINESS PROSPERITY place. Ever since the beginning of the railroad business in this country there have been different methods employed for the adjustment of disputes between the railroads and their em- ployees, and for a brief review of these different methods your indulgence is asked for a few moments. When the business was in its infancy, direct contact was had between the employer and the individual employee, but as the industry grew and expanded and more men were employed, individual contact was impossible and the employees were represented in small groups by local committees on different parts of the respective lines. This was extended from time to time until general committees representing the employees were organized to deal with the various operating officials of the lines as a whole. Later, when the railroads began to form group organizations for mutual benefit and protection, their example was followed by group organizations of employees, the latter generally being represented by the General Chairmen of the systems in such conference, until the eight-hour move- ment was started. It was then ascertained that the railroads were uniting as a whole in opposition to this movement, and finally a national conference committee of the railroads and the employees was agreed upon to handle this matter for the country as a whole. At the time negotiations were in progress, through a multiplicity of advertising, propaganda and other methods, it was pointed out that a national calamity faced the country and that if the eight-hour day became effective the railroads faced immediate bankruptcy, with the result that the National Administration and later Congress intervened and passed what was known as the Adamson Eight- Hour Law. This brought the industrial situation on the railroads into the national limelight. - For a number of years there was no Federal agency in existence that dealt with disputes on the railroads. Finally the Mediation and Arbitration Act came into existence. It was amended from time to time and became a real effective agency in the solution of these questions. In fact it afforded a method of accommodation in virtually all disputes until the eight-hour movement was inaugurated. As a matter of fact, there are a great many of us who hold the view that it would not have been a failure in this case had not undesirable publicity become rampant with regard to this question. LABOR POLICIES OF THE TRANSPORTATION ACT 309 Immediately following the passage of the Adamson Eight- Hour Law, it became apparent that there were those who did not desire friendly or mutual relations between employer and employee in connection with disputes on the railroads, but who thought that a governmental agency should be established. Many hearings were held before the different committees of Congress, but no conclusion was arrived at up to the time that the United States entered the World War and the railroads were taken over by the Federal Government. Of course one of the first duties devolving upon the United States Railroad Administration was the establishment of an agency .to deal with wages and working conditions on the railroads. There was first established the board to investigate and recommend wage increases. This was composed of four public men. After extensive hearings they arrived at the conclusion that substan- tial increases were necessary for the transportation employees. This was followed by the creation of a court of railroad wages and working conditions, bipartisan in character, consisting of six members, three from the railroad employees and three from the railroad management. The duty of this board was to investigate and recommend adjustment in wages and rules, and it continued to function until the railroads were returned to their owners. In addition thereto there were established boards of adjustment, bipartisan in character, to adjust disputes other than those arising over wage questions. These boards were likewise continued until they closed up all cases arising under Federal control. When it became apparent that the railroads were to be re- turned to their owners, Congress directed its attention to the passage of suitable laws, including laws dealing with the ad- justment of wage and other disputes on the railroads. This resulted in the establishment of what is known as the United States Railroad Labor Board, tripartite in character, with three representatives of the public, three of the railroads and three of the employees. In addition to this, the law contained a provision for boards of adjustment, bipartisan and voluntary in character, to handle disputes other than those arising from wage questions. Unfortunately however, such adjustment boards were not established promptly. The result was a general congestion of the docket of the U. S. Railroad Labor Board, 310 RAILROADS AND BUSINESS PROSPERITY and this brought about further criticism and alarm as to the value of the tribunal. During the consideration of this species of legislation, the railroad employees most strenuously opposed the enactment of the tripartite plan, but advocated the establishment of bipartisan boards, with appeal boards or a referee in case of a deadlock. However, despite their opposition, the Transportation Act be- came effective and the United States Railroad Labor Board was created and has now been in existence two years. There has not been sufficient time, in my judgment, to determine the value of the plan, and as a matter of fact a great deal of criticism, whether just or unjust, has been made of this plan. Personally, I have not believed that a tripartite plan is as desirable as a bipartisan plan, and I believe the future will fully justify my position. As a matter of fact, the experience of the past has to a certain extent justified my views with refer- ence to this question. For example, the bipartisan boards deal- ing with the adjustment of disputes on the railroads have in every instance reached a conclusion and with as little criticism as seems possible, whereas the Railroad Labor Board has been the subject of most severe criticism and agitation. My prin- cipal objection to a plan of this kind has been that no industrial court yet known has proved a success. This was true of the thorough trial of this species of legislation made by Australia and the Australasian countries. The so-called Industrial Court of Kansas is going through a most severe test, and I am of the opinion that it is less effective than those systems where the disputants have equal representation, and that it must ulti- mately fail. Compulsory arbitration in this country in the strict sense has not been resorted to in the adjustment of disputes of this character, but instances may be cited which have been tried in foreign countries and proved a failure in each instance. I per- sonally believe that such a law could not be passed in this country and be effective, because it seems repugnant to our form of government. The most effective results in this or any other country, judged by the experiences of the various countries, have been from mediation, conciliation and voluntary arbitration, and the most effective remedy in the form of a law in the United States has LABOR POLICIES OF THE TRANSPORTATION ACT 311 been the Erdman Act, later succeeded by the Newlands Act, which was displaced by the Transportation Act of 1920. Observation and investigation of labor disputes lead me to believe that mediation is the most effective and desirable plan, and when it is coupled with conciliation and voluntary arbitra- tion it is almost certain to afford an accommodation in every instance. Whether or not the United States Railroad Labor Board will succeed and be a satisfactory and effective means of settling labor disputes on the American railroads, depends upon the character, ability and fitness of its members and its- freedom from entangling alliances and political entanglements. In the selection and maintenance of this Board partisanship and favoritism must be cast aside, and practical, experienced and impartial men placed thereon. Any interference or undue in- fluence exercised by the Congress or the executive will tend to disrupt and destroy this agency. Mutual respect by the rail- roads, the employees and the public must be given it or it will fail. Likewise its conduct must be such that it will command the respect of each of these parties. It cannot, however, handle all the disputes over wages, rules and conditions of employment and function with any degree of satisfaction, and if it is con- tinued there must of necessity be other and additional agencies established and maintained auxiliary thereto. Penalties for strikes and lockouts in the existing law are not desirable, and in my opinion are objectionable to our form of government. Therefore I consider it wholly unnecessary to place such penalties in the law and I disagree with those who advocate putting so-called " teeth " in the law. This brings us then to specific conclusions as to a proper solution of railroad labor disputes, and I would suggest the following : 1. The reestablishment of the Board of Mediation and Con- ciliation, with the right to bring about, if possible, voluntary arbitration. 2. The establishment of bipartisan boards of adjustment, on which the railroads and the employees are equally represented. 3. The reestablishment of the rights of the respective parties to adjust any dispute by mediation, conciliation or voluntary arbitration if possible, before reference to any board. 312 RAILROADS AXD BUSINESS PROSPERITY 4. The maintenance, if necessary, of a board to act as referee, -which for the time being, until otherwise changed, would be the U. S. Railroad Labor Board ; this Board to be appealed to only in case of deadlock by bipartisan boards or in case of failure to adjust any dispute through mediation, conciliation or arbitration. 5. The establishment of a system or plan by which exact facts concerning wages, grievances and conditions of employment may be accurately obtained in a fair and impartial manner. The prohibition by law or otherwise of the circulation of pro- paganda concerning railroad disputes which has the tendency of alarming or inflaming the public mind. LABOR POLICIES OF THE TRANSPORTATION ACT FROM THE STANDPOINT OF THE PUBLIC GROUP HENRY T. HUNT Former Member of the United States Railroad Board A DECISION construing several sections of Title III of the Transportation Act and determining tHe powers of the Railroad Labor Board has very recently been handed down by the United States District Court for the Northern District of Illinois, Judge Page, Circuit Judge, writ- ing the opinion. As this decision is the law until modified by higher authority, it may be illuminating to examine it. The Labor Board had, it appears, found that the Pennsyl- vania Railroad had not complied with one of its decisions and was about to publish its finding to that effect. The Pennsyl- vania then applied to Judge Landis for an injunction restrain- ing the Board from such publication, and a temporary order was issued which the Board endeavored to get set aside. After a delay of many months, Judge Page last week rendered his decision refusing to dismiss the injunction. The Labor Board had proceeded against the Pennsylvania as authorized by Section 313, which follows : Section 313. The Labor Board in case it has reason to believe that any decision of the Labor Board or of an adjustment board is violated by any carrier or employee may upon its own motion after due notice and hearing to all persons directly interested in such violation deter- mine whether in its opinion such violation has occurred and make public its decision in such manner as it may determine. The authority conferred by the above section on the Board to publish its finding that railroads or employees have violated its decisions is the only express sanction provided by the Act toward making these decisions effective. Were it not for the procedure set out in this section, a railroad or an organization of employees might issue false propaganda to the effect that it had obeyed the decision or that the decision did not apply to it or that the board had no jurisdiction to make such a decision, 313 314 RAILROADS AND BUSINESS PROSPERITY and so befuddle the public as to the situation that public opinion could not function. Congress did not give the Board arms to enforce its decisions, but did give it a voice whereby it might charge a recalcitrant with disobedience and convict it before the bar of fair-minded men by means of the marshaling of unassailable facts. In this particular case the injunction issued by the Court has the effect of preventing the board from informing the public as to the facts in the controversy between the Pennsyl- vania Railroad and its shop employees. Official information as to the facts relating to this controversy is of very great importance, at least to the students of politics in industry. It would, therefore, seem to be worth while to examine the decision in detail and to ascertain, if possible, whether it rests upon secure foundations. In order that the decision may be understood, certain recent railroad history must be recited. In March, 1920, a dispute was pending between practically all the railroads and all their employees as to what should constitute reasonable wage rates and reasonable working rules. Representatives of the parties had conferred but could agree on nothing. On April 16, 1920, the entire dispute was submitted by both parties to the Railroad Labor Board for decision. The Board decided the wage portion by Decision 2 of July 20, 1920, but reserved the rules portion for further consideration. By its Decision 119 of April 14, 1921, the Board—" Called upon the officers and System Organizations of employees of each carrier parties hereto to designate and authorize repre- sentatives to confer and to decide so much of this dispute relat- ing to rules and working conditions as it might be possible for them to decide." This Decision 119 was, then, a request made of the carriers and employees to aid the Board to arrive at a decision as to what should constitute reasonable rules and work- ing conditions by agreeing on as many of said rules as they could. A new dispute arose on the Pennsylvania Railroad as to the proper procedure to carry out the Board's request. Certain organizations of its employees contended that representatives- should be elected in a certain manner, but the railroad com- LABOR POLICIES OF THE TRANSPORTATION ACT 315 pany disagreed with this proposal and insisted on carrying on the election in quite a different fashion. The officers of the company and of these organizations of employees conferred on the subject but still failed to agree. Application was then made by the chief executives of the organizations of employees directly interested to the Board for its decision. The company also appeared before the Board, put in its evidence and argued in support of its position. By its Decision No. 218, the Board decided the dispute pre- sented by the employees' organization, which dispute had not been decided in conference, although conference had been had. By this decision the Board established rules of procedure for the election of employees' representatives on the Pennsylvania Railroad in order that the request of the Board in Decision 119 might be carried out. No question was raised by the railroad at the time as to the satisfaction of the requirements for con- ference imposed by another section of the act, Section 301. Afterwards the employees' organizations informed the Board that the Pennsylvania Railroad was not obeying its Decision 218 and accordingly the Board took proceedings under Section 313 to ascertain whether the Pennsylvania had violated this decision. Apparently it determined that the railroad had done so and was about to make its finding public when it was enjoined. Judge Page, in the opening paragraph of his opinion, thus states the case : This is a bill by the Pennsylvania Railroad Company against the Labor Board and its members to enjoin them from functioning as a board generally and specifically from exercising the asserted right to control the selection of the referees provided for in Section 301 of the Transportation Act. Two claims were urged. (1) That the Act is unconstitutional if, and in so far as. it attempts to impose compulsory arbitration, and (2) that the Act gives the Board no right under ex parte submission nor under its own motion to do any act under Section 301. This statement of the nature of the proceeding does not aptly describe it. The Board was not, as is stated, attempting to exercise the asserted right to control the election of the conferees provided for in Section 301, but was asserting the right to publish a decision finding the carrier had not obeyed its Decision 218. This decision interpreted the " call " of the Board in Decision 119. The conferees on the dispute which 316 RAILROADS AND BUSINESS PROSPERITY No. 218 decided had duly conferred and had disagreed. The Board did not attempt to control their selection. The chief executive of one of the parties had applied to the Board for a decision of that dispute. In the controversy which Decision No. 218 decided, there was no question that the representatives of the employees in that dispute were properly authorized and designated to confer nor that they had conferred and had disagreed. The opinion considers and apparently decides four points as follows: (1) The Labor Board is a body corporate subject to the jurisdiction of the Federal Courts and may sue and be sued. (2) The appointment or method of selecting referees under Section 301 was not one of the functions delegated to the Board and therefore it had not the right to make the designation provided for in Decision 218 on pages 8, 9 and 10. (3) As to other matters than those jointly submitted to the Board under Section 301, the decisions of the Board are only advisory, but as to jointly submitted matters legally enforcible. (4) Title III of the Transportation Act is constitutional and confers on the Labor Board the right to prescribe compulsory arbitration and to fix wages under such compulsory arbitration. The language of the court is not altogether distinct and without ambiguity, but it is believed the above constitutes a fair statement of the decision on the points covered by the opinion. The first point needs no particular discussion. It is believed that the decision of the court as to the second point is erroneous. Section 301 of the Transportation Act reads as follows : Section 301. It shall be the duty of all carriers and their officers, employees and agents to exert every reasonable effort to adopt every available means to avoid any interruption to the operation of any carrier growing out of any dispute between the carrier and the em- ployees or subordinate officials thereof. All such disputes shall be considered and, if possible, decided in conference between representa- tives designated and authorized so to confer with the carriers or the employees or subordinate officials thereof directly interested in the dispute. If any dispute is not decided in such conference, it shall be referred by the parties thereto to the Board which under the pro- visions of this title is authorized to hear and decide such dispute. The relevant portions of Section 307 should also be cited : LABOR POLICIES OF THE TRANSPORTATION ACT 317 Section 307. (a) . . . Labor Board (1) upon the application of the Chief Executive of any carrier or organization of employees . . . whose members are directly interested in the dispute, (2) ... (3) upon the Labor Board's own motion if it is of the opinion that the dispute is likely substantially to interrupt commerce, shall receive for hearing and as soon as practicable and with due diligence decide any dispute involving grievances, rules, or working conditions which is not decided as provided in Section 301. . . . (b) The Labor Board (1) upon the application of the Chief Executive of any carrier or organ- ization of employees . . . whose members are directly interested in the dispute (2) ... or (3) upon the Labor Board's own motion if it is of the opinion that the dispute is likely substantially to interrupt commerce, shall receive for hearing and as soon as practicable and with due diligence decide all disputes with respect to the wages or salaries of employees ... of carriers not decided as provided in Sec- tion 301. It has always been the construction of the Board and of officers of carriers and of organizations of employees that Section 301 stated the duties of such officers and employees of carriers with reference to railroad labor disputes. They have never understood that Section 301 imposes any duty on the Board. It is also the construction of the Board and of such officers that Section 307 is the section which confers jurisdiction on the Board to decide disputes as to working conditions or as to wages and prescribes the manner in which such disputes shall be presented to the Board. It has also been the belief of the Board that it had power to decide any dispute on which conference had been had or attempted by either party, and which was presented upon the application of the Chief Executives of carriers or of organi- zations of employees, if the dispute involved grievances, rules, or working conditions or wages or salaries of employees. As appears by Decision 218, the Board believes that a dis- pute as to whether representatives were duly designated and authorized to confer was a dispute involving grievances, rules or working conditions which it had power to decide under Section 307. It has been convinced that a dispute relating to the proper designation or authorization of representatives should be interpreted as coming within the meaning of the words " grievances, rules, or working conditions." It could not well decide whether the method adopted in the dispute was a reasonable rule without deciding what a reasonable rule would be. Section 307 (d) provides that all the decisions of the Board in respect to working conditions shall establish stand- 318 RAILROADS AND BUSINESS PROSPERITY ards of working conditions which are just and reasonable. A method of selecting representatives to confer is a" working condition". Experience has shown that controversies as to whether persons claiming to represent a particular class do so are very frequent and of great importance in railroad oper- ation. The right of members of organizations of railroad employees to select their representatives as they see fit and to select whom they see fit is among the most cherished rights of railroad employees. It has been the subject of many con- troversies. Its denial by railroad officers has been a frequent cause of conflict and of discontent. The court's decision in this respect apparently goes to the length of holding that the Board has no power to decide a dispute which concerns only the question whether particular persons claiming to represent a class really do so or to decide what is the correct and legal method of determining who are qualified representatives. This denial of power goes to the very essence of Title III. If the Court's decision in this respect is not reversed, it will destroy the efficacy of that title as means to prevent interruption of railroad operation by labor disputes. It would appear to be clear that there can be no dispute cognizable by the Board unless the subject of dispute is adopted as such by an organization of employees or by 100 unorganized employees who are really organized for the purpose of present- ing the dispute. If a carrier may decline to confer with the representatives designated by the organization according to its laws and the Board has no power to decide whether the railroad officers are under a duty to confer with the said repre- sentatives, the effective power remaining to the Board is little more than a power to collate statistics. The court by this decision, has, in my judgment, disemboweled Title III. The right of organizations of employees to select w'hat representa- tives they see fit has been long acquiesced in by practically all the railroads of the United States. The Pennsylvania Rail- road is the only notable exception. In the past this railroad has generally claimed the right to decide with what representa- tives it would confer. The result of this decision, in effect, is to enable the officers of carriers to decide with what persons claiming to be repre- sentatives of employees it will confer. The Board according LABOR POLICIES OF THE TRANSPORTATION ACT 319 to the court has no power to correct their decision. The de- cision destroys the efficacy of Section 301 as a mandate to officers and employees of carriers to confer and to decide their disputes in conference if possible. Naturally the employees can confer only by representatives. If the carrier may decide finally who are representatives of the employees, it is clear that the representatives so designated by the carrier may not be those whom the employees wish to represent them. As the representatives selected by the carriers to represent the em- ployees may not, in fact, represent them, it is clear that the employees will not be bound by the agreements entered into by the representatives recognized only by the railroad officers. There may be conference and agreement between the conferees but the agreement will get nowhere. Railroad employees will not permit railroad officers to select their representatives. It is respectfully urged that the court in this respect is in error. Railroad employees have a right to organize and the members of the organizations have a right to choose such repre- sentatives as they see fit and it is the duty of officers of carriers to confer with the representatives chosen by the members of the said organizations. It must be within the power of the Board to decide whether the representatives claiming to repre- sent the members of organizations do in fact represent them, if the Board is to function. As stated above, the fourth matter decided by the learned judge is that Title III provides for compulsory arbitration and that it is constitutional. Yet it is decided that prior to refer- ence to the Board as arbitrators of the dispute there must be conference between representatives of the parties. It is further decided that one party may recognize whom it pleases as the representatives of the other party and that the Board may not review this decision. Therefore, the court has decided that railroad employees are required by law to confer by representa- tives but that the management can select their representatives ; that the representatives so selected and the management may jointly refer the dispute to the Labor Board; that the repre- sentatives selected by the management to represent the men may present evidence and arguments to the Labor Board ; and that when the Board has heard the representatives selected by the management to represent the management and the repre- 320 RAILROADS AND BUSINESS PROSPERITY sentatives selected by the management to represent the men, the Board may decide the matter and the employees of the railroad concerned are bound by law to obey the decision of the Board. Judge Pages states that the decision of the Board on disputes jointly referred by the parties is binding and may be enforced by court proceedings. The dispute must be jointly referred by the parties. And who are the parties? The parties must be the railroad com- pany and the organizations of employees conferring through representatives. Who is to refer the dispute? The words of Section 301 are " it shall be referred by the parties." The parties to a reference are not the representatives or delegates conferring but the persons or organizations they represent. Under Judge Page's decision it would appear that it is the rep- resentatives who must jointly refer the dispute. If the dispute is referred by the representatives of the management selected to act for the management and the " representatives " appointed by the management to act for the men, what becomes of Section 307? That is the only section conferring any power on the Board to decide disputes. It can act only upon the application of the Chief Executive of any carrier or organization of em- ployees whose members are directly interested in the dispute unless it intervenes on its own motion because the dispute is likely to interrupt commerce substantially. As the carrier can in effect select the representatives of the employees under the court's decision, to get the matter "arbitrated" by the Board it. must necessarily also select the Chief Executive of the or- ganization of employees to refer the dispute. It would seem, therefore, that not only has the court in effect rendered organi- zations of employees impotent to select their own representa- tives to confer under Section 301 but it has also in effect author- ized the management to select the Chief Executive for the organizations of employees. The court has apparently author- ized the railroad companies to create organizations of em- ployees of their own to handle rights provided and duties im- posed by Title III. The court decides, however, that the Chief Executive of an organization of employees may make application to the Board for decision of a dispute and that the Board must decide it. LABOR POLICIES OF THE TRANSPORTATION ACT 321 In this case, however, the Board's decision is only advisory and can not be enforced by legal proceedings. Probably the Board is also without power to look into the qualifications of the Chief Executive claiming to be such. If the Board may not decide who are qualified conferees it may not decide who are or are not " Chief Executives." Railroad employees must thus receive such wages and work under such working conditions as the Board decides are just and reason- able after hearing representatives of the management only. Section 309 provides : "Any party to any dispute to be con- sidered by the Labor Board shall be entitled to a hearing.either in person or by counsel." As apparently under the court's decision the parties to the dispute may consist entirely of repre- sentatives satisfactory only to the management, it is only repre- sentatives of the management who are entitled to such hearing. The opinion finds that the decision of the Board has a different effect according to whether the dispute comes before the Board by joint submission under Section 301 or by appli- cation of the Chief Executive of a party. If by the first method, the decision of the Board is binding and can be en- forced by legal proceedings, if by the second method, the decision is merely advisory. If the carrier goes to the length of selecting a " Chief Executive " as well as representatives for the men, it may get a binding decision. It is believed that this is an error; parties have only one method of getting a dispute before the Board for decision. This one method is set out in 307, viz. by application of the Chief Executive of a carrier or of an organization of employees directly interested or by application of 100 or more unorgan- ized employees. This provision was adopted by Congress in part to avoid the reference of trivial disputes to the Board. It was believed that the Chief Executives of the carriers and of organizations of employees would refer only matters of consequence. Con- gress also understood that the Chief Executives of carriers and of organizations of employees had adopted definite policies with reference to wages and working conditions and it was believed desirable to put them in a position to control reference of disputes. The inference from the court's decision is that the parties 322 RAILROADS AND BUSINESS PROSPERITY to the dispute are the representatives conferring. If this is the case, these representatives may apparently, under his de- cision, refer what they wish without reference to the Chief Executive. Thus disputes, for example, between shop fore- men and employees on trivialities may be referred to the Board for decision. The effect of this will be, of course, to swamp the Board with unimportant disputes. The requirement imposed by Congress that the Chief Executive make application im- poses on him the duty of weeding out matters of slight importance. As the Board makes rules and wage rates for almost two million men and its decisions have involved hundreds of mil- lions of dollars, it ought not to be troubled with matters which responsible officers can themselves settle. The judge finds that the Board's decision under an appli- cation not jointly submitted by both parties to a dispute is advisory only. Decision 218 was a decision upon the appli- cation of one party, viz., the labor organization. Hence, under the judge's construction, Decision 218 was advisory only, yet he refuses to dismiss an injunction against the publication of this advisory decision. It seems remarkable that the Board may not even render its advice without doing irreparable in- jury to the Pennsylvania Company. Of course, it may be that the decision is intended to restrain the Board from the expenditure of public money to publish a decision which it had no authority to make. This is not stated, but conceivably it might be rested upon that ground. The argument would be that the law gives the Board the right to decide only disputes involving grievances, rules and working conditions, whereas a dispute which relates to a question whether particular persons are* in fact duly designated repre- sentatives of the parties is not a dispute involving grievances, rules and working conditions. Yet it would appear that Congress must have intended a dispute involving those sub- jects to be within the powers of the Board to decide. The paramount object of Congress as is shown by an examination of the entire act was to prevent interruption of operation growing out of disputes between railroads and their employees. Certainly a dispute as to who should be the representatives of employees is one which might well bring about interruption to LABOR POLICIES OF THE TRANSPORTATION ACT 323 operation. When the tribunal created by Congress to decide disputes tending to interrupt operation is prevented from de- ciding one of the main subject matters of disputes, a subject matter which experience has shown is among the most passion- ately asserted and strongly maintained rights of workmen, the power of that tribunal to function effectively is almost fatally injured. It would seem to be clear that Congress intended the Board to have jurisdiction over all disputes tending to interrupt oper- ation ; that a dispute as to what persons are properly recogniz- able by railroad management is one tending to interrupt oper- ations ; that such a dispute involves grievances, rules and work- ing conditions ; that Decision No. 218 of the Board was within this jurisdiction; that the Board had power to determine whether the Company had violated its decision and to publish its decision. It is believed, therefore, that the court should have overruled the injunction instead of continuing it. If this line of reasoning is valid, Judge Page's decision can- not be considered a correct determination of law. It is earn- estly hoped that the Board will take steps to secure a review of this decision by the Court of Appeals and by the Supreme Court. If such action is not taken the discontent already exist- ing in railroad service will be enormously increased. THE FARMERS AND THE RAILROADS HENRY C. WALLACE Secretary of Agriculture AGRICULTURE is our greatest industry ; transportation our second greatest. These two industries are de- pendent upon one another, and the national well- being is dependent upon both. The failure of either to function efficiently results in widespread inconvenience, financial loss, and quite possibly national disaster. Agriculture and railroad transportation have developed together, each making the rapid extension of the other possible, and together they have contributed to the rapid development of the country. Perhaps exploitation is a more truly descriptive term of what has happened through the rapid extension of agriculture and transportation during the past sixty years. Intelligent consideration of the subject assigned to me re- quires a brief historical review. As population increased along our eastern and southern coasts, the farmers pushed up the navigable streams, using them as a means of transporting their surplus to market. Until the middle of the last century the occupation of the land was proceeding in an orderly manner, farming being extended as the need for food increased, and in- dustry following close after as the country settled up and the cost of transporting manufactured products made it more economical to carry the factory closer to the farm. Frontier agriculture and pioneer settlements were based upon the prin- ciple of self-sufficiency, and the commercial surplus was limited to products which were valuable in relation to weight and bulk and could be easily preserved and transported in the pack. Each pioneer farm family itself produced most of the things necessary to its living. The growth of the cities and settle- ments nearer the sea stimulated the desire for transportation of farm products from farther back in the country and led to the building of canals reaching rich agricultural areas. The building of the Erie Canal, for example, made possible the maintenance of the growing population of New York City, since 324 THE FARMERS AND THE RAILROADS 325 it lapped the fertile wheat-producing areas and assured an abundant supply of bread at a reasonably low price. The development of rail transportation, the invention of labor-saving farm implements and the liberality of the Gov- ernment in the disposition of its lands resulted in the most remarkable period of agricultural expansion and industrial and urban growth the world has ever seen. In 1860 there were about 30,000 miles of railroads in operation, mostly east of the Mississippi. By 1900 there were almost 200,000 miles. In 1860 there were about 407,000,000 acres of land in farms, much of which was not being intensively cultivated. By 1900 the land in farms had more than doubled, and was being much more thoroughly cultivated. Coincident with this develop- ment of transportation and expansion of agriculture came the improvement in ocean shipping, bringing the markets of Europe closer by at least one-half because of the reduction in shipping rates. Within the lifetime of one generation, there- fore, we opened up a vast agricultural empire and our country became the greatest producer of agricultural surplus in the world. A fertile soil suited to extensive farming operations, the rapid improvement in labor-saving implements, cheap transportation both by rail and water, and ambitious, energetic, hard-working farmers, eager to possess the land, combined to produce a flood of cheap grains and live-stock which brought disaster to the farmers of the east and even compelled import- ant readjustments by farmers in the older settled countries of Europe. Had our railroads been extended into the west only as the growth of our population made necessary an increased supply of food, it is reasonable to suppose that freight charges would have been fixed at figures which would have made sure of operating costs and a fair return upon the capital invested. Under such conditions it is reasonable to suppose further that manufacturing and industry, and with them a consuming popu- lation, would have moved westward following the extension of agriculture. But a different policy was followed. Our people were possessed of a fever to occupy the country. Land grants and subsidies of all sorts were offered for railroad-building, and as these new roads were necessarily dependent for their principal revenue on agricultural tonnage and tonnage on goods 326 RAILROADS AND BUSINESS PROSPERITY the farmers would buy, freight rates were based on what the traffic would bear, rather than on what might be shown to be a fair charge for the service rendered based on operating costs and interest on the actual investment. Thus rates on grain were fixed at a point which would not discourage the growing of grain, while rates on live-stock were so adjusted as to come just within the point at which the stockman could better afford to ship than to make his stock walk to market. In those days of western development it was the policy of railroad managers to foster agriculture along their various lines, for the very good reason that they depended upon agriculture for a living. Low rates were made for long hauls of farm products. This gave cheap food to eastern industrial centers and gave the rail- roads long hauls back on manufactured products. The traffic departments of the western roads courted the farmer and stock- man. Their products were moved promptly. In the case of live-stock, the shipping time from western points to the central markets was shorter thirty years ago than it is today. As the country settled up and towns and villages in the west grew into small cities, the policy of low rates for long hauls both of agricultural and manufactured products was continued. Efforts to establish industrial enterprises in great surplus- producing states west of the Mississippi were systematically dis- couraged, even to the extent of making grossly discriminatory rates against such enterprises. Those were the days before government supervision or control of rates. The railroad man- ager was a law unto himself, made rates according to his own sweet will, and made and unmade individuals and communities in his own interest and the interest of his own road. He con- ceived it to be to the advantage of the railroad to keep the farm and the factory as far apart-as possible in order that the railroad might haul their respective products the longest pos- sible distances. It was this high-handed policy which caused the enactment of the famous granger laws and later the inter- state commerce law and the creation of the Interstate Commerce Commission with government control of rates and practices. In the foregoing I have tried to make clear that western agriculture has been developed on freight rates made with a view to encouraging the movement of farm products long dis- tances to central processing and consuming markets, such rates THE FARMERS AND THE RAILROADS 327 of course being adjusted roughly to the bulk and value of the crop to be moved. It necessarily follows that the character of the farming and the value of the land and improvements were determined by this policy, and that any marked change in the policy, even if adhered to for but a relatively short time, is bound to make necessary profound changes in both agriculture and industry. During the years from 1890 to 1917 the Interstate Commerce Commission was kept busy hearing appeals from shippers for rate changes and adjustments, and during the latter part of that period the railroads made several appeals to the commission to permit substantial advances in rates. The requests from ship- pers were mostly for a more equitable adjustment of rates as between communities or regions and as between commodities, in the effort to remove discriminatory rates which were the in- evitable result of the purely arbitrary and unscientific methods of rate-making which had been followed during the period of exploitation. It was during this period that we began to form a conception of just railroad rates, based not upon what the traffic would bear but upon a fair return to capital actually invested, or the fair value of the property, plus a return suffi- cient to cover operating charges and adequate upkeep under competent management. As a necessary preliminary to the determination of such just rates Congress provided for a com- plete physical valuation of all the railroads of the country, and this stupendous undertaking was begun during the period indicated. When the railroads were taken over by the government it was with the understanding that they should be assured a net return equal to the average net return of the three years just preceding, which happened to be the most prosperous three- year period the roads had ever experienced. No measures were taken to control wages or the other factors which entered into the cost of operation and maintenance. It was simply another way of applying the utterly vicious cost-plus policy and added much to the burden of debt under which our people will be laboring for a generation yet to come. During this period of government operation prices of most commodities rose to the highest point ever known. Intelligent railroad oper- ation, therefore, would have justified increases in freight 328 RAILROADS AND BUSINESS PROSPERITY charges fairly comparable with the increases in the values of the commodities, with a view to holding down the amount needed to make good the government guarantee. Some in- creases in rates were made, but not enough to meet the increase in expenses. Costs of operation were permitted to increase almost without hindrance, and in the case of wages, the largest cost item, with government acquiescence and even encourage- ment. Thus when the time came to hand the roads back to their owners they were in such condition that they seemed to require very large increases in freight rates if they were to be kept out of the hands of receivers. Just at the time, therefore, when we were entering the period of severe liquidation and prices of commodities and especially of agricultural products were falling with great rapidity, burdensome rate increases were put in force. The blighting effect upon agriculture can hardly be compre- hended. I would not be understood as suggesting that the increases in freight rates were wholly responsible for the un- precedented depression through which our agriculture has been passing and which for a time threatened a financial disaster of nation-wide scope, but these higher rates contributed ma- terially to this depression and if continued will require changes in agriculture and industry of national and international im- portance. Transportation is an essential part of the process of production. Transportation costs are a part of production costs. Any material advance in the cost of production with- out a corresponding advance in the price received for the pro- duct involves important readjustments. During the past year the farmer has been compelled to accept for his products, whether grain, live-stock, cotton, wool, or fruits and vegetables, prices which are on the average no greater than those which prevailed during the pre-war period, meaning by the latter the five-year period 1910-14 inclusive. For a time the prices of some of the coarse grains were as much as forty per cent below the pre-war average, and the prices offered the farmers in some of the vegetable-growing regions were so low that they did not cover the cost of harvesting and preparing for ship- ment. During the same period freight rates on agricultural products have been on an average about eighty per cent above the rates which prevailed before the war. An illuminating THE FARMERS AND THE RAILROADS 329 illustration of just how the farmer is affected by this condition is furnished by the investigations of the Congressional Com- mission of Agricultural Inquiry. Four standard implements needed on the western grain and stock farm are a gang plow, a wagon, a corn-harvester and a grain-binder. On August 1, 1913, the cost of these implements at certain points in Kansas and Nebraska was $490.50, which was equivalent to the farm price of 928 bushels of corn. The freight charge to Chicago on the number of bushels of corn required to purchase these implements at that time was $122.16. On August 15, 1920, the cost of these implements was $944. This charge was- cov- ered by the price received for 706 bushels of corn, but the freight charge on the corn was $179.30. On October 15 the cost of the implements had been reduced to $751, but it required the value of no less than 4,191 bushels of corn to purchase them and the freight on the corn was $1,051.41. Similar illustrations in unlimited number can be furnished to show the blighting effect upon agriculture of advances in freight rates without regard to the value of the products to be moved. Perhaps a more understandable way to show the effect upon agriculture of a continuance of the present freight rates is by noting the additional charge per crop-acre which they impose. Under the old rates a great fruit industry was built up in California. It is estimated that the freight charge paid by that State in 1920 was about $64,000,000. The increase in freight rates during the past four years imposes an additional charge per acre on lemons of $187.67, which capitalized at 7 per cent would amount to $2,681 ; on oranges an additional acre tax of $192.38, which capitalized would amount to $2,748.28; on apples $160.87, which capitalized would amount to $2,298.14. Approximately the same burden is imposed upon the fruit industry of the entire northwest and the truck industry of the southwest, the source of a large supply of vegetables of all kinds. In the case of the less valuable crops, such, for example, as corn, wheat, potatoes and cotton, the increased tax per acre imposed by the present freight rates does not seem to be so great when presented in figures, but is in fact relatively as great. For example, the increased rate tax per acre on corn, wheat and oats, and cotton is greater than was the net return 330 RAILROADS AND BUSINESS PROSPERITY per acre to the farmer during the pre-war period. In the case of potatoes the increased rate tax per acre in Maine amounts to $31.80, and in Michigan and Louisiana, both great potato- producing regions, the increased rate tax per acre is above $15, which, because of the lower yield, is relatively as great as the increase in Maine. When it is remembered that prior to the war agricultural production yielded to the average farmer nothing more than a fair living, and, indeed, less than this had the farmer demanded a fair interest charge on his money invested in land and farm- ing equipment, the impossibility of maintaining production under the imposition of a rate tax as great as has been indi- cated at once becomes apparent. Either freight rates on agricultural products and on the principal commodities the farmers need to buy must come down quickly to about pre-war levels, or prices of agricultural products must increase suffi- ciently to equal the increasing freight rates, or there will be profound readjustments in agricultural production, and these will involve readjustments in industry as well. Cherishing the hope that present high freight rates are tem- porary, the farmer is struggling to continue his farming oper- ations without material change, and in the meantime casting about for ways by which he may overcome the handicap im- posed upon him. The fruit- and truck-growers of the far west and southwest, for example, are turning to water transporta- tion, and with the better adaptation of vessels to their needs may find in his way some measure of relief from the high freights. The wheat-growers of the west also are using the shorter haul to water for export grains. To illustrate what is happening in this respect, fifty-three per cent of the wheat exported from this country in 1913 went out through the Atlantic and Canadian ports. In 1921, only twenty-four per cent passed through the eastern ports. In 1913, the Gulf ports handled thirty-one per cent of our export wheat, and in 1921 slightly more than fifty-nine per cent. Last year the east-and- west rail lines, which formerly handled the bulk of our grain, were running small trains with light loads, while the north- and-south lines in the surplus-producing country, which had formerly handled less than one-third of our export grain, were hauling long trains, heavily loaded, and our southern ports THE FARMERS AND THE RAILROADS 331 were congested with cars of grain waiting for ships that they might be unloaded. If the American farmer is to compete successfully with the Argentine or the Australasian farmer in the markets of Europe, he must be able to lay his products down in Europe at a cost approximately the same as his competitors. The two principal competitive factors entering into the cost of marketing agri- cultural products in Europe are the cost of production and transportation. I shall not attempt to go into the question of cost of production, but shall confine myself to a comparison of the cost of transportation from the wheat-producing centers of the United States and Argentina to the United Kingdom. It may be well at the outset to point out that while the cost of ocean transportation is an important factor in the cost of marketing agricultural products in foreign countries, it is by no means as important a factor as rail transportation to the sea- board, particularly in the United States, where our producing centers are located much farther from the seaboard than are the producing centers of Argentina, Australia, and other countries that compete with the United States. In Argentina, for ex- ample, the average rail haul from the wheat-producing regions to the seaboard is approximately 435 kilometers, or 261 miles. The cost of carrying 1,000 kilograms (2204.6 pounds) of wheat a distance of 500 kilometers (310.6 miles) is $15.44 Argentine paper, or $0.15 per bushel in United States money on the basis of the prevailing rate of exchange. With an ocean freight rate from Buenos Aires to Liverpool of $5.00 per ton, this would make a rate of $0,134 per bushel, or a combined rail-and-ocean freight rate from the wheat-producing centers of Argentina to the United Kingdom of $0,284. In the United States the export freight rate on wheat from Hutchinson, Kansas, to Galveston, Texas, through which a large part of our wheat is exported, is $0.44^ per 100 pounds, or at the rate of $0,267 per bushel. The ocean freight rate from Galveston to the United Kingdom is $0.21 per 100 pounds, or at the rate of $0,126 per bushel. This makes a combined rail-and-ocean freight rate from Hutchinson, Kansas, to the United Kingdom of $0,393 per bushel, as compared with a total rail-and-ocean freight rate from the wheat-producing centers of Argentina to the United Kingdom of $0,284 per 332 RAILROADS AND BUSINESS PROSPERITY bushel. The wheat producer in Argentina thus has an apparent advantage of approximately $0.11 per bushel in the cost of transportation alone. In the case of crops for domestic consumption grown in the great surplus-producing states east of the Rocky Mountains, water transportation is not available. The farmers in these states must use railroads to ship their surplus to market and the continuation of the present high rates must inevitably re- duce the tonnage of coarse grains and hay shipped to the east. We hear some criticism of the agricultural schedules of the tariff bill now under consideration by Congress. In point of fact, the duties proposed to be levied upon the principal agri- cultural products are hardly sufficient to equalize the additional freight tax which already has been imposed upon the farmers of the surplus-producing states. The increase in railroad rates during the past five years has been in effect a differential against our own farmers in favor of the farmers of foreign nations with whom they must compete. A few examples are given below in order to illustrate con- cretely the effect that high freight rates, if continued, are cer- tain to have, not only on farming but on the railroads them- selves. In the case of a cheap bulky commodity like potatoes high transportation costs will have an important effect on the dis- tribution of acreage. At present the commercial production of this crop is more or less concentrated in the northern border states, the central states obtaining much of their supply from those to the north of them. But when the freight rate on potatoes from Bangor, Maine, to New York City increases from 25c a hundred pounds in 1913 to 52>4c in 1921, a differential is established in favor of the growers in New York, New Jersey, Pennsylvania and Connecticut that will undoubtedly increase the acreage in those states and make necessary a reduction of acreage in the State of Maine. This will deprive the railroads of a large and remunerative traffic. These rates have the effect of decreasing the profit on potatoes in Maine by 25c per hundred pounds, which makes it possible for other regions nearer the market to compete. Since 1913 there has been an increase in rates on Michigan potatoes to New York of 29c or just 100%. A continuation of this rate will have the effect of THE FARMERS AND THE RAILROADS 333 decreasing potato acreage in the west and of increasing it in the east, thus cutting off another source of traffic. The effect on the hay trade is similar. This crop can be grown anywhere that farming is possible. Previous to the war the eastern states obtained a large part of their hay from the Middle West. Already rail shipments of hay eastward have been curtailed. The cotton belt has hitherto imported most of the hay it requires. The recent increase in freights has so enhanced the price of hay in the south that cotton-growers, if this high price continues, are resolving to produce their own supplies of this necessary commodity. This will deprive many roads of a large and important traffic. The shipment of fruits and vegetables from the south and from California to eastern and northern cities is an important part of the traffic of many lines of transportation. Even un- der pre-war conditions large quantities of vegetables were produced under glass near these cities for the winter trade, in competition with California and the south. The present rates for transportation will enable more men to succeed in growing vegetables under glass and this will reduce the tonnage of such commodities shipped from California and the south. This tendency is in fact already noticeable. A pound of pork represents about ten pounds of corn, and a pound of butter much more. Every increase in transpor- tation rates tends to induce corn-growers to condense their products into meat and butter, thus reducing the tonnage of farm products delivered to the carriers. The largest yields per acre and the greatest weight per bushel of oats are obtained in our western mountain states. Yet these states have never grown oats except as a supply crop. It is so cheap a product that it will not bear the cost of transportation to distant markets. The commercial production of oats has therefore always been concentrated about the great market centers. Every increase in cost of transportation tends to emphasize this concentration, thus reducing tonnage. Wheat, because of its higher value per unit of weight, has hitherto been widely grown in the western mountain states. This is the only crop generally available to farmers in that section that is sufficiently high-priced to bear the necessarily 334 RAILROADS AND BUSINESS PROSPERITY heavy transportation costs. The enormous increase in these costs in recent years may have the effect of materially reducing the acreage of wheat in these states. The land thus vacated will go to forage for dairy cows because butter is sufficiently concentrated to stand the cost of getting it to eastern and even to European markets. In so far as this change takes place, and it is in fact actually taking place, the railroads will lose the difference between the freight on the large volume of grain now shipped and the few pounds of butter than can be made from the land vacated by wheat. Fortunately it is not necessary for you to accept merely my opinion as to the effect of high transportation costs on agricul- ture. The accompanying diagram shows the difference in the farm prices of corn, wheat and oats, in the New England States on the one hand, and the West North Central States on the other, by five-year periods from 1871 to 1915, and for 1921. It will be observed that the differences in prices east and west gradually decreased until 1915. Since that time they have greatly increased and are now approximately as wide apart as they were back in the seventies. In the case of oats the differ- ence is actually greater. It will be observed that this great spread in prices between the east and the west since 1915 is coincident with the recent increase in freight rates. While the decrease in these differences was going on because of decrease in transportation costs, there was a rapid reduction in acreage of the cereals in New England, amounting between 1880 and 1909 to 46%. Following the Civil War the differ- ence in prices east and west was sufficiently great to justify the New England dairyman in growing grain for feed; but as the cost of getting grain from the west fell it became more and more advantageous to the- New England dairyman to buy his concentrated feed. This accounts for the reduction in the acreage of cereals. That the New England farmer, if present conditions continue, will go back to growing grain is shown by the fact that during the period of high prices prevailing in war times the acreage of wheat in New Hampshire increased from practically nothing to 1,400, and oats increased from 11,000 to 15,000 acres. The acreage of rye more than doubled. In Vermont wheat increased from 700 to 11,000 acres and oats from 71,500 to 83,100 acres. A similar increase occurred in THE FARMERS AND THE RAILROADS 335 Massachusetts. It is true this increase occurred under high transportation rates, but the high prices of farm products at the time made these rates relatively no greater than they had PRICES IN PRODUCING AND CONSUMING SECTIONS COMPARED INDEX OF FARM PRICES OF CORN, WHEAT AND OATS. UNITED STATES, NEW ENGLAND AND WEST NORTH CENTRAL STATES. • 5 YEAR AVERAGES OF DECEMBER FIRST PRICES. 1S71-1915 and 1921. 100= AVERAGE FOR UNITED STATES. Small figures on chart are actual prices. PRICE INDEX 190 ISO 170 160 150 140 130 120 110 100 90 80 70 60 50 -AVERAGE FOR THE UNITED STATES WEST NORTH CENTRAL STATES 1S71-75 12S2-S6 1331-95 1901-05 1911-15 1921* •Wheat Kcnthly averase for year. Corn and oats Dec. 1 PRICE INDEX 190 ISO 170 160 150 llJO 130 120 110 100 90 so 70 60 50 been before the War. The case is different now, for the prices of farm products are lower. There appears to be no escape from the conclusion that unless there is a material reduction in cost of transportation, New England will soon be producing 336 RAILROADS AND BUSINESS PROSPERITY again the concentrated feed she requires. The loss in profit to the railroads this will occasion is no small item to many of the roads supplying this section of the country. To discuss in detail the effects upon agriculture and industry in general of the advances in freight rates of the past four years would require hours and days rather than minutes. In brief, if the present high rates are continued for any length of time their probable effect will be : First, to favor the farmers of South America and Australia at the expense of our own farmers, and all the more so be- cause of the substantial decreases in ocean rates. Second, to keep prices of farm products in the large surplus- producing states at figures lower than are justified by the in- vestment in land and equipment and cost of farm production, except during years of short crops. Third, to prolong the period of dissatisfaction among farm- ers and encourage advocates of economic fallacies of all sorts. Fourth, to improve the position of eastern truck- and fruit- growers, but also to add considerably to the cost of production of milk and dairy products, because of the advanced prices of hay and coarse grains necessarily shipped in from the west. Fifth, gradually to shift industrial enterprises westward, nearer the surplus food producing territory. Sixth, to promote sectional rather than national spirit and make more and more difficult large national policies with re- spect to international affairs. No good citizen can find comfort or satisfaction in con- templating such results. I am not making a special plea for the farmer as against the railroad. The relation between agriculture and transportation is so very intimate and dependent that neither can afford to acquiesce in a condition which seriously affects the other. They must work together in harmony and understanding. The important point I am trying to make is this : That this nation has been built up by a system of low railroad rates designed to encourage the movement of our surplus agricultural crops long distances to manufacturing, industrial and business cen- ters, with a corresponding return haul of manufactured pro- ducts, and that a sudden reversal of this theory of rate-making THE FARMERS AND THE RAILROADS 337 results in great economic injustice and if persisted in will keep us in a state of confusion and agricultural and business uncer- tainty for a prolonged period. The need of permitting the railroads to charge rates sufficiently high to cover reasonable costs of operation and maintenance and yield a fair return upon the capital invested is so obvious that it must at once be conceded. Both commerce and agriculture require efficient transportation. But the folly of undertaking to establish such rates wholly without consideration of their disastrous effect upon agriculture, the greatest industry of the country, is now apparent to everyone. The most hopeful sign at the present time is the apparent recognition of the railroad management that our present high rates cannot be continued without disaster to the railroads themselves, and that rates must come down to a point not far, if any, above the pre-war levels. Railroad management should have the whole-hearted support of all right-minded and clear- thinking people in taking the steps which will make it possible to bring about the necessary reduction. TRANSPORTATION ACT OF 1920 DANIEL WILLARD President, Baltimore and Ohio Railroad Company THE framing of the Transportation Act of 1920 was pre- ceded by one of the most exhaustive investigations ever conducted by Congress, and the Act in its present form undoubtedly reflects the enlightened effort of that body to deal with the American railroad problem in a constructive and effective manner. It is desirable that we have a clear understanding of just what the American railroad problem really is before we attempt to decide how it should be dealt with. What we are in the habit of speaking of as the American railway system is, of course, not a system at all in the sense in which the word " system " is ordinarily used. It is not, for instance, such a system as we have in mind when we speak of the Pennsylvania or Santa Fe Systems, nor is it like the American Telephone and Telegraph Company, which latter includes under one general management or supervision a network of wires reaching all parts of the United States. When we speak of the American railway system we have in mind, I suppose, the 1,800 or more separate and independent railroad companies in the United States, owning and operating steam railroads, with a total length of about 265,000 miles, having in the aggregate about 2,500,000 freight cars, about 65,000 locomotives and about 56,000 cars used in passenger train service — all representing a total investment of approximately $20,000,000,000 and giving direct employment to upwards of 2,000,000 persons. The American railroad problem, as it is called, grows out of the question : how can this great aggregate property, represented by an investment of $20,000,000,000, be so developed, main- tained and operated as to furnish the people with adequate transportation at reasonable rates? The steam railroad has ceased to be a new thing and certain fundamental truths concerning the railroad problem have been so clearly demonstrated that they may now be accepted as estab- TRANSPORTATION ACT OF 1920 339 lished. One of the fundamental truths which I have in mind is this : Whatever policy of ownership, control or operation may be adopted with reference to our American railroads, it must make satisfactory provision so that in times of emergency it will be possible to mobilize and coordinate promptly all of the physical properties of all the companies in order that the rail- road plant as a whole may be used in the most effective manner possible. Such coordination we know is possible under gov- ernment operation. Such coordination was attempted by the railroads themselves in 1917, and with a much greater degree of success than is generally recognized, through the agency of the Railroad War Board, which they voluntarily established in April of that year. The War Board, however, had no legal status, and as the laws were at that time, its efforts were much hampered and interfered with. A satisfactory settlement of the railroad problem demands among other things that suitable provision be made by law for the prompt mobilization and co- ordination of the railway properties when necessary in the public interest. The Transportation Act of 1920, therefore, specifically pro- vides that in times of emergency the Interstate Commerce Commission shall be authorized to assume direction and control of all the cars and engines of all the railroads in the United States, as if they were in fact owned and controlled by the government, and it authorizes the Commission to take such further steps as may be necessary to give effect to this provision of the Act. It should be borne in mind, however, that this broad authority which the Commission is authorized to assume over private property is to be exercised only in times of emergency. Congress undoubtedly recognized the fact that it is not possible to have complete coordination and unified oper- ation of all the railroads and at the same time have the benefit of competition. The two things are incompatible. It was be- lieved, and I think justifiably so, that while it was necessary in the public interest to provide for the effective mobilization of all the railroad facilities in times of emergency, it was also desirable in the public interest that except in times of emer- gency the individual companies should be given the fullest op- portunity for individual initiative, enterprise and competition. I believe the Transportation Act of 1920 effectively provides i 840 RAILROADS AND BUSINESS PROSPERITY for that phase of the railroad problem, and my belief is based upon the knowledge that during the fiscal year 1920, when it may be said there was a transportation emergency such as was contemplated in the words of the Act, the American railroads, acting under its provisions and in cooperation with the Inter- state Commerce Commission, so coordinated their efforts that in the aggregate they moved over 447 billion ton-miles during the year. This was 7 billion ton-miles greater than the high- est previous accomplishment, which was in 1918, while the roads were under Federal control. The importance of being able to mobilize promptly all of the railroad facilities in times of emergency is so great that had it not been possible to provide satisfactorily therefor in connection with private ownership and operation, it is altogether likely that Congress would have felt compelled to accept the policy of Government ownership and operation as the only possible alternative. Congress, however, having decided that it was possible under proper legislation effectively to coordinate the railway facilities when necessary, or in times of emergency, and having made suitable provision by law for such coordination, then gave con- sideration to another phase of the railroad problem as related to private ownership and operation. Of course, it is recognized that if we are to have private ownership and operation of the railroads, it can only be had upon a voluntary basis. No one, under institutions such as ours, can be forced against his will to invest his money in rail- roads. At the same time it is recognized that at least $500,000,000, and probably more, must be expended each year by the railroads for new facilities in order that they may pro- vide for the demands of our growing commerce, and unless railway securities can be made "so attractive that each year at least $500,000,000 of new capital will seek investment in that direction, then the scheme of private ownership will fail, be- cause we cannot as a people afford to have inadequate trans- portation facilities. But whether railway securities are attrac- tive or not from the investors' point of view depends, of course, upon the rate and dependability of return and the certainty of ultimate recovery of the capital invested. Congress, with a full understanding of this phase of the problem, for the first time laid down for the guidance of the TRANSPORTATION ACT OF 1920 341 Interstate Commerce Commission a definite rule to be fol- lowed with reference to the fixing of the rates and charges which the railways might lawfully impose. What Congress in effect did was to announce a policy, and in harmony therewith it authorized and directed its agent, the Interstate Commerce Commission, to fix rates and charges so that the railroads as a whole, or as a whole in certain regions or groups, should be able, in connection with honest and efficient management, to earn a net operating income equal as nearly as may be to a fair return upon the value of the property devoted to transportation purposes. Nothing was said in the Act about the rate of return upon the stocks and bonds of the railroads. As a matter of fact there is no mention in the law of either railroad stocks or bonds, nor is there a guarantee of any definite return as some have seemed to think, but simply the statement that the railroads as a whole should be entitled to receive a fair return, if honestly and efficiently managed, upon the value of the property devoted to the public use. However, because the railroads are not all in one compact system, because there are in fact several hundred separate and independent companies, because some roads are more favor- ably located than others, and because it was recognized that different roads running between the same points should, and as a matter of fact must, charge the same rates, it was therefore recognized that rates which might be high enough to yield a fair return to some of the carriers, might not yield an adequate return to others in the same group. It was realized also that the identical rates might yield to still other carriers in the same group a higher return than could be justified from the public point of view. It is essential in the public interest, however, that all the roads, generally speaking, should be able to survive and at the same time properly maintain and enlarge their facilities as circumstances may require. To overcome the difficulties re- sulting from the conditions just referred to, it is provided in the Act that if from rates fixed so as to yield a fair return upon the value of all the roads in a specific group, certain individual companies in the same group should be able to earn more than six per cent upon the value of their property, then in that case one-half of the net operating income earned above six per cent 342 RAILROADS AND BUSINESS PROSPERITY from rates so fixed should be recoverable by the government. This feature of the Act has been much criticized, and by many has been held to be unconstitutional. Personally, I do not believe it is possible for private ownership of the railroads to endure in this country without such a provision as this in the Act. As a practical matter without such a. provision in the Act, I do not believe that politically appointed agencies, in face of the opposition which might be urged, would approve rates high enough to yield a fair return upon the properties as a whole constituting a group for rate-making purposes, when it was clear that from a lower or existing basis of rates one or more companies in the same group could earn an operating in- come in excess of the requirements from an investment point of view. The result would be that while some of the railroads might be very prosperous and others might manage to live, still others less fortunately situated might not be able to survive as commercial enterprises, and consequently they would be un- able to furnish adequate transportation to that part of the public depending upon them for service. It was therefore thought better and more in the public inter- est that rates should be fixed high enough to yield a fair return upon all of the property used for transportation purposes in any particular group of competitive lines, even though some roads might be able to earn a sufficient return on a lower rate basis. Inasmuch, however, as the more fortunate roads would benefit by the higher rate basis necessary to sustain the less fortunate roads, Congress decided that whatever was earned above six per cent upon the property value of any particular road from rates so fixed, should be divided equally between the road and the government. I repeat that in my opinion private ownership and operation of the railroads in this country can not endure without some such provision, nor do I think the provision which I have just referred to is in itself unfair or inequitable. Undoubtedly if it were not for the necessity of the less fortunate roads, the more fortunate ones would not be permitted to charge the higher rates. The very fact that some roads in a group are fortunate enough to be able to earn more than six per cent upon the value of their property, even though part of such excess is recoverable by the government, puts the securities of such companies in a TRANSPORTATION ACT OF 1920 343 preferred class, and because such companies are permitted to retain one-half of all they can earn above six per cent, there would seem to be ample inducement to stimulate initiative and enterprise. Personally, I approve of this particular feature of the Act, and I venture to express the hope that its constitu- tionality will be upheld in the courts. Otherwise I feel that rates will not be maintained on a basis sufficiently high to sus- tain the roads in general, in which event private ownership and operation of the railroads as a national policy will fail. Congress, having satisfied itself that it was possible under private ownership, with suitable legislation, for the railroads to be coordinated in times of emergency, then addressed itself to the financial phase of the problem, which it undertook to solve by the establishment of a rule for rate-making, as I have shown. There still remained to be dealt with one other important phase of the problem, to which I shall now refer. In no other country in the world do the people make so great a use of the railroads as in ours. The steam railroads in the United States perform a freight service equal to the movement of 4,000 tons one mile per annum for each man, woman and child of our entire population, while the latest figures available show that in Europe the analogous service performed by the railroads is probably less than 600 tons one mile per capita per annum. The greater use made of the railroads by the people in this country is of course influenced largely by the fact that ours is a country of great distances and is also rich in natural and varied resources. It has come about, therefore, that in the City of New York, an an example, the flour used is very likely made from wheat grown on the rich prairies of Minnesota and the Dakotas. The beef which is eaten here was perhaps bred in Texas, developed in Wyoming, fattened in Iowa and dressed in Chicago. Not only do we find upon the tables in New York and Boston salmon caught in the waters on the Pacific Coast and shipped from Seattle, but there will also be found on the tables in Seattle the cod caught in the North Atlantic waters and shipped from Boston. Many similar instances might be cited. In short, it has generally been found advantageous, be- cause more economical, to produce our flour, meats, minerals, forest products etc. where each can be produced or obtained at 344 RAILROADS AND BUSINESS PROSPERITY the lowest initial cost and then transport them, largely by rail, to the point of ultimate consumption, the entire transportation cost being less than the difference in initial cost of production in different parts of the country. With this in mind it is mani- festly important that there should be regularity and continuity of service by the railroads, and one of the important problems before Congress was to insure if possible such continuity by guarding against interruption of service which might be caused by misunderstandings and disputes arising between the railroad managers and their employees. It was urged by some that this provision of the Act should be so written as to prohibit strikes upon the railroads. It was not possible to enact legislation of that character, nor do I think it would have been wise to enact such legislation at that time. I believe it would be a mistake for Congress to pass a law prohibiting strikes unless we are quite certain that we shall be able to enforce such a law once it has been enacted. Per- sonally I do not believe that we have reached a stage where we can feel confident that such a law would or could be effec- tively enforced. The matter was, therefore, dealt with, I think, in the wisest way possible under the circumstances. Congress created machinery and set up agencies by virtue of which the employees could feel assured of obtaining just as fair wages and working conditions without striking as they could reason- ably expect to obtain even if they did strike. The Act provides, first, that — It shall be the duty of all carriers and their officers, employees and agents to exert every reasonable effort and adopt every available means to avoid any interruption to the operation of any carrier grow- ing out of any dispute between the carrier and the employees or sub- ordinate officials thereof. All such disputes shall be considered and, if possible, decided in conference between representatives designated and authorized so to confer by the carriers, or by the employees or subordinate officials thereof, directly interested in the dispute. If any dispute is not decided in such conference, it shall be referred by the parties thereto to the Board, which, under the provision of this title, is authorized to hear and decide such dispute. The Act also provides for the creation of the Board above referred to and in that respect reads as follows : " There is here- by established a board to be known as the Railroad Labor Board and to be composed of nine members." The members of the Labor Board are to be appointed by the TRANSPORTATION ACT OF 1920 345 President. Three of his appointees shall be from men nomin- ated by railroad employees, three shall be from men nominated by the railroad companies, and three shall be selected by the President himself, as representing in a larger way the general public, and all nine shall be confirmed by the Senate. In fact, Congress has created for this particular purpose a special Labor Court consisting of the same number as the Supreme Court of the United States, appointed in the same way, that is to say, by the President and confirmed by the Senate, and has given the Board or Court a status and dignity in keeping with its im- portance. The Act says that it shall be the duty of the Bxmrd to establish rates of pay and standards of working conditions which, in the opinion of the Board, shall be just and reasonable, and in determining the justness and reasonableness of such rates the Board is directed to take into consideration, among other things — 1. The scale of wages paid for similar kinds of work in other industries ; 2. The relation between wages and the cost of living; 3. The hazards of the employment; 4. The training and skill required ; 5. The degree of responsibility ; 6. The character and regularity of the employment; and 7. Inequalities of increases in wages or of treatment, the result of previous wage orders or adjustments. It may indeed be said that Congress by this Act has made a preferred class of the railroad workers, because so far as I know this is the first and only time that Congress has ever definitely enacted that any particular class of the people should be given at all times and under all circumstances just and rea- sonable wages and working conditions. Of course, Congress did not do this primarily in the interest of the workers. Con- gress acted only as it had a right to act in the interests of the nation as a whole. Congress acted with a full realization of the importance of an uninterrupted transportation service in a country such as ours, but being unwilling to deprive the work- ers of their right to strike, it sought to provide machinery which would make it unnecessary under any circumstances for the men to stop work in order to obtain just and reasonable 346 RAILROADS AND BUSINESS PROSPERITY treatment. In short, Congress provided, or aimed to provide by law, that the railroad workers should at all times be assured of just as good wages and just as good working conditions without striking as they could reasonably expect to secure even if they did strike, for it is clear that no one could justify or ex- pect to win a strike for wages or working conditions that would be unjust or unreasonable. This feature of the Act has been much criticised, but I venture to think that during the short time the Act has been in effect, the labor provision has more than justified itself by actual results achieved when viewed in a large way. It may, of course, be said that each one of the three features of the Act which I have been discussing is in a sense experi- mental. Nevertheless, it is my feeling and firm belief that so far it cannot be said that the experiment has failed in con- nection with any one of the features mentioned. On the con- trary it seems to me that the results so far obtained, when fairly considered, have measurably met the proper expectation of Congress. There are other important features of the Transportation Act to which I have not referred at all, chiefly because of my limited time and because I do not consider them of fundamental importance. One of the provisions which I have in mind has reference to the future grouping of the railroads into a rela- tively small number of strong, competing lines. I am in favor of the general policy so announced. I do not, however, con- sider it of fundamental importance. I believe that the Transportation Act of 1920 affords a work- able basis for the future successful operation of the railroads in the United States, in harmony with our long-established policy of private ownership and- operation. That the success of the Act has not yet been thoroughly demonstrated in all of its aspects, I admit. I believe, however, that it would be a great mistake to attempt to amend or change the Act in any of its fundamental features at the present time. I do not think we have yet had sufficient experience under the Act to justify a conclusion that a change is actually necessary or, if necessary, to indicate clearly what the change should be. I firmly believe that if the Act is permitted to remain as it is for a period of five years, and if the railway managers could be assured that TRANSPORTATION ACT OF 1920 347 it would not be changed within that period of time, such knowledge would have a most stimulating and encouraging effect, not only upon the railway managers, but upon investors as well, and would in itself go far to assure the success of the Act. Undoubtedly the Act is not perfect in all its details. Nevertheless I believe that in its present form it makes private ownership and operation of the railroads possible, and that too on a basis much to be preferred to the only probable alternative. I urge, therefore, that the Act in its present form be given a fair and sympathetic trial. THE NEW BASIS OF RATE-MAKING WALKER D. HINES • Former Director General of Railroads 1WANT to express at the outset my cordial belief in the view that the Transportation Act deserves a fair and impartial trial. Even if we were passing through times that were entirely normal, it would still be true that an act adopted with such care and after such prolonged investigation should be given a reasonable time within which to justify its usefulness. But the truth is that we have been passing through times that are wholly abnormal, and the fact that in such times a new and comprehensive piece of legislation may not have brought satisfaction to the interests affected by it is not proof that it is not a forward and constructive step. I do not know of any place in the world where any institution or any scheme of law has brought satisfaction to the people in these war years and the years since the war. So I think we must give to this new and important piece of legislation an opportunity to justify itself when we again get into something approximating normal times. I think it is particularly important to emphasize this neces- sity because it is undoubtedly true that in the period of re- adjustment through which we have been passing, a great part of our population, and that is the agricultural part, has suf- fered most intensely from the unfortunate combination of pre- war prices or less for its products, and of greatly increased freight rates based on the existing much-increased costs of railroad operations. This has been a condition which was bound to produce discontent and it was bound to direct attention to this new legislation as the most obvious reason for the trouble, although in fact, I do not believe that the legislation can be held re- sponsible. Under any other possible scheme of legislation, we would either have had rates approximately as high as the existing rates or we would have had a series of railroad bank- 348 THE NEW BASIS OF RATE-MAKING 349 ruptcies which would have been infinitely worse for the farm- ers as well as the people in other walks of life. I want to say something about the principle of rate-making which has been put into the Transportation Act. I shall not attempt again to outline the provisions of the Act on this point because Mr. Willard has done that clearly and concisely. I want to emphasize that this new rate basis has been adopted from the standpoint of the public interest and that public inter- est is vitally concerned in the maintenance of this new basis. The provision in the Transportation Act that rates should be so fixed as to produce a fair return upon the aggregate value of railroad property was not put there merely to provide inter- est and dividends for the holders of the existing bonds and stocks of the railroad companies. It was put there for other broad public purposes, in addition to that purpose, and I wish to call attention to some of these other purposes. One aspect of the railroad business is that it employs about two million workmen. In a normal year, I suppose there would be spent by the railroads, if they have a basis of rates that yields a fair return upon their property, from two and three-quarters to three billion dollars in wages. The dis- tribution of that amount to the wage-earners of the country would be a tremendous factor in the prosperity of every class of people in the country. But in practice there is much more fluctuation than is generally appreciated in the amount of rail- road labor and the amount of the railroad pay roll. Even if the wages remain unchanged, there may be very great fluctu- ations in the number of employees, in the amount of work they are called on to do, and hence in the amount of money that is distributed to them as wages. The moment the railroads begin to be apprehensive as to whether they are obtaining enough revenue fairly to protect the interests with the protection of which they are charged, they begin to lay off their maintenance forces, and maintenance represents close to forty-five per cent of the total operating expenses of the railroad companies. When the maintenance employees are laid off, the purchasing power of themselves and their families is impaired and to a considerable extent dstroyed, and that has a distinctly un- favorable influence upon the general state of business in the country. 350 RAILROADS AND BUSINESS PROSPERITY The moment this condition becomes an influence to cut down general business — and the cutting down of the maintenance program is bound to have that influence — the number of freight trains begins to diminish, the number of employees in the train service is cut down, and you have an additional element which makes for a slowing down of the prosperity of the country. Let us look now at the material which the railroads buy. I suppose it is lair to estimate that in the course of a year under approximately normal conditions, the railroads would buy from a billion eight hundred million to two billion dollars' worth of materials, which are used in the operation of the roads. In addition to this, in normal times, they would ordinarily buy perhaps two or three hundred million dollars' worth of ma- terials for the purposes of new construction. The railroads buy nearly one-third of the soft or bituminous coal that is produced in the country. It has been estimated that they buy about forty per cent of the steel and iron articles produced in the country and that about forty per cent of the country's lumber production goes directly and indirectly into materials used by the railroads. When the reasonable return to the railroads begins to be seriously diminished and there comes to be a cutting-down in these purchases of materials, as there is bound to be when the maintenance program is diminished, or when the construction program is diminished, we have another and very important condition to militate against the prosperity of the country. The various industries of the country, which are dependent so largely upon the railroads, commence limiting their operations, and their employees lose their jobs and their purchasing power. The volume of business diminishes still more and again we have a falling-off in the amount of freight service and in the number of trains and enginemen employed. We begin to have a cutting-down in the amount of coal that the railroads can consume, with consequent embarrassment to the coal industry and its employees. It follows that the giving of a fair return to enable them to proceed in a normal manner with their operations has a tre- mendously important relation to the public interest with respect to the labor that the railroads employ, with respect to the ma- terials that they use, and with respect to the industries which manufacture these materials, and in all these respects the gen- THE NEW BASIS OF RATE-MAKING 351 eral prosperity of the country is vitally involved. When these factors take an unfavorable turn, there is no class which is more seriously affected than the farming class, which is dependent upon the general prosperity of the country in order to have a satisfactory demand for its products. Another point of vital interest to the public is the adequacy of the railroad service. That involves two considerations : one is that the railroads of this country are not in a condition to handle satisfactorily the amount of business which could be regarded at present as normal. They need much additional equipment and many sorts of improvements in order to meet more satisfactorily the demands of the public for an adequate service. This requires capital. In addition there is a steady growth in the volume of business done in this country. In 1900 the mount of freight traffic carried was double what it was in 1890. In 1910 it was eighty per cent more than in 1900. In 1920 it was sixty per cent more than in 1910. So that we can count upon a continuing and heavy increase in the normal amount of business. I am speaking broadly now and disregarding for the moment the fluctuations that may come in particular years of depression. With this increase in traffic there must be enormous increases in the railroad plant and they cannot be obtained without enormous expenditures of money. I think Mr. Willard estimated only five hundred million dol- lars a year. There will be needed, I believe, eight hundred million to a billion, which can be expended in the further im- provement and extension of the railroads to the distinct advant- age of adequate and efficient service, although I can readily appreciate that if the railroads cannot raise that much addi- tional money to spend, they must, and no doubt they can, by spending less than that amount, get along with a service less satisfactory than it ought to be. Such enormous amounts of capital cannot be raised unless there is adequate assurance of a fair return to the railroads, and there again we have an important element of public interest underlying the rate-making principle of the Transportation Act. There is still another feature embodied in this rate-making principle of the Transportation Act, and that is, that the Transportation Act was designed to establish a greater certainty as to a fair return for the railroads. 352 RAILROADS AND BUSINESS PROSPERITY Prior to the Transportation Act, the attitude of the Govern- ment was restrictive rather than constructive. It merely told the railroads what they should not do, but assumed no obliga- tion to aid in creating a rate basis which would affirmatively assure them a fair return. That contributed to a condition of uncertainty which was unfavorable to the public interest. The Transportation Act for the first time has imposed an affirmative, express duty on the Interstate Commerce Commission to estab- lish a rate basis which, as far as may be, will yield a fair return. This provision was designed to establish a greater certainty, and I think that is one of the most important elements of public interest that is involved in this new conception. I believe as the railroads become better assured of their status there can and will be developed on their part a more confident and steady policy of carrying forward on a more regular and normal basis their maintenance and construction programs. The lack of public interest in maintaining a fair return was always working to make the return uncertain. There was consequently a disposition on the part of the rail- roads to respond very quickly to any unfavorable aspect of general business by promptly cutting down their maintenance and construction programs. That has tremendously accen- tuated the tendencies already working toward depression in general business conditions, so in the past we have had a con- dition where this great institution, which represents the greatest organized purchasing power and the greatest organized source of wages in the country, has been under an influence which caused it, the moment there came to be signs of depression, to convert itself into an agency for increasing that depression. And that picture has another side. When business begins to get better, prices begin to go up. and labor begins to get scarce, the railroads, having been forced to cut down their main- tenance and construction programs in times of depression, then have to redouble their efforts in these directions and thereby they become an influence for creating instability by putting up the price, by bidding against each other and the other interests in the country, in order to make up for their deferred programs in times of depression. Further than this, the result of such a policy has been that in a time of returning general business prosperity the railroads have had to use their tracks, equip- THE NEW BASIS OF RATE-MAKING 353 ment and other facilities very largely for handling their own material and supplies, which on account of their retrenchment policy during the preceding period of depression they had not purchased and distributed while they had ample surplus equip- ment and other facilities. This has led to congestion of busi- ness and has tended to accentuate still further the high prices characteristic of returning prosperity. I strongly believe this new policy of the Transportation Act is calculated in large part to correct these highly unfavorable influences and to enable the railroads, as they begin to feel better assured of the con- tinuance of this new policy, to adopt a more regular policy of maintaining more uniformly in bad times their normal pro- grams of maintenance and construction and thereby help stabilize the conditions of the whole country, rather than be forced into a condition of intensifying unfavorable influences in the direction either of further depression or of undue ex- pansion. I think this result will be one of the most important and salutary effects of the law, and will constitute one of the most striking ways in which this new basis will be in promotion of the public interests. I fully appreciate that the adoption of a policy of carrying forward normal programs of maintenance and construction in times of business depression involves some difficult'complioations in the matter of cash, because the railroad maintenance and construction work is largely a cash proposition. All employees engaged in such work must be paid in cash and all materials used in it must be bought for cash or on very short time. Naturally in time of business depression railroad companies cannot generally raise on satisfactory terms large amounts of capital by the issue of stock or of long-term bonds, and they have been quite hesitant to borrow money on short-term paper for carrying forward maintenance and construction work. Nevertheless with increased assurance of a definite and helpful governmental policy I believe the railroad companies could and ought to make further efforts than they have felt justified in making in the past to provide themselves with the necessary cash to carry forward their maintenance and construction work in times of depression when labor is more plentiful and ma- terials are cheaper, and when they have ample equipment and other facilities for handling the work with a minimum of inter- 354 RAILROADS AND BUSINESS PROSPERITY ference to their transportation of commercial traffic. Not only will this be to their own direct benefit, but it will immensely promote the general public interest, and hence this consider- ation in itself constitutes a highly important justification for the rate-making principle of the Transportation Act. In the last analysis railroad rates will depend upon the cost at which railroad transportation can be carried on. This new rate basis rests on the assumption that this cost is a matter of vital importance. It assumes that the railroads must be economically and efficiently managed. This subject is to be increasingly a matter of scrutiny and concern on the part of the Interstate Commerce Commission. With such scrutiny, and with the efforts on the part of the railroad managements, and with the improvement of conditions generally, I think it is fair to predict that there will be such reduction in the unit cost of railroad operation that to a large extent the difficulties from which the public has suffered — and no interest has suf- fered more than the farmers — on account of rates out of pro- portion to the cost of the products transported, will be over- come. So believing as I do that this is an important forward step, and being utterly unable to think of any substitute for it which will begin to offer as great promise of adequate service, adequate employment of railroad labor, adequate consumption of materials produced in the country, or as great promise of a definite forward movement in the stabilizing of business of all sorts throughout the country, I certainly wish to add my voice in favor of giving the Transportation Act a thorough and sympathetic trial, and I predict, with great confidence, that it will justify itself when it gets normal times in which to work. HOW RAILROADS ADAPT THEMSELVES TO NATIONAL CONDITIONS ALBERT SHAW Editor, The Review of Reviews TRANSPORTATION is in itself a specialized form of business which has problems of its own. In its aspect as a distinct interest, the transportation system — of which the railroads constitute the larger framework — is subject constantly to inquiry and discussion from many standpoints. But the railroads thus regarded do not constitute the subject of our meeting of the Academy today. It is the economic situation of the United States, as inseparably affected by transportation methods and policies, that is before us for our consideration. It is true that from the standpoint of investment and from that of organization and employment the railroads, with their related industries of service and supply, constitute a foremost economic interest. But railroads are also, as an everyday affair, looked upon by men engaged in every other form of production and exchange as a subordinate but essential factor in their own operations. The producers of wheat and corn, as well as the producers of coal and steel, think of railroads not as a distinct field of investment and of employment but as an agency necessary to their own success. Every business meas- ures its own prosperity in terms of market and price. Trans- portation is in many industries the vital factor in measuring the range of markets. Freight rates go far to determine the habits of whole communities as regards the things that they eat, the houses that they build, the fuel that they consume, and the particular forms of employment that they find profitable. Considerable changes in transportation rates, when such changes come suddenly, are likely to disturb complicated move- ments to such an extent as to create emergencies in some lines of business and to produce sharp and painful crises in others. At such times, the demand for remedies often creates confusion of thought, so that slow and far-reaching policies are suggested 355 356 RAILROADS AND BUSINESS PROSPERITY as cures for transient evils. It happened, as has already been explained by a distinguished speaker, that a greatly delayed advance in freight rates to meet the needs of the railroads took effect at the very time when agricultural prices were rapidly falling by reason of the curtailment of European markets. To advocate a ship canal to connect our Great Lake system with Europe by way of the St. Lawrence, as a remedy for this particular crisis, would be something like proposing the inven- tion and adoption of new methods of fire prevention at the moment of an actual conflagration. If one is considering the relation of railroads to business prosperity in the more permanent sense, it becomes important to remember that the railroad systems of the past and of the present are merely a concrete expression of the phases of our economic development as we have spread across the country from Atlantic to Pacific. The early railroads followed the lines of pioneering progress, while the later railroads pushed ahead in order to aid more rapidly in the settling of the great West. Nearly all of the problems affecting American railroads are best understood by studying them in close relation to the facts of our economic history, as we have taken vast expanses of new country, opening up agricultural and mineral resources,, and creating communities occupied by many millions of settlers. The transportation methods and conditions of the future are also, like those of the past, to be vitally related to changing conditions in the nation's development as a whole. There will always be long-haul business for the railroads in ample volume ; but there will be a relatively increasing intensity of short-haul traffic movement if the country is to continue to expand in a normal and healthy way. Vast surpluses of agricultural pro- duction in the Mississippi Valley and the farther West, in the nature of things, are a temporary phase. Obviously the agri- cultural development of these regions was destined to come first. But the growth of towns and cities, and the transplan- tation of varied industries, were sure to follow. To an increasing extent the bread-stuffs, the beef and pork and the fruits of the central and western States will be con- sumed by populations within their own boundaries. Europe is not destined to live upon the wheat of the United States, nor even upon that of Canada. It is far more important for the HOW RAILROADS ADAPT THEMSELVES 357 interior of the country to develop its own transportation sys- tems and expand its own varied economic life than to advocate large expenditures which would look to future markets beyond the Atlantic. The group system as proposed in the new Transportation Act would seem to be in accord with the normal tendencies of the country. We shall continue to have a very large traffic that is national in its scope. New England will make articles that will be sold in every State. The citrous fruits of Florida and California will find consumers everywhere. Natural cen- ters for the production of iron and steel, like Pittsburgh or Birmingham, will hold preeminence and will find markets be- yond their own districts. But the tendency will be towards intensive regional development. The agriculture of the East, which has been abnormally depressed and neglected, will be revived under conditions of a more normal and permanent character. Not more than twenty-five per cent of the fruit- growing capacity of the Eastern States is now utilized. Obviously it is highly important that there should be im- mediate study of freight rates with a view to adjustments for the lightening of specific burdens. But our recent experiences, which have brought distress to wide regions and heavy loss to particular industries, will have been attended by some in- direct advantages. Localities will see the greater relative value of home markets, and will endeavor to import industries rather than to export commodities. It was natural enough that in the earlier period the emphasis should have been placed upon the long-haul. The story of the transcontinental lines, of the eastern trunk lines, of the granger lines, all has to do- with the eastward movement of surplus agricultural products and the westward movement of various commodities and supplies. A marked trend toward equalization of average conditions, as our Western States be- came mature, was gradually producing changes of a normal and healthy sort when the great European war reversed all tendencies and created a market condition unknown before in the history of the world. Along with the movement of men and war material to the eastern seaboard, there arose an un- precedented European demand for food and commodities of all kinds. Price-fixing by Government, and prompt payments 358 RAILROADS AND BUSINESS PROSPERITY through the United States Treasury, made European markets seem the most desirable of all things to Western producers. It has not been easy to accept the fact that this war-time phase was wholly abnormal, that it will never return, and that pros- perity must be found at home or nowhere. One of the greatest benefits that could come to our trans- portation interests themselves would lie in the purchase of railway securities by Western and Southern investors, in order that the definite and conscious control of their own major agencies of travel and traffic movement might become localized. Our program this afternoon is designed to bring the question of freight rates and their relation to general prosperity before us from the standpoint of several practical and theoretical stu- dents of these subjects, who are recognized as authorities in their respective fields. THE TRANSPORTATION COST IN A BASIC INDUSTRY— STEEL PRODUCTS CHARLES R. HOOK Vice-President and General Manager, American Rolling Mill Company, Middletown, O. IN talking on the subject " Transportation Costs in Steel Products ", I do not presume to speak for the Steel Industry. However, the figures which I shall present, although applicable to plants making high-finished sheet steel, are, I believe, indicative of what is true with respect to all other steel products. In arriving at the quantity of iron ore, coke and limestone used in the production of one ton of pig iron we have used as a basis the amounts shown by the Southern Ohio pig-iron manufacturers in the ore case before the Interstate Commerce Commission. To make one ton of pig iron, the following quantities of raw material are required : Iron ore 2 gross tons Coke 1.10 net tons Limestone 50 net tons The quantity of pig iron used in the production of one net ton of finished sheets is taken from our own detailed cost sheets. If you will refer to the chart you will observe that we have presented figures showing the accumulated freight in the five principal raw materials in a net ton of finished steel sheets delivered at St. Louis. The city of St. Louis is used only be- cause it is a natural market for a plant in our locality. This freight today is $24.07, in 1914 it was $11.84. showing an increase of $12.23 today over the period at the beginning of the World War. If we deduct the freight from Middletown to St. Louis, which is $6.80, we have $17,271 as the amount of accumulated freight in these items at Middletown. Sheets which are being delivered on orders taken prior to 339 360 RAILROADS AND BUSINESS PROSPERITY this month were sold at $60.00 per net ton ; in other words, this item of $17,271, representing the accumulative freight in only the six items enumerated, is equal to 28.8% of the sales price. r ■ — " > I ^ O °l —3 o o o 1 — Ol — B Of o — cr o Of O! 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When Congress, in 1919, considered the many plans for the solution of the railroad problem, it responded to an over- whelming public sentiment by rejecting all proposals looking toward government ownership or operation in any form. Pub- lic opinion was unmistakably in favor of a return to the initia- tive and competition of private ownership and management. The passage of the Transportation Act appeared to wipe the slate clean of public resentment and antagonism because of past abuses and mismanagement, and the railroads were returned to their owners with an encouraging degree of public confidence. Principally because of the disturbing effects of the business depression and the burden of war-inflated freight rates, a large part of the public confidence in railroads has changed into an attitude of criticism and distrust. Much of the criticism is the result of misunderstanding. It is commonly believed that the railroads are working under a guarantee from the govern- ment and that they are not accepting their fair share of the pains of post-war deflation. The effect of freight rates upon the cost of living and upon the marketing of commodities has been unfairly magnified, and the atmosphere is befogged by professional propagandists with a mixture of sophistry, half- truth and misstatement. If we are to find a way out of the dilemma short of gov- ernment ownership it can only be by the exercise of patience and tolerance on the part of the public. They must give the railroads time to adjust their costs to' changed conditions and to put their house in order for the hoped-for better times and bigger traffic. The public must exercise moderation and tem- perance in their demands for rate reductions. Just now each group of shippers is insisting that the rates in which it is interested must come down at once without regard to the effect 370 RAILROADS AND BUSINESS PROSPERITY upon railroad net income and service. Notwithstanding the fact that the present rate scale is yielding only slightly more than three per cent on property value, certain interests are intent upon cutting the heart out of the Transportation Act by repealing its rate-making clause, and upsetting the equili- brium by curtailing the power of the Interstate Commerce Commission over state rates. Unless the public will refrain from encouraging Congress to tinker with the existing laws, and from bringing political pressure to bear upon the Interstate Commerce Commission to make wholesale downward rate adjustments while the rail- roads are barely able to pay taxes and charges, there can be little progress made in putting the transportation machine in order for the heavy traffic load which will probably soon be in sight. Patience and tolerance, and a reasonable degree of con- fidence in the integrity of railroad management, will serve the real and long-time interests of the public much better than impatience, intolerance and distrust. Adequate service and a factor of safety in traffic-carrying capacity are more important than low rates. An insistence upon rates which are unre- munerative will work against the rehabilitation of the railroad properties, prevent the making-up of deferred maintenance and effectually block the flow of income and new capital into imperatively needed and long-delayed improvements and enlargements. WHAT RAILROADS ARE DOING TO INCREASE ECONOMY AND EFFICIENCY OF OPERATION R. H. AISHTON President, American Railway Association, Chicago; Former Regional Director, Northwestern Region, U. S. Railroad Administration I HAVE been assigned twenty minutes in which to deal with a rather large subject. How large it is, I doubt whether many people realize. For example, in the year 1921 the Class 1 railroads performed the following service. They moved 3°6rV billion tons revenue freight one mile ZlYs billion passengers one mile To do this They created 1-fV billion train miles They earned S l A billion dollars They paid operating expense ^ l / 2 billion dollars There was paid in wages 2& billion dollars, the decrease over pre- vious year being due to depressed business, deferred maintenance and consequent large reduction in number of employees. That is all I shall say regarding billions or millions. It is hard for me to comprehend what a million is, to say nothing of a billion. Let us get down to something we can all under- stand without undue mental strain. I have been allotted twenty minutes. I started talking at 5 :00, I will finish and sit down at 5 :20, and during that twenty minutes this will have hap- pened on the railroads. During the twenty minutes that I am talking the energy developed by the railroads is equivalent to moving a train consisting of a locomotive with ten freight cars carrying 311 tons of revenue-paying freight, with two more freight cars containing 38 tons of Company freight that doesn't produce revenue, with two passenger cars containing 38 paying passengers together with the employees necessary to operate the train, with the necessary postal, baggage and express car, and a little old red caboose, a total of 17 cars, a distance of 37,500 miles, or once and one-half times around the earth at its greatest circumference. What do they get for performing this service? The year 1914 is taken for comparison because 371 372 RAILROADS AND BUSINESS PROSPERITY it was a year of depression and because it marked the start of the European war, the beginning of all our troubles : In 1914 every 20 minutes the gross earnings were $115,347 In 1921 every 20 minutes the gross earnings were 209,874 Increase — 82% In 1914 every 20 minutes the operating expenses were... $83,844 In 1921 every 20 minutes the operating expenses were... 173,652 Increase — 107% In 1914 the pay roll for 20 minutes $50,888 In 1921 the pay roll for 20 minutes 106,379 Increase — 107% The above figures indicate what the matter is. In addition, the following facts should be considered. In 1914 every 20 minutes there was paid in taxes $5^59 In 1921 every 20 minutes there was paid in taxes 10,526 Increase — 104% In 1914 every 20 minutes the net Railway operating in- come, which is the amount left after payment of ex- penses and taxes, was $25,153 In 1920 it practically disappeared, being only 822 In 1921, however, with an increase of 3,091 millions in investment over 1914, the net operating income every 20 minutes was 22,755 In other words, whereas the book value increased 18% between 1914 and 1921, the net railway operating in- come earned on the investment thus increased actually decreased 9A%. What are the Railroads doing to bring about economy and efficiency ? In 1921, although the times were depressed, as was the case in 1914:— They handled 7.7% more revenue ton-miles than they did in 1914. They handled 8.0% more passenger-miles. They did it, however, with 10.6% less train-miles, and the train-mile is what creates expense. There must have been economy and efficiency manifested there, surely. In 1920, with a large business, as compared with 1914, with a light business : — There was an increase of 44% in revenue freight-ton-miles, and about 36% in revenue passenger-miles, and yet this was accomplished with the same train-miles, practically, as in 1914. ECONOMY AND EFFICIENCY OF OPERATION 373 As a matter of fact, it was 300 miles less every twenty minutes than in the 1914 period. Truly a notable record. There isn't a railroad but what has been and is making the strongest individual efforts, through its own organization of experts, to develop new methods of efficiency and economy. I doubt if there is any industry in the country that has any more complete check on the minutest details of its operations, or that has competitive initiative developed to a higher degree, than the transportation companies. The field for economy in the future lies largely, in my opinion, in two main directions : (i) Heavier car loading. One ton more per car load is equivalent to adding 80,000 cars to the supply. (2) More mileage per car per day. One mile additional is equivalent to adding 100,000 cars to the supply. These two things the railroads and shippers are vitally inter- ested in and they are working cooperatively towards the ulti- mate goal. Besides this there are, of course, the large intensive developments requiring large capital expenditures that will produce economies. When the time arrives when such ex- penditures can with safety be made with a hope of reasonable return, as great progress will be possible in the future as has taken place in the past. The time limit has now expired. It is 5 :20. Our train has completed its twenty-minute journey once and one-half times around the world; but while this talk stops the train must still keep going day and night through storm and sunshine, through business depression and great activity, without a hitch but with constantly increasing speed and cargo, if this nation of ours is to continue to expand. THE TRANSPORTATION FACTOR IN THE PRICE OF COAL J. D. A. MORROW Vice-President, National Coal Association, Washington, D. C. SPEAKING as I do as Vice-President of the National Coal Association, which is an organization of bitumin- ous coal producers, what I have to say on the subject of the transportation factor in the price of coal refers particu- larly to bituminous coal and not to anthracite. When the ordinary consumer pays his coal bill he thinks he has paid for coal. As a matter of fact what he has chiefly bought and paid for is transportation service from the coal seam to his furnace room. The discussion of this factor in the cost of coal usually centers about railroad transportation, but in order that you may appreciate more fully the part which the railroad plays in the whole problem of transporta- tion of coal, I want to speak very briefly about some of the transportation problems involved in volume production of coal. Transportation of bituminous coal from the mine to the consumer begins at the face of the coal seam underground, often two or three or four miles from the tipple where the product is dumped into railway cars. Various methods are used in that underground transportation, ranging all the way from primitive haulage by mule or horse in very small mines to splendid motor haulage over miniature electric railway sys- tems in the larger modern mines. If the mine is a drift mine, that is if it goes directly into the hillside, the trains or " trips " of mine wagons are hauled out and dumped directly into rail- way cars. If it is a shaft mine, the wagons are brought to the foot of the shaft, uncoupled, lifted to the surface, and then dumped into railroad cars. Sometimes the mine wagons are dumped at the shaft bottom into skips which bring the coal to the surface. The cost of transporting coal underground upon the mine haulage varies, of course, with many different local conditions, such as the type of haulage used, the grades in the mines, the 374 TRANSPORTATION FACTOR IN THE PRICE OF COAL 375 length of haul, the extent to which falls of the roof have to be cleaned up, the extent to which bottom conditions necessi- tate repairs to track and increase the track maintenance cost, and similar factors. The range of mine haulage cost is gener- ally between 20 cents and 35 cents per ton, on the basis of present wage scales, out of a total average production cost for 1921 of $2.94 per net ton. There are extremes, of course, above and below those figures, but they represent the general range of transportation costs at the mine at present. Approxi- mately 80% of this haulage cost is direct labor cost in the operation of the mine transportation system. The other 20% is made up of cost of supplies, repair parts and power, and of depreciation on the haulage system. It must be remembered that these railway systems are equipped with expensive electric or storage batteries, or with compressed air locomotives, and that many of the mines have a large number of cars underground. They are equipped with heavy steel rails. The operators have the problem of maintenance of track under the adverse conditions common to coal mines, with constant falls of slate and rock from the roof, with other difficulties with roof and bottom, with a certain amount of corrosion from mine water and so on. The main- tenance of way underground is much more difficult than the maintenance of a railway system on top of the ground. All of these factors enter into that cost of underground transporta- tion. Moreover, the mine transportation system is not used twenty-four hours in the day, as is an outdoor railroad system. The second element in the transportation cost of bituminous coal is the railway freight rate. Railway freight rates on bituminous coal at present are approximately 93% higher than in 1913. They range from 90 cents per ton on short hauls to $7.25 per ton on such movements as that from the mines of Utah and Colorado to the Pacific Coast. According to George M. Shriver, Vice-President of the Baltimore & Ohio Railroad, the present average railroad transportation charge on all revenue bituminous coal is $2.27 per ton. Not all of the out- put of bituminous coal bears this transportation charge. Of the total normal production approximately 11% is used at the mines and 89% is shipped away. This 11% is made up as follows: About 3.7% is sold locally to consumers in the vicinity S76 RAILROADS AND BUSINESS PROSPERITY of the mines; 2% is consumed by the mines themselves for power and fuel purposes; and 5.3% is made into coke at the mines. The 89% which is shipped away from the mines moves as follows: 2% by water, chiefly on the Monongahela, Kanawha, Ohio and Mississippi Rivers; and 87% by rail. One-fifth of this 87% is non-revenue railroad fuel coal. This coal is used on the lines of the originating carriers and while it bears a transportation cost, no charge is made by the carrier for the movement of its own fuel supply. This leaves approxi- mately 69.5% of the normal output of bituminous coal as revenue freight, which moves at an average transportation charge of $2.27 per ton. On this coal the total railroad freight charge is something over $780,000,000 annually at the present freight rates. It is of interest here to call attention to the further fact that this 69.5% of bituminous coal which bears a definite rail- road transportation charge is made up of 9% distributed through retail coal dealers to household and small industrial consumers and 60.5% consumed by carload users of coal. The latter consumers, such as railroads upon whose lines there are no coal mines, electric light and power plants, street railways, gas works, by-product coke plants, manufacturing establish- ments of all kinds, exporters of coal and ship bunkering con- cerns, pay the freight on that coal themselves; so that their delivered price is made up of the f. o. b. mine price plus the railroad freight on the coal. For the three months of Janu- ary, February and March, 1922, the general market level of bituminous coal prices for the United States as a whole aver- aged between $2.05 and $2.33 per ton for run of mine coal. By run of mine coal I mean the coal just as it comes to the surface, without any further cleaning or preparation than what it has received from the miners underground. Bituminous coal is sold not only as run of mine but also in a number of different sizes ranging from fine screenings to eight-inch lump. Just as the freight rates on bituminous coal varied from 90c per ton to more than $7.00 per ton according to the haul, so also the open market prices for bituminous coal during the winter ranged from 75 cents per ton for screenings to $5.00 per ton for the highest grade of especially prepared domestic lump coal. TRANSPORTATION FACTOR IN THE PRICE OF COAL 377 Before passing on from the subject of railroad transportation of coal I desire to call your attention to another significant fact. Not only is it true, as I have already pointed out, that the freight charge on coal makes up over one-half of the total delivered cost of coal, but it is also true that the freight charge on coal constitutes a much larger percentage of the total deliv- ered cost than is the case with almost any other commodity, and also that the increases in freight rates granted during and since the war have borne with special hardship upon bitumin- ous coal. These facts may be best shown by a few typical illustrations taken from actual shipments before the -begin- ning of the strike. Let us compare coal with another bulk basic commodity like cement. There is a considerable movement of cement from Allentown, Pennsylvania, to Fairmont, West Virginia. Simi- larly bituminous coal moves in the opposite direction from Fairmont, West Virginia, to Allentown, Pennsylvania. In 1914 the freight rate on a carload of cement was $75.00, or 22.1% of the value of the shipment. The freight rate on a carload of coal was $87.75, or 58.5% of the value of the shipment. See now how the increases in freight rates between 1914 and 1922 affected these figures. In January, 1922, the freight rate on the cement had been advanced to $142.50, and now constituted 41.9% of the value of the cement. Mean- while the freight rate on the coal had been increased to $160.65, or 107.1% of the mine cost of the coal. In other words, while the actual increase in the rate on coal was only $5.40 more than that in the rate on cement, that increase constituted 48.6% of the value of the carload of coal and only 19.9% of the value of the carload of cement. It will be readily seen that if such a relation existed in the case of cheap bulky commodities it would become still more striking in the case of more valuable articles. Without un- necessary details let me quote two other illustrations. Cotton is shipped from Opelika, Alabama, to Birmingham, Alabama, and there is a reverse movement of bituminous coal. In 1914 the freight rate on cotton was 1.4% of the value of the com- modity, while that on coal was 50%. As a result of rate in- creases the freight rate on cotton in January, 1922 was 3% of the value of the shipment, while that on bituminous coal 378 RAILROADS AND BUSINESS PROSPERITY was 95.2% of that value. In other words the increase amounted to 1.6% of the value of the cotton, and 45.2% of the value of the coal. On the shipment of automobiles from Detroit to Athens, Ohio, and of bituminous coal from Athens, Ohio, to Detroit, we have the following corresponding figures. In 1914 for automobiles the freight rate was 1.1% of the value of the ship- ment, while on the coal the rate was 63.9% of that value; in January, 1922, for automobiles the percentage was 2.4% and for bituminous coal 137.2%, showing an increase in the case of automobiles amounting to 1.3% of the value of the ship- ment, and in the case of bituminous coal to no less than 73.3% of the value. These illustrations are sufficient to give force to the point often made, that the transportation charge on coal is so high as to constitute a serious burden upon the consumer, and furthermore that the method of increasing freight rates in recent years has greatly augmented that burden. While bituminous coal for household use constitutes be- tween 11% and 12% of the total output, about 3% out of this 12% is consumed in the vicinity of the mines and does not move on railroad lines. On the remaining 9% freight is paid from the mine to the retail dealer's yard. It then must bear an additional transportation charge, namely, the trans- portation cost of the retail delivery of the coal. Little definite detailed information is available as to this particular item of transportation cost. Inquiry among representative retail deal- ers, however, indicates a range in transportation costs for the delivery of domestic bituminous coal of from 70 cents per ton to $1.75 per ton. The low delivery costs are obtained where large lots are delivered regularly in 5 to 10 ton trucks. The high costs are incurred in small Irregular deliveries to house- holders. The difference in the volume of deliveries may double the cost of delivery in summer as compared with winter. It should be clearly understood here that haulage cost is only a part of the cost of retailing coal. Office and yard employees' wages and salaries, insurance premiums, taxes, telephone and telegraph charges, allowance for depreciation of plant and equipment, and losses due to degradation and deterioration of the coal handled, constitute a large part of the total cost of retail coal distribution, just as many other items besides haul- age go to make up the total cost of mining coal. TRANSPORTATION FACTOR IN THE PRICE OF COAL 379 What is the prospect for a reduction in some of these trans- portation costs in the prices of bituminous coal? So far as the haulage cost in the mine is concerned, reduc- tions in wage scales at the bituminous mines will, of course, correspondingly reduce the haulage cost of the coal, and there is a constant progressive improvement in mine haulage facili- ties and methods which tend to lower costs. With respect to railway transportation charges on bitumin- ous coal, the Interstate Commerce Commission now 1 has under consideration the evidence submitted in its general inquiry into the present level of freight rates. As railroad operating costs decline we may expect a decline in the railroad trans- portation charges on coal. With respect to the cost of delivery of bituminous coal by retail dealers, so far as wages paid employees of retail coal con- cerns may be reduced, a corresponding reduction in such retail delivery costs may likewise be anticipated. Better methods of distributing household coal may also gradually operate in the same direction. It is frequently suggested that a steadier movement of coal from the mines to the user would materially lower the trans- portation charge. This opinion is predicated on the assump- tion that bituminous coal moves to market with great seasonal irregularity. Examination of the facts, therefore, may be enlightening as to the possible economies in the transportation of coal which might be effected by an equalization of summer and winter movement. I have analyzed the production of bituminous coal as re- ported by the United States Geological Survey month by month for the last nine years, averaging the monthly produc- tion for the six summer months, April to September, in com- parison with the production for the six winter months, from October to March. Such analysis shows that of the total out- put of bituminous coal during these nine years, 48.9% was produced and shipped from the mines in the six summer months and 51.1% in the six winter months. Considered as a whole, therefore, the bituminous coal industry is not at all a seasonal 1 April 28, 1922. The decision handed down by the Interstate Com- merce Commission on May 16, 1922, reduced all freight rates, includ- ing those on bituminous coal, approximately ten per cent, effective July 1, 1922. 380 RAILROADS AND BUSINESS PROSPERITY industry ; in fact, but few of the great industries of the United States approach it in steadiness of operation. Whatever economies might be expected from an equalization of summer and winter movement would necessarily be confined to par- ticular coal-mining districts where the movement of coal is seasonal. I realize that a general statement for the industry as a whole, and a general average for the industry as a whole, is somewhat like the average temperature of the patients in a hospital. The average may be pretty nearly normal and yet a particular patient may be seriously ill. On the same principle, while the average seasonal variation for the whole bituminous coal industry is low, there is seasonal movement in some mining districts. This is notably true in the western part of the United States, where the chief con- sumption of bituminous coal is in the households and where the requirements of railways and industrial establishments are comparatively small. At this point let me direct attention to the difference in summer and winter consumption of some of our major indus- tries. Studies by the United States Geological Survey indicate that the railways of the United States consume only 10% or 15% more coal in winter than in summer. The great public utilities, gas plants, electrical plants, street railway systems, by-product coke plants and the steel industry show similar very slight differences between summer and winter consumption of coal. The cement-manufacturing industry consumes more coal in the summer months than in winter. Throughout the great Appalachian coal-mining fields, which produce some two- thirds of our total annual output, the great bulk of the pro- duction goes to these transportation and industrial users. The slight decline in their summer demands upon the mines is counterbalanced by the summer shipments up the Great Lakes to the Northwest, and by rail and water both into Canada and into New England for storage against the succeeding winter's requirements. Thus, throughout all these great coal-producing districts there is no important seasonal fluctuation in the pro- duction and shipment of bituminous coal. The studies of the United States Geological Survey already mentioned show that the one striking difference in amount be- TRANSPORTATION FACTOR IN THE PRICE OF COAL 381 tween the summer and the winter consumption of bituminous coal is found in the consumption of households, the domestic users. From a winter maximum of 10,000,000 tons per month, their consumption drops in the summer to but little over 2,000,000 tons per month. Here is a winter maximum five times as great as the summer minimum compared with only 10 to 20% difference in the case of the railways and industrial consumers. Equalization of the summer and winter movement of coal from the bituminous mines, therefore, considered from a prac- tical standpoint and stripped of all optimistic misunderstand- ing, comes simply and squarely down to a question of persuad- ing the domestic consumer to put in his household coal in fairly regular quantities throughout the year. He who would regulate the production of bituminous coal for the purpose of bringing about steady mine production in the interest of coal mine operators, employees and consumers, should understand clearly that the real regulating must be applied not to the mines, but to the domestic user of the product. It is proper at this point to consider what means may be employed to attempt to equalize the shipments of household coal from the mines throughout the year. Seasonal variations in freight rates have been proposed for this purpose. The National Coal Association has neither advocated nor opposed this measure. Operators in some parts of the country favor seasonal freight rates; other operators oppose the project. It is claimed that a spread between summer and winter rates will induce enough householders to buy coal during the summer so that the production of this type of coal and operation of the mines producing it will be stabilized throughout the year. Opponents of this proposal assert that in most districts a very wide spread would have to be employed in order to bring about such a result, because it would have to compensate the consumer for the additional expense entailed in carrying his coal supply for some months and for any degradation of the coal while in storage. In the mining districts which are in most need of summer business, the mines of Oklahoma, Kansas, Iowa and Illinois, the coal deteriorates decidedly in storage even in the householders' cellars, while the output of the lignite mines of Colorado, which furnish the fuel of Denver, eastern 382 RAILROADS AND BUSINESS PROSPERITY and western Kansas, and Nebraska, will not store at all, but must be used fresh from the mines. Opponents also point out that the increased railroad rates on coal in the winter time would have to be paid by those consumers who can least afford to pay the charges, namely: the poorer class, those householders and consumers who have neither the facilities nor the money to permit them to take advantage of the lower summer rates. Such a system, there- fore, would simply penalize these poorer consumers of coal and benefit their richer neighbors at their expense. Railroad offi- cials object that a decided change in freight rates on a given date would result in shipments being withheld just prior to a decrease in freight rates and being increased prior to an ad- vance in rates, with a consequent irregularity of mine and railroad operation in the period immediately preceding and following the change in rates. It has been suggested also that producers of bituminous coal should make a difference in their prices at the mine, reducing the price levels in the spring and gradually increasing them through the summer, so as to persuade the consumer in that manner to take in at least a part of his coal supply during the spring and summer months, thereby stabilizing production. It will be readily seen that much of what has been said as to seasonal variations in freight rates applies here with equal force. In addition, it should be pointed out that competition in the open market normally reduces prices to their lowest levels in the early spring months when demand is at a mini- mum. Since bituminous coal prices are determined by com- petition in the open market no individual operator, or group of operators is any more able to arrange in advance a schedule of prices month by month throughout the year than a grower of hogs in Indiana can determine in advance the price at which he will sell his hogs in different months. It has been found possible for distributors of anthracite coal to put arrangements of this character into effect, but they are dealing with a com- modity which can be stored readily and of which the produc- tion is limited by nature, so that methods of marketing the out- put can be applied there which are wholly impracticable in the case of bituminous coal. It is frequently urged that coal producers should store a TRANSPORTATION FACTOR IN THE PRICE OF COAL 383 part of their output at the mines in summer and thus render the operation of their properties more stable and regular. This proposal has the defect of being impractical. Coal mines are organized, equipped and operated to send coal forward on a continuous journey from the face of the coal seam to the boiler room of the consumer. The production, transportation and distribution of that coal is obtained at the most economical cost when that movement is uninterrupted. As it comes from the underground mine wagons coal is dumped directly into railroad cars and shipped straight through to the plant or retail yard of the buyer. That is the most economical manner in which coal can be produced and moved. If it is carried two or three miles from the face of the coal seam underground out into the daylight at the mouth of the mine and there dumped on the ground or put into storage bins from which it must be again loaded into cars, there is an increase in the cost of the coal consequent upon the additional handling involved. There is also a certain degradation and deterioration of the product in storage. This stored coal must be sold by the producer who has stored it at a higher price than his freshly mined coal, if he is to avoid a loss on the operation. But on account of the deterioration of the product during storage this stored coal for which he must ask a higher price is a less efficient and less desirable fuel than his freshly mined coal which his salesman can offer at a lower price. If he should attempt to equalize his prices or place a sufficient premium upon his freshly mined coal to allow him to sell his higher-cost storage coal at a discount he will merely invite numerous competitors to take his business away from him through their offers of freshly mined coal at prices below his quotations. In short, a producer who should store considerable quantities of his own coal at the mines would inevitably find himself caught between the competition of his own freshly mined coal and his stor- age coal, and would have to accept an inevitable loss on the transaction in consequence. No sane business man would attempt any such enterprise, nor would he get any sane banker to finance it even if he were foolish enough to try it. The proposal is impracticable for another reason. The mines already open have an over-capacity of approximately 384 RAILROADS AND BUSINESS PROSPERITY 4:0%. In other words, these mines can currently furnish 40% more freshly mined coal than the country needs. In the absence of strikes at the mines the only thing which has ever prevented the mines from meeting all demands of consumers with current daily shipments of freshly mined coal direct from the mine tipples has been the inability of the railway lines to transport the tonnage demanded by consumers. These consumers have never failed to get their coal because of in- ability of the mines to produce it, but only through the in- ability of the railroads to handle it when shipped. Now, if the railroads in time of maximum demand are not able to place railroad cars enough at the mines to carry away the coal that is being mined from day to day, what opportunity would a mine operator have to obtain cars to take coal from storage in addition to shipping his usual daily output? As a matter of fact, there is already a tremendous storage of coal in the United States, not in the mining districts, but where the storage ought to be, namely, in or adjacent to the consuming centers. Consumers and wholesale and retail dis- tributors of coal in the United States have provided facilities in which they regularly store from 40,000,000 to 50,000,000 tons of bituminous coal annually. Just prior to the signing of the Armistice they had stored over 60,000,000 tons and at the beginning of the present strike they had utilized these facili- ties to store approximately 65,000,000 tons, in addition to the amount upon the docks at the head of the lakes. If the capacity of these docks is included, the total possible storage by consumers and distributors of coal in the United States exceeds 70,000,000 tons. This is practically all storage by the consumers, who own these great stocks and are, therefore, insured against any raising of prices on this tremendous ton- nage. Storage of this kind has developed wherever it is prac- tical ; that is, wherever the service to the user of the coal in actual practice justifies the investment and the expense of installing and operating the facilities for storage and com- pensates him for the deterioration of the coal. The greatest future saving in the cost of moving coal from the mine to the user will doubtless come not through the adop- tion of artificial devices in the coal industry, but through trans- porting the energy in the coal instead of the coal itself. By TRANSPORTATION FACTOR IN THE PRICE OF COAL 385 this I mean that long-distance, high-tension transmission of electricity and the transmission of gas manufactured from the coal will be the practical means of reducing the transportation cost to the user of the energy of coal. Engineers already look forward to utilizing a large part of the output of bituminous coal at the mines or in the immediate vicinity of the mines and to transmitting from the mines to important consuming centers in the form of electricity or gas the energy thus developed from the most efficient combustion of the coal. They also look forward to a much more general use of gas as a domestic and household heating fuel than at present. Such transmission of energy from the mines would go far to remove coal from the rails of our transportation systems, upon which coal now constitutes approximately one-third of all the freight moved. Improvement in the manufacture of gas from coal, with the consequent wider use of gas as a domestic fuel, is expected to reduce the ultimate cost of heating our dwellings. There is not time here to discuss the details of developments in these directions. Let me merely say that competent authorities be- lieve the future will bring almost revolutionary changes in the transportation of coal through the means just indicated. APPENDIX THE SEMI-ANNUAL MEETING (FORTY-SECOND YEAR) OF THE ACADEMY OF POLITICAL SCIENCE, NEW YORK CITY, APRIL 28, 1922 The Committee on Arrangements, which also served as the Program Committee, planned for three sessions at this meet- ing to consider the three most important problems growing out of the actual experience of the country with, and operations under, the " Transportation Act, 1920." The Academy,' at its Annual Meeting in November, 1919, had discussed quite fully the railroad problem in all its various aspects at the close of the w r ar and while the railroads were still under Federal control. The very substantial volume on " Railroad Legislation " {Proceedings of the Academy of Political Science, Vol. VIII, no. 4, Jan., 1920, 268 pp.), which contains the papers and ad- dresses presented at that meeting, gives a good account of the considerations under discussion in Congress while the Trans- portation Act was still in its formative stages. This volume, together with the text of the Transportation Act, 1920 (Act Feb. 28, 1920), which is too voluminous to reproduce here, should be studied as the basis of the program of the meeting of April 28, 1922. The three problems which seemed to the Committee to cover the most important matters of present public interest and to serve as a means of following up the discussion of railroad legislation at the Annual Meeting of the Academy in Novem- ber, 1919, are: (1) The labor provisions of the Transportation Act; (2) The general railway policies of regulation and control with respect to the general or public welfare; (3) Freight rates and business revival. To each of these a special session of the meeting of April 28, 1922, was devoted. The thanks of the Academy are due to the railway executives and to the economists and publicists who have specialized in transportation problems, who gave generously of their time and service in the work of the Committee on Arrangements, and in the preparation of papers and addresses delivered at the meeting. 387 388 RAILROADS AND BUSINESS PROSPERITY COMMITTEE ON ARRANGEMENTS SAMUEL McCUNE LINDSAY, Chairman ex-officio FRANK H. DIXON HOWARD ELLIOTT MILTON W. HARRISON ELON HUNTINGTON HOOKER EMORY E. JOHNSON ROBERT S. LOVETT YICTOR MORAWETZ CHARLES P. NEILL WILLIAM L. RANSOM CHARLES M. SCHWAB HENRY R. SEAGER EDWIN R. A. SELIGMAN ALBERT SHAW T. W. VAN METRE PAUL M. WARBURG FRANK J. WARNE THE PROBLEM OF RAILROAD CONTROL EMORY R. JOHNSON Dean of the Wharton School of Finance and Commerce, University of Pennsylvania FOR fifty years the American people have almost contin- uously had under consideration the problem of railroad control. The particular questions to be solved change decade by decade with variations in economic conditions and with the evolution of political ideals and institutions; but the railroad problem, like the poor, is always with us, and is at all times fundamentally the same — how can the public secure ade- quate and efficient transportation services at rates and fares that are reasonable and just to all parties concerned. This is a period of economic reconstruction. The processes of production, transportation and trade were so disorganized by the World War, and the powers of economic recuperation were so enfeebled by that great conflict, as to make it inevitable that the world should for a period of years be slowly struggling back to its former virility. The railroad problem of the hour is part of a world-wide economic disorder, and it is not to be hoped that the difficulties confronting American railroads can be fully overcome until the nations of the world are again func- tioning normally in their political, economic and social life. However, while the condition of the railroads of the United States is a part of a general situation, the railway problem in this country has its particular aspects which may well be con- sidered with a view to determining what public policy should be adopted and what, if anything, can be accomplished by legis- lation. The present problem will be better understood by re- viewing briefly its antecedents. The Problem of 1919 l When fighting was brought to an end by the armistice, the railroads of the United States had been under government 1 For a discussion of the problems of railroad regulation as they presented themselves in 1919, consult the papers contained in the volume containing the proceedings of the Annual Meeting of the Academy of Political Science, held in New York City, November 21- 22, IQIQ. Published as vol. viii of the Proceedings of that Academy. 389 390 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI operation for somewhat less than a year, but the period of government operation was extended to March 1, 1920, a total of twenty-six months. Throughout the year 1919, earnest consideration was given by all people to the question of the future railway policy of the United States. Out of the discus- sions in the press and on the forum, there not unnaturally emerged three" distinct views, each of which was urgently championed. Government officials of the railroad administra- tion led by the Director-General of Railroads, Mr. William G. McAdoo, urged Congress to extend the period of federal opera- tion for five years from the first of January, 1919. It was urged by Mr. McAdoo, and for a time by his successor, Mr. Walker D. Hines, that the country should avail itself of this opportunity to ascertain what could be accomplished by the government operation of railroads. He saw, or felt that he saw, great opportunity of accomplishing the unification of the transportation systems of the United States by government operation. He pictured to himself a national transportation system in which railroads, waterways and other agencies were so coordinated as to be of maximum efficiency and economy. It was an attractive dream, but its realization would have invol- ved the success of the government of the United States in the operation and development of the railroads and other transpor- tation facilities. As is usual with men of the promotive type, Mr. McAdoo kept his mind upon the desired goal, and ignored intervening obstacles. It was inevitable that agitation for the adoption of a policy of government ownership and operation should follow the tak- ing-over of the railroads by the government for operation as a war measure. The propaganda for government ownership as a permanent policy was led by the brotherhoods and unions of railway employees, whose leaders evidently felt that they could more readily control wages and working conditions in a regime of government ownership and operation. The leader of the propaganda was Mr. Glenn R. Plumb, an attorney of the brotherhoods, who presented an ingenious plan for the purchase of the railroads by the government and for their operation by a board of fifteen men, ten of whom were to consist of the railway employees and officials, the other five being representa- tives of the public. The Plumb plan received the official sup- No. 3] THE PROBLEM OF RAILROAD CONTROL 391 port of the railway employees' organizations, although by no means the united support of all the members of these associa- tions, but the plan met with little, if any, support on the part of the public generally. As the year 1919 progressed, it became increasingly evident that the great majority of the American people and their rep- resentatives in Congress were in favor of the return of the rail- roads to their corporate owners and the resumption of private operation of the railroads. Upon numerous questions of public policy, such as competition, rate regulation, the adjustment of wages and working conditions etc., there were marked differ- ences of opinion, but upon the fundamental question as to the desirability of private ownership and operation of railroads in the United States, there was no serious question in the mind of the public. While it is probable that the majority of the people in the United States, had they been given an opportunity, would have declared in favor of the continuance of competition among private railroads, it is also true that those persons who have made a careful study of railroad questions saw clearly that there should ultimately, if not immediately, be a great reduction in the number of railroad corporations. There were one hundred and eighty-seven railroad systems of class one (companies having annual gross earnings of a million dollars or more), and it was not difficult to see that this number was excessive and that many of these railroad companies, roughly forty per cent of them, were too weak, because of their past history, their existing traffic opportunities, or their present financial status, to render the public efficient service and to insure the sections of country they served future railroad systems, vigorous and pro- gressively efficient. Railway consolidation was realized by the clear-sighted to be an ultimate, if not immediate, necessity. There was some sen- timent in favor of dividing the country up territorially and creating in each of those sections a single railroad system, built up out of the numerous lines owned by existing corporations. In accordance with this plan, a federal corporation would have been created to take over the railroads in each section. This would have been the adoption of the principle of monopoly in the future management of the railroads and would probably 392 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI have been a mistake. When Congress came to act, it favored the maintenance of competition among private railroads, but provided for their voluntary consolidation. There were many in favor of compulsory consolidation, but it did not receive popular support, at least, the support of the House of Repre- sentatives. This is one of the questions which the American people must reconsider. Consolidation must be brought about before the railroad problem can be finally and satisfactorily solved. It was evident in 1919 that the government was incurring a large deficit in the operation of the railroads, and that it would be impossible for the corporate owners of the railroads to operate their properties profitably without a large increase in net revenues. Expenses of operation had greatly increased during the war, partly as a result of the war, and partly because of policies adopted by the government in dealing with railway labor. The problem that had to be considered first of all in returning the railroads to their owners was the restoration of railroad credit. Economic conditions generally were depressed. Railroad operations were unprofitable. The corporate owners of the railroads would need capital to repair the wastes of war and to provide facilities for the traffic demands of the future. This capital must come from private sources. Would investors advance the funds? If they did not, the railroads would de- teriorate unless the government advanced the necessary capital, and if the government were to embark upon such a policy, ultimate public ownership would be the probable consequence, as has been amply shown by the experience of other countries in similar enterprises. While the public was desirous that the capital required by the railroads should come from private investors, it was clear to everybody that the time had come for the federal regulation of the issue of railroad securities. Some of the states had for many years regulated the issue of securities, but only a small minority of the states had attempted to make such regulation thorough and effective, and even those states were able but partially to accomplish their purpose, because regulation was not general on the part of all states. Massachusetts and New York might have laws for the regulation of railroad securities, but a Connecticut corporation like the New Haven might be No. 3] THE PROBLEM OF RAILROAD CONTROL 393 wrecked by the pyramiding of securities in the interest of finan- cial speculators. Thus the public decided in 1919 that when the railroads were returned to their owners, the government of the United States should be given authority to pass upon the advisability of proposed investments and upon the nature and volume of securities that may be issued to secure funds for carrying out approved enterprises. Any policy intended to reestablish the credit of the railroads after their return to their corporate owners must necessarily involve a policy of rate regulation different from the policy that had been followed prior to government operation. Foj some years before the government took over the railroads, rates had been so regulated by the Interstate Commerce Commission as to limit the earnings upon railroad investments as a whole to such a low rate of income that investors had already begun to avoid railroad securities. Between 1912 and 1917, a few rail- roads, even the more prosperous ones, were able to sell stocks at a figure which justified the issue of securities in that form. Most of the new capital required by the railroads had to be obtained by the issue of bonds, and thus the desirable ratio of 50-50 as between stocks and bonds had to be abandoned, and the indebtedness of the railroad companies, at least of many of the companies, became so large as to endanger their financial stability. It was clear that the future control of railroad rates by the government should be constructive rather than merely correc- tive in purpose. The laws of 1906 and 1910 had vested the control of rates and revenues in the government, which thereby became responsible for the net revenues and the financial integ- rity of the railroad corporations. If the government were, upon the return of the railroads to their owners, to continue to determine the revenues of the carriers, and if it were allowed to sit in judgment upon security issues, it was seen that it would be necessary for the rate-making authority, that is, the Inter- state Commerce Commission, to be responsible for the estab- lishment of rates that would yield the carriers revenues sufficient to enable them to render efficient services and to provide the country with a system of railroad transportation capable of progressing with the development of the country. Any policy of rate control that stopped short of this degree of responsi- 394 POLITICAL SCIENCE QUARTERLY [Vol. XXX VL bility on the part of the government would be disastrous to the American railroad system. When it became evident that the federal government in the regulation of the railroads must assume responsibility for their financial stability and for rates and revenues that would enable the country to .enjoy a progressively efficient system of rail transportation, it was clearly seen that the central government must not allow its rate policies to be negatived or seriously in- terfered with by the states in their control over charges for intra-state transportation. In the Minnesota Rate Case in 1913 (Simpson, et al. v. Shepherd, 230 U. S. 352), and in the Shreveport Rate Case in 1914 (234 U. S. 342) the Supreme Court had established the principle that the state rate must give way to the federal rate when the charges established by the state limited the regulatory powers of the federal government or established an unreason- ably discriminatory relationship between the state and inter- state rates. The order issued by the Interstate Commerce Commission in the Shreveport case was upheld by the court, but it has been found difficult in practice so to apply the prin- ciple established by the Shreveport decision as to prevent a. serious interference on the part of the states with the regulation of interstate rates by the federal government. The correction of this situation was one of the objects to be accomplished upon the return of the railroads to their corporate owners for operation. None of the problems connected with the return of the rail- roads to their owners was more perplexing or more provocative of divergent views than the policy that should be adopted for the future regulation of the wages and working conditions of the army of railroad employees". From 1912 to 1917 the country was frequently confronted with the menace of a para- lyzing railroad strike, and railroad labor problems were acute throughout this five-year period. If there was a justification for the assumption of the operation of the railroads by the United States Government, it was to be found mainly in the fact that during the period of the war the country could not permit the railways to be tied up or even seriously hampered by labor controversies. The other major reason for government operation was that large expenditures must be made promptly No. 3] THE PROBLEM OF RAILROAD CONTROL 395 by the railroads in order to meet the extraordinary demand for service placed upon them by the government in the prosecution of the war. In my judgment, both of these problems could have been met without resort to government operation. The Railroad War Board, established by the railway executives in the spring of 1917, was bringing about the coordination of the railroads, and more traffic was being moved than had ever previously been transported. Acting under his war powers, the President could have given this railroad war board greater authority, and financial support might have been given to the railroads, under conditions that would have safeguarded the public interest. A discussion of what might have taken place at the end of 1917 is, however, academic. The railroads were taken over by the government in order that the executive authority might remove the menace of strikes, might relieve the railroads from the limitations imposed by existing anti-trust laws, give the com- mon carriers needed governmental aid, and hasten the coor- dination of the several railroad lines into a unified and efficient transportation system. When, in 1919, consideration was being given by the public to the conditions under which the railroads should be returned to their corporate owners, much thought was given to problems of service, with the hope of retaining under private operation the service advantages of unified management that had been secured during the period of government control. It was rea- lized by the public that railroads and waterways ought not to be kept dissociated and forced to serve as unrelated competi- tors. The necessity of providing for a unified service by con- nected and cooperating rail and water lines was realized. It was also clear that terminal operations in the future could be brought about by treating each urban district, no matter \>y how many railroads it might be served, as a single terminal in which the various freight yards and stations of the several carriers and their tracks and yards were coordinated for the performance of a unified service. The realization of this project for the reorganization of terminals will take time, but the advantages to be gained by it are manifest. When the government operated the railroads, the entire equipment of different types of freight cars was used without 396 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI much regard to ownership. The railroad stock in the country was utilized as a whole. Freight cars became legal tender and remained in circulation when and where needed, instead of being redeemed by frequent return to their owners. This use of rolling stock was made to meet a national emergency, and it was recognized by the public that provision should be made for its similar use in the future to meet any crisis that might arise under peace or war conditions. The Solution Attempted by the Transportation Act of IQ20 To provide for the return of the railroads from the govern- ment to their owners, under terms that would meet the railroad situation as it had come to be understood during the year fol- lowing the armistice, the Transportation Act of 1920 was passed by Congress. It was approved February 28, and provided for the return of the railroads to their owners on the first of March of that year. The law provided for the maintenance of competition in the operation of the railroads, the grouping of the railroads terri- torially or otherwise not being required. The Act, however, gave the Interstate Commerce Commission power to compel the owner of a railroad terminal to permit other carriers to use the terminal in return for reasonable compensation. Thus a begin- ing was made in what will ultimately be the unification of rail- road terminals. Competing carriers were also given permission to pool their traffic and earnings after securing approval of the Interstate Commerce Commission. The consolidation of rail- roads while not made compulsory was made possible. The law requires the Interstate Commerce Commission to work out a plan for the grouping or consolidation of the railroads into a limited number of systems that. shall be so arranged that the cost of transportation as between com- petitive systems and as related to the values of the properties through- out the service as rendered shall be the same, so far as practicable, so that these systems can employ uniform rates in the movement of competitive traffic and under efficient management earn substantially the same rate of return upon the value of their respective railway properties. The law thus contemplates the ultimate consolidation of rail- roads by voluntary action of the carriers and the maintenance of competition among the permanent systems. The Senate Bill No. 3] THE PROBLEM OF RAILROAD CONTROL 397 provided for the compulsory consolidation of railroads, but in conference the Senate gave way to the House, and voluntary consolidation was agreed upon as a compromise. It is probable that future legislation upon railroad consolidation will be neces- sary, and that the government will ultimately be obliged to compel the grouping of railroads into the contemplated limited number of permanent competitive systems of relatively equal strength and stability. The most constructive parts of the Transportation Act of 1920 were those providing for the restoration of railroad credit, for the regulation of railroad finances, and for the establishment by government authority and responsibility of rates sufficient to yield a rate of return designated by the statute as reasonable. Some of these provisions were temporary, others were of a permanent nature. The temporary provisions included (1) the proviso that rates in force at the time of the return of the rail- roads to their owners should remain in effect until changed by state or federal authority, and that no reduction in such rates should be made during the first six months of private operation (before the end of this period, rates were largely increased by the Interstate Commerce Commission) ; (2) the provision that the government guarantee of the net return which had been assured the railroads during the period of government opera- tion should be continued until September 1, 1920; and (3) the appropriation of three hundred million dollars as a revol- ving fund from which loans might be made to the carriers to help tide them over the period of transition from government to private operation. The carriers were also to be allowed to fund their indebtedness to the United States government for a period of ten years at the rate of six per cent per annum. The most important permanent provision included in the Transportation Act with the intention of giving financial stabil- ity to the railways of the United States, was that which con- cerned the future policy of rate-making and rate regulation. A new principle of rate control was adopted. The Interstate Commerce Commission was authorized to divide the United States into an appropriate number of districts for rate-making purposes, and the Commission has established four districts: — Eastern, Southern, Western and Mountain-Pacific. The aggre- gate value of the railroad property devoted to the public service 398 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI in each of these districts was to be determined, and the Com- mission was to authorize and establish rates and fares that will yield the carriers a reasonable return upon the aggregate value of the property. For the two years following March 1, 1920, the statute declared a reasonable return to be 5>4 per cent per annum, and the Commission was authorized to allow the car- riers to earn and retain an additional >4 per cent upon the ag- gregate value of railway property, this additional l / 2 per cent to be devoted to improvements and not to be capitalized. Any carrier's earnings in excess of 6 per cent per annum are to be divided with the government. After March 1, 1922, the Inter- state Commerce Commission is to determine what rate per cent per annum upon the aggregate value of railroad property shall be a reasonable return to the carriers. This policy of rate control differs radically from the policy adhered to prior to government operation. Up to that time regulation was exercised for the purpose of preventing the car- riers from charging unreasonable rates. It was regulation of a corrective and negative character. In the future, the Govern- ment is to act positively and to establish reasonable rates, and. the statute for the first time defines what the standard of reason- ableness shall be. This is a large forward step in government control of railroads in the United States. In the regulation of rates, the difficulty of the problem has grown mainly out of the fact that charges over competitive routes for similar services must be the same; also, that for like services in different sections of the country there cannot prop- erly be wide differences in the charges. Some railroad lines are favorably located, have abundant traffic, and are economi- cally and profitably managed. Other lines, over which the charges in many instances must be the same as those of their prosperous competitors, are poorly located, have light traffic,, and can be operated profitably only under the most favorable conditions. If rate systems are established that will yield profits to the " weak sisters ", the stronger brothers will be favored with larger rail rates than the public should be required to provide. This situation cannot be altered except by the consolidation of all the railroads into a limited number of per- manent systems of relatively equal strength. For this reason consolidation must ultimately be accomplished. If it does not No. 3] THE PROBLEM OF RAILROAD CONTROL 399 come about voluntarily, as it probably will not, it must be brought about by the government. One of the most satisfactory provisions of the Transportation Act of 1920 is the one which writes into the law the principle established by the Supreme Court in the Shreveport decision. A rate established by a state authority must give way to the lawful interstate rate whenever the Interstate Commerce Com- mission " after full hearing finds that any such [state] rate, fare, charge, classification, regulation, or practice causes any undue or unreasonable advantage, preference, or prejudice as between persons or localities in intra-state commerce on the one hand, and interstate or foreign commerce on the other ". In the case of an unreasonable discrimination caused by the state rate, the Interstate Commerce Commission may prescribe the intra-state rate thereafter to be charged, " the law of any state or the decision of a state authority to the contrary not- withstanding ". However, in the hearing and the determination of cases involving the relation of interstate and intra-state rates, the Interstate Commerce Commission may confer with the authorities of the states, and avail itself of the cooperation of state authorities in the enforcement of any provisions of the law. The rate-regulating authorities of most of the states have united in a case that is now pending in the Supreme Court of the United States to determine whether this part of the Trans- portation Act of 1920 is an invasion of the constitutional rights of the states. What the decision of the Supreme Court will be remains to be seen, but the Court can hardly fail to follow the course it adopted in reaching the Shreveport decision. In the future, railway properties and railroad investments are not to be made the prey of unscrupulous speculators as they have too frequently been made in the past. Permission must be secured from the Commission for the extension of a railroad line or the construction of a new road, and the Commission must be convinced of the public necessity and convenience of the proposed investment. Securities to obtain new capital are to be issued only upon approval of the Commission, and the securities shall be put out " upon such terms and conditions as the Commission may deem necessary or appropriate in the premises". Public authority now sits in judgment upon the necessity of any railroad investments, determines what amount 400 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI of new capital it is necessary to invest, decides what kinds of securities may be issued and the terms upon which these secur- ities may be offered to the public. The days of stock-watering and " high finance " in the railroad business are presumably at an end. The labor provisions of the Transportation Act of 1920 are an example of the kind of compromises all too characteristic of important legislation. The Senate, led by the able Chairman of its Committee on Interstate Commerce, Albert B. Cummins, adopted the principle of compulsory arbitration of disputes as to wages and working conditions in the railway service. The Committee on Interstate and Foreign Commerce of the House of Representatives favored the adjustment of disputes as to wages and working conditions by boards composed of repre- sentatives of employers, employees and the public; while the brotherhoods and unions of railway employees championed the continuance of national boards of adjustment, such as had been set up during the period of government operation of the railroads. These were dual boards of adjustment composed of an equal number of representatives of the employees and the carriers, there being no members of the public on the boards. When the House bill was under consideration by the House of Representatives, the brotherhoods secured an amendment, sub- stituting their general plan of dealing with labor disputes in place of the plan recommended by the Committee on Interstate and Foreign Commerce. When the two bills came under con- sideration in the Conference Committee of the two houses, the House conferees prevailed. The representatives of the Senate gave up the plan of compulsory arbitration and agreed to a plan similar to the one that originated in the House Committee on Interstate and Foreign Commerce. The law provides that the carriers and their employees shall first seek by direct negotiation to agree upon wages and work- ing conditions. If such negotiations fail, the questions as to working conditions, not as to wages, may be considered by boards of adjustment created for a single railroad company, for a section of the country, or for the United States as a whole. These boards are to be established by agreement of the carriers and employees. They are to be dual in character and com- posed of representatives only of employers and employees. In No. 3] THE PROBLEM OF RAILROAD CONTROL 401 case a board of adjustment is unable to settle a dispute as to working conditions, appeal may be taken to the Railroad Labor Board provided for by the Act. This board is composed of nine men, appointed by the President, three appointees to be from nominees made by the employees' organizations, three from nominees made by the railway executives, while the other three are to be such representatives of the public as the Presi- dent may select. This tripartite board has jurisdiction over disputes as to wages and also as to working conditions. It was contemplated by the statute that disputes as to working condi- tions should go before the Labor Board only upon appeal from decisions of the boards of adjustment, but inasmuch as the car- riers and the employees have not been able to agree upon the kind of boards of adjustment to be established, such boards have not been brought into existence, and the Railway Labor Board has, in fact, decided questions of working conditions as well as of wages. Working conditions, other than in the train-operating ser- vices, during the period of the Railroad Administration, notably during the latter days of that period, were fixed by the adop- tion of national agreements; and, after the railroads were re- turned to their owners, the labor board, being confronted with the difficult problem of deciding what increases should be made in railroad wages, announced that the working agreements be- tween the carriers and the unions should remain in full force until changed by agreement of the interested parties. The carriers and the brotherhoods could not agree upon modifica- tion of the national agreements, and thus early in 1921 the labor board was obliged to enter upon extended hearings to decide whether the agreements as to working conditions that had been adopted during the period of government operation should be continued, modified, or abolished. The board de- cided that the agreements should terminate on July 1, 1921, if, in the meantime, the carriers and the representatives of the employees had adopted other agreements, but as the carriers have not been able by negotiation to modify the agreements, they will remain in force until the labor board shall have sub- stituted new agreements. The effect of the labor provisions of the Transportation Act of 1920 has been to place in the hand of a single board power 402 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI to determine the wages of all railroad employees and to fix the standards of working conditions prevailing on the railroads throughout the states. Moreover, this board is entirely inde- pendent of the Interstate Commerce Commission. The Labor Board controls half or more than half of the expenses of the railroad companies, while the Interstate Commerce Com- mission is charged with the duty of establishing rates that will yield the carriers what the statute has established to be a rea- sonable return upon railroad property. Whether this plan of independent action on the part of two boards, one determining expenses, and another fixing revenues, will work successfully is an open question. That the Transportation Act of 1920 is a genuinely recon- structive measure is evidenced by the provisions it contains re- garding railway services. By this law the government has undertaken definitely to bring about better service conditions on American railroads. Regulation begins, as has been pointed out, with the exercise of judgment by public authority as to what tracks and terminals shall be constructed and how capital shall be raised for such construction and for the acquisition of additional facilities and equipment. The equipment has to be operated in accordance with car-service rules determined by the government. The joint use of terminals may be required ; and, in the enforcement of the Act, the carriers will be required so to develop their terminals as gradually to bring about the much- desired unification of terminals in the important railroad centers. Moreover, the interchange of traffic by railroads and waterways and provisions for through-shipment and through-billing by joint rail-and-water routes are definitely provided for. Developments Since Resumption of Corporate Operation Whatever merits the Transportation Act of 1920 may pos- sess, and it is unquestionably a constructive measure of great promise, a series of events has prevented the law from accom- plishing what it was hoped might be brought about. The law was enacted during a period of great business activity that fol- lowed the close of hostilities ; but, before the law had been in force a year, the United States was suffering along with other countries from a world-wide depression in business. The plight of the railroads in the United States has been serious No. 3] THE PROBLEM OF RAILROAD CONTROL 403 since the beginning of 1921, and there is no promise of an im- mediate and prompt return to prosperous conditions. Several important actions have been taken by the govern- ment in accordance with the provisions of the Act of 1920. Shortly after the Act became a law, there developed an acute car shortage which was accentuated in April and May, 1920, by the so-called " outlaw-strike " of yard-men and switch-men in the principal railroad terminals. Although this strike was of short duration and failed utterly, because it was carried on in opposition to the employees' unions, it added greatly to the difficulties of the railroads. In order to meet the critical situa- tion promptly and fully, the railroads requested the Interstate Commerce Commission to take charge of car service, in accord- ance with the powers granted the Commission by the Act of 1920. The Commission decided that an emergency existed, and for several months it exercised as full control over car service and distribution as the railroad administration had ex- ercised during the period of government operation. Before the end of the year 1920 railroad traffic fell off sharply and the car shortage was changed into a car surplus which has prevailed thus far throughout 1921. The depression in business was so general as to cause a large decrease in railroad traffic and revenues. The decrease in the earnings was so great that during the early months of 1921 many railways in the United States had recurring operating de- ficits, and in the case of even the most prosperous railroads operating expenses were nearly equal to operating revenue. This financial situation developed in spite of the fact that the Interstate Commerce Commission in August, 1920, had granted the railroads an increase in rates designed to enlarge freight revenues by 33 J/3 per cent and passenger-train revenues by about 24 per cent. The rates authorized by the Commission in August, 1920, were based upon the assumption that the volume of traffic which the railroads then had would continue. The members of the Commission were no prophets, and they had no means of foretelling the financial depression. It came within six months after the Commission's rate order was issued. Moreover, the increase in rates granted by the Commission was made with a view to enabling the carriers to earn six per cent upon a tentative value which the Commission placed upon the 404 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI property of the railroads in the United States, subdivided terri- torially among the four districts mentioned above. The tenta- tive valuation placed upon the property of the railroads was $18,900,000,000. This was undoubtedly a conservative valua- tion. The fact that the total value fixed by the Commission was more than a billion and a half dollars less than the book value of the carriers' property may not have much significance, although the appraised values of the railroads, in so far as they have been determined by the Commission under the valuation act of March 3, 1913, indicate that the physical properties of the railroads as a whole will be quite equal to the amount of the assets as carried on the books of the companies. In any event, rates calculated to allow the carriers as a whole to earn but six per cent per annum in 1920 and 1921, upon their prop- erties valued at a figure which they had reached by the opening of the world war, would necessarily have been considered con- servative, if not relatively low, even had business conditions remained prosperous, as was anticipated by the Commission when the rate increase was authorized. Railroad credit was not restored. It is clear now that it would have been impossible in 1920 to take any action that would have exempted the railroads from sharing with other enterprises in the consequences of the world-wide business de- pression that began at the close of 1920. The financial and rate-making features of the Transportation Act of 1920 have had comparatively little effect because the benefits they might have accomplished have been overcome by adverse economic conditions. What actually happened to the railroads may be in- dicated by a few figures of earnings and expenses. The operating revenues during the calendar year 1920 were $6,225,000,000, and exceeded the revenues of the preceding year by $1,041,000,000, but the outlay of the railroads for operating expenses, taxes and rents in 1920 amounted to $6,163,000,000, and was greater than the figures for 1919, by $1,495,000,000. The result was that the net operating in- come for 1920 was but $62,264,000, whereas in 1919 it had been $516,290,000. Even in 1919, the railway operating in- come was only about five-ninths of the amount guaranteed to the railroads by the government during the period of federal control. When the railroads were taken over by the govern- No. 3] THE PROBLEM OF RAILROAD CONTROL 405 ment at the close of 1919, the companies were guaranteed a net operating income equal to the average for the three years end- ing June 30, 1917. This guaranty amounted to somewhat more than nine hundred million dollars per annum. The actual net operating income of the railroads in 1920 was thus about one-fifteenth of the average for the three years pre- ceding the entry of the United States into the war. The bad financial showing of the railroads for the years 1919-20 (and the situation was even worse during the early months of 1921) was caused by the extraordinary increase in expenses during the year 1920. This increase, amounting in all to nearly a billion and a half dollars, was made up of the following items : increase in payments for wages and salaries $884,148,000, for locomotive fuel $196,429,000, railroad ties $28,113,000, and other items $386,682,000. The situation of the railroads in 1920 in comparison with their condition in 1916 is explained by the fact that during this five-year period the revenues increased 71 y-^j- per cent, while total expenses rose 141 T y 7 per cent. What Remains to be Done The foregoing figures are sufficient to show that the railroads can be restored to financial stability only by a large decrease in expenses. While it is probable that with the return of business to normal conditions there will be an increase in gross revenue, yet it must be remembered that the traffic of 1920 was heavy, much larger than it has been running in 1921. It is not to be anticipated that the tonnage of the railroads in the near future will much exceed that of 1920. Moreover, it is agreed by everybody that railroad revenues cannot be increased by rais- ing freight rates and passenger fares. Any changes made in the charges must be downward. In fact, numerous individual rates are being readjusted downward in order to make possible a larger and freer flow of certain staple commodities. The future success of the railroads clearly depends upon greater economy and efficiency and upon a large reduction in the ratio of expenses to income. Something has already been done to reduce expenses. The Railroad Labor Board by an order effective July 1, 1921, has reduced wages about twelve per cent. Some railroad companies 406 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI by their own action have reduced salaries. A twelve-per-cent reduction in salaries and wages paid in 1920 will amount to more than four hundred million dollars. Savings of an equal amount in other expenses must be made in order to put the railroads securely upon their feet. Presumably the cost of coal, fuel-oil, ties, rails, equipment and supplies will follow the downward trend of prices generally, but it is not to be expected that large reductions can be secured in the costs of material and equipment in the near future. Hope must be placed in the introduction of operating economies. The carriers, federal and state commissions, and the public must unite in efforts to reduce the terminal expenses and to bring about the maximum use of equipment and facilities. In the long run, railway co- operation and consolidations will make many economies pos- sible, but during the next five years the greatest opportunity for a reduction in railroad expenses will be found in the intro- duction of economical methods of handling traffic into, out of, and through large city terminals. It is to be hoped that it will not be necessary for the govern- ment to make large additional advances of funds to the rail- roads, but there is a financial measure by which the govern- ment might promptly be of much assistance to the railroads. During the period of government operation some seven hun- dred or eight hundred million dollars were invested by the government in improvements and betterments. Had these in- vestments been made by the railroad companies, the funds would have been secured by the sale of securities. They would have been funded obligations. The government has, however, withheld this large sum of money from the railroads in settling its obligations to the railroads. In other words, the govern- ment has credited itself with this "sum of money, and thus has withheld it from the railroads. Valuable temporary assist- ance would be given to the carriers, were the government to fund this investment of seven or eight hundred millions and advance the cash to the companies. It is doubtless too early to pass final judgment upon the plan of adjusting wages and working conditions established by the Transportation Act of 1920. The labor problem is a compli- cated one at all times, and under present conditions of business depression, and of consequent unemployment and unrest on No. 3] THE PROBLEM OF RAILROAD CONTROL 407 the part of workingmen, the problem is more than ordinarily difficult. The continuance of the national agreements entered into by the railroad administration and the railroad brother- hoods, other than those of which the train operators are mem- bers, and the inability of the railroad companies to agree with the employees' unions as to the kind of boards of adjustment to be set up under the Act of 1920, have resulted, as stated above, in placing the whole problem of adjusting the wages and working conditions of railroad employees in the hands of the Railroad Labor Board. The direct negotiation of railroad em- ployers and employees, outside of the train services, has' been minimized and practically set aside. A national board, one- third of the membership of which is made up of representatives of the public, is fixing wages, and thus for the present is de- termining six-tenths of the expenses of the railroads and is fix- ing the rules controlling working conditions throughout the country. It is doubtful whether the Railroad Labor Board will prove to be a satisfactory agency. I am aware that the tendency, not only in the United States, but in other countries, is toward the establishment of wages and working conditions by national boards instead of by direct negotiation of employers with em- ployees. Nevertheless, I am not convinced that the tendency is in the right direction or that the tendency will permanently continue. It may still be that experience will demonstrate the wisdom of returning to the policy of establishing wages and working conditions by contract, by negotiation and agreement of the parties directly interested. If the task is to be taken from those directly concerned and placed with a board, prob- ably that board should be made up only of representatives of the public. Moreover, it should surely be a board to which cases come only upon appeal, either upon appeal by the em- ployers and employees when negotiations have failed, or upon their appeal from the decision of some local arbitration or ad- justment board, which has first considered and passed upon the questions at issue. If this opinion, here tentatively expressed, should prove to be sound, an amendment to the Transportation Act of 1920 will be found to be necessary. Of one thing I am quite certain. The railroad systems of 408 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI the United States must be brought together into a limited num- ber of permanent systems of relatively equal traffic possibilities and financial strength. During the next few years, the rail- roads will be given an opportunity to consolidate by voluntary action, in accordance with a general plan of railroad grouping determined and promulgated by the Interstate Commerce Com- mission. The present unfortunate financial condition of the railroads will necessarily cause the process of consolidation to be slow, and it is by no means certain that even when the rail- roads regain their normal financial strength they will be dis- posed to work out the consolidations found by the Interstate Commerce Commission to be in the public interest. Doubtless Senator Albert B. Cummins, Chairman of the Senate Commit- tee on Interstate Commerce, is correct in believing that Con- gress will have to pass a law compelling the railroads to con- solidate. As he stated in the Senate, in debating the bill that later became the Transportation Act of 1920, It has been utterly impossible for any body of men to make a system of rates that will sustain the weaker railroads of the country, without giving the stronger railroads an income excessive and intolerable in its extent; and there lies the great fundamental obstacle in our system of rate-making. The Interstate Commerce Commission can no more give to each railway of the United States the return to which it is fairly entitled than it can annihilate distance or overcome any other law of nature. ... It was obvious, I think, to the students of the sub- ject long before the government took possession that we must adopt some plan that would remove this inherent fundamental difficulty. The Senate bill contemplated such a grouping of railroads as would maintain inter-system competition ; and it was provided that the capitalization of the consolidated systems should cor- respond to the actual value of the properties brought together. The obstacles to be overcome in bringing about the con- solidation of American railroad* in the manner just suggested are probably greater than can be overcome by voluntary action of the carriers. Experience will probably show the necessity for the amendment of the Act of 1920 so as to provide that after a period of five or seven years the carriers shall be com- pelled to consolidate, in accordance with the plan adopted by the Interstate Commerce Commission. For the next year or two, the country will note what progress is made by voluntary action, and will then decide whether compulsion is necessary to bring about consolidation. No. 3] THE PROBLEM OF RAILROAD CONTROL 409 Along with the consolidation of railroads, whether by volun- tary action or by compulsion of the government, should come the federal incorporation of the railroads. A law for the federal incorporation of the railroads should have been included in the Transportation Act of 1920. The draft of such a law was included in the bill prepared by the National Transporta- tion Conference that was convened by the Chamber of Com- merce of the United States. It was a simple comprehensive plan of incorporation. This or some similar plan should re- ceive early consideration by Congress. There remains a question concerning which there is much difference of opinion. Should the administrative regulation of the railroads, as well as the determination of rates and revenues, and the exercise of the functions closely related to rates and revenues, be vested solely in the Interstate Commerce Commis- sion, or should a separation be made of the executive and semi- judicial tasks of regulation, and the acticities of the Interstate Commerce Commission be confined to those of a semi-judicial character? I have elsewhere stated the reasons why a federal transportation board should be created, and what its functions should be. 1 It should not be forgotten " that the success of the whole venture of regulation of the railroads must neces- sarily hinge largely upon the machinery that is provided to give effect to the laws that may be enacted." The Interstate Com- merce Commission has functioned successfully for the purposes for which it was created. It is, however, too large a body, and is by temperament and method too judicial in its practices, to be a highly efficient executive board. Successive statutes have increased the membership of the Interstate Commerce Commission from five to seven, to nine, and now to eleven members, and with the increase in member- ship there has been a multiplication in the executive tasks to be performed. Will it not be wise for Congress, when it again gives consideration to railroad legislation, to reduce the mem- bership of the Interstate Commerce Commission to seven men and to limit its activities to the regulation of the rates and revenues of the carriers and the administration of the bureaus 1 See Proceedings of the Academy of Political Science, vol. viii, pp. 572-574; also Program of Railroad Legislation, pp. 49-56 (this volume was published by the Chamber of Commerce of the United States, Washington, D. C). 410 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI necessarily associated with this task. If this is done, the ex- ecutive functions of regulation as they have developed to date, and as they will be increased in the future, might well be en- trusted to a board of five or preferably three members, execu- tive in practice and organization, and of maximum administra- tive efficiency. In general, the government regulation or control of the rail- roads is a problem of securing for the country a system of rail- road transportation adequate to the demands upon it and at all times progressively efficient. The railroads, the waterways and the highways should develop simultaneously, and they should be so coordinated that they will together form a physically unified transportation system. The government's task is largely executive as well as semi-judicial. For these reasons, it is probable that experience will demonstrate the necessity of amending the Transportation Act of 1920 by a law creating a transportation board entrusted with the executive task of the government regulation of the railroads. PROCEEDINGS OF THE ACADEMY OF POLITICAL SCIENCE The Proceedings have been issued regularly by the Academy since iyio as a record of its activities and as a means of giving detailed treatment to special subjects of im- portance as follows : Vol. I. No. i. 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Single numbers of the Proceedings and of the Political Science Quarterly may be pur- chased at the prices indicated as far as the supply on hand will permit. Special prices will be quoted on request for numbers which may become go reduced in stock as to make higher prices necessary. Address business communications to The Academy of Political Sciknce, Kent Hall, Columbia University, New York City. THE ACADEMY OF POLITICAL SCIENCE IN THE CITY OF NEW YORK BOARD OF TRUSTEES President Samuel McCune Lindsay Vice-Presidents Albert Shaw Paul M. Warburg Secretary Treasurer Parker Thomas Moon George A. Plimpton Executive Secretary and Assistant Treasurer Ethel Warner Directors Charles E. Hughes William L. Ransom Thomas W. Lamont Henry R. Seager Adolph Lewisohn Edwin R. A. Seligman V. Everit Macy Munroe Smith Ogden L. Mills Henry L. Stimson Frank A. Vanderlip Managing Editor of the Political Science Quarterly Paekkr Thomas Moon The Academy of Political Science, founded in 1880, is com- posed of men and women interested in political, economic and • ocial questions. The annual dues are S5. Members re- ceive as part of their membership privileges the current issues of ::ie Political Science Quarterly and the Proceedings of the Acad- emy and are entitled to admission to all meetings, lectures and receptions under the auspices of. the Academy. Members and subscribing members are urged to notify the Academy office of any change of address. If members and subscribing members wish to discontinue membership in the Academy notice to that effect should be sent ; otherwise it is assumed that a continuance of the member- ship is expected. Communications regarding the Academy should be addressed to the Secretary of the Academy of Political Science, Kent Hall, Columbia University, New York. PRACTICAL TESTS OF THE TRANSPORTATION ACT BY A. M. SAKOLSKI REPRINTED FROM POLITICAL SCIENCE QUARTERLY Vol. XXXVI, No. 3, Skptkmbkr, 1921 NEW YORK PUBLISHED BY THE ACADEMY OF POLITICAL SCIENCE 1921 PRACTICAL TESTS OF THE TRANSPORTATION ACT * I THE Transportation Act of 1920 has been generally re- garded as the most constructive congressional legisla- tion in recent times. Its direct aim was to solve certain complicated railroad problems that had been growing in size and in importance for over a quarter-century. These problems became acute at the time the government took over the opera- tion of the roads as a war measure, and it was generally apparent that the railroad properties could not be safely returned to their owners unless an honest legislative attempt was made to elimin- ate the accumulated difficulties of both the pre-war and the war periods. How far Congress succeeded in accomplishing this end by the Transportation Act and what further adjustments are desirable, are the subjects of this paper. The practical and permanent features of the Transportation Act of 1920 may be summarized as follows: First, it proposes to adjust railroad rates so that the carriers at all times shall be permitted to earn a reasonable return on the fair value of their property. Secondly, it proposes to eliminate state interference with rail- road rates and railroad financial policies. Lastly, it aims to relieve the carriers from the incubus of per- ennial labor demands and union domination. Let us see to what extent these admirable objects have been obtained. _ 1 In view of the unusual interest attaching at the present time to the problem of governmental control of public utilities, it has been deemed valuable to offer the readers of the Political Science Quarterly in this issue two articles dealing with the question from different points of view. Both Dr. Sakolski, of New York Uni- versity, and Professor Johnson, Dean of the Wharton School of Finance and Com- merce, are scholarly specialists in the field of railroad economics. The editors, in conformity with their general policy, assume no responsibility for the opinions ex- pressed or the recommendations advanced by the authors. — Ed. 376 PRACTICAL TESTS OF THE TRANSPORTATION ACT 377 As a means of rate adjustment the new railroad act provides : In the exercise of its power to prescribe just and reasonable rates, the Commission shall initiate, modify, establish or adjust such rates so that carriers as a whole (or as a whole in each of such groups or terri- tories as the Commission may from time to time designate) will, under honest, efficient and economical management and reasonable expendi- tures for maintenance of way, structures and equipment, earn an aggregate annual net railway operating income equal, as nearly as may be, to a fair return upon the aggregate value of the railway property of such carriers held for and used in the services of transportation. Incidentally, it should be remarked that this provision, re- garded as the most important in the whole law, adds nothing new in theory or fact. Under the law, public utilities are en- titled to charge rates that give " a reasonable return on the value of their property". The perpetual difficulty has been to define clearly "reasonable return" and "fair value". For almost a decade the Commission under the valuation section of the Interstate Commerce Act has been endeavoring to estab- lish a basis of fair value. No definite policy has been adopted, nor is one likely to be finally and conclusively adopted until after years of litigation. In the rate testimony before the Com- mission the railroads presented the aggregate of their invest- ment accounts as a basis of property value. In support of this data they exhibited figures of " tentative " valuations of fifty railroad properties obtained from the Commission's valuation department, showing that in the aggregate the values as " tenta- tively" reported were not very different from the aggregate of the companies' capitalization. The Commission seems to have seized on this point as a "safe way out", for in the decision wherein the railroads were given an aggregate valuation of $18,900,000,000 (against a property investment account of $20,040,572,611) it is stated that "so far as the work [of valuation] has produced results, either as to particular roads or as showing general tendencies or principles, we have given con- sideration thereto". The Interstate Commerce Commission, knowing the responsi- bility placed upon it by the Transportation Act of 1920, un- 37 g POLITICAL SCIENCE QUARTERLY [Vol. XXXVI doubtedly was intent on carrying out the letter of the law. The rate-making section of the Act explicitly states that the Com- mission when determining the aggregate value of railroad prop- erty " shall give due consideration to all the elements of value recognized by the law of the land for rate-making purposes and shall give to the property investment account of the carriers only that consideration which under such law it is entitled to in establishing values for rate-making purposes." Accordingly some method of establishing railroad value other than mere reference to the investment account is required before a sound basis of rate-making can be adopted. Nevertheless the questions of valuation and adequate rates are of immediate importance under the provisions of the Trans- portation Act, since, after having increased freight and passenger rates to an extent which was confidently believed to furnish revenues that would result in the maximum statutory net return on property investment, the railroads have been experiencing the lowest scale of net earnings in their history. However, un- foreseen circumstances which have arisen since the passage of the Act have made the rate-making provisions difficult of practical application. In the first place the volume of traffic of all kinds due to widespread and almost universal business depression fell off abruptly to an abnormally low amount. Secondly, the wastes and inefficiency resulting from government operation combined with the higher wages and the restrictive labor regulations en- forced by the Railroad Labor Board enlarged operating ex- penses beyond a point of financial endurance. Consequently, when the special session of Congress convened in the spring of 1 92 1 serious and widespread concern prevailed regarding the railroads' financial stability. As a further complication, ship- pers began to complain of excessive charges under the new scale of rates, so that congressmen found themselves bombarded by petitions and complaints. Farmers, manufacturers, export- ers, jobbers, commercial salesmen and others, all feeling the effects of the general business depression, naturally laid much of the blame on the increased transportation charges. Railroad security-holders, likewise, held up their hands in supplication No. 3] PRACTICAL TESTS OF THE TRANSPORTATION ACT 379 for relief. They feared that the growing political pressure in favor of reduced railroad rates would have a most deleterious effect in decreasing the earnings of their investments in rail- road properties. It should be borne in mind that the rate provisions of the Transportation Act were essential at the time to stabilize rail- road credit. The roads under government operation had exhib- ited such poor net returns that some sort of guaranty that higher earnings would result under private operation was required to prevent a disastrous slump in railroad securities. Congress was made to realize the situation. The result was a crovernment guaranty of earnings during six months following return to private operation, and thereafter the statutory minimum return to be secured by higher rates. Nothing in the rate provisions of the Transportation Act, however, requires parallel increases or decreases in all freight or passenger charges to produce the statutory return on investment. The practical error of the In- terstate Commerce Commission in carrying out the law was its crude method of indiscriminately making general rate increases. The resulting maladjustments must in every case be ironed out by further rate hearings and investigations. Unfortunately there has not yet been developed an agency which possesses adequate data as to the relation of freight rates to manufacturing costs or to the prices of commodities at points of ultimate consumption. Such information, scientifically assembled, to inform shippers and the public of the relation of railroad rates to commerce and living costs, is highly desirable. A cooperative organization of carriers would be the proper agency through which this in- formation could be supplied, but no organization having author- ity over these subjects exists whose conclusions or suggestions could be generally accepted. Moreover small progress as yet has been made in scientific freight-rate adjustments from the standpoint of basic principles. Results of past experiences and the desire to maintain regional competition have been the chief factors in creating present freight-rate structures. The public is forced to rely upon governmental agencies to define and apply the principles which should originate with those who are conducting transportation. 380 POLITICAL SCIENCE QUARTERLY [Vol. XXXVr Railroad rate-making is an extremely delicate and difficult task, so that when a scale of charges covering the many groups and kinds of commodities is once established, railroad traffic officials are loath to make adjustments demanded by changes in competitive forces or in business conditions. This rate rigidity cannot be easily altered under the new powers of the Interstate Commerce Commission, since, in order to create the conditions leading to the practical application of the " rate- making rule ", the Commission, in addition to controlling without interference every detail of railroad policy, must provide rate zones that will tend to maintain sectional economic and com- petitive conditions, and, at the same time, must furnish financial stability to the carriers. To accomplish all this without serious sectional and political controversies, seems almost impossible. Hardly less glaring than the difficult application of the " rate- making rule" to bring immediately an adequate income on investment, is the ineffectiveness thus far of the provisions for the elimination or nullification of state and local interference with railroad activities. Restrictive and punitive state railroad legislation prior to the war had grown with such cumulative intensity, that the railroads in 191 6 joined in a concerted move- ment for an entire new scheme of railroad control, whereby the companies would be relieved of the vexatious state interferences and political railroad-baiting. All told, between 191 2 and 191 5, it was computed that upward of 4,000 bills affecting railroads were introduced into the national and state legislatures, of which 440 became laws. Whatever the purpose of these laws, there was almost always a certain result, viz., increase in operating costs. The full-crew laws have been extremely costly : the law of small New Jersey alone added"an operating cost of something like $400,000 annually. Hence it is with deep satisfaction that one may look upon the provisions of the recent Federal law which vest exclusively in the Interstate Commerce Commission regulatory functions formerly exercised in common with or ex- clusively by the states. The conflict between Federal and state authority began immediately after the grant of increased rates by the Interstate Commerce Commission. Most of the state public utility commissions refused to sanction proportionate No. 3] PRACTICAL TESTS OF THE TRANSPORTATION ACT 381 intra-state rate increases and have carried their opposition into the courts. The litigation is still pending, so that a series of new Supreme Court decisions similar to the Shreveport and the Minnesota Rate Cases is awaited before the validity of the Interstate Commerce Commission's supreme rate-making power conferred by the Transportation Act is finally determined. The grant of exclusive financial control to the Interstate Commerce Commission is likewise opposed as unconstitutional, by several of the states, though in this matter the opposition is not persistent, and is likely soon to disappear altogether. The labor sections of the Transportation Act are likewise undergoing a serious test. The results thus far have been dis- appointing. As a means of settlement of the railroad labor problem, the new legislation is but a step toward a much-desired end. The measure, as finally enacted, however, does not amply protect the public or the railroads against the strike evil. It merely makes provision for a system of regional labor boards of adjustment, which, in a more or less haphazard way, had existed previous to government railroad operation. A national labor board of appeal, composed equally of representatives of employees, of the railroads, and the public, all appointed by the President, was created with power both to hear and determine -disputes and to initiate investigations. The decisions of this National Board are not enforced by penal provisions. In view of the inability of previous national labor-adjustment boards to settle railroad labor disputes satisfactorily, it may be assumed that the public is not yet amply protected from railroad labor disturbances. Thus far the labor adjustments formulated by the National Labor Board have not brought satisfaction to either the em- ployees or the employers. After the return to private operation, the railroads naturally sought relief from the national labor agreements and other concessions to labor made by the Railroad Administration. These agreements, which covered the shop crafts as well as train operatives, proved exceedingly costly and in accordance with the claims of railroad officials, constituted a large factor in producing the abnormally high operating ex- 3 32 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI penses. The national agreements are opposed by the carriers chiefly for two reasons. First, they create a universal yardstick to which all carriers regardless of peculiar and widely varying operative and financial conditions must conform. Secondly, they " unionize " all railroad labor, including shop employees, many crafts of which had formerly worked under local regula- tions and had not' the support of powerful national organizations. After the return to private operation, it was argued by the carriers that the national labor agreements were in reality not incumbent upon the railroad companies, since the companies were never parties to the contract. The railroads contended, moreover, that neither the Constitution nor any statute empowers Congress to compel employment of adult male labor in private occupations at a fixed wage rate. After extended hearings in which both railroad officials and employees took part, the Railroad Labor Board formally set aside the national agreements. The Board's decision, however, sets up certain rulings in relation to railroad labor which are causing serious difficulties. The decision enforces " system " collective bargaining and establishes the rule that in local dis- putes and arbitrations "the majority of each craft or class of employees shall have the right to determine what organization shall represent members of such craft or class". The effect of this is likely to establish unionism on a national basis in all rail- road crafts, since in view of the fact that local craft unions are under the jurisdiction and control of the national labor organ- izations, national uniform standards can readily be set up and again enforced. For years, the leading railroads, in dealing with their em- ployees in certain crafts (particularly shop employees) have ad- hered to the " open shop " principle. They have accordingly retained both union and non-union employees and if union wages and working conditions were adopted, they were not en- forced as the outcome of direct agreements with the national labor organization, but were set up merely as each individual company's own " shop rules ". It is only by this plan that the railroads can avoid domination by the national labor organiza- tions in establishing wages and working conditions among their No. 3] PRACTICAL TESTS OF THE TRANSPORTATION ACT 383 employees. The threatened destruction of the " open shop " principle by the Labor Board may mean a continuation of a uniform national standardized wage scale and working condi- tions for railroad labor in all sections, regardless of differences in the operating problems and the financial conditions of indi- vidual companies. The dispute of the Pennsylvania Railroad with the National Labor Board illustrates the difficulties in the settlement of rail- road labor disputes under the provisions of the Transportation Act. The Pennsylvania Railroad in accordance with its old-time practice, made arrangements with its employees concerning working conditions and the settlement of disputes. The Labor Board has ordered these arrangements set aside on the ground that the company had no legal authority to divide its system into regions and require the employees to elect regional repre- sentatives. They also ruled that the election of employees' representatives should be by open and not by secret ballot. The railroad company's officials maintain that unless the regional method of establishing wages and working conditions as con- trasted with the " system " plan covering all the company's lines is maintained, the same conditions will prevail as existed under the recently abolished national agreements. II In view of the present difficulties in the railroad situation the question is naturally asked, "Is the Transportation Act of 1920 a failure?" Any answer must take into consideration present political and economic conditions in reference to the various provisions of the law. As a piece of legislation, the Act is too far-reaching in its proposed remedies and regulations to merit at this time general condemnation. This is essentially the con- clusion drawn from the hearings before the Senate Committee on Interstate Commerce. The Senate inquiry has two prime purposes, viz. : ( I ) to ascertain the causes of high railroad oper- ating costs, and (2) to estimate the effect of the increased freight rates on both the carriers and the shippers. There has been nothing in the investigation suggesting railroad national- ization or a return to government railroad operation. 384 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI The causes of the high operating costs appear to have been the most pertinent part of the inquiry. Adequate data regard- ing the direct or indirect effect of general rate increases on railroad traffic or on the general business of the country are lacking. As already pointed out, neither the government nor the railroads have any research organization which has this information at hand. Consequently the only evidence of the effect of the higher rates on traffic that has been thus far pre- sented to the committee has been in the form of personal opin- ions, guesses and biased deductions. As a result of the wide- spread business depression various groups of shippers and pro- ducers have been exerting political pressure to have rates on their particular commodities reduced in order to promote their own peculiar interests, regardless of the effect thereof on gen- eral welfare or on railroad income. Thus, eastern grain rates were reduced early in August twenty-five per cent for a period extending to the end of 192 1 in the belief that this action would promote the export grain movement and aid the western agri- cultural sections. Reductions of rates on building materials, iron and coal products are also likely to be put into effect. The adjustment of freight rates to favor certain classes of producers is a " robbing Peter to pay Paul" policy that may have serious disturbing effects on general business. The attitude toward the Transportation Act assumed by the railway executives at the Senate hearings is indicated in the statement of Mr. Thomas De Witt Cuyler, Chairman of the As- sociation of Railway Executives. This statement makes it plain that the railroads are satisfied as a whole with the Transporta- tion Act of 1920. The failure to earn a fair return on invest- ment under the " statutory " rates and the heavy falling-off of traffic should not be taken as evidence that the Act is ineffective in solving the railroad problem. The blame for the failure lies with the Railroad Administration. This governmental agency, through its disruption of railroad operating methods and tradi- tions, through its wasteful policies and through its national agreements with railroad labor organizations, has saddled a burden on the companies, which they are not able to shuffle off without difficulties and delays. Moreover, the increased rates No. 3] PRACTICAL TESTS OF THE TRANSPORTATION ACT 385 granted by the Interstate Commerce Commission last August have not balanced the higher wage rates granted at the same time by the Labor Board, for while labor costs increased 115 per cent the gross revenues increased 54 per cent. As labor costs consume approximately 70 per cent of railroad revenues, there is thus a considerable gap between income and outgo. Briefly, the testimony of Mr. Julius Kruttschnitt, President of the Southern Pacific Company, and the other railroad execu- tives who followed him as witnesses before the Senate Commit- tee, resolves into the following points : (1) Heavier railroad operating costs are not caused by lower efficiency, since statistics show that in 1920 an increased volume of freight traffic was carried with fewer freight train-miles. Moreover, the miles run per freight car per day were greater in 1920 than in 19 19 or 19 18 (years of government operation), and the average tonnage per loaded freight car was also greater. Nothing is said, however, regarding the costs by which these results were obtained. Statistics indicating efficiency, to be conclusive, should be accompanied by figures proving economy in operations. Heavier train loads and high speed may be directly opposed to lower costs and greater profits. (2) The national labor agreements inherited from the Rail- road Administration and continued in force after the return to private ownership not only caused pronounced and excessive wage advances, but because of strict classifications of employees, the elimination of piece work, and the adoption of " union rules " and regulations also caused higher and disproportionate labor costs. Consequently, wage payments are tending to con- sume more and more of the railroad dollar. (3) The poor physical condition of the railroads and their equipment at the close of government operation necessitated heavy maintenance expenditures and at the same time handi- capped the lines in the efficient and economical performance of the transportation service. The operating cost per unit of traffic under these circumstances would naturally be in excess of the cost under normal conditions. (4) The scattering throughout every section of the country of the railroad cars owned by the individual companies during o«6 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI the period of government operation resulted in a large move- ment of empty cars when each company began to draw its roll- ing equipment to its own lines. This extra expense, together with the necessity of repairing equipment that had been neglected and misused by the leasing lines, resulted in a con- siderable addition to total railroad operating expenses. (5) Through an accumulation of restrictive legislation, such as the "long and short haul" clause of the Interstate Com- merce Act, the Panama Canal Act (taking away from the rail- roads the control of steamship lines) and similar measures, the railroad companies have not been able to meet the competition of other transportation agencies. Hence they have lost traffic. The increasing use of motor trucks (operating without cost of right-of-way or of any fixed investment) is also causing serious losses of short-haul traffic. It is thus the complaint of the rail- road executives that the services of their companies are unjustly discriminated against. Ill What are the remedies for the existing unfavorable condi- tions? The railroad executives in their testimony suggest several changes in national railroad policy, some of which are not likely to meet with congressional sanction. The executives, be it remembered, offered no serious opposition to the re- cently enlarged powers of the Interstate Commerce Commis- sion, preferring this concentrated control to conflicting and an- noying state regulation. The present railroad opposition to ad- ministrative control is confined largely to the enforced subjec- tion to obnoxious labor-union rules. It is proposed, therefore, by the railroad executives that the iTabor Board permit a prompt return to pre-Federal-control working conditions. In the words of Mr. Kruttschnitt : It is imperative to remove the waste and inefficiency fastened upon the railroads by rules and working conditions made by men who were indifferent to the future of the properties, and in the negotiation of which railroad owners had no voice. It is an essentially preliminary step in any effort toward the realization of conditions which make it possible for the railroads to live. No. 3] PRACTICAL TESTS OF THE TRANSPORTATION ACT 387 Other proposals of relief comprise the repeal of the " full crew " laws and other state and Federal statutes saddling addi- tional operating costs on the carriers. Discriminations against the railroads in favor of water carriers should be removed and the " long and short haul " clause of the Transportation Act repealed or modified. Rate adjustments covering single com- modities or groups of commodities should be made when there is evidence that the increased rates have diminished traffic or have interfered with established market competition. Wage reductions, changes in working conditions and adjust- ments of rates for the production of greater revenues, however, do not promise sufficient financial relief. Economic wastes in railroad operations require elimination. As Mr. S. Davies Warfield, President of the National Association of Owners of Railroad Securities, has pointed out, American transportation has outgrown the system under which it now operates and only a recognition of this fact " will save them [the railroad com- panies] from being swallowed up in the demoralization that Government operation and after-war readjustment has brought on them." The Security Owners, through Mr. Warfield, ac- cordingly have proposed a plan of coordination of services and facilities under Government supervision. It is not expected that the general approval of this plan by many railroad execu- tives and by the public will be received immediately, but what- ever action is finally taken, it is an undisputed fact that intensive and unhampered economy is needed to save the roads from general bankruptcy and ultimate government operation. The proposals of the National Association of Owners of Railroad Securities were brought before the Senate Committee in the testimony of Mr. S. Davies Warfield and Mr. Forney Johnston, president and counsel respectively of the Association. Testimony to the same effect was also presented by Mr. Walter Fisher, a member of President Taft's Railroad Securities Com- mission, Mr. John F. Wallace, a distinguished railroad engineer, and Mr. W. A. Colston, Director of Finance of the Interstate Commerce Commission. Mr. Warfield's plan as outlined in the testimony, proposes the creation of a national railway service board to act in cooperation with and under the supervision of ^88 POLITICAL SCIENCE QUARTERLY [Vol. XXXVI the Interstate Commerce Commission. This board is to be composed partly of railroad officials selected from among the territorial groups of railroad officials, and partly of other citi- zens, preferably experienced business men and financiers. In each territorial group there is to be an advisory board presided over by a member of the national board. The national board is to be subdivided into two separate divisions : ( I ) the finance and administrative division, and (2) the railway officials division. The finance and administrative division is expected to be com- posed of officials of leading life-insurance companies, savings banks, investment and business institutions having a direct interest through ownership of securities or otherwise in the welfare of the railroad companies. The railway officials' divis- ion is to be composed of members serving on the divisional railway boards, who are to be elected by the carriers in the respective groups, with the approval and confirmation of the Interstate Commerce Commission. All decisions of the board or of the divisional groups in matters over which the Commis- sion now has jurisdiction under the Transportation Act will be under the regulatory supervision of the Interstate Commerce Commission. The primary purpose of the plan is the coordination of rail- road service and railroad expenditures in order to eliminate the economic wastes of transportation and to encourage and facili- tate the joint use of railroad property for public convenience and economy. The proposed new organization, therefore, would take the place of the present numerous voluntary railroad ope- rating associations and, at the same time, relieve the Interstate Commerce Commission of much direct regulatory and super- visory work recently saddled on it by congressional legislation. If successful, the plan would avoid evils of direct Federal rail- road control and operation, of which the nation has had a sad experience during the late war. An illustration of effective cooperation of the railroads and the Interstate Commerce Commission in the provision of ade- quate standardized equipment, is found in the National Railroad Service Corporation, an organization created, through amend- ment of the Transportation Act, under the joint auspices of the No. 3] PRACTICAL TESTS OF THE TRANSPORTATION ACT 389 Interstate Commerce Commission and the National Association of Owners of Railroad Securities. This corporation was formed to finance the purchase of new rolling equipment for the rail- roads which were unable to borrow at reasonable rates in the general money market. Under the plan of financing adopted, the Interstate Commerce Commission advances from the re- volving fund provided under the Transportation Act, forty per cent of the cost of the new equipment. The remaining sixty per cent is furnished by the Service Corporation in exchange for a like amount of equipment trust obligations of the borrow- ing railroad maturing over a period of fifteen years. As security for the government's share of the financing, there are deposited with the Commission, " deferred " or second-mortgage notes having the same maturity dates as the first-mortgage equipment trust certificates. The latter are sold to investors and financial institutions. Several of the large insurance companies now hold large blocks of these securities. The National Railway Service Corporation is a non-profit-making organization, merely acting as the agency of the Interstate Commerce Commission in the matter of loans to railroads for the purchase of equipment. Among the specific problems facing an organization created with a view to eliminating wastes and to encouraging and pro- moting further economies in railroad operation, are those relat- ing to (a) the standardization and use of equipment, (b) the joint use of shops, yards and terminals, (c) the cooperative purchase of supplies, and (d) the harmonizing of traffic rela- tionships. Many of these matters are under the jurisdiction of the Interstate Commerce Commission, but it is readily apparent that a governmental agency such as the Commission, acting in both a judicial and executive capacity, is incapable of adequately handling these problems without the direct assistance and co- operation of an organization composed of active railroad ope- rating officials and practical businessmen. Should the railroads themselves not effect such an organization satisfactorily to all concerned, (including the Commission, security owners, shippers and the public), it may be found advisable to create by statute as an agency of the Interstate Commerce Commission a board of cooperation and research such as has already been appointed 39 o POLITICAL SCIENCE QUARTERLY by Mr. Warfield's organization. This board should be concerned primarily with broad problems of railroad operation and eco- nomic policies, and in its advisory capacity could propose to the Commission desirable operating changes and rate adjust- ments which, under the existing competition among individual carriers, are frequently held in abeyance. Experience has proven that the country cannot look to a thousand or so railroad executives, about 200 alone represent- ing the larger systems, to reach agreements and conclusions among themselves, respecting the coordination of facilities and service, or the introduction of economies essential to guarantee the most efficient administration and methods of transportation under private management. Unless these conditions are recog- nized and relieved through definite authority the most approved provisions of the Transportation Act of 1920 will be rendered ineffective. And if the interest of railroad security owners were alone considered, it might be better for them to have the lines taken over by the government and paid for under fair methods for determining their value rather than that there should be a continuation of the present unsatisfactory railroad conditions. A. M. Sakolski. New York City.