I 3» ( L 9 I WKa N-/^ ffe^ fei.%' *C-i(. '^-^ ^^ .>V r/^ IS, z^'' ft, t -*' +■ •-:'?>*. \\'^3 s?^ €>- i -^'^1'. . -I*^. ■%.■ N, ^/^^^ !*■ •V ."» -A a'l im '*Jvm HE2757 19"S?i:9"r""'"*™^ Railroad legislation as developed up to 1924 014 047 678 Railroad Legislation As Developed Up to Date. DECEMBER 10, 1919. By R. S. LOVETT. Chairman, Union Pacific System. Cornell University Library The original of tiiis bool< is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924014047678 RAILROAD LEGISLATION AS DEVELOPED UP TO DATE. By E. S. Lovett, Chairman, Union Pacific System. December 10, 1919. It seems useful to take stock at this time of the prog- ress made by the present Congress during its first ses- sion toward the enactment of legislation necessary to meet the railroad emergency. The controlling necessity for additional railroad legislation is to reestablish rail- road credit, which failed even before the War under the system of regulation in force, and to save from bank- ruptcy and ruin many, and perhaps most, of the railroads of the country because of the extraordiaary increases in wages and in prices of fuel and other materials during federal control. Unless railroad credit is reestablished, it will be impossible for the railroads to reasonably keep pace with the growth of the country or to finance any sub- stantial part of their requirements for extensions and betterments, generally estimated at one billion dollars annually. Let us therefore examine what Congress has proposed to date, and determine how far it meets this fundamental necessity, and what the country faces if these proposals are really as far as Congress means to go in solving the -railroad problem. Both the Senate Committee on Interstate Commerce, of which Senator Curomins is Chairman, and the House Committee, of which Mr. Eseh is Chairman, have pre- sented Bills designed to embrace all the legislation they deem necessary upon the subject. The Esch Bill, after many amendments in open session of the House, was passed by that body and has gone to the Senate. The Senate did not consider either Bill during the first session but has taken up the subject in the session which has just convened. If the usual course is followed, it will substi- tute its own Bill for the House Bill, and after extended debate and probably amendments, it will pass its Bill, and the differences between the two measures will be worked out in conference. The Esch BUI in the House. The Esch Bill as amended and passed by the House contains the following discouraging features : 1. The first and fundamental objection is that it bases its whole scheme of relief upon the Interstate Commerce Conunission. It imposes upon the already overburdened Commission the performance of many new duties and the administration of many new regulations. It creates no new agencies to assist the Commission in rate matters, such as Eegional Commissions ; and it leaves the Commission still burdened with the administration of the Car Serv- ice Act, The Act Eelatiug to the Construction and Op- eration of Switch and Sidetrack Connections, the Act of August 24, 1912, the Safety Appliance Acts of March 2, 1893, the Act of May 6, 1910, relating to Kailroad Ac- cidents, the Safety Act of February 23, 1905, the Hours of Service Act of March 4, 1907, the Safety Act of May 30, 1908, the Act Relating to the Transportation of Ex- plosives, approved March 4, 1909, the Boiler Inspection Act of February 17, 1911, the Act Relating to Block Sig- nal Systems and Appliances, approved June 30, 1906, and many other duties of an administrative character having nothing to do with rates, which could be better performed by a smaller Board — leaving the Commission free to devote its time and talents to the making of rates and to the hearing and determining of rate cases and other important controversies. The Bill adds two new members to the Commission, it is true, making the mem- bership eleven instead of nine, as at present. But it is still a single Commission. And though its membership be increased and it divide itself into sections, it remains a single body, governed by the same semijudicial rules of procedure and methods, and with the same diffused and all-embracing duties, many of which are in no wise re- lated and require wholly different experience and tal- ents and methods for their correct solution. It is obvi- ous that the Commission must employ subordinates, not merely to assist, but actually to decide and dispose of many of its important duties ; and the Bill authorizes it to do this and the Commission has been doing it hereto- fore of necessity, even with its present duties. This is one of its defects. It is not right to put the practical de- cision of questions of such vast public importance upon subordinates of the Commission who are unknown, who get no credit or recognition for what they do, who hold their places at the pleasure of the Commission, and who receive salaries insufficient without any certainty of ten- ure of office, to command the ability and experience that ought to be brought to bear in the decision of such ques- tions. No reflection upon the subordinates of the Com- mission is intended, for I believe them to be, individually and as a class, quite equal in ability and character to any other men in similar lines of work. But my point is that the system is not calculated to produce the wisest deci- sions, and that decisions by even the best of men in such subordinate, precarious, underpaid and unrecognized positions would be unsatisfactory as a rule. All experience suggests that Regional Commissions and administrative Boards for administrative duties, composed of members appointed by the President and confirmed by the Senate, for definite terms, and receiving fixed salaries, would be better suited to decide and dis- pose, subject to review by the main Commissiou in rate cases, all these important questions, and be more in keep- ing with our traditions and ideals. The Interstate Com- merce Commission must either leave wholly and entirely to subordinates the final decision and disposition of a great multitude of important matters, or it must devote to the review and revision of the conclusions of its subordi- nates an amount of time that will be seriously needed for rate questions and controversies, and its more important work. Delay in rate making and revision and in the de- cision of rate questions is deadly to railroad and com- mercial interests alike. It has been a great evil in the per- formances of the Interstate Commerce Commission in the past, and with the additional duties imposed by the Esch Bill, it will, in my judgment, become intolerable. 2. The Esch Bill, as introduced and as amended and passed by the House, recognizes that the revenues from existing rates remaining after the pa3Tnent of wages and other operating expenses will be insufficient, due to con^ ditions arising during federal control and stiU existing, to save many of the railroads from bankruptcy and to conserve the credit of the others. It therefore provides a guaranty for a period of six months after federal con- trol. But this "guaranty" is illusory if not worthless. It does not provide, as one would suppose, that one-half of the "standard return" for twelve months now paid shall be guaranteed the Companies for the period of six months, but provides instead that the guaranty to each Company shall be the average of the corresponding pe- riods of six months during the test period. That is to say, assuming that federal control terminates December 31st, as now believed, the Bill provides that the average net earnings during the test period for the six months from January to June inclusive, rather than one-half of the earnings for the whole year, shall be taken. Now we know that the first six months of the calendar year are the worst for the railroads. The crops have been moved and the traffic is light, and during the three Winter months of January, February and March, the snows are heaviest, the weather generally is the worst, and the op- erating difficulties are the greatest of the year, while in the Spring months of April, May and June, the main- tenance work is actively resumed to repair the ravages of Winter and to prepare for the heavy traffic, of the late Summer and Autumn. As a result many railroads have deficits for the first six months of the year. Hence I say the "guaranty" tendered by the.Esch Bill as passed by the House, fails to meet the emergency which it recog- nizes and assxunes to provide for. 3. The provision of the Esch Bill as amended by the House with respect to the funding of amounts charged by the Government to the railroad Companies for addi- tions and betterments made during federal control is a serious menace to the credit of Companies without great financial resources and strength. It requires that the amount due from the Government to any Company, even for rental, shall be set off against amounts incurred for additions and betterments made during federal control and chargeable to capital account, to the extent permitted under the standard contract between such Company and the United States relative to deductions from compensa- tion. Any balance due by the Company with respect to additions and betterments may be funded into not ex- ceeding ten equal amounts, one of such amounts to be payable annually beginning at the expiration of five years from the termination of federal control, with inter- est at the rate of six per cent per annum from date, sub- jecft to the right of the carrier to pay before maturity. Any other indebtedness existing at final settlement shall 6 be evidenced by notes payable on demand with interest at the rate of six per cent per annum and secured by such collateral as the Government may require. No progres- sive railroad company in a growing country such as ours, can pay for its additions and betterments out of earnings, as this Act thus requires. Such expenditures are for capital account, and as such must, to a great extent if not entirely, be provided for by the issue of capital securi- ties. Furthermore, the Bill provides that even the bal- ance which the Government cannot collect by setting off the rental because of the restrictions in the standard con- tract, shall be funded for only five years and shall be thereafter payable in annual instalments, provided the Company is able to give good security, which many of them camiot do. Funding for five years, it is true, allows a breathing spell, but the requirement that the amounts shall be paid in ten annual instalments thereafter, is a method which only financially strong Companies can avail of, and probably will have to be taken care of out of current income. When it is considered that the additions and better- ments were ordered by the Government, and many of them to meet the emergencies of the War, and especially when there is considered the very liberal treatment ac- corded by the Government to War Industries with respect to improvements, it would seem not unreasonable to allow the railroads which need the indulgence a long term in which to pay the capital expenditures charged against them by the Government while under federal con- trol. The provision leaves the railroad companies with- out a dollar of working capital, with a large indebtedness to the Government for equipment and for additions and betterments ordered and made by the Government dur- ing federal control, with an increased pay roll of over a billion dollars a year added during federal control, con- fronting a scale of prices for fuel and other materials comparable mth the increased cost of living for indi- viduals, and witli a rate increase insufficient to save the Government itself from a huge deficit in its own opera- tion of the railroads. Such a refunding provision cer- tainly does not tend to the enhancement and reestablish- ment of railroad credit. 4. But the most amazing provision of the Esch Bill as amended by the House is that with respect to Labor. It effectually perpetuates every wage increase and every workiag rule or regulation made by the Railroad Admin- istration under the stress of the World War and the ab- normal conditions resulting therefrom, no matter how radically conditions may change nor how soon normal conditions of living may be restored. As reported by the Committee, the Bill contauied an elaborate provision for a "Eailway Labor Adjustment Board" and a "Eailway Board of Labor Appeals ' ' for hearing labor disputes, but no means were provided for enforcing such decisions. Where a contract existed, it was provided that the Rail- road Company and the Unions respectively and members advising should be liable in damages and civil actions for violation of such contract. But this would simply dis- courage or prevent the making of wage contracts. Strikes and lockouts were not made unlawful, and no penalties were prescribed therefor. But even this "milk and wa- ter" provision called forth the usual denunciation from the union leaders, and when the Bill came up in the House, a strictly union labor amendment was adopted by a vote of 161 for to 108 against. The Bill as thus amended and passed recognizes the various RaUroad Brotherhoods and Unions by name and provides for Boards of Adjust- ment composed equally of representatives of such Unions and of the Railroad Companies, but makes no provision for enforcement of the decisions of such Boards or for the decision of cases, of which there must be many, where the equally divided Board cannot agree ; and it does not pro- hibit or in any wise discourage strikes. But the most re- markable provision is that the Act as thus amended makes every decision of the United States Railroad Adminis- tration or of the Commission of Eight permanent, fpr it says all such decisions ' ' affecting questions of wages, hours of service or conditions of employment are hereby confirmed and shall apply to all carrier lines subject to this Act. Decisions which have been rendered by the United States Railroad Administration and which apply to the individual carriers subject to the pro- visions of this Act shall remain in effect until su- perseded by mutual agreement between the carrier and the employes or by decision" of one of the Adjustment Boards created by the Act. Of course this provision means that no change can ever be made except in the way of further wage increases, since the requisite "mutual consent" to a reduction or modifi- cation will not be given by the Unions, and will not be "superseded" by the Adjustment Boards, since tmder the Act the Unions have one-half the membership of each Board. The same provision exists with respect to the; Adamson Eight Hour Law. I am not advocating a reduc- tion of wages at this time or any change in working rules and regulations although some of them are absurdly un- just to the railroads and to the people who pay the freight bUls. But it is almost unbelievable that the House realized that by adopting this amendment it would saddle upon the country by law the railroad wage scales and working rules established mider the stress of War and at a time when the cost of living and the profits of labor both were above anything known for generations, and enforce the same by the penalties prescribed in the Act, while prescribing no penalties for strikes. Legislation of this sort is not likely to attract investors to railroad securities or to inspire much confidence in the future provision of the transporta- tion facilities which the country will need. The Esch Bill as passed by the House contains other provisions that will not be helpful though less objection- able ; some that seem merely formal and of no particular consequence ; and some that undoubtedly are wise, as, for example, giving the federal government exclusive regu- lation of the issue of railroad securities. But I comment only on those which in my judgment tend to defeat what I conceive to be the main object and reason for any legis- lation by Congress at this time, namely, the reestablish- ment of railroad credit to the extent necessary to enable the railroads to obtain the means required to provide the transportation facilities which the country must have. The Cummins BUI. The Bill introduced by Senator Cummins and reported by the Senate Conmaittee has the merit at least of recog- nizing the facts of the railroad situation and the courage of grappling with them an an honest attempt to solve the problem. It recognizes that the Interstate Commerce Commission is overburdened now with duties -that inter- fere with its more important work of making and revis- ing rates and deciding rate controversies. The Bill, therefore, relieves the Commission of various adminis- trative duties with respect to other matters which can be as well or better performed by some other Board, and confers upon it additional duties of a much more impor- tant character and provides it with the assistance neces- sary for the proper performance thereof. The Bill also recognizes for the first time in our Congressional legis- lation the responsibility of the Federal Government to create some agency charg««l with the duty of promoting the establishment of adequate railroad facilities re- 10 quiring it to keep an eye on transportation service and find out what is necessary to provide that which is needed, and cooperate with the railroads and the Conunission in bringuig it about. The Bill creates a Transportation Board composed of five members to be appointed by the President with the consent of the Senate, and charges it with the duties just mentioned, and transfers to it the various administrative duties with which the Interstate Commerce Commission is now burdened with respect to the Oar Service Act, the Safety Appliance Acts, the Rail- road Accidents Act, the Hours of Service Act, the Act Eelating to the Transportation of Explosives, the Boiler Inspection Act, the Automatic Signal Act, and other Acts referred to above. The Bill also recognizes the danger to the whole people in the power of four men, whoever they may be and however wise, who lead the Trainmen's Brotherhoods, armed with a strike vote given merely to support them in negotiations, to tie up the railroad trans- portation of the country and to throttle the life of the Nation. The Bill therefore provides means for promot- ing the just settlement of all railroad labor disputes through tribunals created by the Bill; and, this done, it prohibits strikes under severe penalties by provisions that are undoubtedly consistent with the Constitution. The Association of Railway Executives has taken no posi- tion upon this question, because it relates to disputes be- tween the companies and their employes, and it is for the public to determine what measures it will take, and how far it should go, in protecting itself against the results of such disputes, in the form of strikes or otherwise. The Cummins Bill also contains rather elaborate pro- visions with reference to the merger or consolidation of the railroads of the country into from twenty to thirty- five competing systems — voluntarily for seven years, and thereafter compulsorily. I do not believe the plan is work- able, but as its operation is not immediate and as experi- 11 ence and time will demonstrate its defects bef oi'e the plan becomes obligatory, it need not be discussed here. The Bill contains many other provisions of a wise and far-seeing nature, and in my judgment it would go a long way in solving the railroad problem, but for one feature, which I believe would be fatal: The Bill proposes that for the first time in the history of this country, Congress shall declare that railroad own- ers shall not be entitled to the earnings they may be able to save out of rates which the Government itself pre- scribes. Hitherto it was supposed that the duty and power of the Government were to determine the rates which the carrier should be entitled to charge and the shipper required to pay. With the rates once fixed by the Government, it was supposed that all carriers in the district could seek the business and each would be enti- tled to all that it could make and save through ability, enterprise, efficiency, economy and otherwise. But the Cummins Bill makes a novel and radical departure by providing that no railroad company shall retain out of the earnings it may save under rates which the Govern- ment itself authorizes or approves in the manner pro- vided in the Act, more than "a reasonable return on its Property Investment." It then proceeds to declare in effect that 5i/^ per cent on the "value" of the property as determined by the Commission is a "reasonable" re- turn, and confiscates all in excess of 6 per cent upon such value. But it allows the Company to retain one-half of its savings between 6 and 7 per cent and one-fourth of its savings in excess of 7 per cent, to be put in a "Reserve Fund" until the reserve fund amounts to 5 per cent of the value of the property — the Eeserve Fund to be drawn upon for dividends or interest in years when the savings amount to less than 6 per cent. After such reserve fund amounts to 5 per cent of the value of the property, the 12 carrier is allowed one-third of its earnings in excess of 6 per cent. Except these fractions, all earnings and savings of the Company in excess of 6 per cent on the value of its property as fixed by the Oommission, are to be paid over by the Company to the Government within four months after the end of each year, to be. used by the G-ovemment "in furtherance of the public interest in railway transportation by carriers subject to the Act to Regulate Commerce, and avoiding congestions, in- terruptions or hindrances to railway service * * * or in furthering the public service rendered by them, either by way of purchase, lease or rental of transportation equipment and facilities * * * or by way of loans to such carriers" etc.,' whatever such clause may mean. Whether the "value" referred to in such limitation of return is the "book value" or the value which the Com- mission is already engaged in making is not clear. In one paragraph the provision is that no carrier shall re- tain more than a reasonable return upon its "property Investment", which undoubtedly means the investment, whether good or bad, wise or foolish, and regardless of real, intrinsic or earning value. In another paragraph the provision is that the ' ' Commission shall from tinie to time determine the value of the property in each district and rate-making group ' '. A literal construction of these two paragraphs means that for rate making purposes by groups, the Commission should determine the value, but that for limitation of earnings of individual roads, the "book value" should be the guide. But the most extraordinary provision is that com- manding that the Interstate Commerce Commission "shall, so far as practicable, adjust rates, fares, charges and 6lassiJSoia;tions that the net operating income of the several Carriers shall bear ttie same 13 relation to the value of their respective proper- ties." That is to say, that the Commission shall disregard earnings, efficiency, ability of management, economy, wise expenditures in development, location of line, volume of business, and every other consideration en- tering into and ordinarily controlling relative values of properties in the every day, common sense transactions of men, and shall instead observe a rule which is never observed by anybody. To the extent of "" property, investment" or to the extent of "value" as determined by the Commission (which, according to the tentative valuations thus far filed by the Commission, means "junk" value — as so many second hand ties, bridges, structures, engines, cars, etc. — and not a {joing rcdlroad) it shall be the lawful duty of the Commission under this provision to manipulate "rates, fares, charges and classifications" so that the value of a low grade, highly efficient, first located line, and the value of another line in the same group but located well up toward the top of the Rocky Mountains, with steep grades and high costs shall be equalized; and that the value of every modem and. highly efficient railroad shall be equalized with the most inefficient and unprofitable railroad in the same territory 1 Obviously this equalization can be accomplished only in one of two ways^either by raising the value of the inefficient or reducing the value of the efficient lines. The value of the inefficient can be raised only by raising the rates to a point where sufficient net is realized or by giving them in some form a share of the savings of the efficient lines. In any case, the in- evitable effect of such provision, if it be possible for the Courts to regard it seriously, will be to ruin the credit of the railroads by which the great bulk of the business of the country is aad must be transported. I am as con- 14 fident as one can be of a legal proposition that the Courts will annul the provision as confiscation prohibited by the Fifth Amendment of the Federal Constitution. But the damage to railroad credit from the wiUingness of Con- gress to enact such legislation will be irreparable. But that is not all. The same Section provides that in 1925 and in every fifth year thereafter, the Commis- sion shall determine what, under conditions then exist- ing, constitutes a fair return, and that it may "increase or decrease the five and one-half per centum basis herein prescribed or the basis for the determination of excess income. ' ' So that the Commission at such periods here- after is at liberty under the Bill to determine that 6 per cent upon the value is too high a rate, and that 5 per cent, or 4 per cent, or a lower rate is enough for a railroad in- vestor, and that all net earnings in excess of such lower rate should ue forfeited to the Government. Is it conceivable that the money necessary to provide the railroad facilities which this growing country needs — generally estimated at not less than one billion dollars per annum — will be obtainable from investors under legis- lation of this sort? The whole world is borrowing — Gov- ernments, municipalities, railroads, steamships, iadus- tries, mines and enterprises of every kind. The rest of the world realizes as never before that credit — ^fidelity to financial obligations — ^is something that every people must sacredly guard at all times in order to obtain means in emergencies. Opportunities for safe and profit- able investments are almost unlimited and are bound to continue so for many years. Profits on industrial, com- mercial, financial, mining and other enterprises in our own country are unrestricted and most attractive to our investors. It is with such competition as this that rail- road executives must contend for the money necessary to maintain and increase our transportation facilities. The best railroads, under the legislation proposed, could 15 offer a return of only six per cent on the value of their property, and even that return only in case it is earned, for, mind you, the Bill does not propose that the Govern- ment shall guarantee the return. As matter of fact, money everywhere is to-day worth more than 6 per cent and the strongest railroad companies cannot sell their se- curities now on a 6 per cent basis. It is in the face of these facts that the Bill proposes to confiscate all the company earns in excess of 6 per cent. Thus a measure designed to reassure investors and attract new capital to railroad enterprises defeats itself by discriminating against investments in the railroad business by confis- cating all the rewards of wisdom in investing and effi- ciency in operations. As part of the plan the same Section 6 of the Bill provides that "The Commission shall initiate, modify, or ad- just rates, fares, charges, and classifications, 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 rail- way operating income equal, as nearly as may be, to 51^ per centum upon the aggregate value, as determined in accordance with the provisions hereof, of the railway property of such carriers in the district held for and used in the service of transportation." Of course this includes the railroad that operates at a loss as well as the railroad that earns a surplus, th0 road that should never have been built as well as the most useful line, the badly managed as well as the best managed railroad, for all in the district or group must be included and rates made sufficient to yield the speci- fied return on the "aggregate value" in the rate group. I have already pointed out that the "property invest- ment" in one sentence of the Bill is taken as the basis 16 for limiting the return, and that in another sentence in the same Section, the Oonamission is empowered — ^with- out any guide — to determine the "value" of the railroad property. As indicated by the tentative valuation re- ports thus far filed by the Commission, that body takes the estimated reproduction cost of the elements en- tering into the railroad, such as rails, ties, bridges, build- ings and other structures, cuts, fills, etc., less depreciation — or what I have called a "junk" value, rather than the value as a going railroad — as its guide of value ; and ac- cording to that method an unwisely built and improperly located railroad operating at a perpetual loss might be valued even higher than a wisely built and profitably op- erated line. But if "property investment" is to be taken as the guide, the more overcapitalized a railroad has been, the greater would be its value, for, until the book- keeping rule was changed by the Commission in very re- cent years, all securities issued were carried in the Prop- erty Investment account by most Companies at par, re- gardless of the price received for them. It certainly will be a number of years before" the Commission can com- plete the valuation work upon which it is already en- gaged; and advocates of this scheme outside of Con- gress urge property investment as the basis of such value. The promoters of this scheme, before it was incor- porated in the Senate Bill recognized that it would in- volve a very substantial increase in rates, and in order to lull the people into submission, they devised the plan of confiscating, in the manner and to the extent above de- scribed, the net earnings of the wisely built and developed and well managed railroads in excess of 6 per cent. They assumed apparently that the controlling objection on the part of the people to an increase in rates was that some roads would be able to save more from such rates than others and more than a moderate profit. But what will it profit the shippers for the Government to confiscate 17 the earnings in excess of 6 per cent, as proposed by this Bill? The amount is not returned to the shippers. It in no wise reduces the rates they pay. It goes into a fund for the very vague railroad purposes indicated by the provision hereinbefore quoted from the Bill. The lead- ing advocate vehemently denies that the amount is for the benefit of the weak lines. The shippers are to go on paying the high freight rates in order that the so-called "weak" lines, however inefficiently managed or improp- erly built, may get increased revenue in that way, but are expected to be lulled into acquiescence by the delight- ful reflection that the inherently valuable and efficient railroads shall not be allowed to retain the benefit they get from the increased charges. This assumption involves two fundamental mistakes : The first is that the people are willing to pay more than a reasonable rate in order to reward improvidence or mistakes or misfortune in locating and building rail- roads, or possible inefficiency in management and oper- ation (for all the risk of these is put upon the pubUc by the Bill in dealing with net earnings) ; and the second is that the people of this country are unwilling to reward wisdom in construction and development, and efficiency in management and operation of railroads — the property in the success of which the public at large is more in- terested than in any other class of property existing. I deny that our people are in favor of confiscating the net earnings of a railroad company saved by it out of rea- sonable rates established or approved by the Government itself. The people are interested in the rates they pay — not in what the carrier by economy, efficiency, wise fore- sight or otherwise, is able to save out of such rates. Our people view with complacency, and indeed approval, large earnings by well managed banks, manufacturing indus- tries, commercial institutions and enterprises of various kinds, out of prices and rates fixed by themselves — free 18 from regulation by the Government, How preposterous then that the people should object because some railroad companies by wise foresight and good management in competition with others should be able to make out of rates made — not by themselves but prescribed by the Gov- ernment itself — a profit much less than that commonly made in other lines of business. That, too, when the peo- ple are enormously interested in the maintenance and de- velopment and increased efl&ciency of railroad transpor- tation, which is a necessity for all — ^whereas the success or failure of the other enterprises are not matters of such vital public concern. The cloud of fiction and prejudice which has so long befogged this aspect of the railroad question is vanishing and the people are learning that, if private capital is to supply railroad facilities, it must receive as fair treatment as that employed in other and much less necessary enterprises. It is not the weak roads that transport the country's commerce. It is not the weak roads on which the traffic becomes congested. Many of the "weak" roads are weak because they serve territories which, for various reasons, afford little traffic. But they are giving the service which the traffic justifies and requires. Some are weak because they are in competitive territory, and their rivals through more fortunate location, or accessibility to industries, or for other good reasons, are more con- venient and satisfactory to shippers and therefore able to get the business. Others are weak as a result of mis- takes in policy, unsound financing or bad management; and others are weak because building in the first instance never was justified by the traffic obtainable, and was merely a. speculative effort. It has seemed almost impossible to attract sufficient attention in this connection to the supremely important fact that the country's transportation service is per- formed by the "strong" lines and not by the "weak." 19 The industries are located on the strong lines ; and such lines, by location and otherwise, are best adapted to the business. Their growth and development have been more in conformity with the needs of the trafllo. They serve better the convenience and requirements of the people. It is the strong lines to which traffic inevitably flows, and upon which congestions occur. The congestion of traffic in 1917-1918 did not occur on the weak roads, but on the strong. Very few of the weak lines were taxed except with the overflow of traffic in excess of what the strong lines could handle. This was because the bulk of the traffic is normally on the strong lines-, and this tends to make them strong. The most prominent exceptions to this are certain of the New England Lines and certain large bituminous coal carriers. "Without speaking definitely from statistics, I feel safe in asserting that not less than 80 per cent of the railroad traffic of the United States is transported by railroad com- panies which regularly pay dividends. Their credit de- pends upon the continuance of such dividends. Their stocks are held by hundreds of thousands of individuals — many representing the savings of almost a lifetime. Un- less such dividends are continued — and indeed practi- cally assured — ^it will be impossible for these Companies so situated "as to be called upon to handle the great bulk of the conunerce of the country, to obtain the money for improvements and development required to meet the needs of our growing commerce. It was the Commission's policy of stationary and inflexible rates in the face of increasing wages and other operating costs, and the conflicting regulations of the various States, that made investors anxious about the stability and continu- ance of dividends, and deterred many of the strong railroads from making the improvements, additions and extensions which all now know to be necessary. The fact undoubtedly is that it is the strong roads 20 upon vMah the bulk of the business naturally falls that need the additional facilities, and it is the strong roads whose credit must be conserved if such facilities are to be provided. Hence I protest against the confiscatory provi- sions of Section 6 of the Senate Bill, as not only failing to provide for the transportation emergency con- fronting the country, but as making it infinitely worse by attacking for the first time in the history of this Govv ernment — ^not the transportation rates to be charged the shipper (which the Government may and ought to pre- scribe) but the net saved out of such rates, which is as much the private property of the stockholders as the money and assets in the treasury, and by seeking to bring the valuable and the worthless, the important and the unimportant, and the efficient and inefficient railroads to a d6ad level. To base rates upon "property investment," as advo- cated by representatives of some of the "weak" lines, or upon the separate appraisement of the different ele- ments entering into the construction and making up the physical structure, as seems to be the method thus far adopted by the Commission in its valuation work, un- doubtedly will require radical changes in the rate struc- ture and the rate relations now existing, which represent growth and commercial needs for generations, and to which commerce is adjusted. And it is a false and wholly arbitrary basis. Further increases of freight rates undoubtedly are necessary, as the Government's own experience with the railroads shows. No well informed person expects rail- road wages to be materially reduced under existing con- ditions; and the prospect of material reductions in the prices of fuel and other supplies for many months is cer- tainly not encouraging. Added to this must be the ex- pense of traffic organizations and soliciting agencies in- 21 cident to a restoration of competitive conditions, which were not necessary during federal control. Hence large deficits from operations — ^like those suffered by the Gov- ernment — confront nearly aU the railroad companies un- less freight rates are further increased very substantially. The practical and only effective method of making such increases is to take the rates as they exist and base upon them such increases and adjustments as may be nec- essary to meet the increased wages of labor, the increased cost of material and other operating expenses and taxes, and provide a return on the new capital that has been put into the properties in such enormous amounts and which must be provided for the future. The Commission should be left free to consider new rates from time to time, so as to adjust the revenue to the changing expense of oper- ation, the rise and fall of wages and prices, and the ex- penditure for new capital. So far as it becomes necessary to consider the value of the railroads : the average earn- ings during a series of years, taking into account the conditions then existing, plus a fair return on the new capital expended for betterments, additions, equipment and extensions, is economically and in sound common sense the rule that ought to be followed. A railroad is legitimately worth nothing to its owners except what it can earn and pay i/n the way of interest and dividends. True, earnings de- pend in large measure upon the rates a carrier is al- lowed to charge, and these rates in turn may be fixed by the Government so long as they are not confiscatory. But our railroad rates have been under Congressional regu- lation since the creation of the Interstate Commerce Commission in 1887. Since 1906 at least, the Commission has had power and has effectually exercised it, to reduces rates when found too high, and railroad earnings have been open to the Commission and the public. No one can justly claim that our railroad rates as a whole, or in any 22 substantial territory, or on any important line, have been too high. The fact is that they have been too low. Under this system, railroad values have worked them- selves out. Eailroads that could earn net returns have demonstrated their ability, and those that had little earn- ing capacity have been disclosed — all under "rates for which the Government is responsible. The securities of all these roads have been bought and sold at prices based upon their demonstrated earning capacity, and are today held by those who bought at such prices. The prices of these securities are the evidence of popular judgment of the relative value of these railroads,— as ' one com- pared with another; — and these values were based upon net earniugs made under rates that the roads were allowed by law to charge. The Grovernment should not, j,nd consistently with fair dealing cannot, question the ^alue of the railroads as demonstrated through many years by rates established by or under the regulation of its own agencies. New money has been put into the properties by investors for additions, betterments and equipment, thus increasing the transportation facilities — which it would be the duty of the Government itself to provide, if not furnished by private capital; and much of this capital has been too recently invested to be yet re- flected in increased earnings. It is upon such consider- ations as these, with the values established under earn- ings from rates prescribed or sanctioned by law for years, that rates should be based, and not upon "property in- vestment" or upon the value of so many second hand ties, so many second hand rails, bridges, structures, etc., etc. One point more : Both the Senate BiU and the House Bill recognize the obvious necessity for increases in rail- road rates, and contemplate immediate application there- for by the carriers to the Interstate Commerce Commis- sion, in the meantime continuing to a greater or less 23 extent — as already pointed otit — the present guaranty for five or six months, within which it is assumed such increases may become effective. But both Bills carefully refrain from preventing any State Eailroad Commission or Legislature from immediately reducing state rates, thereby depriving the carrier of revenue which the Gov- ermnent itself has been collecting during federal control. More than that, such changes in state rates generally affect interstate rates and often disturb a wide and im- portant interstate rate structure. Often a railroad com- pany will not dare to increase an interstate rate unless it knows that a corresponding increase will be made in a competitive state rate. How will the railroads be able to carry out the increases which both these Bills contem- plate until they know what will be done by the State Com- missions with respect to state rates'? True, both BiUs give the Interstate Commission the power to review all state rates which affect interstate rates. But the Senate Bill provides that before the Com- mission shall hear or dispose of any such issue, it shall cause the State to be notified of the proceeding; it re- quires that the Commission "shall confer with the au- thorities of any State having regulatory jurisdiction", etc., Avith respect to the relation between rates, fares, charges, classifications, regulations or practices of car- riers, etc. ; and also "to hold joint hearings with any such State regulatory bodies on any matters wherein the Commission is empowered to act where the rate making authority of the State may be affected by the action of the Commission". It is only "after full hearing" that the Commission may make any order removing interference of the state rate. It is obvious that the delay in the ad- justment of such differences under the provisions of this Bill would be disastrous to railroads suffering for rev- enue. The provision of the Esch Bill upon the subject is 24 much to the same effect, but admits of more prompt ac- tion with respect to the matter by the Interstate Com- merce Commission than is possible under the provisions of the Senate Bill. 120 Broadway, New York. B. S. Lovbtt. December 10, 1919. \ .:*:\ ^•v ■■ ■ I'M ■!' )r< '^^ i Xv*^' -.;^i>*^&*,: .':i^-" ^■i'i^ \>.!S>^lsis /i'^i S-. ■'■■ Mi: .:y(, '\:^^-f vj^ V-" ^(tSf ;<-^ ^^^Pi #1 A^ '.^iSfesB-*; '"^ii^U^