Federal Regulation
of Railways
ADDRESS OF
JUDSON C. CLEMENTS
Interstate Commerce
Commissioner
BEFORE THE
ATLANTA FREIGHT BUREAU
Delivered January 12
1909
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ADDRESS OF
JUD SON C. CLEMENTS
Interstate Commerce Commissioner
Gentj.euen :
Coming at once to the assigned subject for discussion,
"Federal Railway Regulation," we do well to keep in mind
from the outset the magnitude of the problems, and the in¬
terests involved, lest we become unreasonably impatient in our
endeavors toward more perfect regulation, and act unwisely
or rashly to the detriment of all concerned. The total single
track railway mileage of the United States is approximately
227,000 miles, and the total trackage of all kinds, including
double track, switches, etc., is about 328.000 miles. In a
straight, continuous line, this mileage would reach far beyond
the moon, and yet every foot of it has been constructed within
the life time of persons yet living. The rates of transportation
vitally affect the rights of those holding the investments of
the many billions of dollars which have constructed these
great properties on the one hand, and the equal rights of the
90,000,000 people of this country who are their dependent
patrons, on the other. How to secure justice to both and how
to promote the general welfare are the great and pressing
problems.
For many decades after the beginning of railway con¬
struction the necessity for regulation was not keenly felt.
There were not long, through and continuous lines as now.
Close parallels, crossings and junction points of transfer were
not as numerous as now. With the establishment and rapid
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growth of numerous inland cities of distribution, and sharp¬
ness of competition between trade centers incident to the an¬
nihilation of distance by the increased speed of trains, as well
as greatly increased capacity of engines and cars, and the
establishment, of great modern railway systems and through
lines, commerce, including transportation, has been revolu¬
tionized, while the transportation facilities, as well as the
volume of business, have increased manifold. It follows that
a discrimination, which under former conditions would have
been of little significance would, under present conditions,
mean commercial ruin to its victims. Some thirty years ago
it became evident to many there must be regulation.
The passage of the. original act to regulate commerce, in
1SS6, was the culmination of an advocacy and agitation of
ten years preceding it. Xaturally, Congress was conservative
and cautious in dealing for the first time with so great a ques¬
tion. The most that was claimed for that act was that it was
an experimental beginning. The soul and spirit of this act
was comprehended in a few words to the effect that all rates
should be reasonable and just, and that there should bo no
unreasonable discrimination. There was nothing new or
revolutionary in this, although the passage of that act was
resolutely opposed by the carriers, none of whom, however,
undertook to gainsay the justice of these fundamental require¬
ments. Their quarrel was with the regulative machinery of
I he new law, whereby it was sought to secure these manifestly
just purposes. Naturally, no one courts public regulation of
his conduct. One argument then urged against the measure,
and sometimes still heard, was that regulation was superfluous
and unnecessary, for two reasons; first, because the interest
of the carrier would be best promoted by fair treatment of its
patrons, and therefore this would guarantee such treatment,
and, second, that instances where it would fail to do so would
be so rare that they did not justify such a statute. No propo¬
sition is better established by human experience than that one.
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party to a controversy can not safely rely upon the self-interest
of the other for the protection of his rights. _ Again, it is
clear that all la ws of restraint and regulation must be framed
with reference to the worst and not the best of those to whom
it applies. The law against murder could be dispensed with
if we should only consider the best, or the great majority
of mankind, but, we must all be subject to it on account of the
conduct of the comparatively few. So, effective regulation
against rebates, unjust discriminations and the like can not
be dispensed with because most carriers would not wish to
indulge in such practices. The carrier that would be upright
needs the protection of the law in these matters against the
one that, for the sake of undue advantage, would be lawless,
as much as the shipper does.
The original act, after a period of litigation between the
commission and the carriers lasting nearly twenty years, was
found to be ineffective, and to make the commission but little
more than an investigating and advisory board.
A growing experience and realization of intolerable
wrong both as to excessive rates and the grossest discrimina-
1 ions culminated in the passage of the so-called Hepburn Act
of 1906. It can not be doubted that regulation intended to
prevent these abuses was made much more effective by this
act, and has diminished the evils prevalent prior to its passage.
Up to July 1, 1908, only one bill was filed against any order
of the commission made under this act. Since that date six¬
teen, 1 believe, have been filed in the various courts, raising
many questions as to the extent of the commission's authority
to make the orders it has made for the correction of rates and
practices. The constitutionality of the act is challenged in
some of these proceedings.
Conditions demand, in my judgment, yet further legisla¬
tion in several important partícula«. The most pressing
need, perhaps,, is the power to hold in abeyance proposed in¬
creases in rates until their reasonableness can be investigated
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and determined. The commission under present law can
condemn an existing rate, and prescribe another, only upon
complaint and full hearing.
It is easy, with practically all important lines centralized
tinder the control of comparatively few managements to bring
about simultaneous action among many roads, increasing rates
between many points on practically all classes and commodi¬
ties. It is perfectly manifest that they can, under present
practices, increase rates much more rapidly than it is pos¬
sible for any tribunal to investigate them upon full hearing
and complaint, which must be served with opportunity to
answer the same. Would it be any great hardship for the
carriers, when they propose an increase over the rates they,
themselves, haft voluntarily made and kept in effect for a
considerable time, to be required to wait until the reasonable¬
ness of the higher rate can be inquired into and determined ?
Such a course would prevent irreparable injury in cases where
the new rate is too high, because for many reasons a damage
resulting from the exaction of an unjust rate can not in mam-
cases be adequately or even approximately repaired.
It is also of vast importance to the carrier that it may
know that the rate it collects may be retained. Thus both par¬
ties may escape the troublesome, expensive, and unsatisfac¬
tory proceedings for reparation, after the condemnation of a
rate that has been for a period exacted, perhaps, 011 a com¬
modity moving steadily in large volume, involving thousands
of .shipments, as ilustrated by the well known lumber cases
in this section. It is clear that with competition between car¬
riers practically eliminated by the absorption of most roads
into a few great systems, and widespread community of in¬
terest between these, we have reached the time when the strong
hand of the Government is the only reliance for just and
reasonable rates. Xo longer is the real power which collirob
tho policy of rate-making wielded by the local management,
in svmpathetie touch with those who pay the rates, as in
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former times. It is far removed from them and as a practical
matter is controlled to an extent as never before by a few who
in the great financial center control the stocks and bonds.
Tliev do not construct rate schedules, but they give orders
to their traffic employees as to results, which for all practical
purposes mean the increase of rates. Not all increases are,
as a matter of course, to be condemned.
But the point is, that since the carriers are engaged in
a business affected with a public interest, and shippers are en¬
titled to just rates—are absolutely dependent upon them—
conditions have so changed that competition and the natural
laws of business can not be relied upon to produce
them. In the somewhat recent investigations of the IIarri¬
man lilies, Mr. Iiarriman, being on-the stand, in response to
questions relating to combinations as affecting rates and their
reasonableness, expressed, in effect, his belief that the amount
of profit 011 the railway investment afforded no standard for
the determination of the reasonableness of rates. Being asked,
in substance, where he would fix the limit of reasonable profit,
whether he would say as much as 10 or 15 per cent, he, in
substance, said: "Ten, fifteen or a hundred, if you please,"
and contended that so long as a road furnished adequate and
satisfactory service at rates as low as any other, for the same
service, that rate would be reasonable. He also, in the in¬
vestigation of the Northern Securities Co., discussing the pro¬
priety of such combinations and the question of their il¬
legality. in substance said that if they could be broken up the
railway managers could not be kept from discussing their in¬
terests when they met each other. The public well knows the
meaning of this remark in the light of the frequent simul¬
taneous but so-called independent action of all interested in
the advance of rates.
Mr. Smith, president of the Louisville and Nashville,
some years ago, combatting the public control of rates, and
contending that common law remedies were sufficient, being
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asked, in snl stance, what could a patron of tlie road do if he
deemed the rate unreasonable, and the road would not reduce
it, answered that he could walk.
In T.tOG, when scarcity of equipment began oil account of
the growing volume of business, Air. Fish, president of the
Illinois ('entrai, in a published letter, set forth a novel sug-
gi -firm that since the shippers were demanding service be¬
yond the capacity of the carrier's equipment, and since the lat¬
ter, though aide to pay for more, could not got it in time be¬
cause the shops could not turn it out, the only alternative was
an increase of rates. 1 can see 110 other meaning to the sug¬
gestion than a claim of power in the carrier to limit produc¬
tion and shipments to meet its convenience and necessities by'
a more or less prohibitory tax. These utterances and practices
are referred to for the purpose? of illustrating the inability
or unwillingness of those powerful in shaping the policies
and practices of the transportation companies to recognize
their "proper obligations and relations to the public and the
individual, and to distinguish between an investment in a
pun ly private enterprise as compared with one in a business
affected with a public interest.
There is, I believe, urgent necessity for the publie con¬
trol of the issuance of stocks and bonds by carriers to the end
that their properties shall not lie burdened to make good
speculative and combination schemes. 1 can not better state
my meaning than to cite a few transactions developed by in-
v< stigations of the commission. A few years ago Mr. llarri
man and three associate- bought a controlling percentage of
the Alton road's -took. it was a giltedged property, had
been paving s per cent dividends, its interests, charges, etc.
When these gentlemen bad gotten through with it. its capi¬
talization bad been more than doubled and new bonds put,
upon, it were taken by the stockholder- at about GG cents on
the dollar. What they obtained for all of them was not shown,
but it did appear that ton millions of them wcirt into one of
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the great New York insurance companies at about 96 cents
on the dollar. In the reorganization, losses sustained by
former owners of the property a generation before these gen¬
tlemen took control of it were resurrected and capitalized.
Hi", Harriman responding to questions respecting the effect
of the great increase of bonded indebtedness and the probable
ultimate necessity of unjust rates for that reason, naively
answered that they had not increased the annual charge, the
new bonds being perhaps at ■'!, per cent, while the old ones
had been at Y—as if it would never be necessary to pay the
principal. The profits of these gentlemen in the transaction
are not, and probably never will be, publicly known, because
it has been held by the Supreme Court that Mr. Harriman
could not, under the law, be compelled to testify to certain
facts necessary to that end.
A few years ago Air. J olin AT. Gates began to buy Louis¬
ville and Nashville stock at a dollar eight on the dollar. Ile
finally secured that magic fit per cent or perhaps, a little
more, as he testified, at an average of about a dollar thirty.
AAdien thi- became known to Mr. Pierpont Alorgan, whose
firm was largely interested in the Southern Railway, a written
option was obtained by hint from Afr. Gates for this stock
at a dollar fifty. Before the expiration of the option this
stock, by arrangement between Mr. Alorgan and the Atlantic
Coast Line, was taken by tile latter, which issued thirty-five
millions in bonds and fifteen millions in stock for that pur¬
pose. It did not appear that a cent of the proceeds of this
great increase of capital went toward the improvement of
the property of the Atlantic Coast Line. It appeared to be
for the restraint of competition.
The Northern Pacific and the Great Northern issued
their obligations to take over the Burlington, a competing line,
at two dollars for one, of the stock of the latter.
These, and some similar transactions, have come to light.
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and doubtless there have been many others under the freedom
of present and past laws.
It is a significant fact that while in the fiscal year 1S98
tlie roads of the country carried a bonded debt of $.30,000 per
mile of line, in 1900 this had increased to $30.000 per mile
of line.
Since it is a settled law that carriers are entitled to an
opportunity to earn a fair return upon the value of the prop¬
erty they devote to the service of the public, it seems that
argument to show the usefulness of a correct valuation in the
interest of justice- would be superfluous. Of course, no exact
formula or rule for rate making can ever be devised, in view
of the many, various and changing factors necessary to be con¬
sidered, so that a knowledge of the value of the property will
not always lie greatly helpful. Such valuation would
tend to a more just and uniform taxation by States.
Again, it would be worth much to have the question of watered
capitalization reasonably determined, irrespective of the ques¬
tion of the basis of rate making. To be of value and to com¬
mand respect, such valuation should be made under direct
authority therefor, should be comprehensive, thorough and
accurate, and made by finished experts of unquestionable
ability and fairne ss.
The so-called commodities clause undertakes to prohibit
carriers from hauling their own freight which they may have
](rodneed or purchased for commercial purposes, for the mani¬
fest. reason that to do so puts the carrier in such case at great
advantage over its patron. This practice was found in the
coal investigation to have been a hotbed of discrimination,
determining who should or should not do business, and tend¬
ing strongly to enable the carriers to monopolize the coal traffic
and coal lands. It is practically impossible under the present
system to promptly or adequately correct the wrongs that
grow out of such practices, dealing as we must with particu¬
lar instances. The methods by which discriminations can be
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indirectly effected are so mimerons and devious that tlirr are
often past finding- out until they have wrought their deadly
and irreparable results. These wrongs having a common
source and are a class of sores that call for the laying of the
knife to their root. The question of the constitutionality of
this clause is before the Supreme Court and I sincerely trust
that for the removal of the incentive and the opportunity to
discriminate, which is accomplished by so many indirect ways
and with such disastrous results, the sound principle of this
provision of the law will be sustained whether it be in this
particular clause or some other to be hereafter enacted.
It is far better to build the structure of regulation upon
sound, underlying principles, the application of which to the
whole field of transportation and to the relations of the car¬
rier to the public will operate by wholesale, so to speak, to
prevent abuses rather than to rely wholly upon correction and
reparation in particular cases upon complaint, and hearing,
when, perhaps, the wrong already accomplished is in the
nature of the case irreparable. The individual is not strong-
enough ordinarily for a contest with the carrier, and preven¬
tion is far better than imperfect remedies for cure.
! Keeping in mind continually the just right of the car¬
riers to fair and adequate earnings and profits, as well as the
true interests of the public that the carriers should have a rea¬
sonable return on their invi -talents in order to enable them
to render at all times safe, prompt, and adequate service upon
which all interests so much depend, rates should he dealt with
in a spirit of complete impartiality and upon full informa¬
tion. The wisdom and justice of suitable compensation of
their employees engaged in a service, necessarily hazardous,
must also not be overlooked, d
Much has been said as to the effect of the late panic on
the earnings of the roads, and while this is by no means to
be ignored, we should look to the figures of record for actual
results.
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The fiscal year 1907 showed the high-water mark in
railway earnings. While 1908 shows gross earnings of $164,-
000,000 less than those for 1907, the former exceeded those
for 1906 by $98,000,000 and exceeded those of 1905 by
$342,000,000.
With an aggregate of 1S4.000 miles of single track in
1898, the gross earnings were $1,247,000,000, while in 1307,
with single track mileage of 227,000 miles the gross earning-
had mon med up to $2,589,000,000—more than a hundred per
cent in the last year of the ten-year period in excess of the
first year of this period. The gross for 1906 showed a gain
over 1905, in one year, of $243,000,000, which is a much
greater sum than the falling off in an equal period of one
year, 190S, from 1907. The net in 1898 was $429,000,000
as against $840,000,000 in 1907, and $729,000,000 for 1908.
The gross per mile of line in 1898 was $6,755, for 1907,
$11,383, and for 190S, $10,722. It is not strange that the
managers of some of these properties were almost panic
stricken by the sudden decline of business in the fall of 1907,
especially in view of the experiences of the long continued
depression beginning in 1893. Fortunately, however, their
worst apprehensions have not been realized, and it is known
that their business is steadily recovering now, a fact which is
just cause for satisfaction on the part of Us all.
To the present law there should, in my judgment, as be¬
fore indicated, be added at least, first, a provision for pre¬
venting the effectiveness of proposed increase in rates until
their reasonableness can be inquired into and determined;
second, one for valuation of railway properties; third, one
for control of capitalization, that the public may be the better
protected from unjust rates exacted to make good dividends
and interest on stocks and bonds not necessary to be issued
for legitimate purposes in the conduct and conservation of
the property, that bona fide inve-tors, trustees and others may
be reasonably protected from deceit and that the proceeds
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of securities issued shall be devoted to the benefit of the
property and not lugged off by manipulators and speculators
as booty in the pockets of bandits. Transactions of this kind
should be scheduled by the law with fraud and cheating, where
in ethics and good morals they belong, and be dealt with ac¬
cordingly. I question not that the number of objections to
these propositions for amending the law will, when marshaled
by those opposed to regulation, be "exceeding great." But
the justice and necessity for such provisions will become more
and more manifest. The time is past for toleration of that
low plane of conduct in these matters of such great and vital
public concern as is aptly, if not elegantly, summed up in the
phrase "every fellow for himself, and the devil take the hind¬
most." Public conscience will be satisfied with nothing short
of rules of action not inconsistent with the spirit of the more
humane and equally apt expression, "Live and let live."