CHAMBER OF COMMERCE OF THE UNITED STATES
WASHINGTON, D. C.
November 14, 1922.
THE NEEDS OF THE RAILROADS
To the Members of the
Chamber of Commerce of the United States:
The Secretary of Commerce has prepared an analysis of the present rail¬
road situation to be published in the forthcoming report of the Department of
Commerce. For the information of the members of the National Chamber,
this portion of the Secretary's report is printed below.
JULIUS H. BARNES,
President.
RAILROAD PROBLEMS
(Extracts from the forthcoming annual report of the
Secretary of Commerce for the fiscal year 1921-22.)
Our transportation facilities have lagged far behind the necessities of the country. Prog¬
ress has been made in their restoration from the demoralization of war, but our rolling stock,
our trackage, and many of our terminals are unequal to our needs. Some increases in equip¬
ment have been made during the past year; yet they are entirely insufficient as the resu.t of
long-continued financial starvation. The deficiency in transportation finds its visible expres¬
sion in car shortage; and while the recent strike has temporarily aggravated the situation, the
trouble is far more deep-seated. Except during periods of business depression or strikes there
has to some degree been continuous car shortage for the last six years. Furthermore, car short¬
age reaches its most acute stage during the four or five months of peak load in the fall and
early winter.
Railway cars are the red blood corpuscles of commerce, and we suffer from commercial
anaemia every year, because they are starved. The losses through short transportation are a
tax upon the community greater than the cost of our Government, because such a shortage not
only stifles the progress of production and introduces speculation into distribution, but it also
seriously affects price levels. No better instance exists than the lift in the price of coal by
over 300 per cent in 1920 when there was no strike, and over 60 per cent in 1922, after
production following the strike had been resumed. In both cases the mines could have pro¬
duced 30 per cent more coal, and if the railways could have transported even 20 per cent
more, then prices would have been normal. Furthermore, this very shortage is one of the
most deep-seated causes of the instability in the bituminous industry and its recurrent strikes.
The car shortage also directly affects our farmers, because in every car-shortage period a
price differential on grain below the Liverpool price (and yet in excess of the railway rates
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and handling costs) set in from 5 to 15 cents per bushel. The losses to live-stock growers
are very great because of the necessity to feed stock beyond the fattened stage. And there are
regularly great losses in fruit and vegetables because of the lack of refrigerator cars.
The management of our principal railways to-day, by all the tests of administration, of
load factors, of mechanical efficiency, etc., is the most efficient transportation machine in the
world in so far as it is not limited by causes beyond the managers' control.
The situation has been contributed to by the war, but also fundamentally by the cumula¬
tion of experiments in public relations to the railways, both National and State. We have
tried uncontrolled operation; we have tried negative regulation in the prevention of discrimina¬
tion; we have tried nationalization; we are now trying positive regulation. Nationalization
would be a social and economic disaster; free operation would reconstruct the vicious prac¬
tices of 30 years ago. Regulation in some form is necessary, but constructive development of
this regulation-—to preserve the initiative and responsibility of our railway executives, to secure
the fine values of private operation, and at the same time to secure public protection and as¬
sure adequate service—are absolutely vital and not necessarily incompatible. The present
Transportation Act possesses many constructive features and some weakness. It was the
result of compromises in many particulars, and these very compromises are some of its
weakest points.
If the causes of financial starvation were solely a question of war and of hard times, we
could afford to wait for a natural solution, but they are not. The Transportation Act of 1920
affirmatively declared that the rates should yield a fair return on the aggregate real value
of the railway properties (as determined by the Interstate Commerce Commission) used in
public service and operated under honest, efficient, and economical management. It pro¬
vided that the fair return during the first two years should be at the rate of 5y2 Per cent on
the railways as a whole, or in each of the major groups in which the country might be divided
in the administration of the law, and that during this period there might be added 1l/2 Per
cent for rehabilitation. At the expiration of this two-year period the Interstate Commerce
Commission placed the fair return at the rate of 5% per cent per annum, or 6 per cent less
one-fourth per cent to cover income taxation. The law, however, further provided that any
particular carrier which earns in excess of 6 per cent per annum shall hand over one-half of
that excess into a contingent fund to be administered by the Interstate Commerce Commission
"in furtherance of the public interest in railway transportation" either by loans to carriers or
by the purchase of transportation equipment and facilities and the leasing of the same to the
carriers. The carriers have never earned these amounts and the failure of earnings without
charge on the Government is complete disproof of the current fiction that earnings are
"guaranteed."
Furthermore, the immediate effect of this recapture provision would be that whereas the
strong and fortunately situated railways are able to earn in excess of 6 per cent, and are
therefore able to secure finance for betterments, the very fact that they did earn in excess of
the average would mean that the weaker roads were unable to earn up to the average. It may
be accepted as a general proposition that carriers earning materially below the 5% per cent
return are not in a position to command the confidence of investors which is necessary for
expansion to meet the public demand. The contingent fund makes available money which
such carriers may borrow, provided, however, that they are able to give the necessary security
for repayment. It is easy to comprehend that such a contingent fund may serve the purpose
of bridging carriers over temporary difficulties, but it is more difficult to understand how a car¬
rier which, though it may be very essential to its part of the country, is financially a chronic
weakling is to be made strong and capable by becoming more deeply involved. If there is any
merit in this device, it seems not to extend to those anaemic carriers that are unable to give
the Government the color of assurance of repayment. This device also carries a certain liability
to the Government in that carriers that borrow from the fund and fail to pay are likely to
become Government railways through their financial difficulties. It would seem that the first
of the two uses to which moneys of the contingent fund may be put holds out better promise of
furtherance of the public welfare. However, the creation of such a national reserve of trans¬
portation equipment has not been seriously undertaken. It would seem that our dire distress
in time of car shortage and, at times, motive power shortage would strongly argue for the
creation of such reserves. Rolling stock for limited use during 60 to 90 days is probably un¬
profitable to any railroad, and certainly the stronger railroads can not, and should not, be ex¬
pected to provide it for the weaker ones.
The present act contemplated the solution of the problem of the weak roads through
voluntary consolidation of the weaker and stronger roads into larger systems to be definitely
indicated by the Interstate Commerce Commission. There is no doubt that such consolidation
would be a large advance in solution to the whole problem. As the Nation has resolved to
control rates, and thus to depend no longer on competition as a means of rate regulation, it
should secure the manifest advantages of larger systems. The economies in operation through
standardization and better employment of rolling stock would be constructive themselves, but
of vastly more imp'ortance would be the strengthening of the foundations for the financing of
betterments and for more intelligent handling of rate regulation. The part of the act provid¬
ing for consolidations has not been advanced very much so far, although a tentative plan of
grouping has been issued to serve as a basis for investigation, and hearings have been begun.
When the permissible consolidations are once enunciated it is possible that some railways can
arrange terms amongst themselves for such consolidations.
How far such voluntary action would solve the problem is uncertain, but compulsory con¬
solidation leads into many untenable premises. It might be that there could be invented some
inducements to consolidate into the proposed systems, or to lease for consolidated operation,
or some form of cooperative operation. If the recapture profits principle is to be maintained
and if it can be enforced by the Interstate Commerce Commission, the assured application of
such recaptured profits within such enunciated groups in some form might at least be worth
discussion as an inducement to consolidate.
The alternative of repealing the miscalled guaranty clauses of the act does not funda¬
mentally assist the expansion of the weaker roads, for so long as rates are controlled by 49 dif¬
ferent commissions, it is unlikely that the rates would or could be made discriminatory in favor
of the weaker roads, and thus the basis for the financing of betterments by these roads would
not be materially improved. The suggestion that all rate control should be repealed except
control against discrimination or preference would not meet the situation of the weaker roads,
because the restoration of competitive rates would enable the stronger roads to again drive the
weaker roads nearer to the wall.
Another vivid question in this connection is that of the rates themselves. In an era of
wide disparity between farmers' income and that in and of industry, the transportation rates
have proven to be a heavy burden on agriculture. On the other hand, under present conditions
railway earnings are obviously not large enough to assure railway expansion. Some relief
both to the railways and the farmer may be obtained by thorough reorganization of the rate
structure. Some classes and areas of traffic are carried at actual loss; others are carried at
lower rates than the relative value of the commodities warrant; and a series of scientific upward
readjustments should be made in some cases in order to give the railways and the shippers of
primary commodities and agricultural produce some relief. The recent reduction of 10 per cent
in rates on luxuries as well as on primary goods contribute nothing to commerce and im¬
poverished the railways just that much. The tangled skein of rates seems a mesh in which
there is so persistent a resistance against every constructive proposal that we are incapable
of rescue except by some complete departure in courage.
Another phase of present regulation is the machinery of wage control and strike preven¬
tion, which is unsatisfactory. The legislation embraces the important principle of the public's
right to secure continuity of service and it carries the obligation of the public to secure just
wages to the employees. The Railway Labor Board has performed large services to the em¬
ployees, to the railways, and to the public. The difficulties arise from the tripartite structure
of the board under the act, from its detachment from the rate-making body, and especially from
the fact that the act did not originally contemplate that the Government would be a universal
wage fixer. It was the assumption that the board would only function in case of a major
threat of stoppage in service. The failure of the local adjustment boards for direct contact
between employees and employers has thrust all disputes on the labor board; and in result we
have practically governmental fixing of all wages and conditions of labor with a large destruc¬
tion of personal contacts.
There can be no question that action in some direction is imperative, if industry and com¬
merce are not to be further strangled by a shortage in transportation. Whatever may have
been the sins of railway finance in the last generation, we are not only suffering from them,
but we have maintained an attitude of bitterness in our public relationship to our railways for
which we pay thrice over in prevention of their proper development.
We must have increased transportation, if we are to maintain our growing productivity.
We must therefore find a way out of the cycle of systematic starvation of a large part of our
mileage and the denudation of our railway managers of their responsibilities and initiative.