TRANSPORTATION ACT OF 1920 NOT ENTIRELY SUCCESSFUL

An instructor of transportation at an important eastern college not Harvard recently canvassed his students at the beginning of his course in an attempt to determine their attitude toward the railroad situation. His primary purpose was to compare their attitude at the beginning and end of his course, but he was interested to find that without exception, they were either indifferent or hostile. Hostility may, or may not be warranted. An indifferent attitude toward the one industry which is most vital to our whole industrial life certainly is not warranted.

It was never more important than today that college-trained men should have at least a general knowledge of the transportation business. Few may be attracted to it as a profession for although it is one of absorbing interest and unlimited opportunity for constructive service, progress is slow and the financial rewards are not alluring. But while the railroads need trained minds on their staffs it is equally essential that the men with trained minds in other industries and professions should have a clear understanding of the conditions under which the railroads of this country are operated.

Indifference Due to Confusion

Indifference to the railroad situation may be due partly to the confusion caused by the volume of discussion in recent years about railroad legislation. Government operation, rates, wages, consolidations and many other details, which bewilder the average person whose contact with the railroads is as a passenger or an occasional shipper, and give the impression that the situation is hopelessly complicated.

The fundamental railroad problem is not complicated, however intricate may be the details involved in its solution. The problem lies in the fact that for many years there has not been a sufficient margin between income and expenses for American railroads as a whole, and that this condition is particularly aggravated in individual cases.

In round figures, the railroads of the United States represent an investment of about $20,000,000,000. During the three years prior to the war, the average income available for a return on this investment was slightly in excess of 5 percent. Going back several years farther the return was even less. Expenses had increased steadily, due partly to the growing power of certain labor organizations, and slight increases in rates were obtained only after protracted contests. This condition did not permit of sufficient dividends or additions to surplus to support general railroad credit, and as a result even the stronger lines, could obtain new capital only through the issue of bonds, and many lines could obtain no new capital whatever. The gravity of this situation is indicated by the fact that to meet the demands of the country for increased transportation and modern facilities it is estimated by recognized authorities that $1,000,000,000 of new capital should be obtained each year.

Turned Back With Deficits

It was in this condition of restricted credit that the railroads of the United States entered the war. At the end of 1917 the President took over practically all the railroads and operated them through a Federal Administration for a period of twenty-six months. During this time there occurred enormous increases in wages, standardization of working rules and conditions of employment which also resulted in large payroll increases, and at the same time the cost of all materials consumed by the railroads including coal, was steadily mounting Freight and passenger; rates were also increased by the Federal Administration, but did not keep pace with the increases in wages and other operating expenses. As a result when the roads were turned back to private management on March 1, 1920, it was no longer a question merely of insufficient income, as practically without exception their operations were showing substantial deficits. During the period of government operation these deficits were assumed by the government and the railroad owners received a rental based on their average not income for the three pre-war years.

The Transportation Act of 1920 was passed by Congress in February of that year just prior to the return of the railroads to private management, and practically all railroad problems today must be considered in their relation to that Act which was the most constructive piece of railroad legislation ever passed by Congress, and the most far-reaching, with the possible exception of the Interstate Commerce Act of 1887.

To Tide Over Readjustment

The Act had two major objects:

First--To help tide over the period of readjustment from Government to private operation. To accomplish this purpose it was provided that the guaranteed compensation paid for the use of the railroads during Federal Control should be continued for a period of six months after March 1, 1920, it being assumed that within that period a normal relationship between expenses and revenues could be restored. A fund was also provided from which, during a period of two years, loans might be made to railroads whose credit would not permit borrowing in the open market.

Second--To provide a permanent living basis for the railroads under private operation, but with even closer supervision than had existed prior to the war. This program involved many detailed provision, but the essential features are--

A Fair Return From Fixed Rates

(1) An affirmative direction to the Interstate Commerce Commission to fix rates which shall yield the railroads as a whole, or by groups, a fair return on their value. For two years, a return of 5 1-2 percent, was fixed by Congress as a fair return. After two years the Commission was authorized to fix the rate and has recently set it at 5 3-4 percent. This direction to the Commission did not constitute a guaranty either to railroads as a whole or individually. The Commission was merely directed to fix rates which should produce a fair return so far as possible, and although two years have elapsed, the rate of return which Congress designated as fair has not yet been attained.

(2) A provision that individual roads which earn more than 6 percent on the value of their property should share the excess with the Government--this being commonly known as the recapture clause.

(3) Added powers were given the Interstate Commerce Commission in dividing through rates between the several carriers involved. This provision recognized that the relative distance over which freight was hauled by each road should no longer be the primary consideration in dividing revenues, but should be subordinated to the relative costs of performing service.

Plan for a Number of Systems

(4) The Commission was directed to prepare a plan for the consolidation of all railroads in the United States into a limited number of systems with which plan future consolidations must be in harmony. These systems are to be arranged, so far as possible, so that the cost of service under uniform rate scales shall be the same, but, where practicable, existing routes are not to be disturbed and competition is to be maintained.

(5) The creation of a Railroad Labor Board as a final court of appeal by railroad managements and employees. No arrangement was made for enforcing decisions of the Labor Board except through the weight of public opinion.

Judged alone by the developments since the passage of the Act, it has not been entirely successful. In August, 1920, the Commission fixed rates which, it was expected, would yield the railroads 6 percent on their value. If there had been no depression in business this result might have been attained, but in 1921 the aggregate return was only slightly in excess of 3 percent. The recapture provision has not yet been an issue as few roads have earned in excess of 6 percent. The provision as to rate divisions has been the subject of

much controversy, and a decision of the Commission in the New England Divisions Case is now awaiting review by the Supreme Court. The outcome of the labor provisions as a whole have satisfied neither the railroad management nor their employees.

The year 1922 gave promise of improved conditions, but the loss in revenue due to the coal strike and extra expense incident to the shopmen's strike have proved severe handicaps. Present indications are that with reasonable freedom from labor troubles, and with a normal volume of traffic, the railroads in general may eventually earn the 5 3-4 percent return which the Interstate Commerce Commission have now fixed as a fair rate of income. There is danger, however, that at the least sign of improvement there will be a general demand for further rate reductions. Lower transportation costs are greatly to be desired in common with lower costs of all commodities, but premature rate reductions which tend to restrict railroad earnings are likely, in the long run, to defeat their purpose, for unless the railroads are permitted sufficient net income not only to meet expenses but to provide credit for financing improvements, they will be unable to bring about the operating economies which are necessary to an ultimate and permanent reduction in transportation charges.

Period of Amendments Likely

The next phase of the railroad problem is likely to be a period of amendments or attempted amendments to the Transportation Act. The so-called "Farm Bloc" object to what they contend is a guaranty of earnings. Many of the states are chafing under the curb which the Transportation Act has placed on their powers of regulation. The labor organizations, in common with many business organizations and some railroad managements, are anxious for different reasons to abolish the Labor Board. Others advocate the strengthening of the Labor Board by the compulsory enforcement of its decisions and the prohibition of strikes. Senator Cummins, who was jointly responsible for the Transportation Act, has indicated his intention of attempting to make consolidations compulsory as was originally provided in the Senate Bill which preceded the enactment of the Transportation Act.

Serious Danger From Politics

Although the benefits predicted on the passage of the Act have not been fully realized, and while amendments will, no doubt, be necessary in due time, there is serious danger that in attacking individual provisions the entire Act will be nullified and the whole question thrown into politics. The alleged guaranty is merely an affirmative declaration of what had been a constitutional right, and has proved powerless to insure fair return under adverse traffic conditions. Indications are appearing that labor representatives and railroad managements can get together just as well under present conditions as without a Labor Board. As to consolidations, there is no reason to be impatient because a process which has been going on practically since the first railroads were constructed has not been completed for all time within a period of two years.

For years prior to the passage of the Transportation Act, every tendency had been toward Government ownership or operation. The experiment during the war resulted in a sharp reaction in favor of private operation which was general, except on the part of railroad employees who believed that they would continue to benefit under Government control. The Transportation Act, therefore, with all its restrictions, was the foundation upon which private management was given a new opportunity. If this Act cannot be altered without a radical change in the general policies which it established, it is far better to leave it alone, for the steady trend toward Government ownership, which was halted by the war, may easily be resumed