FOOTNOTE:
[I] Further, it is common knowledge that the Senate only passed the bill (and that by a majority of no more than three) because M. Clemenceau insisted that he would resign if it was not passed, and, though they disliked nationalization much, they disliked M. Clemenceau's resignation more.
[RAILWAY NATIONALIZATION]
By Sir George S. Gibb.
A paper read at a meeting of the Royal Economic Society, on 10th November, 1908.
Railway nationalization has for many years occupied the minds of economic and political students and the practical activities of statesmen in many countries and in English colonies. It has been regarded here as a remote possibility which might some day or other come to the front for practical discussion. But quite recently it would have been thought to be as incredible that any responsible politicians should be considering proposals for purchasing our railways for the State as that any substantial number of persons could be found who would advocate an abandonment of the fundamental principle that there should be no taxation of imports into England except for revenue purposes. In these days, however, public opinion moves suddenly and rapidly. The despised fallacy of yesterday rises as the creed of to-day. There are already many indications that, before long, there will be a numerous and influential, though perhaps a somewhat heterogeneous party, who will urge that immediate steps should be taken to nationalize our railways.
The test, and the only test, to be applied to proposals for railway nationalization is whether railways owned by the State and worked directly by Government officials would be better and more efficient than railways owned and worked by private corporations, and whether, after taking account of all the effects of the change, upon each class, each district, each interest, the net result would increase the wealth and well-being of the community, and be a permanent benefit to the public.
We may, I think, start from the assumption that railway proprietors as such have no interest in opposing nationalization. The value of their property, whether measured in terms of capital value or in terms of future income, estimated on a fair basis, would, it is assumed, be fully provided for in the gigantic financial operation which railway purchase would involve. There is no legal flaw in the title of railway proprietors. They enjoy the fundamental rights attached by our law to absolute property, subject only to the performance of obligations definitely prescribed by Acts of Parliament. I think, therefore, that we may discuss this subject of railway nationalization without apprehension that the change, if it were adopted by the deliberate judgment of the community, would be accompanied by anything in the nature of confiscation of existing rights.
This might not be the intention or the wish of all who think that our railways should be nationalized. Probably some extreme Socialists would like to transfer railways to the State without giving what, in our judgment, would be adequate compensation to existing owners. Their aim is the substitution of a new social polity for that which exists, in which antiquated ideas of private property would have no place. But that is only a phase of their creed which condemns it to sterility. It is not the small band of Socialist zealots, but the majority of the nation that we have to consider in estimating the risk of anything being done in the nature of confiscation.
Those who join the party for nationalizing will, no doubt, find themselves in strange company. There can be little doubt that the movement up to the present has been mainly Socialistic. A trader, who advocates nationalization because he hopes that he might be able to transfer to somebody else, perhaps he does not very much care whom, some part of the burden of the charges which he has to pay for railway carriage, will find that his next neighbor at a meeting of the party is a man who has joined for quite other reasons, with the object, indeed, of ultimately seizing for the State some part of his neighbor, the trader's, property, which the latter was reckoning to increase at the expense of, amongst others, his neighbor the Socialist, through the plan of railway nationalization. But the homogeneity of the party need not concern us, nor the question whether each and every member of it would be actuated by a single-minded desire for the public good. The forces making for honesty and equity in the treatment of existing interests would, I think, so overwhelmingly outweigh the influences tending in a contrary direction that we need not complicate the question by importing into it a discussion as to whether adequate compensation should or would be paid to existing owners in the event of the State deciding to acquire their property. Fair and adequate compensation for existing interests may be taken for granted.
But although compensation can be paid for property, it cannot be paid to the general community who would suffer in the event of the administration and operation of railways under State management being less efficient than under private management. If a mistake be made, all would suffer, and their sufferings would not, and could not, be mitigated by compensation in any form.
It may be useful at the outset to consider what has led to the question of railway nationalization in this country being discussed.
The origin and the causes of those movements in public opinion which bring about great constitutional and social changes are frequently most difficult to trace, especially by contemporary observers. For a full understanding of such movements, it is necessary to wait for the historian's point of view, and to survey a wider field than is possible whilst the events are occurring, when much of the material for final judgment as to the causes in operation is concealed in an undisclosed future.
That there is a movement in progress tending to the nationalization of railways in England is apparent to every thoughtful observer of the times. But whence does this movement come, and what are its principal causes? We are able to identify some of them, less able to weigh the relative importance of each, still less able to foretell the ultimate share which each will have on the future course of development, which will depend on the direction taken by other movements in public opinion which, at the moment, may seem to be entirely independent of all connection with the particular movement we are considering.
I will refer to a few of the causes which seem to me to be most prominently at work, but I will not attempt to state them in the order of their importance. I will merely enumerate those which are plainly discernible as existing in some shape or other.
The first I will name, though it may not be the most influential, is the existence of a certain amount of dissatisfaction with the present state of railway administration. I suppose that if railway services were as good as possible, charges as cheap as possible, profits as high as possible, and the management as perfect as it is possible for railway management to be, and these conditions were generally admitted to exist, the natural instinct to leave well alone would prevent any proposal for nationalization from obtaining a hearing.
It must be conceded that there is a certain feeling of dissatisfaction, superficial and indefinite though it be, to which advocates of nationalization, whose schemes originate in considerations which have no relation either to the excellence or to the imperfections of railway arrangements, are able to appeal in the pursuit of their aims. It is not that many people really think that our railways do not, as a whole, serve the public well, whatever individuals may say in moments of haste. Hut complaints are sufficiently numerous to have a real importance as an influence on public opinion. And, unfortunately, their influence is to a large extent independent of their justice. The existence of criticism, which, after all, is only another name for difference of opinion, is inevitable, and probably would be inevitable under the most perfect system of railway management which the world has seen or ever can see. State railways would not be immaculate. The nature of railway business lays it open, to an exceptional extent, to the unpopularity which unavoidably gathers round every institution on which there is universal dependence. Providence itself does not wholly escape unpopularity. No other industry is comparable with the railway industry in the close dependence upon it of the vast majority of the people. The necessity for transport services penetrates more frequently and more deeply into the lives and habits of the people than any of the other prime necessities of civilization. The need for transport is a tyranny. All tyrants are unpopular. And the tyranny of a need is apt to beget, by an illogical transposition of ideas, a dislike of those who are responsible for supplying the need. People are conscious of grievances, or, let us say, unsupplied wants. They cannot measure the range of possibility which limits the supply of those wants or remedies for those grievances. They constantly wish for the impossible, but have not sufficient knowledge to distinguish between the possible and the impossible. Defects which cannot be remedied are generally condemned with more emphasis than those which are due to mismanagement. It is irrelevant to consider whether the dissatisfaction to which I have referred is justified or not. Whether well or ill founded, it must be set down as one of the causes of the movement for nationalization.
The second cause I would mention is a belief, growing from a suspicion into a conviction under the stimulus of repeated failures in control experiments, that it is impossible for any Government, by any legislative or executive action in any form, to exercise useful and effective control over railways. People turn in despair from ideas of regulation and control to ideas of ownership.
The third cause is the prevalence of that feeling which, for want of a better name, I will call district jealousy. The competition of privately-owned railways undoubtedly does create inequalities. It would be mere affectation to pretend that the railway accommodation and facilities afforded to all places and all districts are equal in merit and value. The less favored districts see other districts enjoying superior facilities. They do not allow for differences in conditions which, in some cases, explain and justify the differences of service. I say in some cases, because it would be impossible to deny that in other cases the comparative inferiority of railway facilities cannot be explained away by inevitable determining conditions. Hence district jealousy arises and a desire for uniformity, such uniformity as it is hoped a State system of railways would give.
The fourth cause I would name is the example of other countries. This is affecting men's judgments with great force. We are slow to be moved by foreign example. But there is an increasing tendency to submit to international influences, and foreign example in this matter does, on the whole, point to national railways becoming the generally accepted system.
The fifth cause is the one which, I think, has more to do with the initiation of the discussion of nationalization schemes than any other cause. This is the general tendency of the time to Socialistic experiments. If there were no Socialists, and no Socialism in the thought of the age, there would, we may safely conclude, be no talk of nationalization of railways. It is the Socialistic propaganda, and the influence which that propaganda has had on many minds, which more than anything else has brought the question of the nationalization of railways within the range of practical discussion.
The sixth cause is the anxious search for more revenue for the State. National expenditure has grown to such enormous and alarming dimensions that the provision of revenue to meet it has become a serious and urgent difficulty. A Chancellor of the Exchequer on the lookout for cash has not been able to resist the attraction of railways as a source of revenue for the State. He has noted the various influences at work which are tending to bring the question of railway nationalization to the front, has looked with envy at the large revenue which Prussian railways yield to the State, and has at least gone the length of asking himself the question, within the hearing of reporters, whether he ought not to encourage and to take advantage of a state of opinion which might conceivably be worked upon so as to create a majority prepared to approve the principle of State ownership of what might be a highly lucrative State monopoly.
The mileage of railways open for traffic in the United Kingdom at the end of each of the last four decades up to 1907 is shown in the following table:
| Mileage open | Increase in | Average increase | |
| Year. | for traffic. | ten years. | per annum. |
| 1877 | 17,077 | — | — |
| 1887 | 19,578 | 2,501 | 250.1 |
| 1897 | 21,433 | 1,855 | 185.5 |
| 1907 | 23,108 | 1,675 | 167.5 |
The growth has been slow and decreases with each decade. It is probably true that the period of construction has nearly come to an end. Future additions to the mileage are not likely to be either large or of substantial importance. This rather indicates the present as a suitable time for considering a change of system. The considerations which are applicable to what I may call the age of construction are very different from those which become most important in the age of operation.
It would probably be accepted as indisputable that in a country like England, where capital is plentiful and enterprise active, the system of leaving the construction of railways to private enterprise is the best system.
Whatever may be thought as to the respective merits of private and public ownership, it cannot be denied that private enterprise does take more risk than any Government is likely to do, except under pressure of military necessities. The hope of gain is the strongest motive for enterprise, and this desire operates more strongly on the private citizen than it does on the State.
The growth of railway mileage during the age of construction in any country is promoted by the constant influence and moving force of those incentives which act on capitalists. The spur of competition is always in active operation. Then there are the very powerful professional influences which are constantly at work to induce capitalists to spend their money on works and enterprises which afford professional work, even if they do not subsequently provide dividends.
Theoretically; no doubt, railways promoted by private enterprise tend to the favoring of particular localities at the expense of other localities. Perhaps it is right that the stronger should grow at the expense of the weaker, but, at all events, it is inevitable. You cannot expect private competitors to think of anything but their own interests. And if this be so, you cannot expect from a system in which private interests predominate the same consideration of general design, from the point of view of the interests of the whole country, as from a system which places public in front of private interests.
It is difficult to deny that the miscellaneous and unequal activities of private enterprise fail in the absence of some central guidance to produce the best results so far as harmony and completeness of design are concerned. In England railway construction has not been, as in America, almost entirely free from any public control. We have had the control, I think the most salutary and useful control of Parliament, so far as it has gone, both over location and capitalization. But it has not gone far. Although there has been a certain amount of control, there has been practically no guidance. The control, under the system of private bill legislation, has been very ineffectual except as regards capitalization. It has been mainly negative; never constructive. All that Parliament could practically do was to prohibit the making of particular railways which aroused opposition from some landowning or railway interests powerful enough to oppose and wealthy enough to pay the heavy costs of opposition. Private interests have been protected, but the general interest has, in the main, been ignored.
But whilst conceding that it would have been a great advantage if the vagaries of private enterprise had been more restrained by some prudent, general guidance, I think that the chief public requirement during the age of construction is that as much mileage as possible should be constructed; and I submit, as a true conclusion on the point I am discussing, that, as regards the age of construction, at all events, England has derived incalculable benefit from the fact that the railway system has been made by private enterprise. But the problem of working the railway system after it has been constructed is, I admit, essentially different from the problem of securing its construction.
My subject is not one which admits of discussion except on very general lines. Our views on it must necessarily be formed under the influence of the opinions we hold as to the legitimate functions of the State. It has been truly said that no country has ever adopted State ownership of railways from theoretical considerations. In each and every instance there were some practical reasons, based on military necessities or concrete and pressing economic conditions to meet which State ownership was accepted, not as a system desirable in itself, but as an expedient which, in the circumstances, was considered to be the best practical solution of difficulties which stood in the way of the satisfactory development of railways. But whilst agreeing with this as a true historical statement, I doubt whether theory can be entirely excluded from a statement of the genesis of national railway systems. In a country where Individualist opinions prevail, as I think at the present time they do in England, no temptations, no pressure of circumstances short of extreme national emergency, would induce people to face the evils which the Individualist knows must result from the intrusion of State action into matters of trade. This is theory, although those who are influenced by it may think that it is founded on practical experience. On the other hand, those persons who wish to secure trading profits for the State even at the cost of taking commercial risks, or who, when difficulties and obstacles arise in commercial development, resort to the powers of the State to overcome them, either by the imposition of taxes on the general community in the interests of a class, or by handing over to State officials the direction of an industry, instead of relying on the skill, self-reliance, enterprise, energy, and character of the people, are Socialists at heart, whether they know it or not, and are actuated by the radical theory of a creed which, perhaps, most of them would disavow.
But, after all, the question is not whether State purchase would be a step in the Socialist direction, but whether it would be a step in the right direction. Why should we change? Are we suffering from intolerable evils from which there is no other way of escape, or is there some great national benefit to be derived from the change?
The general case for nationalization, as put forward by its advocates, rests on very few arguments, and it is not, I think, unfair to describe these as being mainly assumptions, the accuracy of which it is impossible to verify. I may summarize a few of these:—
(1) Government management would be more efficient and less costly than private management.
(2) Government management would primarily regard the interests of the community and of the country as a whole, and the substitution of that condition for the existing system under which the interests of private trading concerns take first place in the thoughts and efforts of those responsible for management would have the effect of securing a more equal and more satisfactory development of the resources of the country, and, as one writer expresses it with more than the usual proportion of assumption in his statement, trade would be stimulated under equitable, reasonable, and uniform systems of rates.
(3) The change would result in the removal of most of the serious complaints made against the existing administration of railways.
(4) Those who refuse to look upon the matter as mainly a commercial problem think and hope that new means would be found for the satisfaction of the social needs of the nation if the railways were at the disposal of the Government.
(5) Experience of the economy resulting from large combinations in other industries is invoked in support of the proposal to get rid of the separate administrations of private railways. It is said that the advantage of production on the largest scale by a single corporation in place of production by a number of smaller units is being verified by the experience of nearly every important trade and industry. The principle has been recognized in the history of railway development in this country by the amalgamation of large numbers of small railways into the great railway systems which we now see, and it is argued that a further step should now be taken in the same direction. But a step involving the creation of so great a monopoly as further large amalgamations would involve can only, it is thought, be taken by the State. In this country the largest railway system under one management is no greater than about 2,000 miles in length, whereas in the United States of America railway systems covering about 15,000 miles are now under the control of a single President and a Board of Directors. It is said, therefore, that modern methods of administration have made it feasible to direct the 23,000 miles of railway in the United Kingdom efficiently and successfully by means of one comprehensive organization, and probably if there is to be one organization there would be no difference of opinion that the single organization to own, control, and manage the railways must be the State.
Most of the principal objections are, I think, covered by the following list:—
(1) State management would be less efficient than management under private enterprise.
(2) The extension of Government patronage, by placing at the disposal of Government such a vast number of appointments to lucrative offices.
(3) The risk of political corruption, not only in connection with the exercise of patronage, but also in ordinary administration in the settlement of questions relating to charges, wages, and services.
(4) The danger that interested parties would, by political pressure, compel the State to expend public money on unremunerative lines and unremunerative services.
(5) The contraction of the available field for private enterprise, and hence the weakening of the foundation of all individual and national progress.
(6) The introduction of serious dangers in connection with labor disputes between the Government and the large body of railway servants.
The subject has not been sufficiently long under public discussion to make it easy to state fully the hopes of its supporters and the fears of its opponents. Probably both are exaggerated. If one examines the complaints made against the existing railway system, it is obvious that many of these must exist under any system, whilst some are the necessary accompaniments of every system into which competition enters. But if competition is discarded in favor of monopoly it does not need argument to show that this merely means a change from the evils of competition to the evils of monopoly. No one would deny that each system contains inherent and characteristic evils. The evil of competition is waste; the evils of monopoly are stagnation and the restriction of freedom.
Hitherto, for the regulation of railways, reliance has been placed on two factors—competition and control. Parliamentary action and public opinion have veered about from one to the other, and the absence of clear principle in the policy of the Legislature has introduced evils which a more logical and consistent adherence either to the policy of free competition on the one hand, or to the policy of strict control on the other, would have avoided. That some regulation is necessary all would admit. Railways sell transportation as a commodity, but the nature of the business makes it impossible to secure the conditions of absolutely free competition as in the case of other industries. Hence the necessity for control, but every plan of control that has been tried has proved practically inoperative and ineffective mainly because it has endeavored to leave competition in operation, and it is the evils which necessarily arise from competition which lead to most of the complaints against railways. The inevitable weakness of the dual system of competition and control is that control checks competition just where it would be useful in the public interest, and competition nullifies control just where it could be advantageously applied.
Under no system could we expect railways to be free from complaints. They arise equally from the nature of the business and the nature of the customers. But with a view to seeing whether State ownership would remedy the complaints that exist, let us try to understand as clearly as possible what the complaints are. The Chancellor of the Exchequer (Mr. Lloyd-George), speaking to a deputation of traders in 1906, when he was President of the Board of Trade, said that he was impressed with the "great and growing discontent with the whole system."
Now what are the causes of the present discontent? Is it great? Is it growing? These are questions very difficult to answer. But there are some useful data available for the answer. The way has been made plain and easy for complainants against railways. Every encouragement and every facility has been afforded to them. A special Court has been created—the Railway and Canal Commission—the constitution of which was carefully framed so as to encourage anyone with a grievance against railways to hope that he would get a sympathetic hearing of his case. The applications to that Court were so few that those people who cannot bring themselves to believe that the number of real, as distinct from imaginary, grievances against railways are remarkably few, said that the public were deterred from bringing complaints forward by the expense of litigation before the Railway Commissioners. So, to render the path of the complainant still easier, a procedure was introduced which is unique for simplicity and cheapness. All, without distinction, who had any complaint or grievance of any sort or kind against any railway or canal company, were invited to come and lay the same before a Department of Government, the Board of Trade, who practically promised to use their influence to secure an amicable adjustment of any differences. This procedure is so simple, so sweeping, so all-embracing, so encouraging to complainants, and has, on the whole, been exercised by the Board of Trade with so much tact and success, that its records should supply the information we are seeking.
In view of these efforts to get every aggrieved or discontented person to come forward and disclose his complaint, is it possible to imagine that there are now any concealed complaints? It is often said that traders will not complain, that they are afraid of rousing the hostility of those terrible tyrants, the railways, whose power in England, at any rate, whatever it may be in America, is ludicrously exaggerated. It is true that a sensible trader who has a fair case does not fly with it to the Board of Trade. He submits it to the railway officers in the ordinary daily course of business, and almost invariably gets the matter adjusted. But I do not believe that there is any trader who would be deterred from submitting a complaint to the Board of Trade by any feeling of fear. On the contrary, traders in these days suffer from an excess of boldness. If a trader is dissatisfied with any railway charge, he simply refuses to pay, and only those who have experience of the daily conduct of railway business can know how common, and unfortunately how effective, this remedy is.
The Board of Trade make an annual report to Parliament of all complaints made to them under their conciliation jurisdiction, and I think the contents of these reports may fairly be relied on as presenting a complete view of the kind of complaints that exist against railways. A useful table is given in the tenth report of the Board of Trade, issued in July last, showing the total number of complaints for ten years, classified according to their nature as follows:
| No. per | |||
| Total. | annum. | ||
| 1. | Rates unreasonable or excessive in themselves or which were unreasonably increased | 715 | 71.5 |
| 2. | Undue preference | 352 | 35.2 |
| 3. | Sundry complaints | 510 | 51 |
| —— | —— | ||
| 1,577 | 157.7 |
Of the total number forty-eight were complaints against canal companies, but these are not separated in the classification.
Surely the above is a remarkable table, considering the vast aggregate of business and the facilities offered for complaints. Only 1,529 complaints against railways, or an average of about 153 per annum, have been found to exist.
Then look at the results of these complaints. These are given in another table, and only 573 complaints, or an average of 57 per annum, are entered as resulting in the complainants finally expressing themselves as dissatisfied.
Services for which the aggregate payment amounts to 120 millions sterling per annum are rendered, and yet there are only an average of fifty-seven cases per annum of dissatisfied complainants to the most open, most favorable, and least costly tribunal in the world for hearing complaints against railways.
Now let us look at the nature of the complaints made. Would State ownership remedy any of these complaints? I set aside the 510 cases of miscellaneous complaints about delay in transit and other minor matters, because it is obvious that complaints about such matters would not disappear under any conceivable system of railway management.
Practically all other complaints group themselves under two heads:
1. Excessive rates.
2. Undue preference.
The complaint that railway rates are excessive generally takes the shape of a comparison of the charges on some foreign railway. Now, I confess that it is very difficult to meet such allegations, because of the difficulty of presenting all the conditions of which account must be taken in order to make a fair and sound comparison, and also owing to the absence of adequate data or materials in the published statistics of English railways.
A general allegation that English rates are higher than those charged in some countries cannot even be discussed, because the factors needed for the comparison are not available. Are they in fact higher is a question the answer to which must precede discussion as to reasons and explanations. The facts in regard to the average length of haul, the average rate per ton mile for different kinds of traffic, or the average charge per passenger mile, and general information as to the nature of commodities carried, speed of transit, and services rendered for the rates charged must be ascertained before any comparison is possible, and these facts are not ascertainable for English railways.
My belief is that having regard to the capital expended on construction of railways, English railway rates are not excessive for the services rendered, and I greatly doubt whether, after making proper allowances for differences in capital cost of railway accommodation, and for other essentially different conditions, rates in any country are lower, comparing like with like, than railway rates in England. This is an issue of fact. It lies at the threshold of any inquiry into the subject of railway rates, and I confess I do not see how much progress can be made with any discussion which turns on assertions as to the relative dearness of English railway rates until adequate materials are available for a sound comparison.
It is true beyond question that English railways have cost more to construct than the railways of any other country. The capital expenditure of all railways in England is represented by the figure of about £56,000 per mile as compared with about £21,000, which is the corresponding figure for German railways, and about £12,000 per mile for American railways. Railway proprietors in England are not responsible for the high capital cost. They were forced by law, and by custom powerful as law, to pay monstrously inflated values for their lands. Burden upon burden has been heaped upon them by the action of the Legislature, by the requirements of Government departments, and by the exactions of public opinion. They have borne heavy losses in being compelled to spend capital without regard to their ability to secure adequate return upon it, and assuredly no reckoning is due from them to the public in this matter. The reverse would be more true.
The total capitalization of railways in the United Kingdom in the year 1907, as given in the Board of Trade Returns, was 1,294 millions sterling, of which 196 millions represents nominal additions. The net earnings (some of which, however, arose from miscellaneous sources independent of the operation of the railways) amounted to £44,940,000, or 3.47 per cent on the nominal capital. Out of a total of 1,294 millions sterling, 136 millions of loan and preferential capital received interest or dividends in excess of 4 per cent. This presumably arose from the insecurity of capital, involving the payment of a high rate of interest or dividend. One hundred and eighty-one millions of ordinary capital received dividends in excess of 4 per cent. per annum. The capital receiving interest or dividends in excess of 4 per cent. per annum is, therefore, 317 millions, or 24.5 per cent. of the total. It cannot be said on these figures that the interest received by those who provided the capital for the railways is excessive.
But would it be possible for State railways to reduce the amount included in railway rates for interest and dividends? It cannot be denied that our present system does involve the needless duplication of railway accommodation—the inevitable waste of competition. There is the constant endeavor to divert traffic, the corresponding effort to keep it. Capital is wasted, but public facilities are increased. The public could certainly secure by monopoly the saving of waste, but only at the cost of losing the advantages, such as they are, of getting more than they pay for. I suspect that on a broad and comprehensive view these advantages are not worth to the community the waste of capital involved in providing them. But it is rather late in the day to adopt this view. Enormous waste has already been incurred, and it must be remembered that this drain on the resources of the nation is not likely to be so serious in the future as it has been in the past, even if the system of leaving railways to private enterprise is not abandoned.
The private ownership of railways provides for the absorption of the wastage of capital in a manner which would be impossible under State ownership. Eighty-eight millions of the capital expenditure on railways goes without dividend, and 151 millions has to be content with a return less than 2 per cent per annum. Although this undoubtedly represents a loss to the community, the loss is distributed. It falls on those who voluntarily spent their money in the hope of gain, and lost it. The State cannot lose capital in this way. All expenditure incurred by the State would be represented by money borrowed on the public credit, and the interest would have to be paid in full, whether the expenditure proved remunerative or the reverse.
That there would be savings, and large savings, under State management I would not deny, but that is because the railways would be worked as a monopoly, and not because they would be worked by the State. The same and still larger economies in working could be effected under private enterprise if competition were abandoned in favor of universal combination or monopoly. The whole question depends on the waste of competition. Each railway company works for its own route. The result is that unnecessary train mileage is run, and train loads are lessened. The secret of success, the foundation of all economy in railway working, lies in securing the largest possible train loads. This is a simple rule, but it embodies a universal truth. If those responsible for the handling and carriage of railway traffic could work with a single eye to economical results, and in all cases forward traffic by the routes which yielded the best working results, great economies could undoubtedly be effected. This consideration does indicate that a source of improvements in railway results would be open to a railway system under Government management which is not available for privately owned railways competing with one another. And in fairness one must admit that this source of economy obtainable only under the conditions of monopoly must be set down as a point to the credit of State ownership.
Many of the complaints against railway rates as excessive are really, when analyzed, complaints of undue preference. They are based on comparisons with other rates, and, in nearly every case, it is the factor of competition which lies at the root of the difficulty. This is the natural result of our mixed system of competition and control. In principle all would admit that there should be equal treatment on railways. But what is and what ought to be equality are questions in regard to which there is much room for difference of opinion.
To what extent does the law really require equality? The Railway and Canal Traffic Act, 1888, enacts in substance that a railway company shall not make any difference in the treatment of traders which shall amount to an undue preference. It permits the grouping of places situated at various places from any point of destination or departure of merchandise, provided that the distances shall not be unreasonable, and that the rates charged and the places grouped together shall not be so grouped as to create an undue preference. Now, in this legislation there is no definite or tangible principle. The Legislature has not really made up its mind how traders should be treated. It simply says that any preference given to one trader over another shall not be undue, but the interpretation of the word undue is left open. The prohibition of undue preference only applies to the actions of one company on its own railway, and, therefore, covers but a small part of the matter. A trader desiring to have his goods sent to some market which is prejudiced by the competition of goods carried to the same market from some other place by some other railway which, for some reason or other, good or bad, gives better treatment to its customers—a prejudice far more likely to happen, in fact, than one arising from differences in treatment on the same railway—is not protected or assisted by any legislation.
The question may be asked whether national railways would or could cure this somewhat indefinite position?
If railways were nationalized, would it not be necessary, and would it be practicable to settle the principles to be applied in treating different districts in competition with one another? At present there are no principles if the districts are served by different railways. If one railway serves two districts, the law provides that such railway shall not mete out unequal treatment so as to constitute undue preference, whatever that may mean, but if these two competing districts are served by different railways, the law shrinks from any interference.
Now, in practically every case the favorable treatment complained of, due or undue, as the case may be, is forced upon the railway company by competition in some shape or other. It may be competition of other carriers by sea or by land, or it may be the necessity for enabling one district to compete with another less favorably situated. Such consideration for the commercial needs of districts in relatively advantageous positions is permitted and encouraged when it is afforded by different railways, though rendered difficult when one railway serves the competing districts. What would State railways do? If the law of undue preference now operative within the limits of particular railway systems became, by reason of State ownership, applicable to all railways, there would be a stupendous disturbance of existing trading conditions. Instead of State purchase diminishing the complaints of undue preference, it would be the signal for the commencement of fierce conflicts between districts. It would be necessary to face the question whether and to what extent geographical advantage of position should be recognized in fixing railway rates. The centers of production and consumption in England have been fixed away back in commercial history, and from a railway point of view these have largely to be taken as facts beyond control. Facilities for reaching the populous centers of consumption are of vital importance to producers and importers. Would State railways be compelled by the pressure of interested landowners and others to fix rates for agricultural produce and manufactured articles and for import and export trade rigidly in proportion to distance?
It is probable that a bitter controversy would arise on the question, and discontent with the railway arrangements which have gradually, and with very general approval, been established in England, instead of being lessened, would be greatly extended if we embarked on the experiment of State ownership.
Would the management of railways by Government officials be, on the whole, better than management by the officers of private corporations working for profit?
That is the question which lies at the root of the subject which we are discussing. So far as I am concerned, I have no inclination to jibe at the management of those enterprises which are conducted by the State and municipal bodies. I do not think that the postal services would be better managed if they were under private control, probably not so well. Municipal tramways show the weakness of public management, chiefly in the tendency towards fixing charges at figures which sacrifice the interests of ratepayers to the interests of the working classes who possess votes, but who generally occupy houses in respect of which they do not directly pay rates. That there would be very grave risks in substituting State management for commercial management of railways must, I think, be generally admitted.
But some of the principal arguments against municipal trading do not seem to me to apply to the working of railways by the State. Of course, the objection of those who think that no public authority should become directly responsible for the management of any commercial undertaking is as valid against State working of railways as against municipal working of tramways, or municipal supply of electricity for light and power. In both cases there is a restriction of the field of private enterprise, and that is enough for the out-and-out Individualist. He is convinced, on general grounds, that all commercial undertakings should be left exclusively to private enterprise. But those who are not prepared to settle such matters on any general theory, and who prefer to weigh the advantages and disadvantages in each case, see that many of the reasons against municipal trading cannot fairly be urged against the national ownership of railways. Municipal trading is indefensible because it unfairly competes with private traders. Competition in commerce must be fair competition on equal terms, otherwise it fails to secure any of the economic advantages which do undoubtedly flow from the free competition of private traders. A commercial undertaking must be worked for a commercial profit. A municipality raises money on public credit, and thus gains an advantage over every private competitor. It also fixes scales of charges and rates of wages without reference, or, at all events, without exclusive reference, to considerations of profit, and thus makes it impossible for any competing trader to earn a legitimate commercial profit. And to make it possible to do this it uses the power of taxation, and levies rates on the competing traders themselves, so that the municipal business can be carried on without the commercial profit which the private trader must earn in order to live. No one can say that this is fair competition.
Then municipal bodies are, from their composition, unsuitable for carrying on commercial business. Their organization cannot be adapted to commercial management. The individuals who serve on these bodies have neither the time nor, as a collective body, the capacity for managing the business on which they embark with efficiency and success. The difference in results due to the difference between good and bad management is paid for out of the rates.
These considerations do not, however, apply with equal force to the State management of railways. The State would have a complete and universal monopoly. There would be no private competition left, except, of course, competition by sea or by tramway or any other mode of conveyance which can compete with railways.
Then there would not be, it may be assumed, any body like a municipal council who would practically interfere with the management. There might be Advisory Councils, like the Prussian State Railway Councils, and, of course, there would be a Minister of State responsible to Parliament for the railway administration, and Parliament itself, already, one may remark in passing, clogged and overburdened with work. But it is certain that whatever the details of the organization adopted might be, the whole of the management would practically be left to the expert permanent officials of the railways. There is no reason to doubt that railway officers would serve the State with as much loyalty and with as great a measure of success as they now serve the proprietors. Instead of being responsible to boards of directors and shareholders, they would be responsible to a certain number of officers of State, probably, indeed necessarily, to a large extent recruited from their own ranks, and I do not think that the change would result in much practical difference so far as the work of those who really carry out the duties of management are concerned. The only difference would be that these officers would have in view that they were working for the State instead of for shareholders.
There can be little doubt that if railways were nationalized they would be used as a field for many kinds of social experiments. The combination of philanthropy with business is generally regarded with suspicion, but the conversion of the railway manager into a social reformer would, I think, arouse serious and legitimate alarm. The certainty which we now possess that the action of any railway company, whether it be wise or foolish in itself, is wholly commercial in its motives and its aims, is a valuable safeguard. But if railway policy were to become the medium for the promotion of social or even economic theories under the guidance of politicians, would not this be a most alarming peril to trading and industrial interests? One group might insist, by political pressure, that the standard of wages should be maintained at a higher level than could be commercially justified. Another group, or many groups, might devote their efforts to securing the construction of railways in districts which could not support them with sufficient traffic, with the result of burdening the railway system with many unremunerative branches for which either traders, passengers, or the taxpayers throughout the country would have to pay. The policy of others would be to make suburban railways at enormous cost, and run cheap trains to serve the population resident in large cities, regardless whether such railways or trains were self-supporting or not. In this policy they would have the ardent and influential support of the owners of suburban land, who would rejoice in the increase of their rents, brought about by the expenditure of public money in creating railway facilities on uncommercial terms. These are not fanciful dangers. They are the results which we may feel sure would inevitably follow the nationalization of our railways, and the advantages to be gained from State management would need to be very great to compensate for these burdens.
Another aspect of the question which requires the gravest consideration is that which concerns the position of the State as an employer of labor. There are upwards of 620,000 railway officers and servants. The State would become the direct employer of that huge army, and would have to settle all questions relating to hours, wages, and other conditions of service. If a railway company is unable to settle differences with its men the ultimate resort of the men is the withdrawal of their labor, whilst the company are free to employ other men who are willing to accept their conditions of employment. Any railway strike on a large scale is a dire calamity to trade and to the public, but if one were compelled to consider the possibility of a general strike on a national railway system, even the deplorable results which accompany strikes on privately-owned railways would seem comparatively insignificant. Probably a railway department of Government would not urge the adoption of compulsory arbitration, if they were themselves concerned, with as much equanimity as they do in the case of strikes on private railways. It is true that in this matter the advocates of State railways can point to the comparative absence of labor conflicts in connection with the services now under Government control, but municipal undertakings have not been so successful in avoiding labor disputes, and in many cases have secured even the degree of immunity from such conflicts which they enjoy by the concession of terms of employment which constitute heavy burdens on the ratepayers. It seems to me that the danger of serious labor disputes cannot be put aside, and I confess that I am unable to see any safe way of meeting the objection to State ownership on the ground that the State ought to limit, as far as possible, its liability to become directly concerned in such disputes.
In conclusion, I would say that I have felt unable to take up a partisan attitude on the question. For many years past both my studies on railway subjects and my practical experience have led me to a convinced belief in the advantages of well-regulated monopoly, and I am unable wholly to disapprove of a scheme which would secure for the country the advantages of a system of well-regulated monopoly in which I believe, even although it should come in the guise of State ownership.
Competition, in my judgment, creates more evils than it cures, especially the half-hearted and imperfect competition which exists in England so far as railways are concerned, which cannot be regarded as free competition on a commercial basis.
I recognize that it is impracticable to secure unification or any very extensive or far-reaching combinations of railways under our system of private ownership. The public would not tolerate uncontrolled railways under private management, and I doubt whether any form of control which has yet been devised, or is likely to be devised, combined with partial competition, can give entirely satisfactory results. That there are grave dangers and risks in the public ownership of railways I fully admit; indeed, so grave are they, that I think he would be a very bold minister who would venture to bring forward, under Government sanction, a proposal for the nationalization of our railways. The existence of such a huge amount of Government patronage would open the door to political corruption. The existence of such an enormous body of Government servants possessing the franchise—and I confess it seems to me impracticable to hope that any measure could be carried subject to disfranchisement of Government servants—would imperil the financial stability of the railway system, and introduce new and very serious sources of weakness and danger into the body politic.
The risk of loss from the charging of unduly low rates under pressure from the influential body of traders seeking to enrich themselves at the expense of the general community seems to me a risk which no thoughtful man can ignore. No expedients for checking and restraining political influence so that it could not reach or sway the decision of the officers of State responsible for railway management seem to me practicable under our democratic constitution.
If the nation owns the railways, the nation must take all the risks of State ownership, and we could only trust that the existing purity of our politics and the common sense, honorable character, and long experience in self-government of the English people would suffice to protect the commonwealth from these perils resulting in serious harm. But whatever may be the issue of the consideration of the question of State purchase of railways, I am prepared to believe that English railways will continue, whether under State management or under private management, to deserve the praise which Mr. W. M. Acworth expressed in his recent address as President of the Economic Section of the British Association in Dublin, by saying that in his judgment—after, I may remind you, a fuller study of railway conditions in all countries of the world than has been given to the subject of many men in England—that "English railways are, on the whole, among the best, if not actually the best, in the world."
[CONCERNING ADVANCES IN RAILWAY RATES]
February 8, 1909.—Ordered to be printed.
Mr. Elkins, from the Committee on Interstate Commerce, submitted the following
ADVERSE REPORT.
[To accompany S. 423.]
The Committee on Interstate Commerce, to which was referred Senate bill 423 "To amend section 6 of an act entitled 'An act to regulate commerce,' approved February fourth, eighteen hundred and eighty-seven, and acts amendatory thereof," respectfully reports said bill adversely, and recommends its indefinite postponement.
The amendment proposed to section 6 will be found on page 4, commencing on line 10, and ending on page 5, on line 8, of the bill, as follows:
Provided further, That at any time prior to the expiration of the notice herein required to be given of a proposed increase of rates, fares, or charges, or of joint rates, fares, or charges, any shipper or any number of shippers, jointly or severally, may file with the commission a protest, in writing, against the proposed increase in whole or in part, stating succinctly the grounds of his or their objections to the proposed change. The filing of such protest shall operate to continue in force the then existing rate or rates, fare or fares, charge or charges, proposed to be changed and protested against as aforesaid, until the reasonableness of the rate or rates, fare or fares, charge or charges, proposed to be substituted shall have been determined by the commission. Upon the filing of such protest, a copy thereof shall be mailed by the Secretary of the commission to the carrier or carriers proposing the change and thereafter the commission shall proceed to hear and determine the matter in all respects as it is required to do by sections thirteen and fifteen of this act, in case of a complaint made because of anything done or omitted to be done by any common carrier, as provided in said section thirteen; but throughout the proceeding, the burden of proof shall be on the carrier proposing the change to show that the rate, fare or charge proposed to be substituted is just and reasonable.
An amendment was offered in the committee which would modify the original proposition of the amendment, by leaving it to the discretion of the Interstate Commerce Commission, upon the filing of a protest against the proposed increase of rates, to determine whether the schedule filed should go into effect at the end of thirty days or should be suspended by order of the commission until after final hearing, upon the question as to whether the advance was reasonable.
This proposed amendment to the amendment of the 6th section, although somewhat modifying its effect, did not alter the principle upon which the original amendment rested, or remove the objections that influenced the committee in reporting the bill adversely. The reasons which control the action of the committee may be briefly stated as follows:
REVIEW OF QUESTION BEFORE COMMITTEE.
1. From 1887 Congress, by the act then passed "to regulate commerce" through all of its amendments to that act, including the act of June 29, 1906 (which was passed after the most elaborate investigation of the entire subject and the fullest debate), has adhered to a fixed policy in its legislation upon this subject. It has declared its constitutional right to regulate the transportation of persons and property in interstate and foreign commerce, while, at the same time, it has recognized the right of the owners of the instrumentalities of commerce to control and manage their properties subject to the supervision and limitation imposed by the regulating statute, that the charges, fares and rates must be fair, just, and reasonable; that neither discrimination as to person or place must be found in the schedules; and that no device of any character should result in unlawful preference between shippers.
It has in all these acts recognized the right of the responsible managers of the transportation interests of the country to fix the rates for transportation, as upon its revenue must rest the efficiency of its service to the public and the value of its property to its holders, subject only to those wise limitations which prohibit the exercise of these property rights to the injury of the public. Congress has appreciated the magnitude of the vast interest affected by such legislation. With 230,000 miles of track, with millions of rates published in accordance with the statute, with changes of rates numbering between 600 and 700 a day, and reaching the enormous sum of 225,000 a year, it has, with the practical experience of twenty-two years, refused to take the initiation of rates from the carrier and impose it upon its administrative tribunal. Congress and the Supreme Court have adopted the construction of the act to regulate commerce, announced by Judge Jackson (Interstate Commerce Commission v. B. & O. R. R. Co., 43 Fed. Rep., 37, and affirmed, 145 U. S., 263):
Subject to the two leading prohibitions that their charges shall not be unjust or unreasonable, and that they shall not unjustly discriminate, so as to give undue preference or disadvantage to persons or traffic similarly circumstanced, the act to regulate commerce leaves common carriers as they were at the common law, free to make special contracts looking to the increase of their business, to classify their traffic, to adjust and apportion their rates so as to meet the necessities of commerce, same principles, which are regarded as sound, and adopted in other trades and pursuits.
This policy, we believe, has been approved by the country during that period. Pending the elaborate investigation of this subject prior to the passage of the act of June 29, 1906, no crystallized sentiment was manifested, either in the press or during the hearings, that indicated a public sentiment that this policy should be departed from. Since this bill has been before your committee no such public sentiment has been shown to exist by those who appeared before it.
The conferring upon the commission the power to suspend a rate advanced, either upon the filing of a protest by a shipper or in the discretion of the commission, taken in connection with the provision of the statute which gives to the commission the power to fix a rate and to designate the time, not longer than two years, that it should remain in force, would ultimately turn over to that administrative body the function of initiating the rates of the entire country. It would offer a premium to every shipper to enter a protest to the advance of rates, whether they were reasonable or unreasonable, even if discretion was vested in the commission. The protest, prepared by skilled attorneys, presenting a prima facie case of unreasonable advance of the rate, with no opportunity for an investigation before it must be acted upon, an official body, on which was imposed the responsibility to act would be constrained to suspend the rate until a final determination of the complaint.
The existing law permits any shipper to protest any rate that has gone into effect, the hearing on the protest is made without formal pleadings, and the commission is authorized then to determine the question whether the rate put in effect by the carrier was a reasonable rate or not, and, if not, to make the rate reasonable. So far, in the practical operation of the act of June 29, 1906, this provision of law has worked satisfactorily, and but comparatively few of the decisions of the commission have been contested by the carriers. Under existing law both parties are protected. If the decision is that the rate is unreasonable a judgment may be rendered in favor of the protestant for the difference between what the commissioners determine is a reasonable rate and the rate fixed by the carrier, with 6 per cent interest from the date of the overcharge. If, on the other hand, this amendment should receive the approval of Congress and the rate filed by the carrier should be protested and then suspended by the commission (in the multiplicity of duties imposed upon that tribunal), considerable time would elapse before a final determination of the question could be reached. During that period the carrier would be receiving only the old rate, and if the commission finally decided that the advance was reasonable no reparation in any way could be awarded.
It was alleged before the committee that this last result would not be very injurious to the carrier, for the reason that it would be receiving the rate which it had fixed as a fair compensation for the service performed prior to the change. The answer to this seems reasonable, which was, that conditions had so changed that it required an advance of the rate to meet those new conditions. Otherwise the advanced rate would have no justification. That traffic officials fully appreciate the fact that, with the watchful eyes of every shipper affected by an advanced rate and the authority of the commission to determine and fix a just and reasonable rate (as a general rule), rates would not be advanced by such officials without a belief upon their part that there were sufficient reasons to sustain them, if protested.
The attention of the committee has been called to the attitude of the commission in its rulings upon the advance of rates, even where the facts have shown that the rates have been lowered with a view of developing a particular industry. In the case of the New Albany Furniture Company against Mobile, Jackson and Kansas City Railroad Company, etc., decided June 2, 1908, the commission held:
"The rates were low before the increase, but having been established, after prolonged negotiations, especially for the purpose of permitting complainant to reach a particular market, and in preference to making a readjustment in some other direction or territory, and complainant having adjusted its business thereto, defendants may not by an arbitrary advance in those rates destroy complainant's business, there being no evidence that the rates advanced were less than the cost of service."
A similar decision was rendered on the 1st of June in the case of Western Oregon Lumber Manufacturers' Association against the Southern Pacific Company.
Knowledge of the views held by the commission by the traffic officials and shippers will serve as the most effective check upon the part of the carrier in advancing rates over those which have been in existence for any considerable period of time, unless they can support the advance by the most satisfactory reasons.
WOULD THE AMENDMENT PROPOSED BE IN CONFLICT WITH THE FIFTH AMENDMENT TO THE CONSTITUTION?
2. An objection urged to the approval of this amendment, even though modified as suggested in committee, was that it conflicted with the fifth amendment in depriving the carrier of its property without due process of law.
The existing law authorizes carriers to make reasonable rates. Congress recognizing the right of control by the carrier has provided reasonable regulations to safeguard the interests of the public in the exercise of that right. It authorizes a protest after the rate had gone into effect; it provides for a full hearing after notice by the commission; it has further extended the time when the rate shall be made effective to thirty days from the filing of the schedule with the commission. These were held to be reasonable regulations, but it is claimed that under the amendment proposed to the sixth section, that if the rate is suspended from going into effect at the end of the thirty days by a protest, there is no limitation in the act fixing the time when the commission shall determine the question of the reasonableness of the advance; that the period is therefore indefinite, depending upon numerous considerations which might extend the time when the rate would be effective, if it was finally held to be reasonable, to six months or a year.
That the act of suspension either by the operation of the statute or by the commission is without notice or hearing to the carrier; that Congress has no greater right to authorize an administrative tribunal to suspend indefinitely the taking effect of a reasonable rate without notice or hearing than it has the right to provide that an administrative tribunal may authorize a rate which would yield less than the cost of the service.
It was decided in the case of Chicago, M. & St. P. R. R. Co. against Minnesota, 134 U. S., 418, that the right to make a reasonable rate was a property right. In the case of Interstate Commerce Commission v. Chicago Great Western Ry., 209 U. S., 118, the Supreme Court said:
"It must be remembered that railroads are the private property of their owners; that while from the public character of the work in which they are engaged the public has the power to prescribe rules for securing faithful and efficient service and equality between shippers and communities, yet in no proper sense is the public a general manager."
Justice Brewer, in the above case, page 108, speaking for the court said:
"It must also be remembered that there is no presumption of wrong arising from a change of rate by a carrier. The presumption of honest intent and right conduct attends the action of carriers as well as it does the action of other corporations or individuals in their transactions in life. Undoubtedly when rates are changed the carrier making the change must, when properly called upon, be able to give a good reason therefor, but the mere fact that a rate has been raised carries with it no presumption that it was not rightfully done. Those presumptions of good faith and integrity which have been recognized for ages as attending human action have not been overthrown by any legislation in respect to common carriers."
It is claimed that the indefinite suspension of the rate until final hearing is to deprive the carrier, if the rate advanced is reasonable, of its right of property during the period of suspension, without having given it any opportunity to be heard prior to the act of suspension. Due process of law must precede, and should not follow, the suspension. To set aside the carrier's act in fixing the rate pending the investigation required by due process of law is to deprive the carrier, pro tanto, of its property right to charge a reasonable rate. The fact that the statute requires an investigation after the suspension of the rate does not avoid the constitutional inhibition, as that provision can only be satisfied when the investigation precedes any disturbance of property rights. The carrier is entitled to the investigation before it is restrained in the exercise of its property rights; the theory of the amendment suggested is that the shipper is entitled to an investigation before the carrier can exercise its property rights.
Those contending for this objection to the amendment assumed that the indefinite suspension without hearing of the act of the carrier which deprived it, beyond a reasonable time, of the benefit of the advanced rate, was in effect the same as that which was condemned by the Supreme Court in the case of the Chicago, M. & St. P. R. R. Co. against Minnesota. Under the statute of that State, a carrier had the right to initiate the rate, and to put it in effect, and, under the law, the commission was authorized to make such changes as it deemed proper in the schedule so filed, and to direct the carrier to modify or change the schedule in accordance with the decision of the tribunal. In the one case the going into effect of the rate is suspended indefinitely without notice or hearing; in the other, the rate is changed or modified without hearing. On page 418 the court condemns this in the following language:
"No hearing is provided for, no summons or notice to the company before the commission has found what it is to find and declared what it is to declare, no opportunity provided for the company to introduce witnesses before the commission, in fact, nothing which has the semblance of the process of law."
On page 458 the court said:
"If the company is deprived of the power of charging reasonable rates for the use of its property, and such deprivation takes place in the absence of an investigation by judicial machinery, it is deprived of the lawful use of its property, and thus, in substance and effect of the property itself without due process of law and in violation of the Constitution of the United States."
This view of the law as announced in 134 U. S. was affirmed by the Supreme Court in the case of Louisville and Nashville Co. against Kentucky, 183 U. S., 510.
It was further suggested that if this amendment was incorporated in the sixth section, that it was so fundamental in its character, that if the court should hold that it was an unconstitutional exercise of power by Congress, that it might have the effect of destroying the entire value of this remedial legislation, as it would be impossible to separate the clause from those provisions of the law directly controlling the subject of rates.
The committee, without expressing any opinion upon the constitutional questions suggested, feels that it is of sufficient importance and gravity to cause it to hesitate to incorporate such amendment into the sixth section, especially in view of the other objections to such legislation.
COULD THE COMMISSION, UNDER THE AMENDMENT, FIX A REASONABLE RATE, IF IT HELD THE PROPOSED ADVANCE RATE UNREASONABLE?
3. One of the most serious objections to this measure, if the contentions of those who oppose it are well founded, is the assertion that the adoption of this amendment would, in reference to advanced rates that were protested, deprive the commission of the power conferred upon it by the fifteenth section of the act of June 29, 1906, empowering it, if on protest and hearing it found a rate to be unreasonable, to fix a reasonable rate.
The authority to the commission proposed in the amendment "to hear and determine the matter in all respects as it was required to do by sections 13 and 15 of this act," can only be construed to refer to the procedure as provided in the thirteenth and fifteenth sections of the interstate commerce law. There is no attempt to amend the provisions of section 15, which confers upon the commission the right to declare a rate unreasonable, and when so declared to fix a reasonable rate. There are no provisions found in the amendment suggested to the sixth section conferring upon the commission the power, when it finds a rate proposed to be advanced unreasonable, that it may then proceed to fix a reasonable rate.
An examination of section 15 in reference to the power of the commission to fix a rate depends upon a condition precedent that is clearly set forth in said section. It is, that before the commission has the authority to fix a rate it must first reach the opinion that—
"The rates, or charges whatsoever, demanded, charged, or collected by any common carrier or carriers, * * * or that any regulation or practice whatsoever of such carrier or carriers affecting such rates, are unreasonable, or unjustly discriminatory, or are unduly preferential or prejudicial, or otherwise in violation of the provisions of this act."
When this conclusion has been reached as to existing rates the section then authorizes the commission—
"to determine and prescribe what will be the just and reasonable rate or rates, charge or charges, to be thereafter observed in such cases as the maximum to be charged; and what regulations or practice in respect to such transportation is just, fair and reasonable to be thereafter followed."
To leave no doubt of the true construction of this section, an examination of the order required to be entered by the commission is conclusive of the meaning and intention of Congress in the enactment of this portion of the fifteenth section. It provides:
"And to make an order that the carrier shall cease and desist from such violation to the extent to which the commission finds the same to exist, and shall not thereafter publish, demand, or collect any rate or charge for such transportation in excess of the maximum rate or charge so prescribed."
An analysis of this order of the commission which requires it to provide "that the carrier shall cease and desist from such violation, to the extent to which the commission finds the same to exist," recognizes the fact that the rate is an existing rate, is an effective rate, is a rate in full operation, and cannot, therefore, be applied under the provisions of the amendment suggested to the sixth section, as no rate has gone into effect and become operative.
The subject we are considering as affected by the proposed amendment and the provisions of the fifteenth section, do not rest upon any principle of the common law, but are purely statutory enactments to carry out a policy in reference to interstate commerce deemed wise by Congress. The construction, therefore, of the statute in this respect cannot be aided by any principles of the common law, and the conclusion as to its meaning must rest entirely upon the intention of the legislature as expressed by the language of the act.
If this view of the fifteenth section is correct, the adoption of the amendment to the sixth section would change one of the most effective provisions of the act of June 29, 1906, and which was contended for with such earnestness in its passage through Congress.
Under the amendment to the sixth section, if adopted, and a protest was made to the advanced rate, or the commission under a protest was authorized in its discretion to suspend the advanced rate, until hearing as to its reasonableness, the only decision that could be made under that amendment would be, that the rate proposed to be advanced was either reasonable or unreasonable, but there would exist no power in the commission, if they found the rate unreasonable, to fix what in its judgment would be a reasonable rate. The committee does not believe that it is the desire of Congress, in view of the sentiment of the country as expressed in the press and before it, to pass additional legislation which would invite and suggest such confusion and legal difficulties in the construction of an act which has not yet been put in full operation by the tribunal charged with that duty.
COULD THE DECISION OF THE COMMISSION, CONDEMNING AN ADVANCE OF RATES, BE REVIEWED BY THE COURTS?
4. It was suggested to the committee that the incorporation of this amendment to the sixth section of the act of June 29, 1906, would deprive the carrier of the right to review by a bill in equity a decision of the commission which denied to the carrier the right to advance a rate. This contention is based upon the ruling of the courts, that the making of a future rate is a legislative act, and not a question for judicial review, and that until the rate is fixed and becomes effective it is purely one within the legislative function, and presents no subject cognizable by the court.
Under the amendment proposed a carrier would file a schedule of advanced rates; a shipper enters a protest to the rate taking effect; either by operation of the statute or the exercise of discretion by the commission, the rate is suspended until final hearing; subsequently there is a notice of the hearing and a decision rendered adverse to the contention of the carrier seeking an advance of the rate. Under these circumstances there is no remedy of review of that act of the commission provided for by existing law or under the principles of equity.
Existing law, providing for a review of a decision of the commission, does not by its terms enlarge the subject of equitable jurisdiction. The provision of the statute confers upon the court the right to take jurisdiction of a case against the commission and to review its decision when based upon an existing rate. There is no provision of the statute that contemplates the exercise of a jurisdiction by the courts in a case arising under a provision of law similar to the amendment sought to the sixth section of the act of June 29, 1906. In the decision rendered by the commission denying the right to advance the rate, the question of the reasonableness of the former rate or of any existing rate is not involved in the order to be entered by the commission. Under this proposed amendment the carrier submits a proposition to advance the rate, which has never become effective. The order of the commission would simply approve the proposition or deny the advance of the rate. This, under the proposed amendment, would be the extent of the authority and act of the commission.
In the case of McChord v. L. & N. R. R. Co. (183 U. S., 483), followed by the case of L. & N. R. R. Co. v. Ky. (183 U. S., 503), the court sustains the doctrine announced, and held that before a court of equity can intervene, the administrative body must do some act that advances beyond the legislative function. (Reagan v. Farmers' Loan & Trust Co., 154 U. S., 362; Interstate Commerce Commission v. Railway Co., 167 U. S., 479.)
It is contended that the decision of the commission prohibiting the advance is a legislative act, and that under the decisions of the courts the order simply prohibiting the taking effect of a proposed advance could not be the subject of equitable cognizance. If this view is not correct, it is contended that the courts by overruling the order of the commission would in effect be putting in force a future rate. Under existing law, however, if the rate has taken effect its reasonableness is a matter of judicial review, and should the commission after protest and hearing declare it to be an unreasonable rate and set the same aside in its order, that decision is reviewable by the courts, as it presents a judicial question. The statute conferring upon the commission the power to determine whether an existing rate is reasonable or unreasonable has fixed the standard which must determine the jurisdiction of the administrative tribunal, and the courts have a right to review the act of the commission, with a view of ascertaining whether it has acted within the limitations of the power conferred upon it.
In the case of the State Corporation Commission of Virginia against Railways, decided by Mr. Justice Holmes November 30, 1908, speaking of the power of the commission to fix a rate and the appeal from its decision to the court of appeals of Virginia, the court said:
"A judicial inquiry investigates, declares, and enforces liabilities as they stand on present or past facts and under laws supposed already to exist. That is its purpose and end. Legislation, on the other hand, looks to the future and changes existing conditions by making a new rule to be applied thereafter to all or some parts of those subject to its power. The establishment of a rate is the making of a rule for the future, and therefore is an act legislative, not judicial, in kind. * * *
"Proceedings legislative in nature are not proceedings in a court within the meaning of the Revised Statutes, section 720, no matter what may be the general or dominant character of the body in which they may take place. * * * That question depends not upon the character of the body, but upon the character of the proceedings. (Ex parte Va., 100; U. S., 339-348.) They are not a suit in which a writ of error would lie under Revised Statutes, section 709, and act of February 18, 1875. (C. 80 Stat., 318.) * * * Litigation can not arise until the moment of legislation is passed. * * * We may add that when the rate is fixed a bill against the commission to restrain the members from enforcing it will not be bad as an attempt to enjoin legislation or as a suit against a State, and will be the proper form of remedy."
The recent decision of the Supreme Court in the case of Public Service Commission v. Consolidated Gas Co. of New York, in which the opinion was delivered by Mr. Justice Peckham, in deciding what is known as the Eighty-Cent Gas Case from the southern district of New York, is instructive upon the question discussed in this objection.
In that case, the parties had gone to issue upon the question as to whether the rate of 80 cents enjoined by the court from taking effect was confiscatory. After deciding the case upon the merits in favor of the commission, the court was unwilling, upon the supposed effect of a rate which had never been in operation, to bar the parties of their right when the same became effective from asking the protection of the court against its practical results. The memorandum announcing the position of the court upon that question is as follows:
"As it may possibly be that a practical experience of the effect of the acts by actual operation under them might prevent the complainant from obtaining a fair and just return upon its property used in its business of supplying gas, the complainant, in that event, ought to have the opportunity of again presenting its case to the court. Therefore, the decree is reversed, with direction to dismiss the bill without prejudice."
This case simply illustrates the fact that the court was unwilling to decide the question finally until the rate contested had become effective. This was a suit involving a schedule of rates, and the question made by the record was that these rates would result in the confiscation of the property of the complainant in violation of the Federal Constitution. Where that question can be properly made, the courts have intervened upon clear proof and sustained their jurisdiction to prevent such a violation of the constitutional protection. In this case, although the court held that the evidence developed the fact that this allegation of the bill was not sustained, it was so reluctant to give effect to testimony as to what might be the effect of the rates before they were made operative that it preserved the rights of the parties by authorizing a new suit after the rate should become effective. Under the act to regulate commerce, such a constitutional question could hardly be practically raised, and the rights of the court to intervene must depend upon the limit placed upon the power of the commission by Congress in the enactment of the law, in fixing the standard which should guide the commission in its action.
BURDEN IMPOSED ON THE COMMISSION.—CONFLICT OF JURISDICTION.—HOW RATES ARE MADE.
5. Your committee has deemed it proper that it should report to the Senate the legal objections to the incorporation of this amendment in the sixth section of the act of the 29th of June, 1906, but although giving due weight to these objections, the committee has been more strongly influenced in its adverse report upon this bill because of the strong and forcible practical objections which have been urged to the adoption of this amendment as a part of the interstate commerce law.
Should this amendment become a part of the law, it would be in the power of any shipper, whether interested or not in the result, to file a protest against the advance of the rate which under the proposed amendment would at once suspend its going into effect, and under the amendment offered in committee would place it in the power of the commission to order its suspension, if a prima facie case was presented in the protest. The shipper in filing a protest assumes no responsibility, either as to the effect of his action upon the carrier or liability in any way for cost accruing during the proceeding. Considering the thousands of articles transported by the carriers of the country, the hundreds of thousands of rates published for the transportation of these articles, and the thousands of shippers interested in their movement, some idea of the number of protests that probably would be filed on the advance of rates can be imagined. The burden that would be thrown upon the commission in its effort to meet this responsibility would, as Judge Cooley well remarked, require "superhuman" efforts on its part. He said:
"Moreover, an adjudication upon a petition for relief would in many cases be far from concluding the labors of the commission in respect to the equities involved, for questions of rates assume new forms, and may require to be met differently from day to day; and in those sections of the country in which the reasons or supposed reasons for exceptional rates are most prevalent the commission would, in effect, be required to act as rate makers for all the roads and compelled to adjust the tariffs so as to meet the exigencies of business while at the same time endeavoring to protect relative rights and equities of rival carriers and rival localities. This in any considerable State would be an enormous task. In a country so large as ours, and with so vast a mileage of roads, it would be superhuman. A construction of the statute which should require its performance would render the due administration of the law altogether impracticable, and that fact tends strongly to show that such a construction could not have been intended."
If the advance of rates was ultimately decided to be reasonable, the carrier would have been deprived during the period of suspension of the additional earnings to which it was entitled, and under such a provision of law would be required to maintain, at enormous expense, a large force of attorneys to answer and defend these protests. It would confer upon the commission the powers now exercised by the courts, and the jurisdictions over the same subject by both the courts and the commission would necessarily produce conflict and confusion.
The Supreme Court in the case of Texas Pacific R. R. Co. v. Abilene Cotton Oil Co. (204 U. S., 426), construing the ninth and twenty-second sections on the right of a shipper to apply to the courts for pecuniary redress for an alleged unreasonable rate held that, until the protested rate was condemned by the commission, there was no relief in the courts. This decision avoided a conflict of jurisdiction between the courts and the commission. It would lessen very greatly the value of the amendment of the act of June 29, 1906, which requires thirty days' notice in a change of rate, which was adopted, with a view of investing rate conditions with a greater degree of stability than formerly. Under existing law, the shipper is assured of that degree of stability, and can predicate his sales and purchases accordingly. Under the amendment, shippers would never know whether or not a rate is to become effective on schedule time, or at any future time. The effect of the amendment would, therefore, be to a considerable degree to nullify the permanency which this amendment to the act to regulate commerce sought to impress upon the law.
We must remember in considering this question that the majority of advances have resulted from the practice of the roads in the reduction of rates to meet certain commercial and economic conditions at the time, which have usually been the result of appeals from shippers and suggestions from commercial organizations.
We desire to direct attention to the statement filed before the Committee on Interstate and Foreign Commerce upon a similar bill to this by the chairman of the committee of the Southwestern Traffic Association, which is as follows:
"A very small percentage of the changes in freight rates, either reductions or advances, is evolved by railroad officials. Practically every change in rates is the result of suggestion from one or more shippers, who find that by some modification in the existing schedules their business in a certain territory can be increased by enabling them to meet competition which they encounter from other sources of supply, which are in most cases served by rival railroads. Their representation is that by the proposed change their profit or business will be increased, and consequently the railroad serving them will share in an augmented traffic which, at the time of the suggestion, is being handled by the rival shipper and carrier.
"Ninety or more per cent. of these suggestions are for reductions in rates or for changes in rules and regulations beneficial to shippers and classed as reductions. The railroad company is anxious at all times to increase its traffic and gives a keen ear to such pleas of the shipper. The railroad official to whom such requests are made carefully investigates the conditions recited by the shipper and, by correspondence with such railroad's representatives at the points of origin and destination, confirms, if possible, the views of the shipper and the effect of the proposed change on the tonnage and revenue of the company. The traffic official of the railroad thus being daily engaged in investigations of this kind becomes very proficient in his knowledge of the factors surrounding the movement of the principal articles of commerce and becomes, after experience, a ready judge of the merit of such propositions. When thus convinced, he becomes the agent of the shipper in securing the proposed adjustment. This may take the form of suggesting to a rival railroad that the advantage which its shippers have enjoyed is unjust and that he should be permitted, without any corresponding reduction on the part of such rival railroad, to reduce his rate that the complaining shipper may profitably secure an increased share of the competitive traffic in question. Being unable to thus persuade the competing railroad of the merits of such a contention he is forced to proceed by reducing his own rate without regard to the possible change which may follow on the part of other railroads as a consequence of his reduction.
"It will, therefore, naturally be seen that the railroad official and the shipper are constantly planning to increase the business in which they are jointly interested, to the disadvantage of the rival railroad and shipper. Sometimes these efforts result in serious rate wars until the point in controversy has been adjusted and the competitive rates placed on a basis which is more nearly equitable to all concerned. In many instances these disputes result in arbitration either by the Interstate Commerce Commission or by individuals who may be agreed upon by the contending interests.
"Bearing in mind, therefore, that practically all rate reductions are the result of the effort of the railroad company to serve the shipper, it can easily be seen what the result will be if no advances in rates can be made without practically the approval of the Interstate Commerce Commission. Where it is difficult to restore rates to normal figures, the carrier will be loath to reduce them in order that the shipper dependent upon such carrier may increase, for the time being, his share in the competitive traffic in which he is interested."
ADJUSTMENT OF RATES.—INTERRELATION OF RATES.—PRACTICAL OPERATION OF AMENDMENT.
6. The subject of rate adjustment, even upon a single system of transportation, is one involving great difficulty and perplexity. When this adjustment is considered in its relation to the entire country, to the diversified commercial conditions, as affected by commercial competition, and as controlled by the interrelation of rates, it stands forth as one of the most difficult of all the problems which must be mastered that the transportation agencies may not be injuriously crippled in the performance of their quasi public functions, or the prosperity and development of the commercial interests be retarded by the failure to enact proper, reasonable, and just governmental regulations.
Rates which can be considered alone are comparatively few in number. In the large majority of cases they are interrelated with other rates, and frequently this interrelation exists as between areas widely separated. The rates upon iron and steel from mills within 50 to 100 miles of New York, Philadelphia and Baltimore, whose relations to each other are established by long custom and usage, are based primarily upon the necessity of preserving a fair comparative charge between the different shipping points and destinations. Rates upon coal from central Pennsylvania to tide water have close relations with the rates upon coal from West Virginia to tide water, competing as such coal does, in the same markets. The rates upon lumber from the Michigan markets must bear some relation to the rates on lumber from Louisiana and Georgia to the same market of distribution, although separated by hundreds of miles.
The rates upon grain from western farms to eastern points bear a relation to the other, and upon export grain the rates to the Atlantic seaboard bear a close relation to the rates to the Gulf. The rates upon fruit and vegetable traffic from the various shipping districts, as California on the West and Florida on the South, must be considered in the making of rates. The structure of rates between the territory east of the Mississippi and north of the Ohio River, and the territory east of Pittsburg and Buffalo, including New England, is closely interrelated; as an example, the rates between Chicago and New York take a percentage of the Chicago rate from all points west of Pittsburg and Buffalo. The principle of the interrelation of rates has frequently been recognized in the decisions of the Interstate Commerce Commission.
In the interest of the manufacturer there is a very important relationship between rates upon different products entering into the manufacture of a given article. In the great steel-producing districts of the Shenango and Mahoning valleys and Pittsburg for many years the rates upon raw material to the furnaces for the production of pig iron have been adjusted upon a basis, so far as possible, of making the freight cost of assembling the raw materials that enter into this product the same to each furnace. In the one case the rate upon coke may be higher and the rate upon ore or limestone lower; in other cases the reverse. The adjustment of rates upon these different raw materials is so made that when assembled at the different furnaces the aggregate cost is relatively the same. This illustrates the contention that such rates cannot be considered separately, but must be taken as a whole.
Bearing these facts in mind it is manifest that if an advance in rates is made and the protest of one shipper shall operate as a stay to the advance of a particular rate in which he may be interested the result would be to burden thousands of other shippers who have made no objection. The protesting shipper would thus secure an advantage, enjoying for a time, at least, a rate relatively lower than that to which he was entitled. It might be urged that it would be open to all other shippers to file similar protests, but under the provisions of the bill, or of the amendments suggested in committee, the protesting shipper might wait until the last day of the thirty-day period, thus giving no opportunity to other shippers, who would be ignorant of his purpose, to file their protest. It would be possible if this amendment became a law that many individual shippers would take advantage of their competitors by making contracts upon the basis of a lower rate and at the last moment file the protest, suspend the advance rate, and deliver their product under such contracts within the period of the suspension of the advanced rates and thus profit at the expense of their competitors.
The effect of this amendment becomes more serious where the relation of rates is between wide areas, and these relative rate adjustments cannot be made simultaneously. The rates upon grain for export, from the West to the Gulf, as compared with the Atlantic seaboard, will illustrate this statement. The protest of one shipper between two specific points would not only result in throwing out of relation the rates from all points in that section, but would also affect the competitive rates from other sections. Such a result would necessarily render the rate situation in reference to the grain rates "confusion worse confounded."
Rates in a country like the United States, which is comparatively young, and the development of which attracts the attention of the world, must, necessarily, be elastic, not only in the interest of the carrier, but of the shipping public. The principle is sound and has received the approval of the Interstate Commerce Commission, that rates must be fixed with regard to their relations one with the other, and not entirely upon the cost of service. This relation is because of the competition between shippers, between sections of shippers, and between localities, and as (because of the rapid development of our country in the production of new sources of supply, in the opening up of new grain fields, flour mills, mines, and factories, etc.) this competition is constantly changing. It is manifest that rates must constantly fluctuate, so as to be adjusted to the new condition; it is essential in the development of the country, even in the older sections, that rates must be elastic, which means constant reductions and advances.
This is in the interest of communities and the individual shipper. There must be elasticity for other reasons, in the interest of communities as of the railroads; in meeting changes in commercial conditions that necessitates reductions in rates for shorter or longer periods, as an illustration, to enable our grain and other products of the farm to reach foreign markets, which would be impossible in one period unless rates were lowered, whereas in other periods higher rates could be charged without injurious results. Understanding the conditions that surround this complex subject, it is manifest that if a single shipper, or even the Interstate Commerce Commission, is to have the power to prevent at any time that elasticity which involves an advance in rates, the natural result will be that reductions will not be made by the carrier, and the elasticity will be lost. The fear would be ever presented to the mind of the traffic official that the rate once reduced could not—at least, until after exhaustive and long-drawn-out hearings before the commission—be advanced.
The necessary fluctuation in rates to meet the changing conditions of commerce, when examined in the light of the reports of the Interstate Commerce Commission, is startling to one not familiar with the rapid change of commercial conditions in this country. There were 225,982 tariff publications filed with the commission in one year, all containing changes of rates, either reductions or increases, and rules governing transportation. These publications—many of them—contained a great number of different tariffs. The Pennsylvania lines, east of Pittsburg, issued 2,200 tariffs and 3,600 supplements. About 33-1/3 per cent of these covered advances, and 66-2/3 per cent were reductions. As the law exists today, there was no special inducement to the shipper to file protests against the advances. Suppose, however, that this amendment had been a part of the act to regulate commerce, how many protests would have been filed, and what length of time would it have taken the commission to have disposed of them? What uncertainty would have resulted to the commercial interests while waiting for the adjudication of these questions?
OPPORTUNITY FOR FRAUD AND DISCRIMINATION UNDER THE AMENDMENT.
7. One of the most serious objections urged to the passage of this amendment is the opportunity which such a law would present for the perpetration of frauds under it, and in the case of even honest protest to the advance of rates, where rates rest on a differential basis, in producing thousands of instances of unfair discrimination.
An example under the first proposition may be stated briefly, as follows: There are two men engaged in the same line of trade; they are both called upon to bid on a contract involving a large amount of a given commodity in which both deal. The carrier has given notice of an advance in rate, effective thirty days from the filing and publication of the schedule; the commodity is not to move for some days; one of the bidders files his bid, based upon the advanced rate, assuming that the notice of the carrier will be made effective; the other shipper and bidder waits until two or three days before the date the rate is to be made effective, files a protest, confident that it will take three or four months to have the matter adjudicated, files his bid against his competitor, based on the current rate, and being the lowest, secures the contract. An example under the second proposition would be in case of a rate published from St. Louis to be followed differentially from Chicago by a number of competing roads. A shipper on one of the lines, just prior to the taking effect of the rate, would file his protest as to the rate east of Chicago. The differential adjustment that has been made by all these roads will at once be destroyed, and the shipper on the road against which the protest was filed would have the advantage over all of his competitors on the other lines in shipping east.
These discriminations between shippers would be the direct result of the power placed by Congress in the hands of shippers and would have received the sanction of legislative approval, and, therefore, be lawful. The statute has taken it out of the power of the carrier to meet such a condition and to prevent the discrimination. It cannot change its rate under thirty days without a special order of the commission, and that order, it must be assumed, cannot be granted without a reasonable hearing. Congress since 1887 has sought by the most stringent measures of legislation to prevent discrimination and preserve equality among shippers. The original act was demanded more to accomplish that purpose than for any other. The Elkins Act was confined almost entirely to the subject, and the act of June 29, 1906, increased the penalties for the violation of these provisions. Should this policy, which has been followed for more than twenty years, be modified and an act passed, the tendency of which is to tempt the cupidity of the shipper to accomplish results which it has earnestly and vigorously fought to stamp out?
WOULD PREVENT REDUCTIONS, AS WELL AS ADVANCES, IN RATES, AND DESTROY THEIR FLEXIBILITY.
8. On the face of this amendment, it seems only to give to the commission the authority to prevent an increase in rates, but the practical result of such a law would be far more reaching. Such a law would mean a rigid freight tariff in place of the present flexible and elastic system of rates which exists alone in this country. Stability of freight rates is important, but not to the extent that the carrier shall not feel warranted in promptly applying remedies for the relief or assistance of shippers who find themselves no longer able to compete, due to advantages which other shippers have secured, or changes which have occurred in the conditions surrounding the marketing of their products.
A law which tends to minimize the commercial or competitive conditions existing at the present time will necessarily result to the disadvantage of shippers, to the carrier, and to the communities they serve. It is not necessary here to again refer to the presentation of the importance of the flexibility of rates, which is so clearly shown in the discussion of the influences which control in making reductions, as well as advances of rates by the chairman of the Southwestern Traffic Committee, as quoted under section 5 of this report. The more the committee has reflected upon the probable tendency of the principle announced by this amendment, if incorporated into the law, the more definite has become its conviction that it would ultimately result in destroying that important factor in American railroad management, "the flexibility of their tariffs—their adaptability to the changing commercial and economic conditions."
One of the most distinguished and skilled traffic officials in the country, Mr. Henry Fink, in considering this amendment uses the following language:
"Railroad officials are constantly engaged in the work of adjusting rates so as to meet as far as practicable the requirement of their patrons. In times of depression of business they make reduction in rates in order to enable shippers to send their commodities to certain markets, and keep industrial establishments from being closed. These reduced rates are often so low as to barely cover the cost of transportation. But they are meant to be temporary in their operation, and to be advanced when business conditions have become more favorable.
"It must be obvious that when the restoration of such rates is obstructed, so that railroad officials are not permitted to advance rates except by permission of a government bureau after an investigation which must consume considerable time, railroad officials will naturally hesitate, and often decline, to make reductions in rates which involve considerable loss of revenue without any compensating benefits to their companies, either in the present or future.
"It is easy to see the effect of this. Railroads would no longer be able to afford the desired assistance to shippers, however anxious they might be to do so. The rates would in a large measure lose their elasticity, and become rigid, and a condition similar to that existing in France would be created, where state controlled rates prevent railroads from building up the territory."
In considering this question, we must not forget that when we destroy elasticity and flexibility in our rates, we prevent reductions of rates, as well as the raising of rates. Its tendency is not only to prevent the reduction in particular instances that has resulted in great advantage to the shippers and the country in the past, but it prevents the lowering of the general average of rates. There have been comparatively few complaints, as to the unreasonableness of the rates of this country per se. The vast majority of complaints, against the reasonableness of rates, is the claim that they are relatively unreasonable. Under the American system of rate adjustment, with its freedom to meet commercial and economic conditions, the general average of rates per ton per mile has voluntarily been reduced by the carriers of the country from 1870; not so strikingly since 1896 as previously, but substantial reduction as follows:[J]
| 1896 | 802 | | | 1902 | 757 |
| 1897 | 789 | | | 1903 | 763 |
| 1898 | 753 | | | 1904 | 780 |
| 1899 | 724 | | | 1905 | 766 |
| 1900 | 729 | | | 1906 | 748 |
| 1901 | 750 | | | 1907 | 759 |
The leaders of railroad management and the ablest experts on railroad economics in foreign countries have approved in the most enthusiastic language, the wisdom which has preserved to the American railway system its freedom of management and its flexibility of rates, subject only to the limitations of reasonable rates, equality among shippers, and the avoiding of all devices that might result in discrimination among those who use these public means of transportation.
The view of M. Emile Heurteau, president of the Orleans Railroad, speaking of the American system of roads, said:
"We would be only too glad to adopt the American system of fixing the lowest rates proper, and making up the loss of profit on each shipment out of the increased volume of business they make the railways available to, which is the only economically and commercially right and sensible way of doing. We would be glad to build up our territory as the American railways do, by encouraging its industries, by opening its markets, by enabling it to compete with other territory contributing to the same markets.
"But we can not do that; the state-controlled rates prevent it, however strong our desire or the people's may be.
"Railroads under government supervision must set their rates close to the maxima then, and maintain them there, for their own salvation. There are many times when, if it were possible, we would like to lower freight charges to meet some special emergency, such as the necessities of a district suffering from a crop failure, for example.
"That is not philanthropy, but commercial sense, to help the man who creates business for you, when he is hard pressed, and to increase the volume of traffic that is falling because people have not the money to pay the price they have been accustomed to pay easily. But if we should once lower our rates—possibly to the point of loss, as American railways have done frequently in crises—we would not be allowed to restore them later, when they could be fairly restored.
"The wonderful growth and development of the United States is the admiration of the whole world. I have no doubt it is to be attributed largely to the freedom you have always enjoyed in your commercial and industrial life.
"Opportunity is given here for railways and communities to be mutually helpful, and splendid use has been made and is being made of it. The few cases of complaints against your railways, the expansion of trade through the opening of European markets to the producers of your Central and Western States, who are enabled to deliver their products abroad, the low cost of transportation that enables them to compete there with the foreign producer near at hand, whose railways are in no position to help him—all these things seem to me sufficient evidence of the success and desirability of the American practice in the management and regulation of railway matters.
"Any economist, any business man, any transportation manager will tell you that the present American method of fixing freight rates is the only logical and rational one."
In the investigation of railways by the Senate committee in 1905, Mr. W. M. Acworth, who is regarded as one of the leading experts in England on railroad transportation and railroad economics, was invited to appear before the committee, with the request to give a review of the historical facts bearing on the control and management of the railways of England. After complying with the request of the committee, certain questions were asked him that were of great importance at that time in the consideration of the questions then being investigated by the committee. One of these questions involved the effect of the provision of the new canal and traffic act of Parliament, which for the first time embodied the provision that "railway companies must make no increase except for good cause, if anybody objects," and which, as construed by the courts, prevented any increase of a rate where objection was made, until after hearing by the board of trade.
His examination will be found in the third volume of the hearings of that investigation, pages 1848, 1852, 1853 and 1854, and was as follows:
"Since it has been decided that no rate can be put up once it has been put down, without appeal to the law courts, the railway companies have practically arrived at the conclusion that they will not put them down because they do not know whether they will have an opportunity to put them up again.
"Senator Cullom: Do you think it works to the advantage of the people that the railways will not put the rates down for fear they will not get a chance to put them up again?
"Mr. Acworth: Personally, I have no doubt it does not. It is fair to remember always that it may protect the weaker in commercial strife. It is rather hard on the weaker man to be crowded to the wall by a wholesale concern in any walk of life. But if it be true in ordinary business that, on the whole, the public gains by the wholesaling method, it is probably true in railway business also. I think that, so to speak, the heart has been taken out of the railway man. The railway men understand this business; they know how to manage it in their own way. The railway men think 'the responsibility has ceased to be ours; we must maintain the status quo,' and that is what they do.
"The Chairman: You think that dividing responsibility impairs the administrative power of the officials of the roads as well as the service they render to the public?
"Mr. Acworth: From the operating point of view, I do not think our railways have been sufficiently interfered with to prevent them developing the goodness of the service. But as to rate making, I have no doubt that the interference of Parliament, the courts, and the Executive has all tended to stereotype and keep rates at an unnecessarily high level.
"The Chairman: Would you say that, on the whole, the power to make rates generally and primarily should be left to the railroads and to the free play of the forces of the business world?
"Mr. Acworth: Speaking as an individual student, I have no doubt that that is the process that will arrive at the best results for the community, with this exception: That I fully think it is necessary that the community in some way should interfere to protect all customers from unfair treatment.
"The Chairman: You think that the power should reside somewhere to correct excessive and extortionate rates by summary and proper proceedings?
"Mr. Acworth: I am not sure that I should go so far as to say excessive rates regarded as excessive in themselves. I am myself inclined to think that excessive rates will correct themselves. The wise men will discover that it does not pay to charge excessive rates. But I think the law should interfere to prevent unfair rates to A as compared with the rates given to B. It seems to me that the State is bound to insist that the rates shall be public, and that practically will settle it, for if they are public they have got to be fair; I am inclined to think the law should confine itself to securing that, where there is a difference made as between A and B, the difference should be a difference for a commercial reason, and not for any reason of personal favoritism.
"Senator Foraker: And I understand you to say that the effect of fixing maximum rates is to lessen the tendency to reduce rates, which railroads had practiced before this legislation was enacted?
"Mr. Acworth: I am not quite sure that the maxima have really had very much effect at all. It has been a tendency, but I do not think an important tendency. But the interpretation by the courts of the undue preference law, and the recent limitation that having once reduced you can not subsequently increase, have had that effect markedly, I believe.
"Senator Foraker: So that the rates for the transportation of freight on railroads in England have not been declining, I take it from your statement, in recent years, but have remained practically stationary?
"Mr. Acworth: I do not know what the average rate is, because there are no statistics in England; but my own impression would be that it had probably not declined to an appreciable extent, whereas in an earlier period it certainly did decline pretty fast."
The effect of a similar law, passed in England, as shown by the testimony of Mr. Acworth, confirms the views of the committee which have been expressed in this report, that with such a provision embodied in the present interstate commerce law, there would be few reductions or advances in American rates. If it had the effect in England of destroying the flexibility of the rates of the carrier and interfered with the development of England's commerce, as well as her railroads, how much more serious would be the result in this country, that is in the process of rapid development, both as to its commerce and territory? It has been credibly stated that the Board of Trade of England is now seriously considering a recommendation for the repeal of that provision of the statute.
AN ANALYSIS OF THE COMMUNICATION TO THE COMMISSION—MANY OF ITS OBJECTIONS APPLY TO THE AMENDMENT OFFERED IN COMMITTEE.
9. When this bill was referred to your committee for its consideration the chairman addressed a letter to the Interstate Commerce Commission, inclosing the bill, and requested the opinion of the commission as to the wisdom of incorporating the amendment into the interstate commerce law.
The chairman replied in the following communication:
"Interstate Commerce Commission,
"Washington, January 29, 1908.
"Hon. Stephen B. Elkins,
"Chairman Committee on Interstate Commerce,
"United States Senate, Washington, D. C.
"Dear Sir: The Interstate Commerce Commission has the honor to submit the following in response to your communication of 24th instant, transmitting a bill (S. 423) to amend section 6 of the act to regulate commerce, introduced by Senator Fulton December 4, 1907, and requesting the commission to 'advise the committee before its next meeting, January 31, their opinion of said bill and what action they would suggest thereon.'
"Whilst the views of the entire commission can not be definitely ascertained within the time named, because of absences on official business, a majority of the commissioners and probably all of them would not be disposed to favor the enactment of this measure.
"To give to the protest of a single shipper the effect of preventing the advance of any rate until the reasonableness of that advance was affirmatively determined by the commission would establish a hard and fast rule of doubtful fairness to the railroads and questionable advantage to the public. Under existing conditions we are of the opinion that it would be unwise to adopt the arbitrary limitation which this bill proposes, whatever may be found desirable or necessary in this regard in the future.
"It is further to be observed that the passage of such a bill at this time would impose a burden upon the commission which it ought not to be asked to undertake. If every proposed advance had to be investigated by the commission and officially sanctioned before it could take effect, the number of cases to be considered would presumably be so great as to render their prompt disposition almost impossible. In instances of justifiable increase the necessary delay resulting from the probable volume of cases would work injustice to the carriers. Until conditions become more stable and the substantive provisions of the act are more completely observed in railway tariffs and practices we entertain the belief that a wider latitude of discretion on the part of carriers than this measure allows should be permitted.
"It is also suggested that the practical effect of the proposed amendment might be to prevent voluntary reductions of rates by the carriers. If no rate could be increased without the approval of the commission after affirmative showing by the carrier it might happen that many reductions now voluntarily accorded would not be made.
"This subject of rate advances was discussed in our recent annual report to the Congress, and that portion of the report is transmitted herewith for the information of your committee. It concludes with a recommendation relating to the matter in question in which the entire commission concurred, and that recommendation is now respectfully renewed.
"Very respectfully,
"Martin A. Knapp,
"Chairman."
It will be observed by an examination of this communication from the commission that it deemed it unwise to recommend the adoption of the amendment to the sixth section as offered in Senate bill 423, but the letter refers to its former report as expressive of its views upon this subject, which recommended a somewhat similar provision, but differing in this respect. In Senate bill 423 the filing of a protest would suspend the taking effect of the rate until after full hearing as to the merits of the advance. The recommendation of the commission in its former report, referred to in the communication, recommended the adoption of a provision that would confer upon the commission, upon the filing of a complaint, the discretion to suspend the rate until final hearing. The amendment to the bill before your committee offered during its consideration, and which has been fully discussed in this report, was in substance the recommendation of the commission.
An analysis of the letter of the chairman of the commission, stating the objections to the enactments of the proposed amendment into law, sustains many of the reasons which have been urged in this report against the approval of the principle announced by that amendment. The committee quotes from the letter, as follows:
"(a) To give to the protest of a single shipper the effect of preventing the advance of any rate until the reasonableness of that advance was affirmatively determined by the commission, would establish a hard and fast rule of doubtful fairness to the railroads and questionable advantage to the public.
"(b) Under existing conditions we are of the opinion that it would be unwise to adopt the arbitrary limitation which this bill proposes.
"(c) If every proposed advance had to be investigated by the commission and officially sanctioned before it could take effect the number of cases to be considered would presumably be so great as to render this prompt disposition almost impossible.
"(d) It is further to be observed that the passage of such a bill at this time would impose a burden upon the commission, which it should not be asked to undertake.
"(e) In instances of justifiable increase all necessary delay resulting from probable volume of cases would work injustice to the carriers.
"(f) Until conditions become more stable and the substantive operations of the act are more completely observed in railway tariffs and practices, we entertain the belief that a wider latitude of discretion on the part of carriers than this measure allows would be permitted.
"(g) It is also suggested that the practical effect of a proposed amendment might be to prevent voluntary reductions of rates by the carriers.
"(h) If no rate could be increased without the approval of the commission after affirmative showing by the carrier, it might happen that many reductions now voluntarily accorded would not be made."
The nine reasons suggested by the commission why the original amendment offered to section 6 should not be adopted, fully sustain the committee in reporting the bill adversely, and to a great extent, fully justify the views which it has expressed in this report as influencing the actions of the committee in its adverse report upon the amendment proposed in the committee.
The committee is unable to appreciate the force of the suggestion of the modification proposed to the original amendment, as in any way changing the principle embodied in it, or the practical results which would flow from its adoption. If the power was conferred upon the commission, when a rate was advanced, upon complaint to suspend the going into effect of that rate until a final hearing, every objection urged by the commission to the adoption of the bill, but the first two, would be applicable to the modification proposed by the commission to the original amendment.
Under the modification suggested by the commission the burden imposed upon it would be greater, if possible, than under the original amendment. Under the original amendment, by force of the statute, the filing of the protest would suspend the advanced rate, and the hearing upon the merits would take place after the thirty days had expired. Under the suggestion of the commission conferring upon it the discretionary authority upon complaint to determine whether the rate should go into effect at the time prescribed by law or be suspended, there is imposed an official quasi judicial duty upon the commission, which it should not perform except upon proof that probably the rate sought to be advanced would ultimately be determined to be unreasonable. Remembering the large number of changes of rates daily, and the fact that under the law the complaint could be filed at any time within the thirty days, would it not be an impossible undertaking for the commission to hope to perform this official act with justice to the public or to the carrier? In the multiplicity of duties now demanding its most earnest attention, would not the practical operation of such a law compel it to enter a pro forma order of suspension until the final hearing, when the commission, upon an examination of the complaint, is satisfied that it presented a prima facie case of unreasonable advance?
An official tribunal charged with the duty of preventing an unreasonable advance in rates would be constrained, on the presentation of such a complaint, to issue the order of suspension. If the slightest doubt was raised in its mind as to the reasonableness of the advance, its official obligation would require it to enter the order of suspension. Is there any question that such a prima facie case could be made where the consideration of the protest would, of necessity, be ex parte?
The committee is not, therefore, able to draw a distinction between the original amendment and that proposed in committee. In the opinion of the committee the reasons stated in the letter of the chairman of the commission, and the reasons given in this report, not only justify it but compel an adverse report.
CONDITIONS CONFRONTING CONGRESS.
10. The act of June 29, 1906, took effect August 28, 1906. It has been operative only about twenty-eight months. During half of that period of time the country has experienced the effects of a severe commercial panic; business has been prostrated; transportation paralyzed; thousands of cars have been stored on the sidings, and hundreds of engines have been placed in the shops, awaiting the revival of business. From conditions existing today, we have a right to assume that before many months we shall be approaching normal conditions. The commission has not had sufficient time to interpret and construe the recent law and to promulgate its orders in reference to the action of the carriers under it. Many of the traffic questions involved, under the provisions of that law, are yet to be construed and put in force by orders of the commission. Is it wise, under these conditions, to begin amending that statute by introducing provisions inconsistent with the basis of the act? It has been shown that under the power conferred by that recent enactment, the commission is vested with the power to change an existing unreasonable rate and to fix for the future a reasonable rate. It has also the authority conferred upon it to award reparation to the extent of any injury resulting to a shipper, by reason of the existence of an unreasonable rate.
Attention has been called to the opinion of the commission, as expressed in its decisions, narrowing very greatly the right of the carrier to advance a rate that would meet with its approval upon hearing. The committee must assume, in considering this question, that both the shippers and traffic officials, with knowledge of the views entertained by the commission upon the question of an advance of rates, will in the one case be prompt to avail themselves of that attitude of the commission, and in the other that they will seek to so adjust their rates as to bring their schedules within the rulings of that tribunal. The committee believes the highest duty of the commission is to bring together shippers and carriers, to the end that each may see that neither can be permanently prosperous at the expense of the other. It further believes that in many instances this effort has been made by the commission, and successfully made. It cannot be accomplished by statutes causing rigidity of rates. The most sensitive spot in the great business dealings of the country is the railroad rate. This rate must be raised or lowered, not in obedience to a rigid statutory law, but in obedience to the varying conditions of trade and commerce.
The National Board of Trade, one of the most important commercial organizations in the country and one of the most influential, met in Washington on Tuesday, January 19, 1909. Two proposed resolutions were submitted to that convention. First, by the Philadelphia Press League, urging an amendment to the interstate commerce law, to permit railroads engaged in interstate traffic to enter into the making of agreements under the supervision and control of the Interstate Commerce Commission. The second proposition was submitted by the Scranton Board of Trade, embodying the provisions of the amendment offered in the committee upon the consideration of Senate bill 423, and approved in the report of the Interstate Commerce Commission as to the advance of rates.
These resolutions were referred to the committee on resolutions having charge of interstate commerce matters. That committee, through its chairman, made the following report, which was unanimously indorsed by the convention of the National Board of Trade:
"The committee on interstate commerce law respectfully reports that, in its judgment, the National Board of Trade ought not at this time to recommend any change in the laws relating to interstate commerce."
The convention was not satisfied with the passage of this resolution, but the chairmen of the several committees of that association were subsequently authorized and directed by resolution to urge the conclusions of the board in its name whenever possible.
The country is now demanding repose in its industrial upbuilding. It is not a time to experiment and to change the basis upon which the former acts to regulate commerce have been predicated. The recent law passed by Congress so greatly enlarging the authority of the commission should, before changes are sought, have the opportunity of at least a fair trial as to the value of its provisions in the regulation of interstate commerce. When trial has been given and normal conditions have been restored, any defect in the regulating statute can then, in the light of experience, be promptly remedied.