FOOTNOTES:
[688] Characterized somewhat heatedly by Senator La Follette in his Autobiography (American Magazine, 1912, p. 189), as "in all the history of railroad legislation, the rankest, boldest betrayal of public interest ever proposed in any legislative body."
[689] The best references are the following:—F. H. Dixon, Quarterly Journal of Economics, vol. XXIII, 1910, pp. 593-633; reprinted in the Railway Age Gazette, vol. XLIX, p. 688 et seq.; American Political Science Review, vol. IV, 1910, pp. 537-554. Our other sources are the files of the Annual Reports of I. C. C.; the Congressional Record, Railway Age Gazette, and daily press reports.
[691] Concrete instance in 17 I. C. C. Rep., p. 317. Also p. [510], supra, and [587], infra.
[692] The suspension of increased rates on Maine potatoes in October, 1912, long enough to permit the entire season's crop to be marketed on the old tariffs is a case in point.
[694] Volume IV, p. 3293.
[695] The following is the form in which the Fourth Section now stands:
"Section 4. That it shall be unlawful for any common carrier subject to the provisions of this act to charge or receive any greater compensation in the aggregate for the transportation of passengers, or of like kind of property, for a shorter than for a longer distance over the same line or route in the same direction, the shorter being included within the longer distance, or to charge any greater compensation as a through route than the aggregate of the intermediate rates subject to the provisions of this act; but this shall not be construed as authorizing any common carrier within the terms of this act to charge or receive as great compensation for a shorter as for a longer distance: Provided, however That upon application to the Interstate Commerce Commission such common carrier may in special cases, after investigation, be authorized by the Commission to charge less for longer than for shorter distances for the transportation of passengers or property; and the Commission may from time to time prescribe the extent to which such designated common carrier may be relieved from the operation of this section: Provided, further, That no rates or charges lawfully existing at the time of the passage of this amendatory act shall be required to be changed by reason of the provisions of this section prior to the expiration of six months after the passage of this act, nor in any case where application shall have been filed before the Commission, in accordance with the provisions of this section, until a determination of such application by the Commission.
Whenever a carrier by the railroad shall in competition with a water route or routes reduce the rates on the carriage of any species of freight to or from competitive points, it shall not be permitted to increase such rates unless after hearing by the Interstate Commerce Commission it shall be found that such proposed increase rests upon changed conditions other than the elimination of water competition."
[697] Cf. the example on p. [590], infra.
[698] The following account, by W. M. Acworth in the Railway Age Gazette, of a conversation with the late Collis P. Huntington illustrates the possible abuse:
"The Southern Pacific built two fine steamers to run between San Francisco and Sacramento, Cal. They gave a daily service, each boat running up one day, and down the next, and the passenger fare was $2. A private individual thought he saw his way to compete with advantage, and bought a smaller boat, which only gave a service every other day, but, on the other hand, only charged $1 for this service.
"The Southern Pacific began to lose money, and when Mr. Huntington next came to California the position was put before him. 'Would you like to leave me to run this fight?' said he to the local manager. 'Certainly, sir,' was the reply. 'Is there an old boat you can buy that could give a service?' Being told that there was, Mr. Huntington bought it, ordered the two first-class boats to be laid up, and announced that the new purchase would run alongside the rival boat at a fare of 50 cents. 'Why, sir,' said the local manager. '50 cents won't pay for the coal.' 'No, I do not suppose it will,' was the answer, 'but when you go to war you have got to fight!"
"Before long the owner of the rival boat came to Mr. Huntington and asked him what he was prepared to do about it. Mr. Huntington replied that he would buy his boat for $10,000—I think the sum was. 'But, Mr. Huntington, the boat cost me $20,000, and she is worth it.' 'Very likely, but I am only going to give you $10,000.' So the fight went on for a while longer. When the spring came Mr. Huntington was on the point of returning to New York. He sent word to his rival that he was leaving California the following week, and that if the matter was not settled before he left, his 50-cent boat would continue to run till his return the following winter. Whereupon his competitor at once threw up the sponge and then sold his boat for $10,000. 'Since then,' concluded Mr. Huntington, 'there has been no competition with the Southern Pacific on the Sacramento river.'"
[700] Opinion No. 44, 1911, is the first Commerce Court case to interpret this jurisdiction. Cf., also, p. [587], supra.
[701] 191 Fed. Rep., 37, first interprets this clause. P. [587], infra.
[702] Quarterly Journal of Economics, XXVI, 1912, p. 444.
[704] Report of the Railroad Securities Commission, Nov. 1, 1911.
[706] These will be fully described in our second volume in connection with stock-watering, valuation and allied financial problems.
[707] Volume II, in the chapter on Valuation.
[708] Volume II, in the chapter on Capital Stock.
[709] Cf. Senator La Follette's characterization of it. Footnote, p. [559], supra.
[710] The National Waterways Commission Report of 1912 urged this strongly. And the attempts in connection with fixing the tolls for the Panama Canal in the same year, to prohibit all railway ownership or interest in coastwise steamships, were significant of legislation yet to come. Cf. pp. [591] and [638], infra.
[711] Cf. the Goodrich Transit Co. case. Page [586], infra.
CHAPTER XVIII
THE COMMERCE COURT: THE FREIGHT RATE ADVANCES OF 1910
The Commerce Court docket, [581].—The Commerce Court in Congress, [582].—Supreme Court opinions concerning it, [583].—Legal v. economic decisions, [586].—Law points decided, [586].—The Maximum (Cincinnati) Freight Rate case revived, [588].—Real conflict over economic issues, [590].—The Louisville & Nashville case, [590].—The California Lemon case, [592].—Broad v. narrow court review once more, [593].
The freight rate advances of 1910, [594].—Their causes examined, [595].—Weakness of the railroad presentation, [596].—Operating expenses and wages higher, [597].—The argument in rebuttal, [598].—"Scientific management," [598].—The Commission decides adversely, [599].
The three vital features of the Mann-Elkins law of 1910 were: the creation of the Commerce Court, for the purpose of expediting the judicial review of cases appealed from the Interstate Commerce Commission; the grant of power to suspend rate advances pending examination as to their reasonableness; and the rehabilitation of the long and short haul clause. The law was passed on June 18, 1910. Within the brief period of two years it successfully emerged from a supreme test respecting rate advances; enough experience had already been had with the new Commerce Court to warrant an opinion as to its merits as a special tribunal for the review of transportation decisions; and, finally, an opinion by the Interstate Commerce Commission was rendered, and is at this writing under review by the Supreme Court of the United States, in the most important case ever likely to arise under the long and short haul clause. Predictions were freely made in 1910 that certain shortcomings in the revised law, particularly the failure to grant control over minimum rates and the establishment of differentials between rates, would soon have to be remedied. Experience promptly threw light upon these questions also. The present is thus an opportune time to review the entire situation respecting Federal railroad regulation.
When the Commerce Court was created, fears were entertained that there would not be enough business to employ its time. This prediction was far from being realized, judging by the record of the first year.[712] Including thirty-six cases transferred to it from the various Federal circuit courts, a total of fifty-seven suits were placed upon its docket up to December 20, 1911. Fifty-four of these cases directly concerned orders of the Interstate Commerce Commission, the large majority—forty-four—being suits brought by carriers to set aside such orders. The Commission appealed to the court but once for enforcement of its mandates, the remaining nine cases being appeals of shippers for relief. But a number of these suits were withdrawn or dismissed, or else lay outside the class of what may fairly be called contested cases. Only thirty-eight of them were in reality of significance as throwing light upon the function of the court as an appellate tribunal, standing between the Interstate Commerce Commission and the Supreme Court of the United States. Thirty of these were disposed of up to December 20, 1911. That the court took itself seriously as a check upon, rather than a coördinate body with the Commission, was evidenced by the fact that restraining orders or final decrees in favor of the railroads and against the shippers and the Commission were issued in all but three really important cases out of the entire thirty. And even of these three cases the Commerce Court held two to be outside its jurisdiction, while in the third the carriers had already joined in the view of the Commission, so that there was really no contest.[713]
A bitter campaign for the abolition of the Commerce Court, as a result of the tendency of its decisions, was waged in Congress during the session of 1911-1912. The House of Representatives, in response to popular feeling, promptly passed a bill abolishing it forthwith, the vote standing 120 to 49, with many Republicans joining the Democrats in its condemnation. A sharp contest was precipitated in the Senate over "the legislative recall of judges," as the matter was not inaptly termed. The Administration, through the Attorney-General, ably defended the imperilled court.[714] Evidence was adduced to show that the Commission had been sustained in a larger proportion of cases than under the old circuit court system;[715] that injunctions had not issued with greater freedom than formerly and that none of them turned upon questions of fact; and, finally, that the Administration plan had been very much more expeditious. But so far as Congress was concerned this evidence seems not to have been convincing. The Senate soon followed the House of Representatives, by a vote of thirty-six to twenty-three defeating an amendment to the Legislative, Executive and Judicial Appropriation Bill that made provision for further maintenance of the court. So strong was the feeling that only by a close vote was an amendment prevented which sought to legislate the justices out of office as well as out of the Commerce Court. For without such provision, of course, they would, under the law of 1910, be reassigned to service in the circuit courts, from which most of them were drawn. The final conference agreement between the two houses, appended to the appropriation bill above mentioned, definitely abolished the court, but followed the House plan of reassignment of the justices to duty in the circuit courts. This bill was twice vetoed by the President; but the second time, it failed of re-passage in the Senate over his veto by a narrow margin. In the House the popular view was expressed by re-passing the abolition measure by a vote of 149 to 53. These details are highly significant as indicating the impatience of Congress with any attempt at interference with the positive program of administrative control of railroads decreed in 1906-1910. The fate of the court then rested in the hands of the President, its original sponsor. A delicate situation, concerning the relations between Congress and the executive in the matter of legislative "riders" to appropriation bills, resulted. Whether such summary proceedings as those initiated by Congress were warranted by the facts, depended upon the final disposition of the contested cases by the Supreme Court, before which tribunal most of them were then pending on appeal. If it appeared that the court had in reality, as alleged, sought to usurp powers legitimately exercised by the Commission, the case for abolition would be greatly strengthened. But in any event, the certainty of a presidential veto of any law affecting this pet project of the Administration rendered the attack upon the Commerce Court for the time being abortive. As the matter was finally left, Congress acceded to the President's wishes, continuing the appropriation for maintenance of the court until March 4, 1913. What will happen in the meantime after Congress reassembles, remains to be seen.
The determination of the proper scope and function of judicial review was substantially forwarded by several decisions of the Supreme Court of the United States in June, 1912. The general effect of these was substantially to curtail the overweening ambition of the Commerce Court as an intermediate judicial body. Following the Goodrich Transit Company opinion[716] which first reversed the Commerce Court, all three of these latest opinions on appeal again favored the Interstate Commerce Commission as against its judicial reviewer. In two instances, the assumed jurisdiction of the new court was denied; while in the third, although jurisdiction was recognized, its decision was reversed. Because of their bearing upon subsequent developments, a brief review of these cases may not be out of place.
The Proctor and Gamble Company, well-known soap manufacturers, had complained of certain regulations concerning demurrage upon their tank cars. The Commission upheld the carriers, affirming that their rules were proper and lawful. The complainants thereupon appealed to the Commerce Court, which claimed jurisdiction to award pecuniary relief, although in this instance it declined so to do, on the ground that the Commission had rightfully decided the matter in the first instance. Appeal then followed to the Supreme Court, with the odd circumstance that the Commission and the railways joined issue against the shippers. The question was largely a legal one, involving definition of the jurisdiction of the new tribunal. The Supreme Court in this instance,[717]—and, it may be added, in the Cincinnati Freight Bureau case,[718] which similarly involved the relative powers of the court and the Commission,—unanimously affirmed the right of the Commission to decide such matters of fact finally.
To recognize the existence in the court below [the Commerce Court] of the power which it deemed it possessed, would result in frustrating the legislative public policy which led to the adoption of the act. The act creating the Commerce Court was intended to be but a part of the existing system for the regulation of interstate commerce.... It was not intended to destroy the existing machinery or method of regulation, but to cause it to be more efficient.... Wholly irrespective of the general considerations stated, we think the conclusion of the [Commerce] Court, as to its possession of jurisdiction over the subject referred to, was clearly repugnant in other respects to the express terms of the act.
Such a pronouncement, following the line of decisions headed by the Illinois Central Car Distribution case,[719] must make for concentration of responsibility and more effective regulation in the years to come.
The third decision of the Supreme Court, above referred to, was known as the "Restrictive Rate case."[720] Might railway companies—the Baltimore & Ohio and others—charge a different rate for the carriage of coal to railways than to other shippers, the coal being intended for the use of the railways as fuel? In this instance the Commission forbade the practice. Its order was then promptly enjoined by the Commerce Court. Jurisdiction of the Commerce Court was conceded by the Supreme Court in this instance also, but its opinion was again flatly reversed. The issue at bottom was really one of value of service as against cost of service in the determination of reasonable rates. Obviously the cost of carrying railway-fuel coal between two given points is practically the same as that of carrying commercial coal. The Commission, supported now by the Supreme Court in frowning upon any difference in the charge, was thus according priority to this consideration of cost. The view of the Commerce Court, which was here reversed, tended, on the other hand, to emphasize such facts as that the two sorts of coal were intended for different purposes and did not come in competition with one another as to price. In other words, value of service—what the traffic would bear—was given greater weight than mere considerations of cost. The Supreme Court declined to accept this view, preferring to regard transportation as a matter of physical carriage of goods, rather than to look beyond this essential service "to the greater or less inducement to seek the service"—that is to say, to regard its commercial aspects.
The last of this batch of Supreme Court decisions was mainly a question at law, namely the right of the Commerce Court to enjoin the enforcement of an order of the Commission concerning certain allowances for lighterage and terminal service on sugar in New York harbor.[721] The judicial poise of the Supreme Court was here evidenced in its affirmation of the right of the Commerce Court to issue the injunction. The plain purpose of the law in setting up this intermediate tribunal as a safeguard against abuse of administrative authority was given effect; but it was ordered, nevertheless, that the case be remanded, to be disposed of on its merits before the Interstate Commerce Commission, the forum selected by Congress for that purpose.
The grist of cases appealed to the Commerce Court may profitably be divided for discussion into two groups, namely, those which clearly concerned questions of law and those in which matters of fact, or economic conclusions based thereon, were primarily at stake. The first group of purely law cases need detain us but briefly. There could be little doubt about the necessity of judicial review of law findings of the Commission. The best illustration is afforded by the first decision of the Commerce Court to be reviewed by the Supreme Court of the United States.[722] Inland water carriers were not placed under the jurisdiction of the Act to Regulate Commerce by the Mann-Elkins amendments of 1910, except in so far as they were joined in control with railroads or might enter into arrangements for continuous shipments with carriers by land. But the Commission, having always required railroads to file accounts covering both their local and interstate business, called upon the carriers on the Great Lakes to render similar statements as to their entire traffic, whether subject to Federal control or not. This the water lines refused to do. The Commerce Court, in overruling the Commission, did not question the power of Congress to require such accounts, but held that it was its intention to confine publicity to that portion of the lake traffic over which the jurisdiction of the Commission actually extended. It thus appears that the law point was doubly important; inasmuch as its determination affected not alone the enforcement of publicity for water lines but also of all carriers by land, so far as their intrastate business was concerned. Fortunately the Supreme Court, in sustaining the Commission, held that the Commerce Court had erred in confusing "knowledge" of intrastate business with its "regulation." As to the former, the authority of the Commission was fully upheld. This and the important question upon which the entire Intermountain rate controversy rested, namely, as to the authority of the Commission to prescribe relativity of rates,[723] were the most important points of law at first raised before the new tribunal. Other legal questions decided by the Commerce Court—generally in favor of the railroads, be it observed—were: whether reparation might be claimed for an unreasonable rate when the burden had been already passed on to the consumer;[724] whether the Nashville Grain Exchange might lawfully intervene in proceedings before the Commission under the liberal terms of the law of 1910;[725] whether "separately established rates" applied by a carrier to through traffic when there is a through rate but no joint rate are matters of interstate commerce or not;[726] as to the limitations by law of the right of carriers to refund overcharges to shippers;[727] and whether the Union Stockyards Company was a common carrier engaged in interstate commerce, and thus subject to control as to preferential treatment of shippers.[728] However these cases might be finally decided by the court of last resort, there could be no conflict of powers between the Commerce Court and the Commission in regard to such matters of law. The real bone of contention between the two bodies—administrative and judicial, respectively—was the question of their respective powers outside the field of law.
Before leaving the disputes over law points, we may profitably consider one further case, important because of its bearing upon the determination of reasonable rates. This occurred in 1911 through a revival of the old Maximum (Cincinnati) Freight Rate case of 1896.[729] It will be recalled that this involved the relative rates to southern centres from eastern and middle western cities.[730] In the original case in 1894, the Commission held that the rates from Cincinnati were too high by comparison with the rates from New York; ordering those for first-class freight, for example, to be reduced from seventy-six cents to sixty cents per hundred pounds. The Supreme Court directed a dismissal of the bill of complaint, on the ground that the Commission had no authority to establish rates for the future. This defect in the law being remedied by the amendment of 1906, the Commission, upon a new complaint, made a second order in 1910. This differed from its earlier decision in prescribing a reduction of the rate from Cincinnati from seventy-six cents to only seventy cents, whereas the first decision had ordered it reduced to sixty cents per hundred pounds. The Cincinnati shippers, not content with this reduction, then promptly appealed to the Commerce Court for a review of the case. The proceeding was unique, therefore, in that the appeal to the Commerce Court was taken, not by the carriers but by shippers who complained that the rates established by the Commission were too high. The Commerce Court in sustaining the order of the Commission, therefore, in reality acted in favor of the railroads, being thereby consistent with its general attitude of conservatism. But its right to take cognizance of such questions was denied by the Supreme Court. Thus, in all probability, this famous and protracted litigation was brought to a close.
The specific law point in this Cincinnati case was as to whether the reasonableness of a rate should be determined in the light solely of its effect upon the particular carrier concerned; or whether the result for other competing lines and for the entire territory served, should also be taken into consideration. The Cincinnati Southern Railroad extended as a short and direct route 336 miles due south to Chattanooga. It was neither expensive to construct, to maintain or to operate. It was the first in the field; having been constructed by the city of Cincinnati to reach the southern markets. It was not burdened by unremunerative branch lines. Its net earnings amounted to over forty per cent. upon the capital stock. Other competing railroads between the same points were one-third longer and were otherwise burdened by the necessity of maintaining unprofitable branches. These other roads could not be so economically operated. But they had voluntarily entered the field in competition after this direct line was constructed, and they had elected to continue therein. The rates established, however, for the Cincinnati Southern,—the short line,—naturally fixed the rates at which these others had to participate in the traffic. At the rate of seventy cents, prescribed in this second order of the Commission, all the carriers concerned could make a living. The short line alone, presumably, could have endured the rate of sixty cents as prescribed at first. Was it lawful, however, to decide a complaint preferred against a particular most-favored railroad by a city which built it to attain a certain object, upon the basis of the effect of such rates, not upon this road but upon others subsequently built and less fortunately situated? To do so would, of course, enable the most-favored carrier to prosper exceedingly; even more so than it did then. But these higher rates would, most unfortunately, thwart the very purpose animating its construction. The Commission, sustained by the majority of the Commerce Court, adopted the latter view.[731] A dissenting minority, on the other hand, presented strongly the opinion that under such special circumstances, in the determination as to reasonableness, no right existed for considering the effect of a rate upon other roads than the particular one against which the complaint lay. The Supreme Court in affirming the sole authority of the Commission to pass upon such issues, nevertheless, left this detail concerning the determination of reasonableness of rates for possible reargument in future.
Attention may be now directed to the controversy as to the seat of authority, not over law points, but concerning distinctly economic issues. A typical case before the Commerce Court concerned rates from New Orleans to several competing cities on the line of the Louisville & Nashville Railroad.[732] An interesting phase of local discrimination appeared. The accompanying map discloses the situation. Normally the through rate from New Orleans to Montgomery (the long-distance point) would be less than the sum of the local rates from New Orleans to Mobile (the intermediate point) and then from Mobile on to Montgomery. This would conform to the general rule, which is based on the simple fact that through rates, being competitive, are usually forced below the level of local charges, commonly unaffected by such competition. In this case the situation was reversed. Water competition affected the local rates, both into Mobile from New Orleans by sea on the one side, and then up the Alabama to Montgomery by river steamer on the other. But such water competition did not apply to the through rate, probably because through shipment by water would necessitate a transfer en route from a gulf steamer to a river boat at Mobile. Thus in this case it came about that local competition was keener than the rivalry as to through traffic. The Louisville & Nashville, nevertheless, had secured the bulk of the business to Mobile by reason of the low local rates by rail which had been in effect for many years, even after practical elimination of the water lines. The situation was certainly anomalous, from the viewpoint of cost of service by rail alone; in that the freight rate was higher on goods sent to Montgomery direct than when shipped on a combination of local rates on Mobile. This situation, it is apparent, enabled Mobile jobbers to buy goods in New Orleans and actually lay them down in Montgomery for less than the freight charges to the Montgomery dealers who were on the spot. The same situation prevailed at Pensacola.
The immediate cause of dispute was the promulgation by the Commission in 1907, under the new powers conferred by the Hepburn Act, of a rule that through rates must not exceed the combination of locals between the same points. To comply with this rule, the Louisville & Nashville, in this instance, faced the alternative either of reducing the through rate from New Orleans to Montgomery to the sum of its local charges or else of raising one or both of the latter. The railroad naturally chose the latter course—now enabled to do so with safety as the boat lines had long since been put out of business. It advanced its local rates from New Orleans to Mobile sufficiently to make the new combination of local charges equal the through rate to Montgomery. The Commission, on complaint of Montgomery, suspended this advance,—seeking to compel the railroad to even things up, not by advance of the local charges but by a reduction of the through rate. This, it is obvious, would relieve Montgomery of the discrimination as against Mobile of which it complained. As to none of the facts above outlined, was there dispute between the court and the Commission. The controversy turned solely upon which of the two remedies should be chosen to meet the situation. Were the through rates unreasonably high? This was the Commission's contention. If so, equalization should be attained by their reduction. Or, on the other hand, were the local rates unreasonably low? If so, they might be evened upward with propriety. This was the contention of the Commerce Court, leading it to set aside the order of the Commission. Which was the body competent to pass upon such an issue? The Supreme Court had to be called upon to decide. And in the meantime there was the same old story of delay, while irreparable loss to shippers went on.
In another instance,—the California lemon case,—[733] the issue was even more sharply drawn between the Commission and the Commerce Court. The latter, it was averred, not even content to draw its own conclusions in matters of fact, had made an "attempt to look into the mind of the Commission for the purpose of ascertaining the reasons on which its order was based." The case dated from 1909, when the blanket rate from the entire territory east of the Rocky mountains was advanced by the railroads from $1.00 to $1.15. This action followed the imposition of a high protective duty on lemons in the Payne-Aldrich tariff. After careful investigation the Commission, reviewing the whole matter of rates upon citrus fruits, ordered the lemon rate to be reduced once more to $1.00. Appeal was promptly taken to the Commerce Court, which set aside the order as beyond the scope of authority delegated by Congress. The court held that the Commission had sought so to adjust rates as to afford protection to the California lemon industry against foreign competition, especially from the growers in Sicily; in place of confining its attention to the "intrinsic reasonableness" of the transportation charge. The gage thus thrown down was promptly taken up by the Commission in a second opinion, rendered within two months of the injunction granted by the Commerce Court. This time it exhaustively considered all phases of the cost and manner of transportation for oranges and lemons and re-affirmed its opinion that the rate of one dollar per hundred pounds was reasonable. At this writing the matter rests there. What the Commerce Court will do, remains to be seen. The case, as re-stated by the Commission, is masterly in its discussion of the responsibilities laid upon it by the law. "Is the country to be treated as a whole for commercial purposes, or shall it be infinitely divided?"
The Intermountain Rate cases, discussed in the next chapter as a phase of the long and short haul question, illustrate even more clearly these conflicts between the court and the Commission on matters of economics. But they introduced no new legal technicalities. They merely emphasized the critical nature of the controversy, so far as it concerned the larger constitutional question of separation of powers between the three main branches of our government.
The situation, as revealed by these typical cases, reduced itself, in brief, to this: it was the same old question of broad versus narrow court review all over again. The Commerce Court held it to be its proper function, as a court of law, to review in the broadest way all cases which came before it on appeal. The Commission, on the other hand, maintained that not only all matters of fact, but all inferences as to economic facts, of necessity lay solely within the range of its own authority, And it was certainly true that, without some such limitation upon the right of review, the Commission might about as well have retired from the field of regulation entirely, and contented itself with enforcing the safety appliance laws, collecting statistics and serving as a general publicity office.[734] Fortunately the situation promised to be saved by the line of Supreme Court decisions flowing from the Illinois Central case.[735] The making of a rate for the future being a legislative and not a judicial function, the power to determine that a particular rate was or was not reasonable for the future, or that a particular discrimination was or was not undue, was a discretionary legislative power which could not be reviewed by the judiciary. If the Supreme Court in due time applied this reasoning to these later cases, the Commerce Court might confidently be expected to take its proper place in the Federal scheme of things. Until it was forced to do so, much of the railroad legislation of recent years would fail to ensure that full measure of certainty and promptitude of relief to which the country was entitled, and which it was bound to have.
The decision of the Interstate Commerce Commission in 1910 in the matter of freight rate advances[736] was of prime importance; not alone because of the great monetary and commercial interests involved, but also because it might afford a forecast of the policy of the government in such matters in future. Public interest was quickened also because of the novelty of resting the burden of proof upon the railroads rather than upon the shippers, as in the past. The effect of this change in procedure was apparent throughout. The representatives of the shippers were, in most cases, content to point out the inadequacy of the reasons advanced by the carriers. The railroads, on the other hand, were forced to come forward aggressively with positive arguments favoring their side of the case. The only exception to the negative task of appearing in rebuttal against the carriers' arguments was in the somewhat spectacular presentation of the novel issue of "scientific management," shortly to be discussed.
The movement of freight rates since 1900 was insistently upward. On two separate occasions prior to 1910, as we have seen,[737] general advances by concerted action of the carriers took place, namely in 1903 and 1907. These earlier changes had been mainly confined to commodity rates. All the great staples, such as iron and steel, grain, coal and coke, glass, brick and cement, were affected. The rate increases of 1910, on the other hand, which gave rise to the first important test of the Mann-Elkins law, were mainly confined to advances in class rates,—that is to say, the rates upon merchandise and the better grades of freight. It was doubtless true, as alleged, that the steady decline throughout a generation before 1900 had unduly depressed the scale of charges for transportation service; and that prices in general, and especially wages and costs of operation, had greatly enhanced since that time. To meet this situation, the carriers had proceeded either to get together by an understanding not to compete; or else they had permanently put an end to competition by downright consolidation. After the first upward movement which paused about 1904, some time elapsed without further efforts in this direction. Then, after postponement of a concerted attempt in 1908 matters went on quietly enough until 1910. Many changes were unostentatiously made in individual instances by modification of traffic rules or classification;[738] but no widespread action took place. The occasion for the renewal of the upward movement in 1910 was an insistent demand of railroad employees all over the country for a rise in wages. And the acquiescent attitude of the railroad managers toward their employees, suggested a tacit understanding that wages were to be raised on condition that the brotherhoods support the movement to recover this advance from the public through an increase in freight rates.
The trunk lines filed their new tariffs in 1910, even while Congress was in the throes of debate over the Mann-Elkins Act. These schedules substantially increased all class rates,—by from eight to twenty per cent;—and affected about half the commodity rates, mainly of the lesser sort. The western railroads promptly followed suit, filing higher tariffs by about ten per cent, for approximately 200 commodities. In response to vehement protest from all over the country, Congress, as we have seen,[739] promptly conferred authority upon the Interstate Commerce Commission by the Mann-Elkins amendments to suspend such rate advances temporarily for examination as to their reasonableness. By virtue of this authority the Commission took testimony for several months and rendered its decisions both for the eastern and western railroads on February 22, 1911.[740] The strongest impression which one gains from examination of the testimony, is that the case for the railroads was imperfectly organized and inadequately presented. There was no division of the field in argument, with intensive cultivation in each case; but all of the railway representatives traversed much of the same ground, so widely scattering their effort that but superficial treatment of each point was possible. The shippers, on the other hand, evidently laid out their plan of campaign with more system and had correspondingly better results.
The railroads in the presentation of their case were somewhat embarrassed by several complications, some applicable to all the roads alike, while others arose from the diversity of financial and operating conditions on different lines. All alike were denied resort to the main argument advanced in favor of the general rate advances in earlier years, particularly in 1900. It had been expected that stress might be laid upon the increased cost of materials used in construction or operation; but the fact that, largely as an aftermath of industrial depression, prices of many commodities were actually lower in 1910 than they had been on the average for a decade, deprived the railroads of this powerful argument. The main exceptions in this respect were in the prices of fuel and lumber. Owing to the diversity of operating conditions among the carriers, difficulty was also experienced in adducing the wage increases of 1910 as a warrant for advancing freight rates. Considering the entire railroad net affected, it appeared that the augmentation in revenue from the proposed advances would be $27,000,000; whereas the already conceded wage increases were in excess of $34,000,000,—in each case calculations being based upon the same volume of traffic and employment as in the preceding year. The wage argument, generally applied, was thus valid. But taking the carriers one by one, it appeared that the changes in wages and revenue which might result, varied greatly. On the New York Central, the increase in revenue would just about cover the rise in wages; on the Pennsylvania, it was less than half of the enlarged payroll. It was thus apparent that emphasis upon the increase in wages would not be equally valid for argument by all roads alike. The possible advantage of a united front was thereby denied.
Broader ground for rate increases was taken by the carriers, in the argument that operating expenses had greatly augmented in recent years, not so much because of higher prices or even wages, but because of the exactions of the public in the way either of better facilities and service or of greater safety. It was alleged that vast expenditures had been necessarily made for such purposes without a commensurate increase in revenue.[741] The main proof of this point lay in statistical presentation of the greatly increased operating ratio within recent years; that is to say, the higher percentage of gross revenue which it was necessary to expend in operation. Here again, the carriers failed to agree in the particular margin of safety above a reasonable return upon the investment, paid in dividends, which should be put back into the property. It was also urged by the carriers that the necessary funds for constructive development in future could be obtained only by such improvement in railroad credit as would result from a substantial margin of net earnings above reasonable dividends. Such were, in the main, the arguments presented by the railroads on behalf of their plea that the proposed rate advances should not be suspended.
The case in rebuttal, as presented by representatives of commercial organizations, was carried aggressively into the enemy's territory in only one line of argument. It was alleged that sufficient economy in operation could be effected by means of "scientific management" to more than offset the increase in wages together with the general demand for better service and improvements by the public.[742] On the whole the arraignment of the carriers in this regard failed to establish its point. Whatever results from "efficiency" had been obtained in manufacturing establishments, the limited experience in railroading outside of shop management, while generally satisfactory, had not been altogether convincing. Essential differences between railroads and factories, particularly in respect of minute supervision of labor scattered over hundreds of miles of line, tended to render impracticable many of the improvements in process advocated by efficiency engineers. The demands incident to the operation of public-service companies are also different from those applicable in private business. Railroads must consider not only profit-making, but adequate and satisfactory service. And, finally, the thorough organization of labor among carriers was a bar to the untrammelled introduction of new methods. Nevertheless, the publicity which was derived from the presentation of this case before the Commission could not fail to draw attention to the need of determined and general application of such sound and businesslike methods as were found practicable.
The shippers attempted, in general, to meet the railway arguments point by point. Thus the plea of steadily increasing operating ratios absorbing an ever larger proportion of gross earnings, was met by statistical evidence showing that gross revenues had so rapidly augmented during the decade as, nevertheless, to permit of a steady increase in net revenue year by year. In this regard, the time was certainly opportune for establishing this point. Recovery from the depression following 1907 was actively under way during 1909-1910. Not even the indications that a less rosy future was to ensue in 1911,—judged by the then course of net earnings,—sufficed to offset statistical evidence in this regard. Even if for all the roads taken together the wage increases would more than absorb the increasing revenues, the fiscal year 1910 had produced so large an increase in net earnings,—$55,000,000,—as to still leave the carriers better off than they were before, even without the increased freight rates for which they were asking.[743]
The decisions of the Commission in both cases, covering advances east and west, was unanimously against the railroads.[744] It was held that the carriers had failed to prove their case at practically every point. While it was true that cost of operation had increased for various reasons, it was also plain that the growth of the business had more than absorbed these additional outlays. And as to the contention that a fair return upon the value of the property was not being earned, the entire field of argument concerning the reasonableness of railroad rates as related to investment, was necessarily held in abeyance pending more positive data than was then at hand. The decisions, however, contained a ray of hope for the carriers in the promise that while this general increase would not be upheld, particular changes in future would be considered on their merits in each case.[745] The railroads accepted the decision as final, and withdrew the proposed tariffs with surprisingly little protest.[741] Whether the great increase in prices in 1912 over preceding years, operating indirectly through insistent pressure for wage increases to enhance costs of operation, will necessitate a reopening of this issue in a large way, seems likely to depend upon the rate at which the volume of traffic augments in the immediate future. It is clear, in any event, that a sufficient surplus earning power must be permitted to insure a continuance in favor of railway securities as compared with other forms of investment.