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.