1938: Railroads

Problems in 1938.

The recession in business and consequent reduction in the volume of freight traffic brought the railroad problem to an acute stage early in 1938. All the fundamental difficulties had been present for many years without solution, but the increase in volume of traffic in 1936 and the first half of 1937 had alleviated conditions for the better roads. In the fall of 1937, wage rates had been raised, thus increasing costs; and at the same time the force of the depression curtailed revenues to such an extent that the gains of the previous two years were wiped out in a few months. Already a third of the railroads, measured in mileage, were in bankruptcy, while another 10 per cent were close to it. During the first 8 months of 1938, 49 of the 137 Class I railroads failed to earn expenses and taxes, while net operating income was at the rate of only 99 per cent. Prices of railroad stocks and bonds, already low compared to other investments, moved rapidly downward. Under these circumstances it was practically impossible for the roads to raise funds for the new equipment which recent improvements in railroad technique made desirable, and competition with buses made almost necessary. Even funds for repairs were lacking. Moreover, the decline in the price of railroad securities jeopardized those investing institutions which held large blocks of such securities. To meet all these difficulties, both the railroads and the Government attempted to reorganize conditions in the industry. At the end of the year, their accomplishments were negligible.

Rate-raising.

The first means for improvement suggested by the railroads was the raising of the price of their services. At the end of 1937, the Class I railroads applied to the Interstate Commerce Commission for the right to raise all freight rates by 15 per cent, and the Eastern railroads asked for the right to raise passenger rates for travel in coaches from 2 to 2.5 cents per mile. The Commission devoted the first two months of the year to the consideration of this suggestion. Meantime, the Government prepared to make its proposals. On Jan. 7, President Roosevelt asked Interstate Commerce Commissioner Eastman to draft new legislation which would facilitate the financing of new equipment for the roads. On Feb. 20, a conference was called at the White House. Any definite program, however, had to await the decision of the Commission with respect to rates.

On March 9, the Interstate Commerce Commission ordered an increase of freight rates; they did not grant the full 15 per cent asked by the roads. In explaining their decision, they stated that 'the present revenues are inadequate whether the simple common law tests be applied or if they be judged by the statute with reference to their sufficiency under honest, economical, and efficient management to provide in the public interest adequate and efficient railway transportation service at the lowest cost consistent with furnishing such service.' However, they felt that they must consider the effect of rate increases on the movement of traffic and 'give weight to conditions which prevail in the several industries and to the respective general and comparative levels in the market value of the various classes and kinds of commodities affected.' In pursuance of this policy, they granted a general increase of rates of 10 per cent, but exempted two classes of commodities, both very important in volume of freight traffic. For agricultural products, the rise in rates was limited to 5 per cent, and for hard coal to 5.9 per cent. Both classes of commodities were suffering from very severe declines in prices quite out of line with those for other goods. Decision with regard to passenger rates was delayed until April.

Splawn Report.

Since it was evident that these increases in rates would not solve the problems of the roads, the President included in his message to Congress on April 11 a request for legislation helpful to the roads. He expressed the opinion that it was 'important to cooperate in preventing serious bankruptcies among a large number of railroad companies.' He did not recommend, however, any specific legislation, but transmitted the report of the committee of the Interstate Commerce Commission appointed in January. The report was drafted by Commissioner Splawn and hence is known as the Splawn Report. It recommended the following policies:

(1) That $300,000,000 be made available to the roads by the Reconstruction Finance Corporation for the purchase of new equipment.

(2) That the Reconstruction Finance Corporation be empowered to make loans even to roads in need of reorganization. The law then in effect required that the Interstate Commerce Commission must certify that a road was not in need of reorganization before it was eligible for a loan.

(3) That the problem of wage rates be reconsidered. The Committee did not either recommend or oppose a reduction.

(4) That the Federal Government underwrite or guarantee bonds issued in voluntary reorganizations.

(5) That the prevailing low rates for Government traffic on land-grant roads be eliminated.

(6) That a special tribunal be instituted for the handling of cases of railway reorganizations.

(7) That a General Transportation authority be constituted.

(8) That all forms of transportation be regulated by this authority, which should have the authority to force consolidations and pooling arrangements.

Adverse Decision.

Pursuant to these recommendations, bills were introduced into both the Senate and the House to provide for the making available of loans to the railroads under advantageous conditions. The other aspects of the suggestions were not considered. While these bills were under discussion, a new series of events changed the attitude of Congress. On April 14, the application of the Eastern roads for the right to raise passenger rates was denied by the Interstate Commerce Commission by a 6 to 5 decision. The refusal was based in part on the opinion of the Commission that the increased rates would not bring increased revenues. The railroads took the decision as further indication that they could expect no relief for their difficulties from the Government. They accordingly attempted to cut their costs by reducing wages. Following the provisions of the Railway Labor Act, they notified the Railroad Brotherhoods of their intention to reduce wages by 15 per cent, effective July 1. This notice brought forth a storm of protest from the Brotherhoods. In Congress, the bills which had already been reported favorably were withdrawn, and Congress finally adjourned without passing any legislation dealing with the railroad problem.

Railway Labor Act Operates.

The protests of the Brotherhoods now put into operation the machinery of the Railway Labor Act. In the face of threats of a general railway strike, the Carriers on June 28 agreed to postpone the cut pending negotiations with the Brotherhoods, and a conference was called for July 20.

During the interim the Interstate Commerce Commission again considered the question of passenger rates. On July 6, they allowed the rise in coach fares from 2 to 2.5 cents per mile. They explained that 'every reasonable opportunity should be afforded them (the railroads) to increase their revenues' and that the service given to passengers because of new equipment was really much more valuable than that given in 1935 when the 2-cent rate went into force. It remained their opinion that the rise in rates might curtail passenger traffic to such an extent that total revenues would drop, but they no longer wished to take the responsibility for deciding that this necessarily would be the case.

During the remainder of the summer, conferences between the Carriers and the Brotherhoods dragged on. The Conference of July 20 was unable to reach any agreement. The National Mediation Board then stepped in, in an effort to resolve the difficulties. After three weeks of unsuccessful negotiations, the Board suggested that the matter be subject to arbitration. The Carriers agreed, but the Brotherhoods refused. The Mediation Board, following the procedure laid down in the Railway Labor Act, then asked the President to appoint a fact-finding commission. This automatically prevented any action by either the Carriers or the Brotherhoods for 60 days.

The Commission appointed by the President consisted of Chief Justice Walter P. Stacey, of the North Carolina Supreme Court; Professor Harry A. Millis, of Chicago University; and Dean James M. Landis, of the Harvard Law School. The Commission proceeded at once to the taking of evidence. The Carriers presented the facts of their financial condition, showing that they were in no position to pay high wages. The Brotherhoods attacked this argument on the ground that the railroads were improperly capitalized and that only reorganization could bring a secure financial structure. Besides, economic conditions were improving rapidly, railway revenues were again increasing, and security prices were rising. Both sides recognized the difficulties inherent in the competition of other unregulated means of transportation.

Report of Fact-finding Commission.

On October 29, the Commission brought in its report. It recommended that the Carriers not press the matter of the wage cut on the following grounds:

(1) Railway wages were not high compared to wages in other industries.

(2) Wage cuts would not provide a maximum of relief to the Carriers, since they would affect all railroads while only certain of the roads were in need of aid.

(3) A wage cut would run counter to trends in other industries.

(4) The financial distress complained of had appeared only since the wage increases had been granted in October 1937. This period was too short to determine the real effects of the policy, especially since general business was recovering from the recession. The Commission also recommended that Congress should reconsider the whole problem of the relation of the railroad industry to the national well-being. They expressed the opinion that 'both Labor and the Carriers must now have a vital interest in working out an adequate National Transportation System.'

Report of Committee to Recommend Legislation.

The Carriers accepted the recommendations of the Commission, and President Roosevelt appointed a new committee to formulate recommendations for new legislation. This committee consisted of three railroad executives and three representatives of labor. In the last week of December, they presented their report. In most respects, it was identical with that of the Splawn Committee of the spring. They laid the responsibility for the difficulties of the railroads to the Government's favoritism to competing forms of transportation. They reiterated all the recommendations of the earlier committee. In addition, they stressed the necessity for a flexible rate structure adapted to changing business conditions; they asked that competing forms of transportation be made to share equally the burden of taxation, and asked that the Interstate Commerce Commission cease to sponsor consolidations. No recommendations were made either with regard to labor or with regard to the capital structures of the railroad companies.

Situation at Close of Year.

Thus, although the year has seen an almost continuous consideration of the railway problem, accomplishments have been slight. The upturn in general business which appeared in the third quarter promises some temporary relief. In October 1937, before the rise in wage-rates, net operating income of the Class I railroads was $60,000,000 and net income $17,000,000. In April, it had shrunk until net operating income was $9,000,000 and there was a net deficit of $33,000,000. By fall, the situation had improved. Net operating income in October was $69,000,000. The figure for net income is not yet available for October; but for September, when net operating income was $50,000,000, net income was $6,000,000. This change in income explains the willingness of the Carriers to accept the recommendation of the Commission. Security prices also had recovered a little. At their high point in March 1937, railroad stock prices (New York Times index) had stood at 51. They declined to 18 in April 1938, but recovered to 26 at the end of December. See also TRANSPORTATION: Railroads.