1942: Railroads

Emergency Traffic Due to War.

The success of the railroads of the country in meeting the demands placed upon them as a result of the war seems to have met with a more widespread acclaim than almost any other phase of our war effort. Not only were those increases in freight and passenger traffic that might normally be expected to accompany a war economy successfully handled, but the railroads did an outstanding job in meeting certain extraordinary, and for the most part unforeseen, demands.

Achievements of the latter type included the transportation of an immense volume of transcontinental traffic which would normally move by water and the transportation into the eastern states of about four times the volume of oil and gasoline which had originally been expected of them. The handling of a large volume of emergency traffic, both freight and passenger, as a result of shortages of tires and gasoline, and the successful meeting of the problem of the reversal in the normal west to east flow of traffic caused by a Pacific war were also outstanding accomplishments.

Car loadings.

Because of significant changes in traffic conditions during the year, the volume of car loadings of revenue freight has almost entirely lost its significance as a measure of railroad activity. Car loadings of revenue freight in 1942 showed only a 2 per cent increase over the figure for 1941, whereas ton-miles of freight hauled increased by about one-third, or from 475,000,000,000 ton-miles to 630,000,000,000. A further increase of 10 to 15 per cent in ton-miles is expected in 1943. Improvements in equipment and operating efficiency are clearly indicated by the fact that the volume of freight handled in 1942 was about 55 per cent greater than in 1918, the peak year of World War I, whereas the railroads had 27 per cent fewer cars in service in 1942.

Passenger Traffic.

Passenger traffic continued the rapid expansion which had started in 1941, and rose to a new all-time high of 53,000,000,000 passenger-miles, an increase of about 80 per cent over 1941, and of 13 per cent over 1920, the previous record year. Huge troop movements, high rate of business activity and employment, and the strict rationing of tires and gasoline for private use are of course the major explanations of this phenomenal increase. It is expected that 1943 may show increases in passenger traffic even exceeding those estimated for freight traffic.

The tremendous volume of business being done by the railroads is of course putting a severe strain upon rolling stock and track facilities. As a result of priorities, the railroads are able to get only a small part of the additional equipment and material they feel they need. Starving the railroads in this respect might result in serious consequences if the physical burden upon them is much increased, or if it should continue for a very long time.

Financial Report.

The sharp increase in the volume of business in 1942 was directly reflected in the financial results of the railroads for the year. The effect was intensified by an increase averaging about 5 per cent in freight rates and 10 per cent in passenger rates allowed by the I.C.C. in March 1942 as an offset to wage increases which had been granted near the close of 1941. It is estimated that gross operating revenues in 1942 exceeded $7,000,000,000 as compared with $5,325,000,000 in 1941, and about $6,500,000,000 in the peak year of 1926. In the first 10 months of 1942, net operating income of 136 Class I railroads amounted to $1,160,000,000, as compared with $850,000,000 in the corresponding period of 1941. Net income after all charges for the same periods was $709,000,000 and $417,000,000, respectively. In 1940 the corresponding figure had been only $104,000,000. It is estimated that this figure for the full year 1942 will substantially exceed $900,000,000, and that it will probably be the largest in the history of the industry, exceeding the peak figure of $897,000,000 reached in 1929. In spite of their high level of earnings, however, the return to the railroads is still less than 6 per cent on their property investment. Railroad taxes in the 12 months ended Oct. 31, 1942 totalled $1,077,000,000, or nearly double the figure of $547,000,000 for the calendar year 1941.

The high rate of earnings in 1942 has had several important effects upon the railroad picture. There have been a few notable dividend actions taken during the year, among them being the payment of the first dividend since 1931 on New York Central common stock, the resumption of dividend payments upon Southern Railway preferred stock, a substantial increase in the rate of dividend paid on Atcheson common stock, and the first payment in 76 years on Erie Railroad common stock. The fanfare accompanying the latter action was quite misleading since the present Erie common stock was given to former bondholders in the recent reorganization of the road; the equity of the former common stock was entirely wiped out in the reorganization.

In general, however, a very small part of the increase in railroad earnings reached the stockholders. Many of the roads followed the wise policy of using large earnings to reduce substantially the amounts of current and funded debt outstanding. In other cases tremendous cash balances are being built up as a cushion to any future financial difficulties that may arise. Another effect of the abnormally high current level of earnings has been to make the holders of junior securities of railroads in reorganization highly dissatisfied with reorganization plans promulgated by the I.C.C. in recent years when earnings were substantially lower.

Appeals from several of the plans have been taken to the Supreme Court, and the result of the railroad prosperity of 1942 has thus been a further delay in the winding up of the receivership proceedings in which about 30 per cent of the railroad mileage of the country is still involved. Progress during 1943 will presumably depend to a large extent upon the decision of the Supreme Court in the cases now before it. If the proposed plans are remanded to the I.C.C. for further study in the light of recent railroad earnings it will presumably mean that similar action will be taken in a large number of other plans in various stages of development.

During 1942 receivership proceedings were ended in the case of only four railroads, not of outstanding importance. These were the Minneapolis & St. Louis, the Norfolk & Southern, the Wabash, and the Ann Arbor. All were in equity proceedings; one receivership, that of the Minneapolis & St. Louis, had been in the courts since 1923. Section 77 of the bankruptcy act has proved a distinct disappointment as an expediter of railroad reorganizations. The Chicago & Alton was the only addition during 1942 to the list of bankrupt railroads.

The assignment of proper weight to past and present earnings in setting up reorganization plans is a difficult process. The market places a very low value upon current high earnings. Some of the leading solvent railroads, such as the Southern Pacific, have common stock which is actually selling at substantially less per share than its earnings per share in 1942. The common stock of an investment favorite such as the Pennsylvania railroad is selling at only 3½ times its indicated per share earnings in 1942, and it is yielding more than 10 per cent on the basis of the current market price and dividends paid in 1942. The Dow-Jones average of 20 railroad stocks closed 1942 at 27.39 as compared with 25.42 at the close of 1941 and 28.13 at the close of 1940. This is an excellent measure of the skepticism with which the current high level of railroad earnings is regarded. The index of high grade rail bonds rose during 1942 from 90.49 to 92.57, and that of second grade bonds from 48.85 to 53.16.

Legislation.

Legislation during 1942 favored the railroads. The Railroad Reorganization Act of October 1942 set up special procedure by which a road that was not insolvent could put a capital reorganization into effect with the approval of the I.C.C. and two-thirds of its creditors, including the holders of at least a majority of each class of affected claims. This was a re-enactment, effective until Nov. 1, 1945, of Chapter XV of the Bankruptcy Act, a temporary measure under which the most important capital reorganization had been that of the Baltimore & Ohio.

The Revenue Act of 1942, approved in October, also had important effects upon the railroads. In the first place, it levied a 3 per cent tax on freight shipments, and a 10 per cent tax on railroad passenger fares. More important from the standpoint of the roads, however, the Act authorized them to retire debt by purchase of bonds at a discount without the necessity of reporting the amount of discount as taxable income. This was a great stimulus to the use of large accumulations of earnings to retire debt.

Major Problems.

At the close of 1942 three major problems were arising to confront the railroads. Railroad labor was asking substantial pay increases, the Office of Price Administration was requesting the cancellation of the rate increases granted by the I.C.C. in March 1942 and the Justice Department was preparing to indict many rail and motor carriers for alleged rate-fixing in violation of the anti-trust laws. It was announced on Jan. 4, 1943, that this latter action was being postponed at the request of heads of the War Department, the Navy Department, and the Office of Defense Transportation. Any pay increases that may be granted will presumably be substantially less than the $600,000,000 per annum requested, and much of the impact would fall upon taxes in any event. The I.C.C. has agreed to reopen hearings on the rate increases of last March. In general, then, with further increases in traffic expected in 1943, the outlook is for a continued high level of railroad earnings.

1941: Railroads

As was true of most other phases of business and economic activity in the United States, the significant developments in the railroad industry during 1941 were all of them directly or indirectly the result of World War II. Increased volume of business, higher profits, labor problems, and delays in reorganization plans can all be ascribed to that cause.

Carloadings.

In terms of physical volume, loadings of revenue freight during 1941 were about 42,250,000 cars, an increase of 16.2 per cent over the figure of 36,350,000 cars for 1940. Although carloadings in 1941 were 20 per cent less than the level reached in 1929, nevertheless as a result of heavier average loadings per car and longer hauls freight transported in 1941 amounted to about 470,000,000,000 ton-miles, an increase of 5.1 per cent over the 1929 record and of 26 per cent over 1940. It is interesting to note, moreover, as an indication of increasing railroad efficiency, that this new record volume of business was handled with 26 per cent fewer freight locomotives and 23 per cent fewer freight cars than in 1929. Railroad officials estimate that carloadings in 1942 should approximate 46,000,000 cars, while some Government estimates run as high as 52,000,000.

Passenger Traffic.

Passenger traffic during most of the decade of the 1930's was a factor of small and declining significance to most of the railroads of the country. In the last year or two, however, there has been a sharp reversal in this trend, and passenger miles in 1941 were not only some 22 per cent higher than 1940, but the railroads are now carrying almost as many passengers as during former peak periods. This increase may be ascribed to a number of factors, including (1) improved passenger service, (2) large troop movements, (3) business travel in connection with the defense and war program, and (4) larger public income resulting from increased employment and payrolls. A spectacular further increase in passenger traffic as a result of tire, automobile, and possibly gasoline rationing is a distinct possibility.

Finances.

The increased volume of business in 1941, which grew out of the national defense program, was directly reflected in the financial results of the railroads for the year. Gross revenues for 1941 are estimated at $5,325,000,000, an increase of 24 per cent over 1940, but about $1,000,000,000 less than in 1929. Net operating income is estimated at $980,000,000, as compared with $682,000,000 in 1940 and $1,252,000,000 in 1929. It should be borne in mind, however, that in spite of the sharp improvement shown in 1941, the net operating income of the railroads is still less than 4 per cent on their property investment. Net income, after all charges, was about $485,000,000, a spectacular increase over the $189,000,000 of 1940, but still far below the $977,000,000 of 1929. The 1941 results, however, were the highest since the $524,000,000 figure for 1930. Railroad taxes in 1941 were about $550,000,000, a figure far exceeding the $396,000,000 of 1940 and the $397,000,000 of 1929.

Labor Problems.

The great improvement in the financial position of the railroads in 1941 led to a not unexpected demand by railroad labor of all classes for substantial increases in pay and changes in working conditions. The original demands of labor, which were obviously presented as a basis for bargaining, would have added about $900,000,000 per year to the wage bill of the nation's railroads. The customary steps of demands by labor, refusals by management, and the appointment by the President of a fact-finding board to make recommendations, were taken. The report of the President's Board early in November recommended no changes in the basic wage scale, but proposed temporary pay increases, retroactive to Sept. 1, amounting to about $300,000,000 per year. Increases were to terminate automatically on Dec. 31, 1942, unless extended by mutual agreement.

Railroad management agreed to abide by the recommendations of the Board, but labor refused and called a nationwide strike, for Dec. 5. The matter was referred to the Board again for reconsideration in an attempt to avert a strike, and subsequently revised recommendations were made which were accepted by both parties. The revised decision recommended further wage increases of about $30,000,000 per year, but, much more significant from the standpoint of labor, the total increase was to be treated as part of the basic wage rather than a temporary cost-of-living adjustment scheduled to end in December 1942.

The fact that the above-mentioned annual wage increases exceed the average annual net income of the railroads over the past 15 years explains the application by the railroads to the Interstate Commerce Commission for freight and passenger rate increases designed to offset the greater part of the increased wages. The railroads are pressing for prompt action on their application.

Reorganization Plans.

Possibly it will be recalled that at the close of 1940 the outlook for the successful consummation of a number of railroad reorganizations was regarded as very encouraging. It is true that more than usual progress was made in 1941 in this respect, as indicated by the completion of all but certain details of the reorganization of the Chicago Great Western, Chicago & Eastern Illinois, Mobile & Ohio, Spokane International, Erie, Wabash, and Norfolk & Southern. The financial success of the roads in 1941, however, together with court decisions on several reorganization plans, materially retarded the progress hoped for during the year. At the moment a further substantial period of delay is anticipated in consummating reorganization plans for the nearly 30 per cent of the Class I railway mileage of the country remaining in the hands of the courts.

Reorganization plans for a number of important railroads were developed by the Interstate Commerce Commission at a time when the earnings were so low that there appeared to be no value assignable to the preferred or common stocks of the roads in question. The result was that when substantially higher earnings began to be reported in 1941 appeals were taken by dissatisfied groups of security holders and a number of reorganization plans have been turned down by United States Courts, primarily on the matter of adequacy of valuation of the properties in question. The success of these appeals in cases such as the Western Pacific, the Chicago, Milwaukee & St. Paul, and the New Haven gives a strong basis for believing that similar action will be taken in other cases and that, regardless of the ultimate outcome, much delay in consummating reorganizations is to be expected.

A further serious complication in the working out of successful reorganization plans is the position taken by the Treasury Department with respect to the valuation of the properties of reorganized roads for purposes of calculating excess profits taxes. Sound reorganization plans have usually involved a drastic scaling down of funded debt, which would always result in a potentially increased normal income tax. However, unless the Treasury voluntarily or under compulsion modifies its present position, any such plan would in addition heavily penalize the security holders by drastically increasing excess profits taxes. Treasury rulings are thus at present exerting pressure for unsound financial plans.

Summary.

It seems to be generally admitted that the railroads of the United States have done an outstanding job, both physically and financially, in meeting the substantially increased volume of business in 1941, and in preparing to meet further increases anticipated in 1942. Capital expenditures for equipment, roadway and structures, and other improvements to property are estimated at $600,000,000 in 1941 as compared with $429,000,000 in 1940. Large additions to rolling stock were made in 1941, though deliveries were in many cases slowed up as a result of the inability of equipment makers to get materials, particularly steel plates. Of the 1,436 locomotives ordered during the year 1,047 were built. Orders were the largest since 1923, and construction the largest since 1926. Freight car orders totalled 118,371 of which 67,852 were built, the largest total since 1924 and 1930, respectively.

So far as financial strength is concerned, the railroads translated radically improved earnings into current debt retirement, funded debt reduction, and improved current asset position. For the greater part most roads have been conservative in using earnings to strengthen themselves financially before providing for resuming or increasing returns to security holders. The improved operating and financial condition of the railroads in 1941 was not reflected in the prices of their securities. The Dow Jones average of 20 railroad stocks declined from 28.13 at the close of 1940 to 25.42 at the close of 1941. High grade rail bonds showed an average price decline during the year from 95.27 to 90.49. Second grade rail bonds showed very little change at the close of 1941 as compared with the close of 1940.

Government operation of the railroads in 1917 and 1918 naturally suggests the question as to whether Government operation is a likelihood in the present emergency. The railroad system of the country is so much better coordinated and so much more efficient today than it was in 1917-18 that there would seem to be no compelling reason as yet for following the earlier precedent. The roads are cooperating closely with the Government at the present time, and coordination with other forms of transportation is being attained by means of the recently established Office of Defense Transportation, headed by Joseph B. Eastman, Chairman of the Interstate Commerce Commission. On the basis of their record of accomplishment in 1941, the railroads of the country are looking forward with confidence to their ability to do a creditable job in 1942. See also BUSINESS; INTERSTATE COMMERCE COMMISSION; SOCIAL SECURITY; TRANSPORTATION.

1940: Railroads

Earnings.

The unusually high level of rail freight traffic reached in December 1940 is estimated to have been sufficient to give the railroads of the United States their largest annual gross revenue since 1930. However, higher operating expenses, including unusually high charges for repair of equipment, kept the year from showing a corresponding record so far as net income is concerned. Final net income for 1940 is estimated at about $140,000,000, or roughly 50 per cent greater than that for 1939. Aggregate carloadings for the year are estimated at approximately 36,300,000 as compared to 34,100,000 in 1939. In only seven weeks during the year were carloadings less than in the corresponding week of the previous year.

Passenger revenues did not make as favorable a showing for the year, possibly due in part to the fact that the Interstate Commerce Commission in March 1940 refused to grant a continuation of the maximum coach rate of 2½ cents a mile, thus compelling a return to the 2 cent level. Relations between labor and management were for the most part undisturbed during the year. A demand for vacations with pay was made early in the summer, but was not pushed. If rail earnings continue to show substantial improvement, however, it is believed likely that the subject may again arise. Rail employment increased by about 4 per cent during the year, and average earning per worker showed a slight increase. The Railroad Unemployment Insurance Act of 1938, as amended in 1939, was further amended in October 1940 in such a way as to increase substantially the benefits to which employees may become entitled.

Improved Operating and Financial Condition.

The improved operating and financial condition of the railroads in 1940 was not reflected in the prices of railroad stocks. The Dow-Jones average of 20 railroad stocks closed 1940 at 28.13 as compared with 31.83 at the close of 1939. High grade rail bonds showed an average price improvement during the year from 92.65 to 95.27. Second grade rail bonds showed very little change at the close of 1940 as compared with the close of 1939.

The year 1940 was in two respects a significant one from the standpoint of the weaker roads of the country. For the first year since 1930 no Class 1 railroad receivership occurred; and on the last day of the year occurred the first emergence from the courts of a Class 1 railroad which had gone into receivership during the depression. The Interstate Commerce Commission has now approved reorganization plans for nearly all the major roads of the country still in the hands of the courts, and the year 1940 should thus mark the wind-up of a number of such cases. The reorganization plans approved by the Commission have a number of characteristics in common. In the first place, there has been a drastic reduction in funded debt and fixed charges. The Missouri Pacific proposal, for example, cuts funded debt from $661,000,000 to $308,000,000, and annual fixed charges from $24,800,000 to $7,300,000. In the second place, stockholders' equities have in many instances received nothing in the reorganization plans. The composition theory of reorganization thus seems to have largely given way to the absolute priority theory. In the third place, funds for rehabilitation are frequently being provided by the R.F.C. Other common features of the plans are substantial sinking funds and large scale use of the device of income bonds. The importance to the country of the railroad reorganization problem is most clearly indicated by the fact that I.C.C. final plans for 21 of the 33 Class 1 railroads in receivership in December 1940 called for an aggregate reduction in funded debt from $3,643,000,000 to $1,594,000,000 and in annual fixed charges from about $127,000,000 to about $38,000,000. (See also BUSINESS.)

Railroad Legislation.

The only major piece of Federal rail legislation in 1940, other than the Rail Unemployment Insurance Act already referred to, was the Transportation Act of 1940, passed in September and frequently referred to as the Wheeler-Lea Transportation Act. This Act was the legislative culmination of several years consideration of the policy of a more completely coordinated regulation of the various major media of transportation in the United States. Among its more important provisions were the following: (1) Domestic water carriers are brought under the I.C.C.; (2) a new three-man board is created, to be appointed by the President, to study the relative economy, fitness, subsidies, and taxation of railroad, motor, and water carriers; (3) the lending powers of the R.F.C. are so broadened as to permit it to lend money to a railroad for re-purchase of its own bonds in an effort to reduce fixed charges; (4) government freight, other than army and navy material, need no longer be hauled by the 'land grant' roads at the low rates previously in effect; (5) the jurisdiction of the I.C.C. over rates is extended, particularly in relation to the long-and-short haul provision; (6) the carriers are permitted, with I.C.C. approval, to enter into agreements for pooling or dividing traffic, services, or earnings, if in the public interest; and (7) the requirement that railroad consolidations must conform to an official plan prescribed by the I.C.C. is done away with. Railroads are free to develop their own consolidation plans, subject to I.C.C. approval. Special care is taken to protect employees affected by any such plan. (See also SOCIAL SECURITY.)

Effect of Defense Program.

The prospective industrial activity of the country, resulting in large part from the defense program, puts the railroads in a more favorable position than they have enjoyed at any time in the past 10 years. Moreover, because of the fact that the roads are, for the most part, earning a fairly low rate of return on their invested capital, a much smaller part of their prospective increased earnings will be subject to excess profits taxation than is the case for most of our major industries. On the other hand, the relative rigidity of the rate structure might be a serious disadvantage if any major increase in wages or other operating costs should accompany rising business activity.

See also TRANSPORTATION.

1939: Railroads

During 1939 Congress again considered the basic problems of the railroads. One important bill became law and the Senate passed two others, which, if finally enacted, will pave the way for a permanent solution of many current difficulties. Two important cases involving the interpretation of existing legislation with respect to the railroads came before the courts, and the Interstate Commerce Commission handed down one decision involving fundamental principles. Meantime, because of the new business recession, the financial condition of the roads in the first eight months of the year failed to measure up to the position attained at the end of 1938. In the fall, after the outbreak of the war, traffic increased so rapidly that existing facilities for freight were pushed to the limit.

Proposed Plans for Reorganization.

The discussions of railroad problems, which had been interrupted in the spring of 1938 by the injection of the labor problem, were resumed early in 1939. Three general plans were presented. One, sponsored by Representative Lea, Chairman of the House Interstate Commerce Committee, called for a complete reorganization of the Interstate Commerce Commission and an increase in its membership from 11 to 18. A second, recommended by the administration, provided for a new Federal Transportation Board to take over most of the duties of the Interstate Commerce Commission and the Bureau of Roads. The third plan was proposed by the Interstate Commerce Commission itself. The Commission made eight main proposals: that (1) the Interstate Commerce Commission be given power to regulate all transportation including water carriers; (2) the Reconstruction Finance Corporation be instructed to make $300,000,000 available to railroads for the purchase of equipment; (3) pooling of traffic and rate charges be made compulsory; (4) certain roads should be allowed to consolidate voluntarily; (5) the Commission be empowered to delegate certain of its functions to individual commissioners and to limit the scope of appeals in rate and finance cases; (6) land Grant statutes should be repealed; (7) railroads should be relieved from the burden of contributing disproportionately to the cost of eliminating grade crossings; (8) railroads should be reimbursed by the Government for any cost of facilities over navigable waters in excess of the direct benefits to the carriers. (See also INTERSTATE COMMERCE COMMISSION.)

Bills Passed and Pending.

The bill which became law at this year's session of Congress was the Chandler Railroad Bankruptcy Act, approved July 28, designed to save railroads from bankruptcy. It provides that railroads in financial difficulties may enter into voluntary agreements with their creditors to postpone maturity dates and reduce interest rates on securities. The new process may be initiated only with the approval of the Interstate Commerce Commission and of creditors holding 25 per cent of the claims. The petition showing that the company cannot meet its debts is to be filed with a special court of three which, after notifying all persons in interest and holding hearings, may issue a stay of all other actions in bankruptcy for a reasonable period.

The bills which passed the Senate but failed to be considered in the House were even more fundamental. The Wheeler Bill would extend all the regulatory powers of the Interstate Commerce Commission to all carriers except air carriers and thus provide a machinery allowing for consideration of the whole transportation problem as a unit. It is expected that this bill will be approved early in the next session. The other bill passed by the Senate and designed to facilitate the handling of cases of railroads already in bankruptcy, provides for a special Federal court of five whose sole duty would be the handling of such cases.

Cases before the Courts.

The first of the cases in the courts this year came before the United States Supreme Court. The Old Colony Railroad, a Connecticut corporation in financial difficulties, had determined to abandon 88 passenger stations in Massachusetts in order to reduce its expenses. Although the Massachusetts Department of Public Utilities fought the case, the Federal District Court in Connecticut allowed an order to close the stations. The Supreme Court later reversed this decision on the ground that it was an unjustified inroad on a state's power to regulate its own transportation.

The second case in the courts has not been settled. On October 25, the Department of Justice filed a civil action against the Association of American Railroads, charging that the Railroad Association in pursuance of a resolution adopted in 1937 had refused to cooperate with motor carriers, thus violating the Sherman Anti-Trust Act. The case will test the extent to which the association may declare policies for its members.

The Interstate Commerce Commission decision with regard to rates involved the principle of rate differentials for the South. The case was hotly contested and led to debates and proposed legislation in Congress. The Commission finally decided in favor of the South and granted a 25 per cent differential on through shipments from Southern states.

Financial Conditions.

The condition of the railroads continued to be unsatisfactory during the first eight months of the year. The rate of operating return on invested capital which had been 2.67 per cent in December 1938, dropped to 9 per cent in April when the coal strike cut off a large portion of the freight traffic, and rose only to 2.01 per cent in August. Of 135 railroads reporting, 23 failed to earn expenses and taxes in the first 8 months of the year while Class I roads had a net deficit of $74,647,000, after fixed charges, compared with a deficit of $182,725,000 for the same period of 1938. Security prices dropped in sympathy with earnings. Bonds which had averaged 90 in 1937 and 59 in 1938 were 56 in August. An index of stock prices (1926 = 100) which averaged 49 in 1937 and 26 in 1938 was 25 in August 1939. In the fall, as a result of increased business activity and the movement of goods occasioned by the war, freight traffic improved rapidly. Freight car loadings in October were 15 per cent above the estimates made in August, and a shortage of equipment resulted. Railroad repair shops were working at capacity to recondition all equipment; and orders for new freight cars, rails, and steel ingots were the highest since 1936. Under the stimulus of the increased earnings, security prices improved. At the end of October, bonds were selling, on an average, for 62; and the index of stock prices had risen to 33. See also UNITED STATES: Supreme Court Decisions; TRANSPORTATION.

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.