Cook, William Wilson
Will the railroad
act of 1920 solve the
railroad problem?
HE
27 51
1910
WILL THE RAILROAD ACT OF 1920
SOLVE THE RAILROAD PROBLEM?
UBRAKY OF CONGKtSS C«
JAN 2019J
WILLIAM W. COOK
of the
New York Bar
and author of
"Cook on Corporations"
HE
/.?30
cu
JAN 2 I8S4
874224,
WILL THE RAILROAD ACT OF J920 SOLVE THE
RAILROAD PROBLEM?
For fourteen years I have advocated real public control of
the railroads and the elimination of private control. I have
advocated control by a Federal Railroad Board, controlling
the boards of directors of all railroad corporations, reorgan-
ized under federal charters.
In a blind, groping, hesitating, experimental way the public
is slowly moving towards the same goal. The government
now fixes rates and takes surplus profits for general railroad
purposes. The government also fixes the wages of railroad
employees. There is not much left of private control. The
Railroad Act of 1920 (designated the "Transportation Act")
increases public control and decreases private control. It
travels far on the road of real public control. That which was
considered revolutionary now turns out to be evolutionary.
In some respects this Railroad Act of 1920 is a surprising
move forward. It marks a revolution in public sentiment,
namely, the abandonment of the fetish that railroads must
compete and that the consolidation of parallel lines would be a
dangerous monopoly. The record shows the evolution of
public thought. In 1896 the Supreme Court of the United
States held that the combination of the Northern Pacific and
Great Northern Railroads was illegal and contrary to public
policy.1 In 1897 the court held that the Anti-Trust Act of
July 2, 1890, prohibited the pooling of receipts by two or more
competing railroads.2 In 1904 the same court held that it was
in violation of law and public policy for the Northern Securities
Company to hold the stock of the Great Northern Railway
1 Pearsall v. Great Northern Ry., 161 U. S. 646.
"United States v. Trans-Missouri, etc., Assoc., 166 U. S. 290; United
States v. Joint, etc., Assoc., 171 U. S. 505.
Company and of the Northern Pacific Railway Company, and
the Union Pacific Railway Company.1
All of this is now changed. A silent revolution has taken
place in the minds of men. Competition is recognized as im-
possible. Accordingly the Railroad Act of 1920 authorizes
pooling,2 and the leasing of one railroad to another,3 and the
purchase by one railroad of the stock of another.4 It author-
izes the consolidation of railroad systems5 and goes farther and
directs the Commission to formulate a plan for consolidating
all the railroads of the country into a few systems." The Act
of 1920 authorizes, with the consent of the Commission, the
"acquisition" of one railroad by another, by lease or stock con-
trol or "in any other manner," except by consolidation. Even
consolidation is authorized, but "competition shall be preserved
as fully as possible." That preservation of competition is
feeble indeed.
Then there is another fundamental departure in the Act of
1920, namely, that the Commission shall make railroad rates
high enough to pay at least ^/2% on the value of the railroads
for two years at -least.7
This approaches real public control and the elimination of
private control. The government is being swept by the cur-
rent of events into greater and more absolute control. It is
dictating rates, as well as expenses.
And there is another fundamental advance by the Act of
1 Northern Securities Co. v. United States, 193 U. S 197.
2 §407 (5).
'§407 (2).
'§407 (2).
'§407 (6).
"§407 (4). The bill, as passed by the Senate and sent to Conference,
directed that, if voluntary consolidations were not made within seven years!
federal regional railroad corporations were to be formed to take over the
present existing railroads or their stock and bonds, by issue of the federal
companies stock (§ 13). The Senate bill also made strikes a misdemeanor
(§§30, 31). Public sentiment, however, at that time, as represented by the
House, had not advanced that far, and so those provisions were stricken out
in Conference.
'§422 (15, 3-3).
1920. Hitherto public control of the railroads has been two-
fold, national and state — the latter shackling the former.
State control is now curbed by the Act of 1920, and federal
control is made supreme1 — one step more towards full public
control by the national government. The clay of state hector-
ing is past.
But the Act of 1920 stops short of real public control in the
following particulars :
( I ) It gives as an emergency power that which should
be a permanent, every-day power. Take an illustration. On
May 1 5th, 1920 — only ten weeks after the railroads were re-
turned to their owners — the congestion of traffic broke down
the service and the railroads themselves petitioned the Com-
mission to declare that an "emergency" existed under the Act,'J
'§416 (4). "Whenever in any such investigation the Commission
after full hearing, finds that any such rate, fare, charge, classification, regu-
lation, or practice causes any undue or unreasonable advantage, preference,
or prejudice as between persons or localities in intrastate commerce on the
one hand and interstate or foreign commerce on the other hand, or any
undue, unreasonable, or unjust discrimination against interstate or foreign
commerce, which is hereby forbidden and declared to be unlawful, it shall
prescribe the rate, fare, or charge, or the maximum or minimum, or maxi-
mum and minimum, thereafter to be charged, and the classification, regula-
tion, or practice thereafter to be observed, in such manner as, in its judg-
ment, will remove such advantage, preference, prejudice, or discrimination.
Such rates, fares, charges, classifications, regulations and practices shall be
observed while in effect by the carriers parties to such proceeding affected
thereby, the law of any State or the decision or order of any State authority
to the contrary notwithstanding."
This is a Congressional recognition of the Shreveport Rate Case, 234
U. S. 342 (1914) ; and if it proves to be insufficient (which is possible,
judging from the controversy now going on between New York State and
the railroads in that State), the only way by which State rates may be con-
trolled by the federal government will be by federal incorporation or a federal
constitutional amendment. The former remedy I advocated in a pamphlet
on "Legal Possibilities of Federal Railroad Incorporation," issued in
January, 1917.
* § 402 — 15, reading as follows :
"Whenever the Commission is of opinion that shortage of equipment,
congestion of traffic, or other emergency requiring immediate action exists in
and asked that the Commission take charge. The Commission
did take charge, by three sweeping orders on May 20, 1920,
directing all railroads throughout the United States, subject
to the Act, to disregard routing and also to send coal cars east
and box cars west. This was handling the traffic as though
all the railroads were owned by one corporation, and all of its
stock was owned by the Commission. That was real public
control. But why should it be confined to an emergency?
Why should not the Commission, or better still, a Federal
Railroad Board, exercise that power every day, and day by
day, in the interest of the public, the public being absolutely de-
pendent upon the railroads? Why should 30 or 40 or 50
separate, independent, warring railroad managements be
allowed to cause such a blockade of traffic as this ?1 The Amer-
any section of the country, the Commission shall have, and it is hereby given,
authority, either upon complaint or upon its own initiative without com-
plaint, at once, if it so orders, without answer or other formal pleading by
the interested carrier or carriers, and with or without notice, hearing, or
the making or filing of a report, according as the Commission may deter-
mine: (a) to suspend the operation of any or all rules, regulations, or prac-
tices then established with respect to car service for such time as may be
determined by the Commission; (b) to make such just and reasonable
directions with respect to car service without regard to the ownership as
between carriers of locomotives, cars and other vehicles, during such emer-
gency as in its opinion will best promote the service in the interest of the
public and the commerce of the people, upon such terms of compensation as
between the carriers as they may agree upon, or, in the event of their dis-
agreement, as the Commission may after subsequent hearing find to be just
and reasonable; (c) to require such joint or common use of terminals, in-
cluding main-line track or tracks for a reasonable distance outside of such
terminals, as in its opinion will best meet the emergency and serve the
public interest, and upon such terms as between the carriers as they may
agree upon, or, in the event of their disagreement, as the Commission may
after subsequent hearing find to be just and reasonable; and (d) to give
directions for preference or priority in transportation, embargoes or move-
ment of traffic under permits, at such time and for such periods as it may
determine, and to modify, change, suspend or annul them."
1 If all of the earnings of all of the railroads were practically to go
into one "pool" (as they would under the plan I have advocated for so
many years), terminals would be used in common; traffic would go by the
shortesf and cheapest route, irrespective of what railroad received it ; cars
would be sent where needed, irrespective of what railroad owned them;
ican people think that by the Act of 1920 they have preserved
competition in service and avoided government control of the
railroads. They have done neither. Competition in service,
in other words independent service, broke down in ten weeks,
by the railroads' own confession, and then temporary govern-
ment control by the Commission was assumed as airily as
though War Control and McAdoo had never existed1. Sooner
or later it will be clear to the American people that they are
trying to exercise government control over the railroads with-
out providing proper machinery for such control.
(2) The Act of 1920 is piecemeal financing. The rail-
roads are in dire financial straits and cannot extricate them-
selves, even though rates have been raised to pay 6% on their
value. Only recently the New York Central, the Pennsylvania
and other strong railroads issued securities at J%. The
poorer railroads cannot get money at all. The Act of 1920
authorized a loan of $300,000,000 to assist. It was but a drop
in the bucket. According to the testimony of railroad officials
the government did not maintain the railroads up to the old
standards, which means an immense additional expenditure to
bring the roads back to their former condition. The American
people might as well face the fact that the government has got
to finance the railroads. The Act of 1920 stopped short, be-
cause public sentiment was not yet ready for comprehensive
financing, by a guaranty coupled with real public control. And
and all railroad traffic would be handled as though all of the railroads were
owned by one company. Emergencies would not arise, because they would
be anticipated. A Federal Railroad Board would give orders to railroad
general managers, and if any general manager disobeyed he would be
discharged.
1 June 9, 1920, another emergency order gave preference to the trans-
portation of bituminous coal to Lake Erie ports.
June 19, 1920, an emergency order practically commandeered all local
cars east of the Mississippi River. July I3th the mine owners declared that
this last order was not being obeyed by the railroads.
July 26, 1920, coal cars on certain Eastern railroads were practically
commandeered to supply coal to New England. This order was suspended
on September 17.
so that Act authorized a loan of $300,000,000. It should have
worked out a comprehensive plan for $20,000,000,000 — not as
a loan, not on a guaranty of the principal, but on an express
guaranty of a fixed income. That will come and is already
coming fast, on account of the railroads not being able to raise
necessary fresh money. And the new regime will not be gov-
ernment ownership any more than present Commission rule,
under the Act of 1920, is government ownership.
(3) An over functioned Commission. Theoretically and
originally a Commission was supposed to be administrative in
its character, but in these latter days it has become quasi-legis-
lative, quasi-executive, and quasi-judicial; in fact, in Arizona
it is declared to be practically a fourth department of the gov-
ernment itself.1 We certainly have traveled far, but Americans
dearly love a fad — while it lasts. Congress has gradually
made the Interstate Commerce Commission legislative, ex-
ecutive and judicial. The result is too many powers and too
much work. Even before the Act of 1920 that Commission
had a Pandora's box of troubles on its hands — rate questions,
valuation questions, discriminations and the kaleidoscopic
panorama of troubles that appear in the reports of the Commis-
sion itself. Quite enough for one body.
But consider the colossal combination of additional powers
and duties now imposed on that Commission by the Act of
1920. It is to determine what is "efficient and economical
management," which, of course, is largely labor expense. It
is to determine what is a fair percentage of return on the value
1 Those who are interested in the legal status of Commissions and the
justification for the delegation of powers to them, notwithstanding the
written constitutions and jurisprudence of America, will find the subject
treated in Honolulu R. T. Co. v. Hawaii, 211 U. S. 282 (1908); Grand
Trunk Ry. v. Michigan Ry. Comm., 231 U. S. 457 (1913) I Trustees, etc.,
v. Saratoga Gas, etc., Co., 191 N. Y. 123 (1908); Bessette v. Goddard, 88
Atl. i (Vt. 1913) ; State v. Baltimore & Ohio R. R., 85 S. E. 714 (W. Va.,
1915). In the case State v. Tucson, etc., Co., 138 Pac. 781 (Ariz., 1914),
the court held that the Corporation Commission was neither legislative nor
executive, nor judicial, but included all, and was, in fact, another department
of the government. Cp. State v. Great Northern Ry., 100 Minn. 445 (iQO7->-
of railroad property after two years. That value has been and
will continue to be a subject of incessant controversy, and is
subject to review by the courts. It is to determine rate districts
for the whole country. It is to approve or veto the construc-
tion of new railroads. It is to control the issue of railroad
securities, except notes of short duration and limited amount.
It is to govern loans to railroads from a revolving fund. It is
to regulate the division of rates between the railroads. It may
require one railroad to allow another to use the terminals o'f
the former and may fix the compensation. It is to have the
power of veto over the exercise of the new powers of pooling,
purchase of stock, leases and consolidations.
Does anyone believe that that Commission or any other
body can exercise all of those powers effectively and satis-
factorily, in the face of the vast conflicting interests that must
be reconciled or overridden in each instance?1 Not only is
the proposition absurd but the whole proposition is unneces-
sary. Real public control by control of the directors would
prevent most of these questions and troubles from even arising.
If a Federal Railroad Board had complete directors control,
as I have advocated for years and as has been endorsed by the
most advanced thinkers on the subject, that complete directors
'Judge Lovett in "The Spur" of July 15, 1920, states this as follows:
"Some executive agency, such as a Department of Transportation,
headed by a member of the Cabinet, or a small Transportation Board
such as was contemplated by the Cummins Bill, is absolutely necessary
to relieve the Interstate Commerce Commission of the vast executive
and administrative duties devolving upon it under the old law and
continued and enlarged by the new law. * * * *
"Indeed, the Commission could spend its entire time in hard work
upon these executive and administrative duties without ever getting
to the great work of making and supervising rates and deciding rate
questions for which it was primarily created and for which alone it
is adapted.
"This is no reflection on the Commission. There is no more hard-
working or devoted body of officers in our Government. It is simply
impossible — humanly impossible-^-for such a tribunal to perform the
task that has been put upon it without intolerable delays. The remedy
is to put the executive and administrative duties in the hands of
executive officers and departments, by whom they can be performed
expeditiously and without the elaborate machinery and formal pro-
cedure that appertain to a semi-judicial tribunal such as the Inter-
state Commerce Commission."
control would in itself displace this vast welter and confusion
and conflict.
(4) The fatal lack of directors control. What would
you think of a railroad board of directors that had no power
to select or discharge its general manager? What kind
of control would that be? And yet that is the kind of
control that the Act of 1920 confers on the Commission.
Of course, Congress could do no better, unless it was pre-
pared to reorganize the railroads under federal charters, and
public opinion had not yet traveled that far. Congress could
not constitutionally take from present railroad stockholders
the right to control the present railroad corporations.
Congress could not give that power to the Commission, and
no matter how incompetent or extravagant or dishonest a par-
ticular railroad management may be, the Commission cannot
change it. Such a situation leads at once to conflict between
the railroads and the Commission. Even in the instance men-
tioned above, where the Commission took charge in an
"emergency," at the request of the railroads themselves, and
the Commission issued an order, the railroads did not obey
it, and so the Commission had to threaten them with fines and
penalties. This is ominous and yet it is inevitable. The fault
lies in the lack of directors control. Nor is that all. Commis-
sions are not the right kind of bodies for such work. No Com-
mission can successfully direct and guide (instead of merely
regulating) great properties, especially great railroad systems,
which are almost bursting with growth, feverish activity, in-
finite details and throbbing with every pulsation of the vast
foreign and domestic commerce of America. A Commission
is intrinsically judicial, deliberative and slow in its movements.
Railroads cannot be run on that basis. Railroad men are
highly executive, quick, responding to the imperative demands
of the day. They cannot wait months before acting. They
decide at once: otherwise they are swept into the discard.
Hence when they have to wait for the slow moving action of a
Commission their initiative is deadened ; they cannot calculate
on the future; they cannot reassure the investing public and
get fresh money. Delay is deadly in the railroad business. A
Federal Railroad Board could act quickly.
(5) The investor is afraid and the Act of 1920 does not
reassure him. He refuses absolutely to buy new stock issues
of the railroads and so none are offered. He buys ten year
notes at 7%, but only when issued by the few strong railroads.
And yet the railroads need $1,000,000,000 a year for the next
five years. They simply can't get it. The investor will not
invest. He can get greater safety elsewhere. This desperate
financial necessity of the railroads will face Congress and the
American public from now on. When you can't pay your bills
something happens. Director Prouty of the Commission fore-
saw this years ago when he said,
"This is the point at which regulation will break down if at all.
Can private capital be induced, under the treatment which is accorded
that capital by the regulating body, to invest? If Government owner-
ship ever comes in the United States it will probably be because private
capital cannot be obtained in sufficient amounts to afford an adequate
service."
He repeated the warning in his final statement to the Com-
mission at the hearing on valuation in Washington on January
9th, 1920, when arguments were made by counsel in behalf of
the railroads, and of the various State Commissions, and of
labor, and of the Commission itself. He said :
"On the first day of next March private ownership of the railroads
of this country is going to enter on its final test. If it makes good
it will be the policy of the nation. If it fails, within five years we
shall have Government ownership. While I do not believe it is going
to succeed, I want to give it a fair chance, and it cannot have a fair
chance unless the credit of these railroads can be re-established."
He was right that success or failure of the Act of 1920
turns on whether it re-establishes the credit of the railroads;
in other words, regains the confidence of the investor. How
can it? It allows 6% income on the value of the railroads.
The investor can do better elsewhere. He is skeptical because
he has viewed with amazement and consternation the football
treatment of the railroads during the past fifteen years, and he
has tightened his purse strings as the game proceeded. In 1906
Congress gave the Commission absolute power to veto any
10
increase in rates. The Commission did not exercise that power
wisely. It refused an increase in rates in 191 1.1 The investor
scented danger. What next happened is described as follows
by Mr. Acworth (the leading authority in England on railroad
economics) in an article in the Economic Journal, published in
London, September, 1915, where he said, in regard to the
Interstate Commerce Commission :
"In July, 1914, after an inquiry extending over more than twelve
months, the majority of that Commission solemnly reaffirmed their
refusal of three years earlier to permit the trunk lines to raise their
rates. Under the compulsion of gross and palpable fact they reversed
that decision some six months later. But it is safe to say that for
every dollar Jim Fiske stole from the Erie — and he stole a good
many— the inhabitants of the United States lost a million in the
months succeeding July, owing to financial depression and trade dis-
location consequent primarily on the unintelligent ^appreciation of the
situation by the Interstate Commerce Commission."
Then came the Act of Congress of 1916' arbitrarily increas-
ing railroad wages, but not increasing railroad rates to pay
those wages. That left the railroads in desperate financial
straits, facing insolvency. Even this, however, did not cause
the Commission to grant a 15% raise in rates in June, 191 7."
Then the war came on and the government took over the rail-
roads in December, 1917, and McAdoo raised the rates 33%
on freight and 20% on passengers. Meantime the govern-
ment let the railroads run down and bought little new equip-
ment. And worse thtm all in the eyes of the investor, during
all these years State Commissions were gnawing at the vitals
of the railroads by reducing rates and by an infinite variety of
other persecutions. On July 3ist, 1920, the Commission
raised freight rates about 34.5% ; passenger rates about 20^0,
and 50% on sleeping and parlor cars. The total increase is
about 70% on freight rates and 4.0% on passenger rates. The
increase is estimated at about $1,500,000,000 a year, in the
hope of producing 6% on the estimated value of the railroads, as
directed by the Railroad Act of 1920. But this merely enables
the strong railroads to pay the dividends they have been paying
1 20 Int. Com. Com. Rep., 243, 307.
'Act of September 3, 1916; 39 U. S. Stat. 721.
' See The Fifteen Per Cent Case, 45 I. C. C. Rep. 303.
II
and leaves the weak railroads helpless. The investor still re-
fuses to invest except at ruinous rates. The Railroad Act of
1920 does not enable the railroads to do necessary financing.1
In October, 1920, twelve eminent railroad officials pub-
lished, on twelve different days, articles on the railroad problem,
and stressed the imperative need of money, but not one of them
proposed any feasible plan for obtaining it.2
1 Judge Lovett in "The Spur" of July 15, 1920, says of this :
"One must indeed be an optimist to expect a boom in the creation
of additional railroad facilities under such a law."
* The Railway Age for October I, 1920, p. 565, contained the following:
"The interpretation of the provision of the Transportation Act
which requires the Interstate Commerce Commission, in approving
a loan to a railroad from the revolving fund, to certify that the
applicant, in the opinion of the commission, 'is unable to provide
itself with the funds necessary from other sources' than the Govern-
ment, was the subject of a hearing before the commission at Wash-
ington on September 23. * * *
"A. H. Harris, vice-president of the New York Central, said that
his company had borrowed as much money as it regarded proper
from other sources and that it needs additional money from the
revolving fund.
"George Whitney, of J. P. Morgan & Co., said that the New
York Central had already obtained $61,000,000 in recent months and
that his company did not feel it could advise the road to attempt the
sale of another issue of securities at this time, as such a course
would hurt the general market.
"Samuel Rea, president of the Pennsylvania, which has already
issued $50,000,000 of 7 per cent bonds, also pointed out that it would
be impracticable for his company to attempt to borrow in the market
the additional sums which it needs and that as a practical matter it
is dependent upon the revolving fund."
If such is the situation as to the powerful New York Central and
Pennsylvania Railroads, what is to become of the rest?
W. W. Atterbury, Vice-President of the Pennsylvania Railroad, re-
cently said :
"Many other conservatively capitalized and efficiently managed
railroad companies are in the same position. We cannot sell new
stock at par with old issues below par. The bond market for the
best corporate securities is far above 6 per cent, so we can to-day
raise no money at rates which the Transportation Act permits us to
earn. We may be forced to pay on a 7 per cent basis for refunding,
but where is the money to come from for improvements?
"For such improvements and extensions as it is imperative to
make in the near future, the best solution would seem to me to be
that advocated last week in Washington by our president, Mr. Rea,
before the Interstate Commerce Commission, namely, a more liberal
policy with regard to Government advances at interest rates which
the provisions of the Transportation Act give reasonable assurance
of ability to earn."
In October, 1020, the Interstate Commerce Commission approved a
12
(6) The Act of 1920 is only a midway step to real and
effective public control by directors control. I do not agree
with Mr. Prouty that unless the present mode of handling the
railroads succeeds we shall have government ownership. For
many years I have advocated a medium course, which is em-
bodied in the Thomas Bill, which has been introduced three
times in the Senate and which bill I drew. The principle of
that bill has been approved by many leading thinkers on the
railroad problem; among others by Senator Lenroot, who,
when the Act of 1920 was before the Senate for discussion,
said :
"* * * I believe, Mr. President, that the time is not far distant
when it will be recognized that the only solution of the railroad prob-
lem is either out-and-out Government ownership and Government
operation or Federal incorporation and unification of the railroads
under private ownership and public control."
The plan of the Thomas Bill is simplicity itself. A Federal
Railroad Board, not incorporated, but the members nominated
by the President and confirmed by the Senate, would control
five railroad companies, incorporated by the same Act of Con-
gress. That Board would name the directors of these five Fed-
eral Railroad Companies. These five Federal railroad com-
panies (one for each of five districts into which the railroads
of the country would be divided) would acquire the stocks and
in some cases the bonds of the present existing railroad com-
panies, in any one or all of three ways, namely, by exchange
or purchase or by condemnation. The Federal Railroad Board
would fix the basis, from time to time, on which the exchange
would be based or purchase made. The five Federal railroad
companies would sell their own capital stock to the public from
time to time, as money would be needed to buy the existing
railroad stocks and bonds, or to provide funds for extensions
and improvements. The five Federal railroad companies would
also have power to acquire existing railroads themselves, the
loan to the Pennsylvania Railroad of $6,780,000 from the revolving fund
for additions and betterments. The necessity of that great railroad ob-
taining such a comparatively small amount of money in this way instead of
doing its own financing is significant, to say the least.
13
physical properties, by purchase or condemnation. The Fed-
eral railroad stock would be made salable and desirable to the
public as an investment by a rate of dividend varying accord-
ing to the going rate of interest generally at the time of issue,
such dividends being guaranteed by the Government. All
financial operations of the federal railroad companies would
be directed by the Federal Railroad Board. All railroad rates
would be fixed by that Board.
This plan is not Government ownership. The government
would not own any of the property, either stocks, bonds or the
railroads themselves.1 The Government would merely name
the Federal Railroad Board and guarantee the dividends. The
Federal Railroad Board appointed by the President, and con-
firmed by the Senate, would be governmental in its origin, but
not governmental in its work. But the Board zvould have com-
plete control of all of the railroads. It could select, employ and
discharge at will, directly or indirectly, any railroad general
manager in the United States, It would have complete and
absolute control over receipts and expenditures, the same as the
old railroad kings used to have. There would be no divided
responsibility, no delayed decisions. It would be a unified
power and would be workable and logical in its structure. It
will come.
I am aware that there are serious objections to this plan.
There is danger that the Federal Railroad Board might be-
come a political machine. But that would depend on whether
public sentiment would insist that the President and the Senate
put high-class men on that Board — men who would ad-
minister the railroads for the public and not for party. This
political objection was raised against the Federal Reserve
Board and the Interstate Commerce Commission, but no one
1 Government ownership is thoroughly discredited in this country at
present, on account of war experiences, resulting in a loss of about one and
a half billion dollars, to say nothing of the bad service. Yet the American
Federation of Labor, at its annual convention, held in Montreal, voted on
June 17, 1920, by 29,059 to 8,349, that the American government should own
the railroads and exercise "democratic management."
14
has yet made any charge of political control as to either of
those bodies or as to their employees.
Another objection is that if the government guaranteed
results there would be no necessity for economy, no need for
close, careful management. This would depend upon the
character of the general managers, chosen for the various vast
systems by the Federal Railroad Board. Here, too, the result
would depend on the personnel of the general managers, the
same as at present.
Then there is the greatest danger of all, namely, that first-
class salaries would not be paid in order to obtain first-class
men. A fifty thousand dollar railroad general manager cannot
be obtained or retained by a twelve thousand dollar salary.
Here is where real public control of the railroads would break
down, if at all.1
But however that may be, the Railroad Act of 1920 will
not solve the railroad problem. It places too great a burden
on the Interstate Commerce Commission. It will not attract
$1,000,000,000 a year from the investor. Judge George W.
Anderson of the United States Circuit Court of Appeals in
Massachusetts, and one of the clearest thinkers on the railroad
question, himself formerly an Interstate Commerce Commis-
sioner, said, in an address November gth, 1920, at Washing-
ton:
"Slowly, reluctantly, and with persistent inadequacy, the Amer-
ican people have approached the recognition of the essential nature
1 Sir Eric Geddes, of the Ministry of Transport in England, said in
1920:
"The experience of other lands proves that state management would
never pay the market price for the best brains, which is a handicap
you could never get over."
The old railroad kings paid high salaries for the highest railroad talent.
There will be no more railroad kings, because the opportunities to make
fortunes have been eliminated by the acts of Congress and by Commission
regulation. Future railroad general managers will be paid less, and will be
men who cannot duplicate the achievements of the past, in low rates and
efficiency and improvements in handling traffic. In other words, whether
the government assumes control or not, apparently a cheaper and less efficient
leadership is inevitable.
IS
of their railroad problem. In my own thinking, I see no solution
until our railroads are both unified and federalized."
Judge Anderson is right. Unification and federal ization
summarize the first step in the solution of the railroad problem.
Then if the railroads fail to finance themselves, as fail they will,
a government guaranty will be necessary. In fact, there is no
great difference between a government guaranty and govern-
mental increases in rates, as at present. In the end the public
pays either way, and in either case the deadening effect of a
sure thing must be contended against. The Railroad Act of
1920 probably went as far as public sentiment would sustain
at that time. But that Act will fail to furnish proper railroad
service, and that failure will force Congress to back the rail-
roads financially, while taking real public control. This will be
by controlling the boards of directors, under a simple mode of
reorganization by federal charters.
England and Canada are faced with this same railroad
problem, and inasmuch as all branches of the Anglo-Saxon race
adopt each other's solutions of public questions, when adopt-
able, we may well inquire what they are doing.
In England, on June 29th, 1920, the Ministry of Transport
proposed to Parliament that all the railroads in England,
Scotland and Wales be consolidated into seven companies and
that all competition be eliminated. The terms of consolidation,
if not voluntarily agreed upon, are to be dictated by Parliament.
The government is to give no guaranty, but "appropriate"
rates are to be fixed by Parliament on some pre-war basis, any
surplus profit to be used by the state for railroad purposes.
A majority of the directors of each consolidated company are
to be elected by the shareholders, the minority to be elected,
two-thirds by and from railroad employees, and one-third
selected from railroad officials by the rest of the board. The
whole proposition resembles much the Cummins Bill in the
United States Senate.
This English plan is criticized as dividing responsibility and
the criticism is good. It is also criticized as not giving the gov-
ernment the power to control traffic, and that criticism is sound.
i6
Furthermore it is pointed out that there is a point beyond which
rates cannot be raised, and when that point is reached the gov-
ernment will be forced to give financial assistance. It remains
to be seen what Parliament will do with the proposition.
Canada, however, is the country that has travelled farthest
on the road towards public control by controlling the directors
of railroad corporations. Three years ago Canada acquired
the capital stock of the Canadian Northern Railway System.
By the Act of June 6, 1919, the "Canadian National Railway
Company" was incorporated. Its stock is held by the Minister
of Finance. It is to take over the Canadian Northern System
and other government railways, and any entire or controlling
interest the government may acquire in any other railway com-
pany. Either this new company or the Governor-General-in-
Council may vote such stock so acquired. Its directors are
named by the Governor-General-in-Council, composed of the
14 cabinet ministers of the Canadian Government. The Gov-
ernment is to pay any deficit of the company and take any sur-
plus. The new company may acquire securities of the railways
it controls and may loan money to them and may borrow on
its securities. It may construct and operate railways authorized
by Parliament. It may issue bonds and other securities up to
$75,000 per mile of railway owned or controlled. It may buy
and sell stocks and securities of other railways and of com-
panies whose business is incidental to that of railways. Most
of these powers are exercised only with the approval of the
Governor-General-in-Council.
The Canadian Government has now acquired another of
the three great railway systems of Canada, namely, the Grand
Trunk System, by acquiring all of its preferred and common
stock. By the Act of November 4, 1919, on approval of a
majority in interest of the stockholders of that system, new
non-voting stock, with 4% dividends guaranteed by the gov-
ernment, was to be issued in exchange for the then existing
preferred and common stock, the basis of exchange to be fixed
by arbitration but not to exceed a specified amount. This is
practically the same as the Thomas Bill in the United States
Senate, which I drew several years ago. On April 22nd, 1920,
the Canadian Parliament confirmed a contract of March 8,
1920, carrying out this arrangement. The arbitrators were
directed not to consider any rise in the market value of the
stock due to this legislation. The government guaranteed the
debts of the railroad. Stockholders who did not voluntarily
turn in their stock were forced to do so, the Act being one of
condemnation in this respect. The management is to be by five
persons, two to be appointed by the Government, two by the
railroad company, the fifth to be selected by those four. Inas-
much as the directors of this Grand Trunk Railway Company
will be elected by the Government voting its stock, the Govern-
ment will practically name four of these five directors. Tempo-
rarily this Grand Trunk System is being administered by a
joint board of officials of the Canadian Northern and Grand
Trunk Systems, pending further legislation.
Canada was impelled to act by the insolvency of two of its
three railroad systems. It chose to acquire the stock rather
than the physical property, thus avoiding payment at once of
the funded debts. The United States will be impelled to the
same action by the same railroad incapacity to furnish sufficient
railroad facilities. Three advantages will be gained ; first, there
will be real public control ; second, the funded debts will not lie
disturbed ; third, the corporation will be used to separate the
railroads from the office seekers by an intervening obstacle.
That intervening obstacle in the United States will be a Federal
Railroad Board.
WILLIAM W. COOK.
December gth, 1920.
HE Cook, William Wilson
2757 Will the railroad act of
1920 1920 solve the railroad
C66 problem?
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