THE GOVERNMENT PLAN NOT A PERMANENT SOLUTION

The President's plan in no sense constitutes a permanent solution of the so-called railroad question from the security holders' point of view. It merely preserves the integrity of railroad investments during the period of the war. It does not carry assurance that present prices of railroad securities will be maintained. In fact, it would appear that any general appreciation in the prices of dividend-paying railroad stocks and bonds, above the figures prevailing in the latter part of January, 1918, is hardly to be anticipated, until the conclusion of peace begins to be discounted. It is true that the government's guarantee makes the dividend and interest on railroad securities especially secure, but with standard stock issues selling on a 5 to 6 per cent basis and with railroad bonds of the higher grade yielding from 5 to 6 per cent at present prices, the likelihood of further large advances is not very great. So long as the war continues, competition by the government for investment funds will become increasingly insistent. The consequent strain on credit will tend to increase rather than ease up, with the result that investors will demand even a higher yield than now prevails on taxable securities. If the war should last for a number of years taxes will almost certainly increase, with the result that high class taxable investments will suffer by comparison with tax-free government bonds. It must also be remembered that in so far as the security holder is concerned, the earning power of the railroads during the period of the war has to a large extent become fixed. Increased earnings will not mean increased dividends, for it is probable that Congress and the Administration will take the view that the companies' share of excess earnings should go into extensions. The great uncertain element is, of course, the duration of the war, and the extent to which the present situation as regards earning power and methods of operation will be changed before the end is reached. It is furthermore uncertain at the time this article is written, exactly when the government will return the operation of the railroads to their owners. It appears probable, however, that they will be returned within a few months after the conclusion of peace.

The real problem of the railroad security holder concerns his status after his property is returned to him. The old problems of high operating costs and fixed rates; the unwillingness of regulatory

commissions to advance rates; the failure on their part to realize that capital has been gradually forsaking the railroad field, because an attractive return was not offered, must all be faced again. The situation will be aggravated by the practical certainty of high postwar income taxes, which will cause the investor to demand an addition to his rate of return, offsetting at least in part the taxes which he must bear. The most serious element in the situation from the investor's standpoint, is the problem of readjusting railroad wages to a peace basis. It is evident that the administration intends to have no quarrel with the railroad brotherhoods, which means substantial increases in wages. The possibility of reducing wages when living costs decrease after the conclusion of the war, are not at all clear. If it proves impossible to reduce labor costs, the outlook for the railroad security holder upon the return of peace is not very encouraging, particularly when the time is reached as it must be reached-for a general economic readjustment with a consequent reduction in traffic and in operating revenues. The political significance of a general increase in rates while the roads are under government control would be so profound as to cause every expedient to be used to avoid taking this step. Whatever economies can be effected through centralized control and unified operation will offset in part the higher wages which the Director General will without doubt authorize. Mr. McAdoo, moreover, has indicated that he expects to use the $500,000,000 appropriation contemplated by the administration bill to constitute the so-called "revolving fund" to meet, among other things, any operating deficiency which may arise.

It is very possible, therefore, that the roads may be returned to their owners operating on a deficit under unified control and with the probability of still larger deficits under individual control. The significance of the wage problem at once assumes its true proportion when this contingency is kept in mind. The future of railway investments, therefore, depends upon the breadth of vision and courage shown by the Interstate Commerce Commission and the state commissions in adjusting rates from time to time so as to assure a fair return and adequate protection to the security holder.

STATUS OF EXISTING RAILROAD LAWS AND REGULATIVE AGENCIES UNDER FEDERAL CONTROL

BY EDGAR WATKINS.

The regulation of railroads may for the purposes of this discussion be divided into two categories. These are, the regulations tending to promote competition among railroads and those prescribing a price to be paid for a service.

The orders of the Director General which in effect suspend the anti-pooling section of the Act to Regulate Commerce and the right of the railroads to protection against short hauling, which take from shippers their statutory right to route their freight and which limit the right of the carriers to make traffic agreements, fall in the first category and suspend statutes inconsistent with the full utilization by the government of the property taken over. These statutes may be considered as repealed for the time being by clear intendment of Congress. Accounting rules, the discharge of employes and the issuance of passes, within the terms of the law, are but incidents of possession and use, and freight embargoes are frequently enforced by railroads privately owned. Demurrage charges and regulations are not primarily intended to obtain revenue but to facilitate transportation by the prompt release of cars. If the demurrage charge is small a shipper may be slow to release his car, while a high rate of demurrage stimulates the expeditious loading and unloading of cars. It follows, therefore, that the Director General was effecting a greater utilization of "material and equipment" for "purposes connected with the emergency," when he obtained an increase of the demurrage rates.

What has been done was clearly authorized by the act of Congress under which the Director General was appointed, and he probably could have made effective the demurrage rules without the interposition of the Interstate Commerce Commission.

Similarly there could be no reasonable question of his authority to make rules and regulations as to methods of packing, loading and stowing shipments, and of otherwise protecting and conserving those commodities required by the exigencies of the present

situation. Thus he may say, as the Food Administrator has stated in advertisements, that flimsy boxes should not be used as containers for the transportation of food products. Passenger travel might be curtailed, because to do so would leave available more equipment for the transportation of commodities necessary to supply the public wants.

The provisions of sections 2 and 3 of the Act to Regulate Commerce, which prohibit discriminations and preferences, remain in force, except preferences may be given as stated in the act relied on by the President and quoted above. Similar but less liberal governmental preferences were given by the Hepburn amendment of June 29, 1906.

The shipper's right to a reasonable rate, to allowances for services and instrumentalities furnished, to reparation for damages suffered and to protection against an "increased rate, fare, charge or classification" until "after approval thereof has been secured from the commission," 1 are not inconsistent with the purposes for which the President was authorized to take possession of the railroads.

These rights of shippers to a fair equality among themselves, to reasonable charges, to allowances in proper cases and to freedom from rate increases without prior approval by the Interstate Commerce Commission are in the second category; and being entirely consistent with the purposes for which the President was authorized to seize the railroads still exist, and it seems clear that Congress has not as yet given the President power to issue all kinds of orders which "shall have paramount authority."

The shipper's rights are subordinate to the needs of the government in connection with the transportation of all persons and commodities used or necessary to the conduct of the war, and to the authority of the President to utilize the railroads for "such other purposes connected with the emergency (created by the war) as may be needful or desirable. "Needful" and "desirable" give the President a discretionery power of wide scope, but such power is the power of utilization of the railroads. If the utilization for the purposes named or for purposes connected with the present

1 Act of August 9, 1917, amending sec. 15 of the Act to Regulate Commerce. It will be noted that this act was passed nearly a year after the approval of the act under which the director of railroads obtains his power: and that the President seized the roads under authority of a section of an appropriation act passed nearly eight months before Congress declared the existence of a state of war.

emergency and deemed needful or desirable exclude any shipper from the use of the railroads, the statutory power has not been exceeded. If, however, the shipper be not so excluded from such use, the use he receives, limited only by the governmental exigencies, must be on the terms prescribed in the acts to regulate commerce and not on different terms ordered by the Director General.

While the President gives "paramount authority" to the orders of the Director, he means of necessity orders authorized by the act of August 29, 1916, and not orders which would fix charges different from those found reasonable by the Interstate Commerce Commission.

Congress has under consideration bills fixing more definitely the powers to be exercised by the President. The authority to prescribe rates and to make regulations not directly affecting the utilization of equipment, may, in the discretion of Congress, be left with the several commissions; but it may well be argued that a tribunal like the Interstate Commerce Commission composed of nine men cannot act with that promptness demanded by the exigencies arising out of our participation in a great war.

The Interstate Commerce Commission exercises legislative, judicial and administrative functions. It also debates like a legislative body, and delays like judicial tribunals. Its administrative functions can best be left to one man; but its rate making, or legislative function, and its rate judging, or judicial function, will be, if retained, given greater consideration, although not necessarily with more correct conclusions, than if committed to any executive.

Rate making as between the private owner and the shipper is unquestionably a legislative act. There is force in the argument that since the government is the possessor and user of the railroads the charges to be exacted may be prescribed as mere administrative acts. This question is academic as the Congress is proposing legislation which it may lawfully enact, whether or not there exists a difference in power because of the ownership being private or public.

It is proposed in the pending legislation to specify where the authority to make rates shall lie. The argument is made that unless the power is given the Director General to take any action concerning either operation or charge that he may deem needful and proper, he will be unable effectually to meet the public exigency. By others the argument is pressed on the committees of Congress