GOVERNMENT OPERATION OF AMERICAN RAILROADS BY CLIFFORD THORNE The government operation, and possible ownership, of American railroads presents some issues of law and public policy that will be of commanding importance during the next few years. It will be well for every citizen to have a clear grasp of some of the fundamental facts about which this contest will be centered. Government operation is a great experiment, and is fraught with many possible consequences of the first magnitude. Our object will be to outline briefly some of the essentials of the plan now pending in Congress, how that plan differs from the one adopted in Great Britain, and we will present a discussion of two or three of the principal objections which have been offered to the pending measure, with special reference to the compensation proposed in this greatest financial transaction in the history of the world. Our object is not to produce an historical monograph for the antiquarian of the future to mull over, nor a dissertation on the many knotty constitutional and other legal problems involved. Both of these tasks would be interesting and instructive, perhaps. But there are a few vital issues of public policy involved in the legislation now pending which present real live questions worthy of the consideration of every citizen, and it is our purpose to discuss these issues. Unless we are gravely in error the railroad question will now be forced into national prominence, surpassing that which it has occupied for many years; and every man who has the responsibility of representing the people on this subject will be called upon at some future time to render a strict accounting for his acts of today. To understand clearly the discussion and appreciate the relative importance of matters considered it is necessary to have a true conception of the object of taking over the railroads, and what it is expected to accomplish by that act. At the moment of supreme test, when the public interest demanded the highest efficiency in our transportation system, private operation broke down and the government had to come to the rescue. Precisely the same thing occurred in Great Britain. This did not happen in the other great civilized countries engaged in the present war, because they had already taken over the operation of most of their railroad systems many years ago It is a noteworthy fact that not one of these other nations found it advisable to go back to private operation when the crisis came. The only nations which found it necessary to make a change in their methods of dealing with their railroads were those which substituted government operation for private operation. The incidents leading up to this memorable event in the history of American railroads are interesting. For seven years our railway companies have maintained a national combination for the purpose of forcing general advances in freight rates. During this period several cases involving colossal sums of money have been won and lost. In the fall of 1917 the eastern and western railroads asked the Interstate Commerce Commission for a reopening of the celebrated Fifteen Per Cent Advance Rate Case. In the spring they had lost the case on approximately three-fourths of the traffic in the United States. The sum involved in this one proceeding was stupendous, aggregating approximately four hundred million dollars annually, or 5 per cent on eight billion dollars, which is more money than the total cost of the Civil War. It is difficult for the human brain to comprehend such figures. The sum exceeds that involved in any other case between private parties in the history of civilization. During the course of the year 1917 our government floated a war loan of a little less than seven billion dollars, which has been described as the greatest in human history. Announcement has been made that during the coming year the government will need twenty billion dollars more money for war purposes. At this critical moment the eastern railroads announced that if the advances they were then asking were granted in full the car 'In 1911 the railroads lost their advanced rate cases completely. In the spring of 1914 they lost the 5 per cent case on approximately 90 per cent of the traffic involved. On rehearing in the fall of 1914 the Interstate Commerce Commission granted the eastern railroads the 5 per cent on approximately 50 per cent of the tonnage involved. In 1915 the western railroads lost their case on approximately 80 per cent of the tonnage involved. In the spring of 1917 the eastern roads were granted a 15 per cent advance on approximately two-thirds of the traffic involved, and the western and southern roads lost their case on approximately everything except coal, coke and iron. These figures are estimates only. Thousands of individual changes in rates have been made from time to time. riers would come back immediately and request another 15 per cent. The western railroads had just applied for a reopening of their case. The unending cycle of advances, advances, advances, was appalling. The railroads over-played their hand. At this moment the shippers for the first time during all these proceedings from 1910 to 1917 took the position, as one of two or three alternatives, that the time had finally arrived for the government to take over the operation of American railroads. They urged the Commission to make this recommendation to Congress under the provision of the Act to Regulate Commerce requiring the Commission to make suggestions concerning important legislation affecting our transportation system. Within three weeks the Commission made a report to Congress naming government operation as one of the two alternatives which should be adopted by the government, and within six weeks the President took over the railroads. Immediately after the suggestion of government operation was made by the shippers the proposition was bitterly fought by the railroads. Interviews against the measure were given out by leading railway executives. Newspapers and magazines with well recognized railroad sympathies, severely criticised the proposition. When the government operation of railroads appeared inevitable the railroad officials reversed their attitude, and quickly established intimate relations with the government officials engaged in drafting the necessary legislative measures. The wisdom of this procedure was self-evident and it bore fruit in abundance, as we shall see. ESSENTIALS OF THE PLAN Now PENDING IN CONGRESS Shortly after the reconvening of Congress in December, 1917, a bill was introduced in both Houses establishing the plan of government control. This measure contemplates the government operation of the principal railroad systems in the country under the immediate direction of one man. To fill this responsible post the President has selected the Honorable William G. McAdoo as Director General. Under the provisions of this bill the President is authorized to guarantee: 1. Regardless of how high the cost of labor and supplies may go during the war, the average net railway operating income for the three years ended, June 30, 1917, plus additional compensation for all improvements built since that date out of new money, government loans, or earnings from operation. 2. To adequately maintain the properties. 3. To maintain railway credit by loaning all necessary funds for improvements and betterments. 4. To return the properties at the end of the period in as good condition as when taken. If satisfactory agreements cannot be effected with any carriers the President has the option of increasing the compensation providing exceptional reasons exist, or the matter may be referred to a board of referees, and upon failure to agree the whole matter is subject to trial in the court of claims. Allowing for the inevitable increases for companies not accepting the proposed compensation, the total sum guaranteed will probably exceed one thousand million dollars annually. (The Senate Committee on Interstate Commerce estimates this at $955,000,000 to $960,000,000, if all roads should accept the original guarantee; but there are many short lines, whose earnings have been squeezed down by the large companies in the divisions of through rates. The large companies under the provisions of the bill will continue to get these excessive earnings, and the small roads will go into court, as provided in the bill, in order to secure additional compensation. A railroad system like the Pennsylvania will increase its standard return above the average of the three-year period in the following manner: the parent company will accept the guaranty provided in the bill and the subsidiary will go into court-and that subsidiary may be owned completely by the parent company. The settlement should be by "system." The original bill so provided it; but a clever change was made specifying a "railroad" or a system.) The total bonded indebtedness of American railways, as of June 30, 1917, was $10,021,730,075; and the capital stock outstanding in the hands of the public was $6,314,570,354. After the payment of all interest the railroads as a whole, under the proposed guaranty will earn, net, approximately 8 per cent on all their capital stock outstanding; this includes the rich and the poor, water and all. Think of substituting for the six billion dollars of railroad stocks in this country, six billion dollars worth of 8 per cent government bonds. It is true the companies cannot increase their dividends during the period of federal control without the consent of the President; but there is nothing to prevent the distribution of the accumulated surplus after the war is over. In the case of a bond the government takes your money and at the end of the period returns your money, paying interest in the interim. Likewise, under the plan of federal control, the government takes the property of the railway company guaranteeing to return the property at the end of the period, in as good a condition as when taken, and also guarantees an annual return. Here we have all the essentials of a government bond-the payment of the principal and interest. We are shielding the railroads from the effects of the war; we are protecting them from all advances in the cost of materials and in the cost of labor; we are guaranteeing the railroads their net income earned during the most prosperous three-year period since the steam engine was invented-regardless of what may happen to their expenses. During the years 1916 and 1917 American industry—including our railroads received the profits from the very large demands occasioned by the European war, without being compelled to suffer the attendant losses that must inevitably follow our own active participation in the struggle. The result was that American industry in practically all lines reaped tremendous profits. That exceptional condition ceased when we entered the war. The earnings during such a period do not constitute a just criterion of normal earnings before or after that period. Consider a few of the circumstances which make this true. When the war was thoroughly in progress large demands for clothing, food, and war munitions came from the European countries-demands far in excess of what they required in former years, because a large per cent of their population was not engaged in productive pursuits, and because of the enormous consumption of munitions which did not exist in former years. On the other hand, our industrial population was not depleted, and the ordinary traffic among our own people still continued. The excess demand from Europe was a net gain of vast proportions. All American business felt this tremendous stimulus. In 1916 the net earnings of American railroads as a whole suddenly increased to an amount that was two hundred million dollars greater than ever before in their history. In 1916 the net income of the eastern railroads above all their expenses, taxes, and |