THE

QUARTERLY JOURNAL

OF

ECONOMICS

AUGUST, 1919

FEDERAL OPERATION OF RAILROADS
DURING THE WAR

SUMMARY

Reasons why the roads were taken over by the government, 577. The contract, 582. — Federal operation, 587. — Labor conditions, 602. Rate increases, 606. - Capital expenditures and the revolving fund, 609. Relation of the railroad administration to existing regulating agencies, 611. The future, 617.

ON December 26, 1917, the President of the United States issued a proclamation taking possession of the railroads of the country, under the powers granted by the Army Appropriation Act of August 29, 1916. As a preliminary to this profoundly significant step, there were many months of strenuous railroad history. In April the Railroads' War Board had assumed direction of the railroads, under a resolution signed by nearly seven hundred executives, in which the signatories pledged themselves during the war to coördinate their operations in a continental railway system, "merging during such period all their merely individual and competitive activities in the effort to produce a maximum of national transportation efficiency." As the resolution indicated, they desired to be of the greatest service possible in the struggle upon which the country was about

to enter. But they had another object, frankly expressed by more than one executive; they proposed to demonstrate to the country that a coöperative organization of private railroad corporations could so successfully meet the situation that government interference with operation would be unnecessary.

Their failure to effect this demonstration was due to many causes. Probably the most potent of these finds its source in the fundamentally competitive atmosphere in which the railroads have always operated. While in many respects actual competition between individual carriers had reduced itself to matters of service alone, yet our entire body of legislation has been constructed on the competitive theory, and we have forbidden railroads to make agreements that would in any way relieve them from the consequences of this principle. When railroads serving the same termini are not permitted under the Interstate Commerce Act to enter into any agreement for the division of earnings, it was not only natural but justifiable that a carrier should resist attempts on the part of the Railroads' War Board to divert traffic to less congested routes. Only an exaggerated patriotism would induce a corporation without compensation to hand its traffic over to a rival. Other conflicts of a similar sort between the competitive and the coöperative principle blocked the attainment of complete success.

Again the railroads were facing a serious financial problem. They had for some years previously been appealing for higher rates, with indifferent success. They were now faced with an unprecedented traffic, and consequently a need for extensions and betterments as well as for generous maintenance, all to be met at rapidly increasing prices of materials. Looming on the horizon were the demands of labor for increases in wages

to meet the steadily increasing cost of living. Increases in rates might have been granted by the Interstate Commerce Commission similar to those later imposed by the Federal Railroad Administration, but aside from the delays involved in the necessary legal procedure the opposition of shippers, the protracted hearings, the time required for a considered opinion by the Commission there were the endless difficulties involved in the relations with state commissions. Moreover, altho some of the increasing expense of operation might have been met by such increases in rates, the additional income would have gone but a little way toward obtaining the additional facilities and the plant extensions required. And there was little likelihood of securing capital directly. For it is very doubtful whether their income accounts would have so improved in appearance as to attract investors, in the face of the patriotic appeals for the contribution of all private savings to the winning of the war. Neither was there assurance that even if capital could be lured into the railroad industry, the needed facilities could be obtained. Steel and other materials were being " rationed" and cars and locomotives were going abroad for more direct and immediate war service.

On the operating side, there were serious difficulties that lent weight to the argument for government management. Traffic in the eastern section of the country was unprecedented, including the food and munitions going abroad, the raw materials and coal for the manufacturing section, building materials to supply government contracts, and all the varied and unusual demands created by the war emergency. This traffic was originating in and passing through the most congested section of the country, and that for export was routed without restraint to the usual outlets, because as yet coöperation with shipping had not proceeded far

enough to make any other policy possible. Priority for government freight, a privilege in many cases grossly abused, with no central authority to determine the degree of priority, seriously increased the congestion. Providence added to the complications by a winter almost unknown in its severity. This not only hampered rail transportation, but blocked the marine terminals and stopped the flow of traffic. Motive power kept long in service because there was little opportunity for adequate repairs, was crippled and inefficient. There was no satisfactory coöperation between rail and water service, and many of the Atlantic coastwise vessels were withdrawn by the War and Navy Departments, and the traffic thrown on the railroads.

The operating troubles were almost wholly in the east, and the government might have assumed control only of those carriers that were specifically required for the task in hand, instead of taking possession of the system as a whole. But aside from the fact that it was impossible to anticipate at that time how extensive would be the ramifications of the war needs, and just what lines of railroad would be required, the government might have initiated serious controversies if it had selected certain roads whose earnings were to be guaranteed and whose labor was to be assured the market wage. By the socalled Railroad Control Act approved March 21, 1918, which put the proclamation of the President into effect, it was provided that the President might turn any road back to its owners before July 1, 1918, by which time presumably the government would be in a position to judge whether it would find it wise to operate the system as a whole. Whether if properly backed by the government in their financial policy, in their dealings with labor, and in hurdling the many restrictive statutes federal and state, the railroads could have operated

satisfactorily under private management, is an academic question that need not detain us here. That there was some friction among the carriers themselves and a lack of coöperation on the part of a few, is common knowledge. Yet this might have been overcome in time but for the more serious difficulties. It would probably have been impossible to obtain a suspension of existing restrictive statutes; it was the belief of the President and of many members of Congress that financial aid could not be obtained for the railroads from the government unless the government were in complete control. As the President said in his statement accompanying the proclamation that took over the railroads, “The financial interests of the government and the financial interests of the railways must be brought under a common direction."

With a poor prospect of a prompt increase in rates, a dubious investment market for railroad securities, and a stringency in the materials and facilities needed, the one policy that gave any promise of saving the day was the use of existing facilities and equipment to their absolute capacity regardless of ownership. As a war measure, the taking over of the railroads was, under the circumstances, inevitable and a wholly wise procedure. To quote the President again, "It was thought to be in the spirit of American institutions to attempt to do everything that was necessary through private management, and if zeal and ability, and patriotic motive could have accomplished the necessary unification of administration, it would certainly have been accomplished; but no zeal or ability could overcome insuperable obstacles, and I have deemed it my duty to recognize that fact in all candor, now that it is demonstrated, and to use without reserve the great authority reposed in me. A great national necessity dictated the action, and I was therefore not at liberty to abstain from it."