It should be stated at the outset, that in appraising the results of the past fifteen months of government operation, no attempt will be made to determine from this experience the desirability of permanent nationalization. The period has been a wholly unprecedented one, from which no valid conclusions may be drawn. It is not surprising that many individuals and many journals opposed to government ownership, and fearful that once the government takes hold, it will never let go, should have watched every move with intense interest, and seized upon every unfavorable development as an argument to support their contentions. It is not so clear why those associated with federal operation should have made predictions concerning the results of unified operation that they could not hope to realize. Beyond their natural desire to make the railroads contribute to their utmost in winning the war, they could have had no other wish than to do the best possible job under the difficult circumstances, and the necessity constantly of explaining away unfulfilled promises has only laid them open to the charge of cherishing an ulterior purpose.

THE CONTRACT

The President's proclamation ordered the Director General to draw up agreements for compensation, based upon an annual guaranteed rental above depreciation and maintenance, equivalent to the average of the annual net operating income for the three-year period ending June 30, 1917. It was declared that nothing done under the proclamation should impair the rights of stockholders and bondholders to receive just and adequate compensation for the use of their property. Regular dividends and interest were to be continued until and unless the Director General determined otherwise, and

subject to his approval carriers might renew and extend existing obligations. The Federal Control Act, approved March 21, 1918, ratified the terms of the proclamation — that the compensation should be an annual sum equivalent to the average of the net operating income for the three years ending June 30, 1917, to be ascertained and certified to by the Interstate Commerce Commission. It was enacted that every agreement should contain adequate provision for maintenance of property, for its return in substantially as good condition as at the beginning, with provision for reimbursement to the United States for the cost of additions and betterments not properly chargeable to it. Power was given to the President to make special contracts when abnormal conditions, such as a receivership, prevailed during the "three-year test period." The federal administration was to pay interest on any funds expended by a carrier for improvements and extensions, if made with the approval of the President. No carrier without presidential approval could declare a dividend in excess of its regular rate during the three-year test period. A "revolving fund" of $500,000,000 was created, out of which, in addition to meeting the expenses of federal control and the compensation of carriers, provision might be made for terminals and equipment. The President might order any carrier to make additions and betterments or provide terminals and equipment, and might make advances from the revolving fund with proper provisions for interest and reimbursement. If the contract was not accepted by the carrier, the President was authorized to pay to it 90 per cent of the estimated compensation, provision being made for adjudication of the issue by a board of referees appointed by the Interstate Commerce Commission, with final appeal to the Court of Claims.

Under the guidance of this statute, negotiations were undertaken between the Railroad Administration and the carriers for the construction of a "standard contract." So many were the issues involved that the final form was not agreed upon until October 22, 1918, and so varied were the problems of adjustment and the claims for special consideration on the part of the individual carriers, that many of the companies have not yet signed the agreement. Many carriers have announced their intention to follow the method of adjudication provided by the statute.

It is unnecessary to enter into the technical details of this agreement. It follows the provisions of the Federal Control Act already described, and only such points need to be mentioned as will throw further light upon these statutory requirements. The Railroad Administration agreed to meet operating expenses and normal taxes, and to maintain the property and equipment up to the standard prevailing when the road was taken over; but if during the test period, the maintenance appropriations had not been sufficient to put the property in condition for safe operation, additional maintenance up to a normal standard might be provided at the expense of the company. Improvements to railroad property and new equipment were chargeable to the roads, and were to carry interest as rental payable by the Director General, but strictly war improvements were a charge against the government. The annual compensation, payable whether earned or not, was not subject to any deductions that would prevent the company from supporting its corporate organization, keeping up its sinking funds, paying taxes, rents and interest on loans. These charges being provided for, the government reserved an emergency right to make deductions from the remaining compensation to satisfy indebtedness to it.

Such power was to be used only when no other means was available, and when its exercise would not interrupt unnecessarily the regular payment of dividends, where such dividends had been disbursed during the test period. Finally, the contract specifically stated that none of its provisions should be construed as expressing or prejudicing the future policy of the United States concerning railroad ownership, control or regulation.

Protracted negotiations took place before the railroads finally accepted the clauses relative to the right of the government to restore deferred maintenance, and to use a part of the carrier's compensation to pay its debt to the government. But the most insistent contention of the carriers, which was finally denied, was the right to litigation at the end of federal control on the question whether they had suffered damage by reason of diversion of business. It was held by the Director General upon advice of the Solicitor General, that the roads having been taken over for war purposes, Congress intended that the authorized compensation should cover this element.

The "standard return," based upon the average operating income of the three fiscal years previous to 1918, undoubtedly worked injustice to individual roads. For example, the roads of the Southeast, which had been slowly building up their earning capacity, had not in these three years realized fully the results of their investment policy. Yet on the whole, the bargain was probably as fair a one as could have been drawn up for the railroads in general. Nineteen-fifteen was as lean a year as 1917 was a fat one, and the three years when averaged together roughly approximated a just return. And when all the conditions are taken into account, particularly the financial situation that the railroads faced at the beginning of 1918, the transfer of the railroads to the

government must be regarded as distinctly favorable to the interests of railroad stockholders. There is little doubt that the government by this act saved all but the strongest roads from a condition bordering on insolvency.

The Federal Control Act placed within the class of roads entitled to its benefits all independently owned and operated carriers competing or connecting with the roads that had been placed under federal control by presidential proclamation. These were the so-called "short lines." They were in few instances of any importance to the government for the war emergency, yet their very existence was threatened by a policy of unification which would result in a diversion of their traffic. By Section 14 of the Control Act, the President was empowered to relinquish prior to July 1, 1918, any roads not needed, and thereafter any others by agreement with the carriers. In accordance therewith, on June 29, 1918, there were relinquished from federal control 2161 short-line railroads, including standard railroads, plant facilities, electric lines, and switching and terminal roads. By restoration and further relinquishment under agreement, the net number relinquished stood on January 1, 1919, at 2110.

For the protection of these relinquished roads, the administration has prepared a coöperative contract open to signature at will. Signatories are guaranteed a fair division of joint rates, an equitable allotment of cars, and the right to the use of government purchasing agencies. Moreover, in contrast to the refusal of the government to recognize any claim on the part of the controlled railroads to damages for diversion of their business, the Director General agrees to reimburse these short lines in cash for any revenues on competitive traffic lost during 1918, and guarantees for the future to