RAILROAD RATE INCREASES As indicated in our last annual report, on October 23, 1936, the class I railroads with a few exceptions sought the modification of outstanding orders in nearly 1,000 specified cases to enable them to publish and file tariffs providing for increased rates which to a large extent would be equivalent to the then existing rates plus the emergency charges authorized in Emergency Freight Charges, 1935, 208 I. C. C. 4, 215 I. C. C. 439. On November 21, 1936, they filed a supplemental petition including additional commodities and extending the proposals to Mountain-Pacific territory. On the same date they asked us to permit the continuance of such emergency charges as might be in effect December 31, 1936, (the date fixed in 215 I. C. C. 439 for their discontinuance) until 60 days after our decision upon their new proposals. After hearing oral argument, we denied this request, 219 I. C. C. 565. We also concluded that outstanding orders ought not to be modified until interested parties had been heard on the merits of the proposals. The proposals made by the two petitions did not cover all the articles upon which emergency charges were collected, and the increases proposed were in a considerable number of instances less than those charges, although in some instances they were greater. The railroads estimated that in the aggregate the increases would yield about 70 percent of the amount produced by the emergency charges, or an annual total of from $85,000,000 to $90,000,000. Testimony was taken in regard to the general aspects of the case, the proposals relative to so-called heavy basic commodities, the relation of fifth-class and sixth-class rates to first-class rates subject to the official classification, and the proposals as to Mountain-Pacific and transcontinental rates. On October 19, 1937, in General Commodity Rate Increases, 1937, 223 I. C. C. 657, we found justified the increased rates proposed on the heavy basic commodities, except on anthracite coal, iron ore from Minnesota mines to Lake Superior docks, and petroleum products in southern territory (insofar as the increased rates would exceed those heretofore prescribed), and we disapproved the proposed changes in official-classification ratings. With respect to the proposed increased rates on which testimony had not been taken, we vacated outstanding orders in certain other proceedings to the extent necessary to permit these rates to be filed, subject to protest and possible suspension. Except for the proposals with respect to transcontinental and Mountain-Pacific rates, the record on which our decision was based was closed on June 21, 1937. Subsequent thereto and prior to our decision, the railroads entered into agreements with large groups of their employees to raise wages, and these increased wages have since become effective. It has been estimated that the increases will aggre gate as much as $135,000,000 per year. As a result of these and other circumstances, the railroads have taken steps to seek our approval of further and large increases in rates, fares, and charges of widespread character. Without indicating any attitude in regard to these further proposals to increase rates, as to which we have an entirely open mind, the situation presented is one which we feel calls for some comment in this report. It will be generally agreed, not only that the railroads are constitutionally entitled to an opportunity to earn a reasonable return on the fair value of their carrier properties, but also that it is imperative that they be able, in general, to earn such a return under what may be called normal conditions, if the system of private ownership of railroads is to function at all satisfactorily. It will also be agreed, although perhaps not so generally, that if a reasonable return cannot be earned in times of depression, the railroads should have a somewhat corresponding opportunity to earn more than a reasonable return in times of prosperity, so that the average may be fair. Starting with these propositions, many jump to the conclusion that to make them effective all that is needed is for the railroads to propose and for us to approve rates, fares, and charges on an adequate level. Those who are most closely in touch with the practical aspects of the situation, like the active traffic officers of the railroads and of the large shipping industries, know that the problem is not so easily solved; but it is an idea which appears to have found root and to flourish in the minds of many owners of railroad securities and others who are not so well informed. Transportation has never been a complete monopolistic industry in this country, except in spots, but in recent years the element of competition has grown by leaps and bounds. The rapid development of transportation by highway, water, air, and pipe line is a commonplace and requires no elaboration. Practically all of the transportation of passengers by rail is now subject to intense competition from other forms of transportation, and the same is true of much of the freight traffic. The railroads have felt this competition severely. As shown in our recent report on the general commodity rate increases, the Federal Reserve Board index of industrial production was very nearly up to the 1929 level in April 1937, and for the year 1936 it was only 11.8 percent less than in 1929. In 1936, however, total railroad car-miles were 23.8 percent less than in 1929, and railroad operating revenues were 35.4 percent less. Not only had the railroads lost since 1929 a continually increasing share of the total traffic, but to hold other traffic they had found it necessary to make many competitive reductions in their rates and fares. The average freight revenue per net ton-mile was 9.4 percent lower in 1936 than in 1929, notwithstanding the emergency charges, and the average revenue per passenger-mile was 34.5 percent lower. As we pointed out in our report, if the railroads had been able to obtain on the traffic which they moved in 1936 the same average operating revenue per unit as they obtained in 1929, they would have earned, notwithstanding the decreased volume of traffic but with the aid of the reduced operating expense per unit, a net railway operating income of $1,396,100,000 instead of the $667,000,000 which they actually earned, in comparison with the $1,252,000,000 which they earned in the prosperity of 1929. No competitive industry can work out its salvation through a priceincreasing policy alone, and the railroad industry is now, to a very considerable extent, in that class. While price increases are at times necessary, the vital thing in competition is to increase the salability of the product and reduce its cost. Furthermore, so far as transportation is concerned, competition is not the only adverse factor to be considered in the fixing of prices. The higher the level of transportation charges, the more it pays large shipping industries to reduce in every practicable way the amount of transportation used. We have had plenty of evidence that this has actually happened and on a very considerable scale, through the establishment of branch factories and warehouses, economies in the use of fuel and other raw materials, and the like. High rail charges also encourage the substitution of products which require little or no such transportation for products which require much, as in the case of the substitution of natural gas, hydro-electric power, or fuel oil for coal. Public regulation is necessarily an interference with management, but it is not management, and it is no part of our duty to interfere with management in the fixing of rates when the question is only one of what is wise or unwise in the exercise of sound business judgment. Conditions are such, however, that there is a manifest need for caution in the increase of railroad rates, fares, and charges, quite apart from the question of whether the increases will be lawful or unlawful. And in the exercise of sound business judgment there is like manifest need for doing everything that can be done to make railroad service attractive to the public and to improve earnings through reduction of operating costs. That the railroads have done much in recent years to improve service, both freight and passenger, and to accomplish greater economy in operation is plain. Yet it is not clear that they have done all that can be done. We have repeatedly expressed in our reports the belief that by greater cooperation with each other and the coordination of many of their facilities and operations further and material reductions in operating expense are feasible. As we pointed out in our recent report on the general commodity-rate increases, the attempt was made in the Emergency Railroad Transportation Act, 1933, to bring about such reductions in operating expense with the aid of an officer of the Government designated as Federal Coordinator of Transportation. Amendments to the act prior to its passage interposed obstacles to the execution of this policy, and the portion of the act dealing with this matter was allowed by Congress to expire on June 16, 1936. An important reason, however, why it was allowed to expire was because the railroads had set up a new organization, the Association of American Railroads, with the object, among others, of bringing about these economies through voluntary action, and because the railroad managements and employees had agreed upon a plan for the reasonable protection of employees dismissed as the result of coordination projects. Yet, if there have been important accomplishments by the association along these lines, they have not been brought to our attention. It is evident, also, that the conditions which exist call for a realistic approach to the subject of the financial reorganization of the railroads which are in bankruptcy or receivership. It is undeniable that there is a considerable amount of railroad property which is obsolete or obsolescent, and that some railroad systems are more affected by this condition than others. Property values must plainly be considered from the practical standpoint of future earning possibilities and reorganizations shaped accordingly. Moreover, it is clear that more than ever the railroads, if they are to meet public demands adequately, must be kept free from financial entanglements which sap and drain their strength. With respect to this latter matter, the investigation of railroad financial practices now being conducted by the Senate Committee on Interstate Commerce may be expected to point the way to corrective and remedial measures. There is a further phase of transportation competition, also, which calls for our vigilant attention and action, so far as our jurisdiction and powers permit. The constant danger in such competition is that rates, fares, charges, or practices will be established for which there is no economic justification and which will either unduly weaken financial conditions or impose a burden on noncompetitive traffic which it ought not to be called upon to bear. This danger is particularly acute in the case of the railroads because, unlike competing forms of transportation, they still enjoy a relatively large amount of traffic which is substantially noncompetitive. There is no way in which we can act effectively to avert such dangers without. means of comparing transportation costs with the charges levied therefor. Such information of this character as is now available is inadequate and unsatisfactory in many respects. We realize the need for remedying this deficiency in information, and are setting proce dure in motion to that end. It is not a simple problem or one which can speedily be solved, but it plainly requires active and persistent attention. CLASS RATE READJUSTMENTS Ocean-rail rates between southwestern and north Atlantic seaboard States. As the result of a petition by shipper interests, referred to in our last report, and also of a petition filed by interested ocean carriers, for modifications of the prescribed ocean-rail (including railocean and rail-ocean-rail) adjustment between Southwestern States and north Atlantic seaboard and adjacent interior territory (211 I. C. C. 601), we reopened Consolidated Southwestern Cases, with respect to such rates. On May 3, 1937 (222 I. C. C. 229), after further consideration of the record in the light of such petitions, we issued a supplemental report modifying our previous findings in certain respects, the more important changes being (a) to permit equalization of rates through the north Atlantic ports and through New Orleans, on the one hand, and Texas ports on the other to the extent that such equalization appeared to be reasonable, and (b) a revision of the key rates. Revised rates published as a result of that report became effective July 22, 1937. Southern class rates.-After consideration of the petitions of State commissions in the South referred to in our last report, we instituted. a new general investigation into the class rates within southern territory, and to and from official territory, No. 27655, Southern Class Rates, 1937. Assignment of that proceeding awaits the readiness of interested parties to proceed. In By order of November 13, 1935, the Railroad Commission of Kentucky brought about disparities between the intrastate class rates applying within that State and the class rates applying interstate between points in Kentucky and other Southern States and which were on the basis which we had previously prescribed as reasonable for interstate application generally within the South. Upon petition of carriers we instituted an investigation to determine whether such intrastate rates unlawfully affected interstate commerce. our report of July 13, 1937 (223 I. C. C. 109), in that investigation we found that, although the maladjustment caused by the order of the Kentucky commission indicated a need for realinement of rates, the record did not establish that the intrastate class rates caused undue and unreasonable preference and prejudice as between persons or localities in intrastate commerce, on the one hand, and interstate commerce, on the other, or resulted in unjust discrimination against interstate commerce, and was not sufficient, therefore, to support an order requiring that the intrastate rates be increased to the interstate level. In connection with that finding we referred to the pendency of |