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26 commodity groups includes many different geographical movements. For any particular commodity, the rates per ton-mile vary greatly as between geographical movements, so that the loss listed for each of the 256 commodities is already an averaging of loss movements with profitable movements. It is perfectly clear, therefore, that the railroads took a loss on below-cost rates in 1953 of a sum exceeding $1 billion by a wide margin.
Obviously, the railroads cannot take such losses and remain solvent without making up the funds from some source. The source from which these losses are financed is obviously that of the highly profitable noncompetitive rates. On many commodities certain shippers and certain communities do not enjoy the benefits of waterway and common carrier highway competition. They pay the bill for those who do. On the noncompetitive movements, the railroads set rates at levels sufficiently above cost to finance the loss-rate movements competitive with the waterways and the highways. Appendix II reports indicate, in limited measure, the scale of these noncompetitive revenues. In 1953, of the 256 commodity groups, 53 yielded revenues exceeding 150 percent of fully distributed costs, and 8 exceeded fully distributed costs by more than 200 percent. The excess of revenues over the fully distributed cost of the 53 commodity groups amounted to $693,711,000. Thus, merely on those commodities which yield a Terende exceeding total cost by over 150 percent, more than half of the losses on the subsidized movements have been recovered. The largest group of all, the 116 commodities on which revenue amounts to 100 to 150 percent of fully distributed cost, provide the remainder.
The term “subsidy" relates to a financing out of public funds, and, for this reason, is not ordinarily applied to the railroad rate structure. Nevertheless, in its economic operation the two are directly parallel. The high rates collerted by the railroads on noncompetitive traffic are of the same economic character as an excise tax. Instead of transferring the funds through the public treasury to finance the support of loss business, the railroads effect the transfer through their own profit-and-loss accounts. Therefore, subsidies to waterways and highways moved through the public treasury are matched by those of the milroads transferred through their own private treasuries. Comparative traffic subsidization-rail and waterway
Indeed, they are more than matched. I have already pointed out that in 1953, the internal subventions by the railways of traffic which did not cover costs amounted to something exceeding $1,158,494,000. This may be compared with the amount expended by the Federal Government on the waterways for which Do user charge is recovered. For the year ended June 30, 1953, this amounted to $272,130,233. These are outlays allocated to navigation only and include new construction, maintenance and operation, not only on the inland waterways, but also on the seacoast harbors serving foreign commerce noncompetitive with railroads. In its reference to vast sums expended on waterways, the Presidential Advisory Commission might have been more specific. In 1953, the waterway outlays were less than 24 percent of the private traffic subventions within the railroad system.
It may or may not be that Government financing of the facilities of other forms of transportation constitutes unfair competition for the railroads. This is a public-policy issue of internal improvements within the United States and of user charges. But, on the question of regulation under the Interstate Commeree Act, the part played by the Government in the development of other mories of transportation is entirely irrelevant. Regional implications of intermodal transport competition
The report of the Presidential Advisory Commission and H. R. 6141 and H. R. 6142 carry important implications as to regional development, especially adVerse to large areas of the South and the West whose growing industries place greater reliance on highway and waterway transportation than is usual elsewhere in the country. In large portions of the South and West, the railway system never developed the high degree of trackage and traffic density found in the North and the East. Consequently, rail facilities are less abundant and rail rates tend to be higher. These circumstances have led to a greater reliance on highway and waterway transportation, especially in the course of the rapid industrial growth in these regions since the end of World War II.
Corps of Engineers, U. S. Army, Annual Report of the Chief of Engineers, 1953, pt. I, m. 1, p. 19.
Highway transportation in the South and the West
The meaning of highway transportation to rising income levels in the South and the West may be illustrated by certain measures of growth since 1939 and 1940 in the four census regions : East South Central, West South Central, Mountain, and Pacific. The States included in each of the census regions are listed in appendix III. All of these four regions have lower rail trackage density than any of the remaining census regions of the country. But, since 1940, all of them have had a higher percentage of growth in freight carried by truck on main rural roads than any of the other regions. Correspondingly, they are all moving forward faster with respect to percentage increase in income levels than any of the other regions in the country, and in employment in manufacturing their progress exceeds the national average. Table IV summarizes these comparisons. TABLE IV.- Relative railroad trackage density, growth in highway trucking,
and economic development by census regions
1 The States filling within each region are listed in appendix III.
Interstate Commerce Commission, annual report, Statistics of Railways in the United States Data represent trackage owned. 3 Bureau of Public Roads, Highway Statistics. * U.S. Department of Commerce, Statistical Abstract of the United States.
While table IV does not demonstrate casual relationships in a scientific sense, the correspondence between lighter rail trackage density and a larger rate of growth in highway transportation in the South and the West is very startling, and a causal relationship is strongly suggested. It appears highly probable that the competitive reverses for highway trucking which would follow from the recommendations of the Advisory Commission would significantly retard economic development in these regions. Waterway transportation and the South Central States
Similar observations apply to the development of water transportation and the economic growth of the central South. Those reaches of the Mississippi River and its major tributaries which carry the heaviest burden of traffic are essentially southern in their orientation. This is certainly true of the main segment of the Mississippi downstream from St. Louis, and largely true of the Ohio. The Tennessee, the Cumberland, the Warrior-Tombigbee system, and the Gulf Intracoastal Waterway are all entirely southern. In recent years new technologies of inland water transportation as well as rehabilitation of deteriorated navigation facilities have brought a marked upsurge in waterway freight volume. Railroad freight traffic has not increased by the same percentage. From 1946 to 1954 the tons of inland freight moved on the Mississippi and its tributaries, including the Ohio, the Cumberland, and the Tennessee, in
creased by 69.7 percent, while the carloadings of rail freight in the southeastern States, served in considerable measure by these rivers, increased only 9.7 percent.
Waterway transportation has been of growing significance to the movement of grain. With the growth of animal and poultry feeding, the southeast parts of this region have become grain-deficient areas partially dependent upon the movement of feeds from the grain-surplus areas of the Middle West. The tonnage of grain carried on the Mississippi River has multiplied by over four times since 1939, as shown in table V.
TABLE V.-Tons of grain carried on the Mississippi River,' respective years 1939
1, 176, 000 1948
1, 877,000 1954.
5, 104, 000 Corps of Engineers, U. S. Army, Waterborne Commerce of the United States, 1954, pt. 2, D. 183, and Report of the President's Water Resources Policy Commission, 1950, vol. 1,
These observations are merely illustrative of the wide differentials in regional dependence on the respective modes of transportation. Any radical alterations in the competitive status of the respective modes would have far-reaching repercussions in the interregional relationships of agriculture and industry. It is apparent that the South and the West would be adversely affected by a weakening in the position of highway and waterway transport. In any case, regulatory changes should be made, if at all, only gradually and cautiously. In this light, the drastic and abrupt revision in regulatory standards and practice proposed by the Presidential Advisory Commission would appear exceedingly bazardous. The rate of return on railroad investment
The recommendations of the Presidential Advisory Commission and the provisions of the two bills relate to the unsatisfactory rate of return on investment of many of the railroad companies. Much attention has been given to this probiem. Mr. William T. Faricy, president of the Association of American Railroads, has expressed dissatisfaction, and, in testifying before this Commission on September 20, 1955, Mr. Carter Fort dwelt at some length on the inadequate rate of return. I agree that the rate of return on investment in the average railroad is adequate. But, in no sense or degree are the major recommendations of the Advisory Commission appropriate to this problem.
Railway freight is highly profitable, and the rate of return on freight business is remarkably good. The railroads have no major financial problem excepting that of the chronic passenger deficit. Every year since 1946 they have lost anywhere from $400 million to $700 million on their passenger business. That they show any profit on overall operations can be attributed to the highly lucrative freight business which absorbs the burden of passenger losses. The profitability of railway freight The excellent record of freight profits is indicated in table VI. Every year since 1947, the railroads have regularly averaged from 7.1 percent to 10.5 perant on investment from freight operations. For purposes of comparison, table VI presents the comparable rate of return of the 317 leading electric utilities
the country. It will be noted that the railway freight business has been at least as lucrative.
\Wilam T. Farley, Keystone of Defense, Rallway Digest, Association of American Railroads, Washington, vol. 11, no. 2, February 1956, p. 19.
* Bearings before a subcommittee of the Committee on Interstate and Foreign Commore, 84th Cong.. 1st sess., on the Report of the Presidential Advisory Commission on Inesport Polley and Organization, September 1955, p. 127.
TABLE VI.-Profitability of railroad freight, class I railroads
1 First National City Bank of New York, Monthly Letter on Economic Conditions and Government Finances, respective April issues of each year. Book net assets as of beginning of each year based on excess of total balance sheet assets over liabilities.
* Profits on freight and other non passenger business calculated by adding passenger losses to reported net income to determine
what profits would have been had passenger business just broken even. All net income data are after taxes.
If H. R. 6141 and H. R. 6142 are considered as methods of dealing with the problem of railroad return on investment, they are highly inappropriate. They would increase the profitability of an already highly lucrative freight business on the assumption that passenger losses would be permanently continued.
It is evident that in some way the railroads are not being utilized in accord with their inherent advantages in the carrying of passengers. This problem should be approached directly in its own terms and corrected as rapidly as practicable. But, to neglect the problem of wasteful use of passenger facilities, while at the same time introducing into the transport system the new inequities of H. R. 6141 and H. R. 6142, would merely compound one maladjustment with another. Instead of 1 major uneconomic application of our national transport facilities, we should then have 2-or even more.
Of course, drastic measures are sometimes demanded as stopgaps in times of crisis. But, at the present time the railroads are not in any crisis, and none impends. The miles of rail line in receivership are now the lowest in a generation. The trend is shown in table VII. TABLE VII.-Line haul steam railroads—Percentage of total mileage operated
by receivers or trustees 1
Percentage 1930 3. 64 1945.
16.59 1935. 27. 02 1950
5. 16 1940. 30. 63 1954.
4. 95 1 Interstate Commerce Commission, 69th Annual Report, Washington, November 1955, p. 185.
Since the recent release from receivership of the Missouri Pacific Railroad the mileage in receivership has fallen to the lowest of any year since 1910. While the problem of the railway passenger deficit should be dealt with vigorously and directly, no financial crisis is at hand which would justify drastic and emergency measures on the scale contemplated by the recommendations of the Advisory Committee. Summation
The basic issue raised by the two bills before this committee is that of fostering constructive competition while restraining predatory and destructive competition. The railroads, because of their large size, their strategically competitive cost structure, the diversity of their traffic, and the high ratio of capital charges to revenues are in a position to engage in highly damaging attacks upon their competitors in other modes of transportation. The recommendations of the Presidential Advisory Committee and the provisions of H. R. 6141 and H, R. 6142 contemplate a cleavage between carriers in different modes of transportation which would permit these attacks to proceed with limited restraint in cases not involving shipper compalints. This would shift freight traffic from other modes of transportation to the railroads in a pattern irrelevant to the comparative efficiency of the respective modes as to cost and service. The result would
be a wasteful utilization of transportation facilities with insufficient regard to the inherent advantages of each mode.
Furthermore, the consequences would be far-reaching in their effects on regional development, particularly where the waterways and where highway trucking play a larger part in the transportation function in the South and the West. The financial condition of the railroads is not sufficiently critical to warrant protective measures of this nature, and, in any event, the measures which should be taken should be directed at the uneconomic railway passenger business where the real difficulty lies.
H. R. 6141 and H. R. 6142, with respect to their provisions on competition between carriers, are inappropriate to the needs of the transportation system and contrary to the broad stream of American public policy with regard to competition and monopoly. I believe these bills should be rejected.
APPENDIX I.-Carload freight revenue as a percentage of fully distributed cost
Revenue and lo88 by commodity group, 1953
Percentage of revenue to
91 73 65
63 71 71 64
trus, fruits, not otherwise specified
, rished.. I'm done Patriain, erude.
189 22, 066 34,628 15, 022 19, 893 13. 156 13, 910
7, 698 44,911 4,829 7, 261 8, 398 5, 278 6, 002 3, 916 11, 826 36, 730
7, 623 84,984
7, 960 24, 997 10, 466
7,834 8, 646 22, 039
1,575 53, 647
314 1, 804 7, 203 6,003 13, 740
631 1, 525 67, 619
2, 111 1,041, 852 237, 554 74, 226 21, 677 2, 567 2, 438 9, 219 29, 329 56, 615 31. 610 69, 042 74,513 38, 023 18, 114
483 1, 795 1, 713 13, 879 4, 231 404
33 5, 175 1,822 4,743
405 10, 764 6,850 3, 299 10, 534
989 3, 416 1, 969 2, 718
593 1, 448 6,367 23, 483
4, 477 34,711
3, 251 14,060
668 10, 818 2, 298 3,005
83 1, 536 4, 230 4,171 4,338 191
54 132 4, 316 17,079 276, 948 186, 649 18, 556 15, 063 15, 768
728 1.888 5, 175 7, 720 6,020 61, 225 51, 780 25, 348 10, 638