The Interstate Commerce Commission and the Railroads

• Author: Samuel O. Dunn
• DOI: 10.1177/000271621606300114
• Published date: 01 January 1916
• Date: 01 January 1916
• Subject Matter: Articles

THE INTERSTATE COMMERCE COMMISSION AND THE
RAILROADS
BY SAMUEL O. DUNN,
Editor of the Railway Age Gazette.
No problem more important and difficult confronts the people
of the United States than that of establishing between their govern-
ments and their large business concerns relations which will pro-
mote greater equality in the distribution of the burdens and benefits
of the production of wealth, without impairing the efficiency with
which production is conducted. There has been within recent
years a great increase in the amount of government regulation of
business. Its main purpose has been to equalize economic burdens
and benefits. The most important experiment being made in this
field is in the control of railroads. This experiment is so important
partly because the railway industry is one of the largest in the coun-
try. It is so important partly, also, because there is a tendency
for large classes of commercial and industrial enterprises to pass
mainly into the hands of a comparatively few large aggregations of
capital. This tendency, if continued, will give quasi-monopolistic
power to a few concerns in these other fields.
There will then be as
much reason for subjecting them to strict regulation as for subjecting
railways to it. The policy applied to them probably would be
modeled on that applied to railways, having alike its strength and
its weaknesses. Therefore, the wisdom or folly of our regulation
of railways may determine the wisdom or folly of our regulation of
other classes of concerns and the success or failure of government
control of business in many fields.
The system of regulation adopted for railways consists partly
of the passage of laws imposing on them specific and detailed require-
ments, but mainly of the delegation of authority over them to com-
missions. The Interstate Commerce Commission is the most im-
portant body to which such authority has been given. Therefore,
the success or failure of government regulation of railways, and even
of public regulation of business in general, will be determined largely
by the amount and nature of the power given to the commission
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and by the courage and wisdom with which it is exercised. An
adequate study of its authority, of the way it is doing its work, of
the results being produced, and of the changes, if any, which ought
to be made in the laws defining its authority and duties, or in the
policy which it is following, would occupy an important place in an
investigation and discussion of the relations between our govern-
ments and our commerce and industry. Limitations of space for-
bid, however, the presentation in this article of more than an outline
of the points that should be covered in a comprehensive discussion
of the relations between the commission and the railways.
Some Results of Regulation
Regulation of the railways by the federal government began
with the passage of the Act to Regulate Commerce in 1887. Their
regulation by the states began with the Granger movement more
than a decade earlier, and in some states has been effective and
even drastic most of the time since.
But effective regulation
throughout the country, both national and state, did not begin until
1906, when the Hepburn rate act was passed. It has, therefore,
had a life of less than ten years.
As a preliminary to analysis and discussion of the policy fol-
lowed since 1906, it is desirable to take a general survey of the
trend of affairs in the railway industry during this time. It is
easy to show that regulation in general, since it became effective,
has accomplished much good. It has destroyed the railways’
domination of politics. It has abolished the issuance of free passes
except to certain classes of persons who are expressly authorized
by law to use them. It has extirpated rebating and greatly reduced
unfair discriminations in the published rates. It has caused the
adoption of a uniform system of accounting which has made it
more difficult for those in charge of the management of railways to
evade public control or deceive or overreach their stockholders.
It has given so much publicity to the mismanagement, financial
and otherwise, of certain roads as to render such mismanagement
more difficult and improbable in future. This is but a partial list
of the good results it has achieved.
At the same time, regulation has produced, or contributed
toward producing, other effects more questionable. In the decade
before 1906, without there being any considerable advances in av-

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erage freight and passenger rates, the earnings of the railways in-
creased more rapidly than their operating expenses and taxes.
There were, in consequence, large increases in their net income,
which enabled them to recover from the effects of the panic of
1893 and of the depression which followed it; and a large amount of
new mileage was built and unprecedented numbers of locomotives
and cars were bought.
On the other hand, during the period since 1906, despite great
improvements in machinery and methods of operation, the expenses
and taxes of the railways have increased faster than their total
earnings. They have found it necessary year by year to make large
additions to their investment in property per mile of line. This co-
incidence of increasing investment and declining net revenue has
caused a serious reduction in the percentage of return earned. In
the fiscal year ended June 30, 1914, the last year for which we have
complete figures, the investment in road and equipment per mile
of line was $71,551, an increase since 1906 of $11,927. Gross earn-
ings per mile were $12,667, an increase of $2,207, or 21 per cent.
Operating expenses and taxes were $9,794, an increase of $2,546, or
35 per cent. In consequence, net operating income per mile was
only $2,873, or $339 less than in 1906, a reduction of 10~ per cent.
To summarize, the investment per mile was $11,927 more in
1914 than eight years before, but the net money per mile available
with which to pay a return on it was $339 less. In 1906 the per-
centage of net return on property investment was 5.39 per cent; in
1914, only 3.99 per cent.
This decline in net return has rendered it increasingly difficult
to pay interest and dividends and raise new capital. Many roads
have become bankrupt and on October 1, 1915, 42,000 miles of line
were in the hands of receivers.
This is the largest mileage of in-
solvent roads ever known. The construction of new mileage under
way is less than at any time in fifty years.
Until lately the orders
placed for equipment and supplies were at their lowest ebb. These
conditions threw hundreds of thousands of the workmen of the
railways and of railway supply and equipment manufacturing con-
cerns out of employment.
The increase in the outgo of the railways between 1906 and
1914 was due chiefly to two causes. The average wage per employee
advanced from $611 to $810, or 32.57 per cent. The taxes per mile

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advanced from $336 to $568, or 69 per cent. The increases in taxes
were, of course, made by public authorities. A large majority of
the advances in wages were awarded by arbitration boards organized
under the federal Erdman act. There have been other, although
smaller, increases in expenses which have been more directly due to
state and federal regulation. The railways have tried to make
general advances in rates to offset, at least partially, these increases
in their outgo. The regulating authorities, national and state,
have prevented most of these and have caused many reductions in
both passenger and freight rates, and the average passenger and
freight rates are lower now than in 1906, despite the great increases
which have occurred in wages, taxes and other expenses.
On this showing the heavy reduction in the net return of the
railways and the effects which it has produced must be attributed
mainly to government regulation. As the Interstate Commerce
commission is the most important regulating body, many people
give it the credit or blame, commending it if they regard the general
result produced as good and condemning it if they consider it bad.
It is probable that a majority of business men and students of eco-
nomic and industrial affairs believe the reduction of railway net
earnings has been unjustified and has had a bad effect on business
generally. Therefore, among these classes the Interstate Com-
merce Commission is a less popular and more criticized body than
a few years ago.
But much of the criticism visited on it is misdirected. The
commission is often called the most powerful governmental body
in the United States. In a sense, it is so. It has large authority
over the railway industry, which involves the possession of great
power to affect the national welfare. But an examination of the
laws and court decisions under which the commission acts shows
that its authority, while great, is fragmentary and subject to many
limitations; that it is more negative than positive; that it is such that
the harm which the commission can do if disposed to be unfair is
greater than the good it can do if disposed to be fair. Before judg-
ment is passed on the commission’s work, the nature and limitations
of its...