Throttling the Railroads: 6. Railroads in the Grip of Government

Dr. Carson is a frequent contributor to THE FREEMAN and other journals and the author of several books, his latest being The War on the Poor (Arlington House, 1969). He is Chairman of the Social Science Department at Okaloosa-Walton College in Florida.

If someone had set out with malice aforethought to destroy the effectiveness of the American rail­roads, he could hardly have de­vised better ways than those em­ployed by the Federal government for much of the twentieth cen­tury—short of hiring wrecking crews to take up the track and dynamiters to blow up the rolling stock. Before World War I, the government subjected the rail­roads to increasingly debilitating restrictions: by trying to use force to make them compete, not permitting them to compete in many of the usual ways, making it difficult for them to cooperate and coordinate their activities, freezing the systems into their earlier patterns, prohibiting them to follow certain practices by which they could profit and serve consumers, prescribing uneco­nomic practices, driving investors away and, perhaps unintention­ally, promoting the dissipation of working capital.

Having so circumscribed the railroads as to make it virtually impossible for them to adjust to new demands and changing con­ditions, the government took over and ran them during World War I. The railroads were technically returned to their owners after the war, but this was done in such a way that the death grip upon them was retained if not actually tightened. While the railroads were bound hand and foot, as it were, government subsidized and promoted alternative means of transport and facilitated the unionization of their employees against them.

Indeed, if railroad managements had been dangerous criminals with lengthy records of dastardly acts, they could hardly have been more carefully watched and had their activities more extensively limited and restrained. In fact, railroad men were treated as second class businessmen, as charlatans ready at every moment to cheat inves­tors, as extortionists ready to take unfair advantage of custom­ers, as conspirators eager to beset the public, and as brigands on the march to destroy American trans­port. From another angle, rail­roaders were treated as if they were truant children whose every activity must henceforth be mi­nutely supervised and whose deal­ings must be subjected to the most searching scrutiny. In short, men who undertook to operate railroads were, in that capacity, virtual prisoners of their own govern­ment.

However, it would be an error to suppose that those directly connected with the operation of the railroads were the primary victims of these government poli­cies. Railroad executives have no doubt generally enjoyed compen­sation and prestige similar to their counterparts in other indus­tries. Supervisory personnel must have had good salaries over the years. Employees of railroads have usually received relatively high wages. Even stockholders have frequently received dividends and bondholders been paid off. The primary victims of government in­tervention in the operations of the railroads have been consum­ers—all of us—who have been denied the best goods at the lowest prices and passenger service of high quality at low prices which they might have otherwise had. It is probably impossible for gov­ernments to follow policies that will induce businessmen to serve without compensation, but it is easy to devise policies which result in losses to consumers. This has been the result of the govern­ment’s regulation of the railroads.

The Socialist Attack

Back of these policies was so­cialist doctrine, as was indicated in an earlier chapter, however re­vised and watered down that doc­trine might be when it reached the popular mind. More than any­one else, it was socialists who con­ceived of businessmen as villains preying on the public for private gain. To them, private enterprise was irredeemably flawed by the selfish quest for gain. The railroads received the full brunt of the earliest socialist assault against private enterprise in America. It does not follow, of course, that all who favored regu­lating the railroads were social­ists. Much of the animus for reg­ulation can be accounted for by special interests wishing to use the railroads for their particular advantage. But socialism provided the ideological ammunition—the animosity toward private business, the notion that service should be divorced from profit, and the stat­ist assumptions held by regulators—and the protective coloration for these special interests.

More important, socialism pro­vided a direction and a goal for regulation. The ultimate professed goal of socialists was government control of the railroads and their use for the benefit of the people. Two means to this end have been set forth. One is the government ownership and operation of the railroads. This is the way of what are now sometimes called doctri­naire socialists. The other way is more subtle and indirect; it in­volves government control with­out ownership and entails a va­riety of means. This is the way of pragmatic socialists. They do not ordinarily refer to themselves as socialists at all in the United States; they prefer to be known as pragmatists, liberals, or some such euphemism. But from the direction of their thrust it can be determined that they are social­ists, regardless of the name by which they are known.

Pressure Toward Government Ownership and Operation

Up to and through World War I the pressure of socialists was toward government ownership and operation of the railroads. This was true of several third parties which did not identify themselves as socialists as well as the various avowedly socialist parties. Herbert Croly, a "pro­gressive" socialist, indicated how the goal might be achieved in what he wrote a few years be­fore World War I:

In the existing condition of eco­nomic development and of public opin­ion, the man who believes in the ultimate necessity of government ownership of railroad road-beds and terminals must be content to wait and to watch. The most that he can do for the present is to use any opening which the course of railroad develop­ment affords, for the assertion of his ideas; and if he is right, he will grad­ually be able to work out, in relation to the economic situation of the rail­roads, some practical method of real­izing the ultimate purpose.¹

Regulation set the stage for a government takeover by making it increasingly difficult for the railroads to do their job effective­ly. World War I provided the crisis which was used as the oc­casion for government operation of the roads. A major propaganda effort was made during and im­mediately after World War I to make the takeover complete and permanent. This campaign did not succeed; it was thwarted by a Congress determined to return the railroads to their owners.

It turned out, however, that only doctrinaire socialism was re­jected. American reformism had taken its own peculiar form. In­stead of going from operating them to government ownership of the railroads, the government abandoned both of these and turned to full-fledged control. It was sufficient for the day that government have power, author­ity, and control over the railroads. Progressivism had prepared the way for this direction to be taken. Politically, such a direction is clearly superior to ownership and operation. When government owns and operates, bureaucrats must take on onerous duties and re­sponsibilities; they must provide the services and get the money for operation. Control without ownership provides the bureau­crat with power over but little, if any, responsibility for rendering services. At any rate, this is what was established for the Interstate Commerce Commission in the 1920′s.

Regulated Out of Service

It was about as clear as such things can be that when World War I came the government re­strictions made it virtually im­possible for the railroads to pro­vide the desired services. A rail­road historian has recently ob­served that the "poor condition of the rail lines in 1917 was no doubt partly the result of earlier exces­sive or mistaken regulation…."² Even the Interstate Commerce Commission’s recommendations at the time indicated an awareness of the debilitating impact of the restrictions. The Commission rec­ommended that the government either take over and operate the railroads "or that all legal ob­stacles to the complete unification of the railways for that period be removed…."³

Once in power over them, the government reversed its former policies toward the railroads. What was sauce for the private enterprise goose definitely was not sauce for the government gander. William G. McAdoo, who was placed in charge of the railroads, proceeded to do all sorts of things that had been either prohibited or beyond the power of rail execu­tives. Rail service was speedily coordinated; the railroads were treated as if they were a single system. Freight was routed the shortest way. The government discriminated vigorously among shippers, giving war goods pref­erence. Passenger service for the general public was greatly cur­tailed. The railroads had for sev­eral years been denied any sig­nificant rate increase. "Under the Federal Control Act it was un­necessary to secure the approval of either state or federal regula­tory bodies for changes in rates…." New rates could simply be proclaimed: thus, "the Admin­istration announced, on May 25, 1918, a 25 per cent increase in freight rates effective a month later…."⁴ Of course, the govern­ment was free also of antitrust restrictions and could and did treat the railroads as a giant trust.

Even so, the railroads were in bad shape when they were returned to their owners in 1920. McAdoo and his successor had seen fit to accumulate a huge deficit rather than raise rates sufficiently to cover costs. "The official report of the Railroad Administration admitted that the total operating expenses (plus rentals paid to the individual railroad companies) ex­ceeded total revenues for the twenty-six months of federal oper­ation… by just over $900,000,­000. And this figure does not in­clude more than $200 million later paid to the railroads for under-maintenance during the war. This latter figure, however, amounted to only about one-third of what the railroads claimed they were due for under maintenance. The rail­road owners were stuck with an inheritance of high wages to em­ployees, excess equipment con­structed for wartime purposes, and roads that had generally been run down.

The Transportation Act of 1920

Had the management of the railroads been left free to operate them as they saw fit, they might have been able to revive the roads. They were not. Instead, they were much more completely shackled than ever by the Transportation Act of 1920. This act should be considered the crowning piece and culmination of Progressive legis­lation. The agitation of the Pro­gressives produced antitrust ac­tivity, a spate of legislation, sev­eral constitutional amendments, and heady intervention in foreign affairs. By the end of World War I, or before, it appeared to have lost its impetus. Americans were weary of reform and were regis­tering their feelings at the polls. Even so, one more piece of Pro­gressive legislation was pushed through, one which was typical of what Theodore Roosevelt had advocated as the Bull Moose can­didate in 1912—that the govern­ment leave property ownership in private hands but subject the great industries to stiff regula­tion. Of course, Roosevelt sup­posed that the railroads were al­ready so regulated, but the prin­ciple which he would have applied to all industry was carried to its logical conclusion in the Esch­-Cummins Transportation Act.

Much early policy was reversed. The Interstate Commerce Act had prohibited pooling. The Transpor­tation Act of 1920 authorized the Interstate Commerce Commission to approve pools if it could be shown that they were in the pub­lic interest. Antitrust legislation had been aimed at one corporation indirectly controlling others. The new act authorized the Commis­sion, "upon application by any carrier or carriers and after hear­ing, to approve ‘the acquisition… by one of such carriers of the con­trol of any other such carrier or carriers, either under a lease or by the purchase of stock or in any other manner not involving the consolidation of such carriers into a single system for ownership and operation,’ upon such a basis as may be found by that body to be just and reasonable."⁶

Planned Consolidation

The Act charged the Commis­sion with the task of preparing and adopting "a plan for the con­solidation of the railway proper­ties of the continental United States into a limited number of systems. In the division of such railways into such systems under such plan, competition shall be preserved as fully as possible and wherever practicable the existing routes and channels of trade and commerce shall be maintained…." To make it possible for this to be accomplished, the act permitted the Commission to authorize con­solidations of railroads into single corporations according to the master plan.⁷ Actually, the Com­mission have never put any such plan into effect. They are waiting, no doubt, until mathematicians square the circle before undertak­ing so forbidding a task as this.

No longer was it legal for any­one to build or extend a railroad at will. The act required that a prospective builder must first have a "certificate of convenience and necessity" from the Commis­sion before beginning construc­tion. Moreover, the law provides that "no carrier… shall abandon all or any portion of a line of rail­road or the operation thereof un­less and until there shall first have been obtained from the Com­mission a certificate that the pres­ent or future public convenience and necessity permit of such abandonment."

The restrictions on railroad fi­nance were equally restrictive. Following a brief period of grace after the act went into effect, "no securities might be issued legally by any carrier subject to regula­tion except upon Commission ap­proval." The act lays down the general principles upon which such approval may be granted. It notes that Commission approval does not in any way imply that the United States government guarantees such securities. The only securi­ties a railroad might issue without Commission approval would be notes maturing within two years and even such borrowing was re­stricted to 5 per cent of the par value of outstanding securities.

Rate Control

The most amazing provisions of the Transportation Act of 1920, however, were probably those hav­ing to do with rates. The Com­mission was authorized to fix rates for roads under its authority ac­cording to how it grouped them from time to time. The rates were to be fixed so as to assure a fair return upon investment if the rail­road were efficiently run. Initially, Congress declared that a fair re­turn in most instances would be 51/2 per cent annually of the ag­gregate value of railway proper­ties. Any railroad that earned more than 6 per cent on the aggre­gate value of its properties in a given year was to have one-half of the excess placed in a reserve fund for its own future use and the other one-half to be turned over to the Commission to place in a general contingency fund to aid ailing railroads. What was involved was a most complex limitation on earn­ings and a redistribution plan.

There were several other rate provisions of the act. The Inter­state Commerce Commission was granted virtual pre-emptive au­thority over rates so far as state regulatory bodies were concerned. If it found that state regulations occasioned any prejudice or incon­venience to interstate commerce it could negate them. For the first time, also, the Commission was empowered to prescribe minimum as well as maximum rates. It could also prescribe the division of joint rates between or among two or more carriers if it found the pre­vailing division to be unjust. The long and short haul clause was altered so as to further limit the exemptions the Commission could grant from its provisions.

Routing and Service

The Commission was granted extensive powers over routing and service. A carrier found "improp­erly" diverting traffic from an­other line would be liable to the extent of paying the whole amount gained to the "injured" railroad. The Commission was authorized to divert traffic to other lines if, in its opinion, a road was unable to provide a service. Moreover, the Commission was empowered to determine what routes inter­changed traffic should take. Should car shortages develop, the Com­mission could direct their disposi­tion so as to relieve the difficulty without regard to the desires of the owners. The law provided that it should be the duty of every car­rier "to furnish safe and adequate car service and to establish, ob­serve, and enforce just and rea­sonable rules, regulations, and practices with respect to car serv­ice." Nor was the Commission to be particularly concerned about private ownership of terminals and surrounding trackage. If the Commission should find that it would be in the "public interest," "it shall have the power to require the joint or common use of ter­minals, including mainline track or tracks for a reasonable distance outside of those terminals…."⁹ The owners were to be paid some­thing for such usage, of course.

Certain of these provisions have been altered over the years. The Emergency Railroad Transporta­tion Act of 1933 attempted once again to effect consolidations of lines into larger and more stable systems. The attempt to prescribe earnings precisely had already been more or less abandoned. The Transportation Act of 1940 placed restrictions on competitive modes of transportation. But the govern­ment grip upon the railroads by way of the Interstate Commerce Commission has generally re­mained. That hold was authorized and established by the Transpor­tation Act of 1920, and its provi­sions amply illustrate the extent of the grasp.

A state of organized irresponsi­bility was established by this leg­islation. The power to make man­agerial decisions of wide and de­termining scope was vested in the Interstate Commerce Commission. The responsibility for operating the railroads remained with pri­vate management. But that man­agement was denied the authority to make on its own all sorts of decisions by which entrepreneurs ordinarily operate businesses effi­ciently and successfully. Rail ex­ecutives could not, and cannot, buy, sell, build, abandon, or dis­pose of their facilities without Commission approval. They could not sell stock to raise new funds nor consolidate with other lines without the authorization of the ruling government body. In most of the usual ways, railroad man­agers could not compete with rail or other modes of transportation, could not compete in price, in sup­plying of certain kinds of service, or even, if the Commission so ruled, in the exclusive use of bet­ter located facilities.

No Room to Operate

Critics of railroad management have long claimed that those run­ning the roads were cautious, un­imaginative, disinclined to inno­vate, and lacking in vision. In view of the limitations under which they operate it would hardly be surprising if the charges were, in substance, true. Any new service innovation could be quite expen­sive to the railroad. It might not pay off, yet the road might be stuck with providing it indefinitely because the Commission decided that the "public interest" required it.

The crucial factor in explaining the "unimaginativeness" of rail management, however, is the tying of rate structures to earnings. When this is combined with gov­ernment engendered inflation—that is, increase of the money sup­ply—as it usually has been since 1920, it is easy to understand why managements have been re­luctant to make daring innova­tions. Increases in money supply mean that prices in general must rise to offset the increase. Yet railroads have to observe a time lag before they can raise their prices, if it turns out that they are permitted to do so. To get the raise, they need to demonstrate that their earnings are insufficient under the present rate structure. The effect of this is that railroads can rarely expect to turn a good profit by extending services, but they can lose a great deal. In short, railroads cannot—under inflationary conditions—make much of a profit; they can, how­ever, have horrendous losses.

Actually, however, rail execu­tives have often been quite imagi­native. They have even made in­teresting service and equipment innovations from time to time, but that is not what I want to point out here. Much of the managerial imagination has not been expended in finding ways to improve and expand service, as it normally would be. It has, instead, been devoted to finding ways for a rail­road to survive and make a mod­est profit under the crushing bur­den of restrictions, to finding ways to circumvent the thrust of regulation, and to finding argu­ments and evidence to convince the Commission to permit some course of action.

Holding Against Disaster

Railroad men have fought a fifty-year-long holding action against disaster. Denied most of the avenues by which they might advance, they have husbanded their resources by strategic re­treats. They have developed in­genious arguments supported by voluminous arbitrarily construed statistics for reducing services—for dropping passenger trains, for cutting off dining cars, for clos­ing depots, for not installing warning systems, and so on. They have become, in effect, unbusinessmen, for rather than seeking to expand services, they have sought to reduce them; rather than in­creasing traffic, they have some­times sought to reduce it; rather than reduce prices to increase the number of customers, they have often sought to raise prices and have thereby reduced customers and revenue.

These unbusinesslike actions make sense only in the framework of restrictions that has been erected. The reversal of priorities from expanding services through innovation to reducing services can be explained, and the explana­tion will show that it was about as good business as could be done. Denied much expectation of profits by new exertions, railroad men turned to making what profits they could by as little effort as possible. They sought to keep only that busi­ness which was most profitable, involved the least risky outlay of funds, and entailed the least amount of effort to acquire and service. They sought to use the rails where they were most clearly superior to other modes of trans­portation and to avoid competi­tion where superiority was less certain.

Under such policies, the rail­roads ceased to be a growth in­dustry. Indeed, they appear to be an industry dying of a lingering illness. One after another they have abandoned or had taken from them services that they once per­formed: the carrying of mails, the hauling of most packaged freight, much of the passenger service, and so on. Each time a railroad lops off or reduces service to an area it is apt to reduce the num­ber of customers for even its prof­itable traffic. For example, when passenger service to a small com­munity is discontinued, it reduces the likelihood that people traveling at however great distances will go by train when either their point of departure or destination is that city. Cut off enough such service and even long distance trains be­tween great cities will not have enough passengers to warrant the provision of the service. The same principle will generally hold re­garding any such service, and the railroad policies have undoubtedly produced the appearance of a dying industry. These policies, in turn, have been the result of des­perate measures taken by railroad men caught in a stranglehold by the Interstate Commerce Com­mission.

Had this been all, the railroads might still have held their own. But there was more. They were faced by increasing competition from other modes of transporta­tion. And while they were being circumscribed by onerous restric­tions, governments were frequent­ly aiding and abetting their com­petitors. That part of the story needs also to be told.

Next: The Grip of Privileged Competitors

—FOOTNOTES—

¹ Herbert Croly, The Promise of Amer­ican Life, Cushing Strout, intro. (New York: Capricorn Books, 1964), p. 377.

² John F. Stover, The Life and Decline of the American Railroad (New York: Oxford University Press, 1970), p. 175.

³ Sidney L. Miller, Inland Transporta­tion (New York: McGraw-Hill, 1933), p. 156.

⁴ Ibid., p. 163.

⁶ Miller, op. cit., p. 175.

⁷ All such authorized actions were spe­cifically exempted from antitrust suits.

⁸ Miller, op. cit., p. 177.

⁹ Ibid., p. 182.