DENISON ACT OF 1926

During the first 4 years of its operation, 1924 to 1927, the Federal Barge Line operated at a deficit, losing money in each of those years except 1926.

Various reasons were advanced for this poor start. Some contended that the situation would be cured, or at least alleviated, if the operations were extended and expanded. Others recommended that joint routes and rates be developed between rail and water carriers, believing that this too would broaden its range of operations.

Congress in 1928 accordingly passed the Denison Act (Public Act No. 601, 70th Cong.), which increased the authorized capital stock of the Inland Waterways Corporation from 5 to 15 million dollars, and authorized the extension of its service to the upper Mississippi River, and to tributaries of the Mississippi except the Ohio River.

As to joint rates and routes, section 3 (e) of the Denison Act provided that any common carrier by water (including the Inland Waterways Corporation) might apply to the Interstate Commerce Commission for a certificate of public convenience and necessity. Having received such a certificate, the Commission was directed to require all connecting common carriers (most of whom are, of course, railroad companies) to join with such water carrier in through routes and joint rates. Under these provisions, an elaborate structure of joint rail-and-water rates was built up.

The Denison Act of 1928 dealt also with the matter of disposal of the facilities of the Federal Barge Line. Section 3 (c) provided that Federal services should continue until—

(1) Navigable channels have been completed in the rivers where Federal operates, adequate for reasonable and dependable transportation service; (2) Adequate terminals have been provided;

(3) Adequate joint tariffs have been published; and

(4) Private operators engage, or are ready and willing to engage, in common-carrier service on such rivers.

Section 3 (d) provided that when these conditions had been met, "the Secretary of War is hereby authorized to lease for operation under private management, or to sell to private persons, companies, or corporations, the transportation facilities, or any unit thereof," of the Federal Barge Line. It was further provided that the Mississippi River operations were to be regarded as one unit, and the Warrior River operations as another unit.

Thus both the original act of 1924 and the Denison Act of 1928 contemplated disposal of the Federal Barge Line to private operators, and the Denison Act set up specific conditions for such disposal. These conditions were exacting and even burdensome, much more so than in our opinion is justified. Nonetheless, Congress in these acts clearly intended to make the Federal Barge Line a temporary undertaking, and provided specific methods by which to terminate the undertaking.

Under the provisions of the Denison Act, the Inland Waterways Corporation increased its capital stock, extended its operations to the upper Mississippi, to the Missouri River, and up the Illinois to Chicago, and obtained extensive jointrate arrangements with railroads. Despite these developments, its operations have continued to be unsuccessful.

With this background, I submit a brief summary of the results of Federal operations since 1924, 25 years ago.

FINANCIAL RESULTS OF OPERATION

Before presenting official statistics of Federal Barge Line operations, a few comments are necessary on the accounting methods employed by the barge line. It sets up no carrying charges on its capitalization, and thus has never paid the Government a penny for use of the funds advanced to it. It is free of all taxes, and is relieved of other expenses which a private enterprise must meet.

Federal Barge Line annual reports have from time to time listed a number of expenses of which it is relieved, as a Government enterprise. The annual report for 1945, for example, listed such items as free postage, saving in telegraph expenses because of special Government rates, personal-injury claims of employees paid by the United States Employees Compensation Commission, and benefits to employees under the Civil Service Retirement Act.

All these points are important, but of greater importance is the fact that the Federal Barge Line receives an outright subsidy in that it is not called upon

to earn a return on the investment the Government has made in it. As of June 30, 1948, that investment consisted of $24,298,000, made up of $12,298,000 of Government property, mostly barges and towboats, turned over by the Government in 1924, and $12,000,000 of capital stock purchased by the Government. During the past year, an additional stock purchase of $2,000,000 has been made, bringing the total stock to $14,000,000. Had the Federal Barge Line been required to pay the Government a return of as little as 3 percent per year on the total Government investment, its current deficits would be substantially increased.

Despite the favorable conditions under which Federal operates and the direct and indirect subsidies it enjoys, it has run heavily into the red. During its 25 years of operation, from 1924 to 1948, inclusive, the Federal Barge Line reported an aggregate net deficit of $14,539,000. Let me repeat, and emphasize, that no allowance is made in these results for any return on the Government's investment. The Federal Barge Line was in the red during 3 of the first 4 years of its life. In the next 11 years, or from 1928 to 1938, inclusive, the best showing was made. In 9 of those 11 years, Federal reported net earnings, and a net deficit in only 2 years (1929 and 1934). Net earnings for the 11-year period as a whole amounted to $2,556,000, or at the rate of $232,000 per year. But, had adequate depreciation charges been set up during that period, the reported net earnings would have been replaced by a net deficit.

The more recent record of operations is of greater significance for present purposes. This record has been uniformly bad. During the 10 calendar years from 1939 to 1948, inclusive, the Federal Barge Line has has substantial deficits in every year except 1943.

The tonnage average for this latest 10-year period was greater than for the 1928-38 period by 400,000 tons per year. This is single-count tonnage, exclusive of duplications of tonnage as between the several divisions. Despite this increase in tonnage volume, financial results deteriorated from a net earning of $232,000 per year in 1928-38, to a net deficit of $882,000 per year in 1939 48. a net change in the downward direction of more than $1,100,000 per year. Eliminating the war years from the 10-year period, and restricting the story to the 3 postwar years, 1946, 1947, and 1948, the record discloses even greater deficits, now averaging more than $2,100,000 per year, as follows:

Even these figures do not tell the whole story of financial collapse. During the fiscal year 1947, the management of Federal Barge Lines, after consultation with the Interstate Commerce Commission and its own Advisory Board, concluded that it had been charging insufficient depreciation against its floating equipment. Accordingly, those depreciation rates were adjusted upward, and retroactively, from 3.12 percent per year on all classes of equipment to 4 percent on the barges and 5 percent on towboats. "This drastic adjustment," said the 1947 report at page 4, “brings the book value of the Corporation's boats and barges in line with private industry accounting practice and more nearly reflects the current commercial value of the equipment."

Had depreciation previously been charged at the higher rates adopted in 1947. operating deficits to date would have been increased by more than $5,000,000. This is made clear by reference to the balance sheet as of June 30, 1947. at pages 12-13 of the annual report for that year. The report shows that during the fiscal year 1947 a total of 20 towboats, 2 tugboats, and 179 barges were retired from the investment account. The depreciated book value of these units. less salvage, was $5,672,349, all of which was charged to profit and loss during the year 1947. In other words, operating expenses had previously been understated by that amount, net earnings had been overstated in those years that produced a net, and net deficits had been understated in those years that showed a deficit.

Operating at an almost steady loss during the last 10 years, and at an even greater loss during the last 3 years, at the same time wearing out its equipment,

Federal now faces the alternative of going out of business because physically unable to continue, or receiving a shot in the arm, in the shape of a further subsidy.

No enterprise, even though owned by the Government, can continue indefinitely operating in the red unless Congress is willing to face the prospect of further, larger, and continuous subsidies in the future. At the same time, even an inefficient and losing Government enterprise can work great harm in the way of unfair competition to the railroads and to private barge operators on the waterways.

RECOMMENDATIONS FOR LIQUIDATION

For a number of years, failure of Federal to fulfill the program originally laid out for it has been recognized, and recommendations have been made for abandonment of the program. I shall refer to a few of those recommendations.

Shannon committee.-House Resolution 235, Seventy-second Congress, directed a committee of five members, of which Congressman Joseph B. Shannon, of Missouri, was chairman, to conduct an investigation of Government competition with private enterprise. The report of the committee (H. Rept. No. 1985, February 8, 1933) specifically recommended (p. 21) "that the service of the Federal Barge Lines, conducted by the Inland Waterways Corporation, should be discontinued and liquidated by sale to private enterprise."

Board of Investigation and Research.-The Board of Investigation and Research was created by the Congress in 1940 for the purpose, among other things, of appraising the economy and fitness of the various modes of transportation. The staff of that Board in 1944 reported its appraisal of the Federal Barge Lines in the following language:

"In view of the record made by this subsidized enterprise over an extended period, it is questionable whether this experiment in Government operation of a transportation service should be continued. It is also to be doubted that the Scope of the Corporation's operations should be expanded to include additional waterways. The Congress might appropriately give specific consideration to the future status of the Inland Waterways Corporation and the feasibility of its sale to private operators" (Public Aids to Transportation, 79th Cong., 1st sess., H. Doc. No. 159, September 19, 1944, p. 70).

Ploeser committee.-A report on the Federal Barge Lines was made by a subcommittee of the Select House Committee on Small Business, which committee was set up under House Resolution 18, Eightieth Congress, first session, under Chairman Walter Ploeser. The report on the Federal Barge Line was submitted by Chairman Ploeser to the Subcommittee on Government Corporations of the House Appropriations Committee on May 14, 1947 (Union Calendar No. 571, S0th Cong., 1st sess., H. Rept. No. 1102). The report contained a number of recommendations, the first of which (p. 1) reads as follows: "The Government should get out of the barge business, and we are concerned only with recommending when and how that should be accomplished."

Hoover Commission.-During the early part of 1949, reports were made to the Congress, covering a wide area of Government activity, by the Commission on Organization of the Executive Branch of the Government, of which former President Herbert Hoover served as Chairman.

That Commission on March 31, 1949, submitted a report on Reorganization of Federal Business Enterprises. Recommendation No. 20, at page 65, dealt with the Inland Waterways Corporation, as follows:

"We recommend that the Corporation be put into immediate liquidation and that the annual expenditure of the Government be ended."

Thus a number of congressional committees and Government agencies have reviewed the status of the Federal Barge Line, and have recommended that it be iquidated outright, or disposed of. Opinion on this matter, developed in a series of exhaustive studies, from the Shannon committee study of 1933 down to the Hoover Commission study of 1949, has focused on one general theme: Get the Government out of this costly and red-ink competition with private enterprise.

ANALYSIS OF S. 211 AND AMENDMENTS

Despite these recommendations over the years, and despite the accumulated deficit of more than $14,000,000, now come the proponents of S. 211 and proposed amendments, and repeat the same arguments that led to creation of the Federal Barge Line 25 years ago. They admit that large losses have accumulated. They contend, however, that those losses have been due, in part, to

experimentation on newly improved rivers, and to the effort to render package service to small shippers. They recommend further experimentation on newly improved rivers, but proposed that Federal shall not substantially expand its bargeload traffic where privately owned barge lines and terminals are ready, willing, and able to provide adequate service. This position involves a number of inconsistencies.

First, proponents say that with rehabilitated equipment and facilities, such as the proposed new subsidy would provide, Federal can eventually reach a balance between income and outgo. They admit, at the same time, that losses would doubtless continue for a time, and that it might require an experimental period of 5 years or more, before the success or failure of the experiment could be determined. Of course, proponents do not suggest that Federal make any return to the Government on the funds to be advanced under the bill.

Second, proponents emphasize the provision that experimentation should be continued, and in fact expanded, on rivers now newly improved, or in process of improvement, or to be improved in future. They virtually all agree that experimentation of this type can be done only at a loss. Some of the proponents point out that private operators are unwilling to take the risks involved, and that only the Government can afford to enter so speculative a field. Yet, they claim that Federal can make money in that very field.

Third, proponents support the provision that Federal shall not substantially expand its bargeload service where private operators are able and willing to supply similar service. They propose to restrict Federal in developing profitable bargeload traffic, but contend that profits can be earned despite such a restriction. The inherent contradiction involved in this legislation is evidenced by the fact that the improved financial showing of the Federal Barge Line during the present fiscal year (ending June 30, 1949) is the result of curtailing the very traffic which proponents of this legislation would have the line specialize on handling. This curtailment consisted in part of embargoes which reduced operations on the Missouri River and largely shut off package traffic on other portions of the operation. A number of such embargoes and reductions in service were imposed by the barge line in July 1948 substantially as follows:

1. Missouri River service reduced from about four sailings per month to monthly sailings to Kansas City, and suspended above Kansas City.

2. Carload and less-than-carload freight suspended to, from, and via upper Mississippi River ports above St. Louis and service at St. Louis confined to bargeload traffic.

3. Service to, from, and via Baton Rouge, La., suspended, except on bargeload traffic.

4. Service to, from, and via Greenville, Miss., and Helena, Ark., suspended except for bargeload traffic and cotton.

5. Service to, from, and via Memphis, Tenn., suspended except for bargeload traffic, and for bulk petroleum and grain.

Restoration of the service thus curtailed was announced by Federal, December 14, 1948, but actual lifting of the service suspensions was not effective at the several ports until various dates from January 3, 1949, to April 13, 1949. Thus the Federal Barge Line management has followed the policy of cutting off or reducing unprofitable lines of service, at the same time diverting the facilities thus released to building up the more profitable bargeload traffic.

This is, of course, good business. It is in no sense, however, the policy which both Secretary of Commerce Sawyer and Captain Ingersoll have announced as their future program. Mr. Sawyer has expressed his disagreement with provisions of the bill which, as he said, "might be interpreted as limiting the Corporation exclusively to development work and to other operations which are not profitable." Captain Ingersoll has submitted a statement of traffic policy which, among other things, contemplates a backlog of bargeload traffic of sufficient tonnage and variety to insure a self-supporting operation. It is true that Captain Ingersoll disavows any intention to divert traffic from private barge lines. Furthermore, he promises to give preference to bargeload traffic only when comparable service is not provided by private barge lines. However, it is clear that both he and Secretary Sawyer propose to develop a sufficient volume of bargeload traffic to place the operation as a whole on a profitable basis.

SUMMARY AND CONCLUSION

Proponents contend that the Government should supply less-bargeload package and development services, despite its disastrous experience with the Federal Barge Line enterprise in the past. They hope for the best, but frankly admit

that they cannot assure the Government of financial success. The past record of failure certainly offers slight basis for expectation of future profits. So the question confronting the Congress is this: Shall we continue this heavy subsidy, to keep a Government enterprise in existence, competing with private enterprise at every point, or shall we heed the advice of the many disinterested individuals and agencies that have studied the subject, which was to liquidate the enterprise? In our view, the unpleasant facts should be squarely faced, and the best disposition made of a bad situation. This means that Government should dispose of the barge line facilities which it owns, without attempting to place impossible or artificial requirements for continued service or operation in connection with such disposal. Certainly, the Government does not owe to any small group of shippers an obligation to supply transportation services to them at less than cost. On the contrary, Government efforts, we think, should be directed to elimination of discrimination in transportation, rather than to continued encouragement of preferred treatment to a small group of shippers.

In closing, I again emphasize the fact that Secretary Sawyer and Captain Ingersoll are faced with an impossible situation. Both of them recognize it and both of them admitted it frankly to the House committee. The situation is impossible, in that the Federal Barge Line is expected to handle intrinsically unprofitable package freight, and to render so-called development service on new rivers and routes. At the same time, it is told to keep its hands off profitable bargeload traffic, but is expected to produce a net earning on that anomalous basis.

STATEMENT OF J. H. PARMELEE, VICE PRESIDENT, ASSOCIATION OF AMERICAN RAILROADS

Dr. PARMELEE. Mr. Chairman and gentlemen, my name is J. H. Parmelee. I am a vice president of the Association of American Railroads and director of the Bureau of Railway Economics of that association, with headquarters in Washington, D. C.

I appear on behalf of the association, in opposition to the proposal to further subsidize the Inland Waterways Corporation by purchase of $18,000,000 of its capital stock out of the Federal Treasury.

Virtually every person who has appeared in these proceedings has declared himself strongly in favor of private enterprise. Private enterprise is responsible for the amazing accomplishments of American agriculture and industry in production and distribution of goods and services. Application of this principle in any specific case would require Government to refrain from any form of competition with its citizens, except for compelling and overwhelming reasons to the contrary.

Furthermore, if the Government is already engaged in a business where it competes with its citizens, it should withdraw from that competitive position at the earliest possible date. This is especially true of the Inland Waterways Corporation, which has operated, and is operating, on a heavily subsidized basis. It thus offers unfair competition to private operators on the rivers and to other privately owned and operated agencies of transport, including, of course, the railroads.

Private operators on improved rivers of the United States utilize those channels free of charge. Since the rivers have been improved at the expense of the taxpayer, all river operators are in receipt of a subsidy. The Government barge line enjoys this subsidy, along with all private operators.

In addition, it is directly subsidized by having all its capital supplied to it by the Government without paying any return on such capital, and is indirectly subsidized because as a Government corpora