tainly the Congress cannot decide these questions in the public interest by a blanket refusal to allow all modes to integrate. The expert body, the regulatory agency recommended in this report, would be the only one in a position to adjust the various ingredients of our national transportation policy to a complicated set of facts concerning the carriers involved and to the national, regional, and local interests in a rapidly changing technology. This is the sound approach dictated by the ever changing needs of the greatest transportation system in the world, which is still wed unfortunately to 19th century methods, and is an approach which is divorced from the partial considerations of what is best for a particular carrier or mode.

There is no question that physical coordination or integration of the services offered by the various modes is a highly desirable development in our transportation system and a first step towards common ownership. Such coordination has been advocated for years by most students of transportation and its desirability has been recognized to a limited extent by section 1(4) and 305 (b) of the Interstate Commerce Act establishing a duty on the part of rail and water carriers to publish joint rates upon reasonable application therefor.

It has been noted, however, that this duty has been evaded far more than it has been fulfilled. Evasion has been possible because application of the joint rates sought has in some cases been delayed through protracted court action until, when finally approved, as has always been the case, the traffic for which the rate was intended has disappeared.

Despite the discouraging history of joint-rates and through routings we believe that this approach to coordination should be tried once more before it is discarded, but to have any chance of success certain other actions as recommended below should be taken.

1. Repeal the broad congressional policy against rail carriers engaging in other forms of transportation except in special circumstances and allow the regulatory agency, under the factual situation presented in each application, to determine for any and all carriers whether ownership of one or more modes or an extension of the present "auxiliary and supplemental" test for a particular carrier of any mode is in the public interest. As in the case of applications for radio frequencies or television channels before the Federal Communications Commission, the regulatory agency should be allowed to grant authorizations henceforth for common ownership of different modes for a period of 3 years. After each 3-year period, when the applicant renews his or its license, it would have to give an account of its stewardship. If it is abusing its license, the permit could be denied. Conditions designed to protect the public interest could be attached to the grant on a take-itor-leave-it basis. The regulatory agency should, also, as in the case of the Federal Communications Commission under the Federal Communication Act of 1934, as amended, as a result of complaints or upon the regulatory agency's own initiative, have the power to order the applicant at any time to come in and establish to the satisfaction of the regulatory agency that its license to engage in intermodal ownership should be continued. In the event that the grantee of such a license is in violation of law, or if the regulatory agency finds that the applicant is not conducting its

business in the public interest, the grantee could be ordered to divest himself or itself of the additional modes which were authorized under the license and the grant of the franchise for other modes of transportation could be awarded to another applicant or applicants. In this manner, the public interest could be protected at any time, rather than for the public to be saddled permanently with the results of an initial error of judgment on the part of the regulatory agency. A transfer of the franchise, of course, could be made only with the approval of the regulatory agency which should have the right to inquire into the qualifications of the transferee and to deny for cause the license. In addition, the grantee under such a setup has a constant incentive to live up to his or its public trust. The requirements should be uniform for all carriers. Consolidated Freightways, Inc., a large motor carrier, has expanded into steamship operations, railroad tank car leasing operations and the manufacture of such commodities as rail car frames. A water carrier, Pan Atlantic Steamship Corp., controls extensive motor carrier operations. Motor carriers are now attempting to expand into the field of freight forwarding. Freight forwarders are carriers under the Interstate Commerce Act. All of these situations are equally fraught with danger to the public and they should be tested similarly by the expert body, the regulatory agency, as in the case of a rail carrier seeking to expand into other modes, at the touchstone of the public interest. 2. Extend the provision of section 1(4) requiring intramodal joint rates and through routings by railroads to apply to common carriers of all modes.

3. Extend the provisions of section 1(4) and 305 (b) of the Interstate Commerce Act, requiring through rates and joint rates as between rail and water carriers to apply to all modes so far as the regulatory agency finds the traffic is suitable to the mode.

4. Extend the present interchange requirements imposed on rail carriers to apply to intramodal and intermodal interchange by all common carriers insofar as traffic reasonably suitable to the mode is concerned. Routing to be the privilege of the user in all cases. 5. Establish regional joint rate bureaus under the antitrust umbrella to facilitate and expedite all rate actions as well as, specifically, intermodal joint rates, and through routings. Place a regional chief examiner of the regulatory agency with an adequate staff in charge of the regional rate bureau.

6. Broaden the powers of the regulatory agency beyond the Interstate Commerce Commisison's present powers with respect to through routes and joint rates by giving the power to the regulatory agency to compel such when it receives no cooperation from a carrier involved and the latter's acts or refusals to bargain upon the matter amount to bad faith. The regulatory agency's power in this respect should extend to the issuance of a regulation, if it deems that one is needed, which would create a prima facie presumption that the failure to establish coordinated service simultaneously with the establishment of service by one mode alone, if unexplained and good cause is not shown for such action, would amount to discrimination against other modes desiring and willing and able to participate.

7. Provide by legislation that a user as well as a carrier may initiate an application for joint rates and through routings by

common carriers.

8. Require by law that an applicant for joint rates and each respondent and intervenor submit, under oath, full cost information pertinent to his part in the action, to the extent that costs can be ascertained. The knowledge of costs will improve as a result of our recommendations in another part of this report.15

9. Facilitate action by railroads to substitute interchange with highway common carriers at main traffic centers for unprofitable branch line and way station rail service.

CHAPTER 4. CONSOLIDATIONS AND MERGERS

A. INTRODUCTION: THE PROBLEM TODAY

The chairman of the board of the Nation's No. 1 railroad in terms of investment, Mr. James M. Symes, stated that:

If someone asked me what I consider the most important single thing the railroads can do to get the industry back to its healthy and vigorous status of 30 years ago and ready to take a progressive place in the transportation of tomorrow you have been talking about, I would answer in one word-mergers.16

During the past 6 years there has been a renewed and increasing interest in consolidation of the Nation's railroads. It is a revival of an old issue, but appearing in a somewhat new garb. In this discussion of consolidation it should be clear that it means the actual unification of properties under single corporate management with a result that they can be managed and operated as a unit. In this sense, consolidation includes merger, consolidation, long-term lease control, and ownership of all the assets of corporations still legally existing in name only when the result is unified operation. To the railroads and to the Nation as a whole, the issue of consolidation no longer has for its primary objective the equalization of rate of return between weak and strong railroads, the exercise of control to assure participation in interchange traffic or as an alternative to coordination of activities to reduce waste here and there through isolated local activities. The issue is more and more a matter of survival of a privately owned railroad industry which is able to exploit to the fullest the inherent advantages of railroad transportation set about as it is with growing competition with other modes of transportation.

There is nothing new about consolidation in the history of American railroads. Mergers and consolidations characterize their entire history. Our present 500, and more, operating railroads have evolved by merging and consolidating what was once 6,000 railroads. The Pennsylvania Railroad system itself represents a combination of 600 roads. The question before us then is, not one of introducing consolidation for the betterment of American railroad industry, but attempting to answer the question as to why this process which characterized the progress of the industry for so many years has ceased to do so when the stakes are as high, if not higher, than ever before, then to consider

15 See pt. VI of this report.

16 Remarks of James M. Symes, chairman of Pennsylvania Railroad at Southern Research Institute Conference on "Tomorrow's Transportation," Birmingham, Ala., Sept. 30, 1960.

the question of what can be done to "unfreeze" what the general traffic manager of U.S. Steel Corp. has referred to as the "frozen pattern of U.S. railroads ***"*7

We have had three periods of consolidation: One is the entire period prior to 1904 when we didn't want it but when we had a tremendous amount of it; two, that between 1904 and 1920 when we forbade it by law and when it rapidly slowed down to almost zero; and three, the period since 1920 when we have wanted it, but have had so little.

This last period is the one that is of particular interest to us. ginning in 1920, it has been generally recognized that general consolidation of the railroads with substantial competition preserved, is in the public interest. The basis of this interest has shifted from consolidation as a means of simplifying the regulation of rates so that the various members of the industry would get a fair but not excessive rate of return to a conviction, as expressed by Mr. Symes, that general consolidation offers greater possibilities of restoring the industry to economic health than any other measure and indeed that it is the only alternative to nationalized railroads.

We have seen from part II on "Trends," that the postwar developments and particularly those of the last 5 years give cause for genuine alarm in regard to the survival of privately owned railroads, assuming that present trends continue. The railroads ceased to be a growth industry in terms of mileage, employment, and number of units of rolling stock in the early 1920's. It ceased to be a growth industry in passenger traffic, except for the interval of World War II, in the late 1920's but it was not until the last 5 years that the industry has shown evidence of ceasing to be a growth industry in terms of ton-miles of freight. The present investment cannot be maintained if this decline continues and certainly the capital required to modernize the industry to meet its competition or to demonstrate the real potential of the economy of railroad transportation will not materialize unless it again becomes a vigorous growth industry. This is the dilemma that the industry faces, it cannot maintain even its present position without vast amounts of new capital and this it cannot hope to obtain without the elimination of wasteful competition and maximizing the capability of service performance which is inherent in rail transportation but now not realized in the handling of much of its traffic. It is the attainment of the service potential to enable the railroads to compete for all of the traffic which their relative advantages would indicate as possible that is the prime consideration in the consolidation issue today.

This report is confined to railroad consolidation and does not include consideration of consolidation in other transport industries, not because the importance of consolidation as an aspect of growth and progress in these industries is overlooked, but only because the modern problem of consolidation of the Nation's railroads is much more difficult than it is for other modes and more so now than it was in the early history of the railroads. Intramodal consolidation and merger of motor carriers, air carriers, and water carriers are very simple matters compared with that of consolidating the tremendous invest

17 Plowman, E. Grosvenor, vice president, transportation and traffic, U.S. Steel Corp., "Comments on the Preservation of the Common Carrier System in the United States,"

ment and organizations of large and long established railroads. The big investment in way and structures is a primary factor, and it not only complicates the financial problem but also makes for delay in realizing the full benefits of consolidation.

This chapter will survey the record in railroad consolidation and Government policy and explain in some detail its economic importance to the Nation and to the industry itself. Effort will be made. to explain the failure to accomplish substantial progress in regard to a policy stated by Congress in 1920, and to set forth alternative procedures that might give promise of success.

B. RAILROAD CONSOLIDATION BEFORE 1920

1. Periods prior to 1904

As indicated above, the history of consolidation before 1920 can be divided into two periods: first, prior to 1904, and the second, between 1904 and 1920.

Prior to 1920, free competition among railroad carriers constituted the basis of national governmental policy. Free and unrestricted competition, enforced by statute, among rail carriers was viewed as the optimum regulator of railroad economy and the best remedy against the abuses of monopolistic practices, especially unreasonably excessive and discriminatory railroad rates.

This bias in favor of the maximum amount of competition, the more the better, was an old bias but did not become reflected in State and Federal prohibition of combination until after 1887. The spirit of the times was reflected in the act to regulate commerce in 1887 and the Antitrust Act of 1890, as well as in State legislation in regard to monopoly and the regulation of railroads; however, the application of antitrust to railroad consolidation was not specifically applied until the Supreme Court decision in the Northern Securities case of 1904. For example, the act to regulate commerce of 1887 did prohibit pooling among the railroads and the U.S. Supreme Court in the TransMissouri Freight Association cases in 1897 and 1898 held that the rate agreements of the railroad rate associations constituted conspiracy and violation of the Antitrust Act. But neither of these developments forbade merger and consolidation as such; in fact, these actions may be said to have stimulated the crescendo of consolidation which took place between 1887 and 1904. As pointed out above, consolidation or merger was a normal and continuing process from the beginning of the railroad industry. First, with the end-to-end combinations of short lines which featured the period between 1853 and 1873. Such combinations have always had attractive potentials in any mode of transportation to bring about an entirely new level of service and efficiency. Characteristic of this development on the part of the railroads was the connecting of the 10 different lines between Albany and New York through merger in the formation of the New York Central Railroad. End-to-end combination was often obstructed by cartel limitations and State laws; however, State action yielded in time to the force of economic and corporate advantage. In 1866 Congress passed a law permitting all railroads to carry_passengers and freight from one State to another unrestricted by State