The estimates of requirements on an annual basis is compared below in millions:

It will be noted that the range for adequate annual capital requirements varies from $1,424 million for Brookings assumption 1 to $2 billion Barriger's estimate. The lowest estimate about equals the actual peak annual rate of the 1946-55 period which occurred in 1951. Since the railroads' ton-miles of freight traffic have fallen below the 1955-56 level, these estimates if made today would perhaps be slightly lower. Curiously the highest estimate, that of Mr. Barriger, might drop less than the others because of his emphasis upon modernization of way and structures and new potentials in operating efficiency made possible by consolidation as a more effective framework to better exploit technology and recoup traffic. Indeed, there is no case for increased capital investment if there is no assurance of increased traffic and revenue. To attract more traffic better service standards in terms of dependable schedules and fast service at reasonably frequent intervals is required.

Working capital has declined in recent years to a low level as shown in table II. Excluding materials and supplies it approximated $1,300 million in 1946 but by 1957 had dropped to $555 million which is less than the monthly rate of expenditures. There was some temporary improvement in 1958 but the decline set in again in 1959. Dieselization of the railroads was an important factor in explaining the substantial level of capital investment of the railroads between 1948 and 1953.

The rate of return for 1948-58 on the net investment on class I railroads is shown in table III. In spite of relatively high volume of traffic incident to World War II and the postwar prosperity, the series of permissive rate increases by the Interstate Commerce Commission that exceeded 100 percent in the aggregate, the rate of return has remained between 3 and 4.5 percent and dropped to 2.89 percent in 1958 and to 2.72 percent in 1959, an alltime postwar low. TABLE II.-Trends in net working capital-Class I railways (years 1940, 1946–59)

Source: ICO, Annual Report on Statistics of Railways in the United States, Year ending Dec. 31, 1940, table 158; Statistics of Railways in the United States (1946-53), table 158; and Transport Statistics in the United States (1954-58), table 159. Transport Economics, April 1960.

TABLE III.-Rate of return on net investment, class I railroads, 1946–59

NOTE. This is obtained by determining what percentage net railway operating income is of the net property investment, including cash, materials, and supplies, after deducting accrued depreciation.

Source: Moody's Transportation Manual, 1960, p. a13.

Chart I, page 54, shows the trend of the operating ratio of class I railways during the postwar period. This ratio of operating expenditures to operating revenues is a prime indicator of the economic health of the industry. The chart shows a favorable downward trend prevailing from 1946 to 1950, followed by an upward trend which becomes more pronounced since 1955. The favorable trend reflects the effect of rapid rate increases and the rising traffic of the Korean war period. Because of heavy fixed charges an increasing operating ratio is likely to result in lower net income, which has indeed come to pass during the last 4 years.

Our preliminary study of the financial position of the railroads generally supports the unfavorable long-run outlook presented, if not the immediate degree of crisis which was presented, in the 1958 hearings before the committee by the railroad industry.

We are not in the midst of a severe crisis in the railroad industry with insolvency and receivership of extensive mileage an immediate prospect. However, there are critical areas, geographic and trafficwise, such as the New England region and the critical traffic areas of passenger and less-than-carload traffic. The railroads are volume carriers, having a large fixed investment. Since 1942, they have enjoyed the benefit of the most extended period of prosperity in the Nation's history-broken only by the mild recessions of 1949, and that of late 1957 and early 1958. Rail mileage, the number of locomotives, and employment have all declined, but the total volume of rail freight business during this period exceeded all peacetime records.

It is only when we look at the railroad trends of the last few years and anticipate the results of growing competition of other modes and especially of private and exempt carriers, added as they are by rapidly accelerating public aid programs, that we find cause for alarm. The effect of the squeeze on needed cpital is already reflected in lower railroad capacity.

The trend in freight car supply has been downward since 1957 because of decrease in the number of new cars installed and because of the increase in bad-order cars. The number of good-order cars owned by the railroads fluctuated in a rather narrow range from 1946 to 1957. These facts are shown in table IV, page 54. Serious car shortages expected in the spring of 1960 did not materialize because traffic remained at a relatively low level, and a serious shortage later in the year was likely to occur if business remained at a high level.

TABLE IV. Trends in car supply, freight-Class I railroads (years 1940, 1946–59)

ICC reclassified railroads, as a result AAR did not count 5,793 cars which were transferred to class II railroads.

Source: Association of American Railroads, Car Service Division, Washington, D.C.

The ability of an industry in a competitive position to maintain or improve its position requires adequate provision for capital improvements. Table V, page 55, sets forth the story of gross capital improvements for class I railroads from 1922 to 1959 in terms of both actual and constant 1929 dollars. Chart II, page 56, pictures the recent past World War II trend. The table shows a high average level of approximately $800 million between 1923 and 1930 which contrasts with an average of approximately $565 million postwar when both are adjusted for price level. Although the need for modernization of railroads is generally recognized, the decline in capital expend

itures has ben precipitous since 1957, as shown in table V and chart II, page 56, relative to class I railroads. In that year, $1,394,261,000 were expended but in 1958, the figure drops to $738,038,000. The figure for 1959 is $818 million, showing some improvement over the 1958 level. However, the figures adjusted to 1929 basis give a word picture of what is happening relative to the period prior to 1957 and prior to 1930.

Chart III, page 57, shows the trend of factors which largely influence the railroad capital market. It shows that the railroads held their position fairly well from 1946 to 1955 but that these factors show a deterioration since 1955.

TABLE V.—Trends in gross expenditures in actual and constant dollars—Class I railroads in the United States, 1922-59

Source: Years 1921-49, ICC, Bureau of Railway Economics. Subsequent years ICC statement M-125, columns 4 and 5, Bureau of Railway Economics, AAR.

The alternative to privately financed common carrier transportation should be bluntly stated. If transportation cannot obtain adequate capital from internal cash and outside private investment (a) the system deteriorates, or (b) the Government must supply the funds. We do not believe that the public would accept any hamstringing of national economic growth by deteriorating common carrier transportation. If it would not, then Government must supply the cash and

ray reasonably be expected to safeguard such an investment through intervention in management and tight control of competition.

The better alternative is the preservation of common carrier transportation by all modes through restraint of cutthroat competition stemming from shipper essure which is made possible by oversupply of transportation capacity; coupled with rationalization of the transportation structure, including Government promotion, to more accurately equate supply of transportation facilities to present and future demand.

The ability of privately owned common carriers to find adequate private capital depends on growth factors, earnings in particular. Accordingly a review of recent traffic trends of the railroads, still our dominant common carrier system, is especially significant. Then we shall consider the causes of the threat to common carriers.

CLASS I RAILROADS

CHART II

Trends in Gross Capital Expenditures in ACTUAL and CONSTANT Dollars, 1946-59