standing applications of the doctrine have been in controversies involving purely local public utilities where the problem of allocating costs is much simplified. Finally the very fact that the railroad managers, acting in the interests of railroad security holders whom they were duty bound to protect, had found it necessary to resort to the courts served also to increase the timidity of investors, and to make more difficult the task of securing funds for needed physical improvements.

8. The railroad manager, indeed, found himself between two fires. His public responsibility and his private responsibility apparently were in opposition. From one party, composed of those who used the service, came a demand insisting upon its improvement; from the other party, composed of those who depended upon the railroad for a part and, in some cases, perhaps, the whole of their income, came the pressure for maintenance of dividends. In view of the encroachment of business upon the physical capacity of most railroads, the interests were simply not compatible, especially when a rising level of costs was eating away the differential between gross earnings and operating expense. The real issue was not one of maintaining credit, but of doing justice to the security holders already involved in the enterprise. In emphasizing the credit situation and in secking to place the Interstate Commerce Commission in loco parentis toward the railroads, the railroad presidents, while pointing out a public interest, failed to point out the public responsibility: the responsibility of the public to pay for what it was getting.

This then was the problem faced by railroad management: to furnish adequate service for a reasonable charge, and to earn profits-ends not necessarily incompatible, but, because of the immediate necessity for heavy capital expenditures, extremely difficult to achieve. What would have been the situation had the war emergency not developed, it is fruitless to guess. The war and the attendant rise in prices simply brought home to all the condition which was recognized by railroad managers ten years before.

When the extraordinary demand for transportation service an allocation of costs to the transportation of that commodity. An allocation to state passenger business was accepted in Norfolk & Western Ry. Co. v. Conley, 236 U. S. 605. W. E. Hooper, Railroad Accounting, discusses the problem of allocating costs, Chap. XV, p. 423.

arose in 1917, Congress and the President took over the railroads, and by joint use of facilities and unified operation sought to increase their effectiveness. By the use of government credit deficiencies in equipment were supplied. From January 1, 1918, until March 1, 1920, when the Transportation Act went into effect, the railroads (with unimportant "short lines" excepted) were operated by the Federal government. Due to the rapid rise in the prices of material and labor in 1918 and 1919 the expenses of their operation had enormously increased by the time it was proposed to return the properties to their owners. The justice in the insistence of the owners that their properties could not be turned back to them by the government for useful operation without provision to aid them to meet a situation in which they were likely to face a demoralizing lack of credit and income was recognized, even by those opposing the legislation passed. The most significant features of this legislation, the Transportation Act, 1920, were concerned with management: the provision of adequate facilities and the insurance of adequate income; and especially with the rehabilitation of railroad credit as a means to these ends.

1 Senator La Follette, speaking in favor of his minority report (Sen. Rep. 304, part 2, 66th Cong., 1st Sess.), said:

"The first proposition, namely, that the roads be permitted to revert to private management at once, without any provision for the immediate and future financial assistance of the Government, has no support among the railway executives, and, so far as I know, has little support among the members of the Congress or among the people generally. The reason is obvious. Everyone knows that the railroads of the country, if returned to private hands, are incapable of giving the country decent transportation facilities unless they receive assistance from the Government at once of hundreds of millions of dollars and unless their rates and charges are at once increased. That is what we are confronted with. Every bill and every plan which has been proposed for returning the roads to private management has in some form provided for immediate financial assistance of the roads by the Government and the collection from the public of vastly higher rates and charges than now prevail." (Congressional Record, 66th Cong., 2d Sess., Dec. 13, 1919, p. 502.)

CHAPTER XXII

THE REHABILITATION OF RAILROAD CREDIT

Section 1. The Transition to Private Control, 320-Sec. 2. The Rule of Rate Making once more, 322-Sec. 3. The Recapture of Excess Earnings, 325 Sec. 4. The Revolving Fund, 327-Sec. 5. The Carriers' Share, 329 Sec. 6. The Unearned Increment, 331-Sec. 7. The Rule of Rate Making and Valuation, 333.

§ 1. The immediate purpose of the Transportation Act, 1920, is pointed out by clauses no longer generally significant. It was recognized that, in the period following the return of the roads to their owners on March 1, 1920, there was danger of general disorganization and perhaps not a little bankruptcy. The railroad managers would have troubles enough getting their properties in hand without attempting to float new loans. Indeed, the outcome of negotiations for settlement of government accounts must in some instances have determined the necessity of seeking such loans. The Act therefore provided for the funding of debts to the government for ten years at 6 per cent with set-offs for sums owed by the government to the railroads. In the second. place, $300,000,000 was appropriated as a revolving fund to be lent during the period before March 1, 1922, but for not to exceed five years, "for the purpose of enabling carriers . . . properly to serve the public during the transition period immediately following the termination of Federal control." 1

1 To December 1, 1921, the Commission had lent $263,407,717 to 70 carriers including the Baltimore & Ohio, Central Georgia, Rock Island, Erie, Great Northern, Illinois Central, Northern Pacific and Virginian, 35th Annual Report I. C. C. (1921), p. 215.

In allocating the $300,000,000 revolving fund, the Commission limited loans to purposes clearly within the view of the Transportation Act: expenditures needed to enable the applicant properly to meet the transportation needs of the public. Unless such need could be shown the loan was denied. The Commission emphasized the need of self-help, and, on occasion, suggested that interests concerned with securing better facilities should participate in financing. The carriers were not, however, required to borrow on onerous terms in the general loan market. The actual fund was allocated as follows: new equipment, especially refrigerator cars for which

Further to ease over the immediate transition, it was provided that, for six months after March 1, 1920, the rate of compensation paid during Federal control would be guaranteed to the carriers who elected to accept this guarantee. A carrier was not obliged to do so. A few decided to go it alone, because the carrier which did accept was obliged to pay over to the government any excess earned above the guarantee. As matters turned out, it was prob ably the wise board of directors which played a conservative game and took advantage of the six months' guarantee. The retroactive wage decision, the delay in granting advances in rates, and the business depression inaugurated in the summer of 1920, resulted in conditions not generally anticipated in the earlier months of the year.1

To protect the government's interests, the Transportation Act a pressing need was apparent, $75,000,000; locomotives, especially freight locomotives, $50,000,000; additions and betterments, $73,000,000; maturing obligations, $50,000,000; short line railroads, $12,000,000. Coöperation with the Association of Railway Executives was provided for. The Commission emphasized the need for self-help; applicants were warned that they would be expected to contribute at least 50 per cent of the cost of locomotives, for betterments "as much as within their power," and application to the Commission for help on maturing obligations was always to be a last resort, not a first. Extensions, even the laying of rails on a completed roadbed, were not considered "as necessary" within the meaning of the Act. A loan was, however, granted the Aransas Harbor Terminal Railway in order to assist financing rebuilding after a hurricane. The requirement of the law that there must be reasonable assurance of repayment was also, and necessarily, scrupulously observed. When the prospective earning power, and the value of the security offered (usually bonds or notes of the applicant carrier) did not afford reasonable protection or assurance of ability to repay, the loan was denied. Statements of rules on loans from the fund are found in the Commission's special reports, on that subject, 65 I. C. C. 12, 407. Typical opinions granting loans are: (1) for equipment, Loan to the Chicago, Burlington & Quincy, p. 48; (2) for additions and betterments, Loan to the Delaware & Hudson, pp. 96, 332, 350; (3) for meeting maturities, Loan to the Boston & Maine, p. 1. The Great Northern negotiated a loan of $17,910,000 for all three purposes. Applications were by no means limited to the so-called "weak lines." Loans were denied, in toto, in the following typical cases: Maxton, Alma & Southbound R. R. Loan, p. 302; Electric Short Line Ry. Loan, p. 342; Gulf Ports Terminal Ry., p. 421. Frequently loan applications were granted in part: Kansas City, Mexico & Orient Loan, p. 36; Loan to Chicago Great Western, pp. 100, 157, 241, 433, 486, 529. In all cases the references are to Vol. 65 of the I. C. C. Reports-Finance Reports.

1Important roads which decided not to accept the guarantee were the Southern, the St. Louis Southwestern, and the Pere Marquette. The results are commented upon in the Annual Reports: Southern, 26th Annual Report, p. 4; St. L. Southwestern, 30th Annual Report, p. 9; Pere Marquette, Fiscal year ended Dec. 31, 1920, p. 8.

For a Commission opinion on the guarantee, see Settlement with Norfolk Southern R. R., 65 I. C. C. 798.

further provided that, prior to September 1, 1920 (the end of guarantee period), rates should not be reduced unless approved by the Commission. Likewise, and for the same period, the carriers were forbidden, under any circumstances, to reduce wages fixed by the wartime agencies. This insured against "traffic interruptions": an application of the continuity of service principle.

Beyond the six-months' period, government guarantee was not to go. The railroads were to resume their status as private business ventures managed by boards of directors in the interest of the stockholders. Such railroad securities as came into the hands of the government might be sold, but sold free of government guarantee. Government credit was not to be extended to the carriers, but their own credit was to be rehabilitated, and rehabilitating credit is, after all, largely a task of reëstablishing confidence.

§ 2. In this rehabilitation, the rule of rate making was to be fundamental:

"In the exercise of its power to prescribe just and reasonable rates, the Commission shall initiate, modify, establish or adjust such rates so that carriers as a whole (or as a whole in each of such rate groups or territories as the Commission may from time to time designate) will, under honest, efficient, and economical management and reasonable expenditures for maintenance of way, structures and equipment, earn an aggregate annual net railway operating income, equal, as nearly as may be, to a fair return upon the aggregate value of the railway property of such carriers held for and used in the service of transportation."1

For the two years ending March 1, 1922, the exercise of discretion by the Commission was, in one important particular, circumscribed. Until then the Transportation Act established 51⁄2 per cent as the measure of a fair return. The Commission might, however, "in its discretion," add to this amount an additional 1/2 per cent to provide improvements, betterments or equipment, properly chargeable to capital account. In the Increased Rate Case of 1920, the full 6 per cent was used as the basis of calculation.2 After March 1, 1922, however, the Commission came into control of the situation: and, in determining upon the fair rate of return (which must be uniform for all groups or terriInterstate Commerce Act, Sec. 15-a, Par. 2.

258 I. C. C. 220.