to meet the needs of the railroad industry, they will, when placed in effect, also help to strengthen the transportation industry as a whole and to further the general objective of renewed and vigorous national economic growth.

Some indication of the gravity of the situation confronting the transportation industry, and the railroads in particular, appears in the following statistics. While corporate sales in all other industries, measured in dollars, increased about three and one half times between 1929 and 1956, transportation sales, similarly measured, increased less than half that much. During the same period, corporate income after taxes in all other industries increased about one and one half times but in transportation corporate income after taxes decreased about 50 percent. These declines occurred despite the fact that total intercity ton-miles of freight carried by all means of transportation more than kept pace with the growth in gross national product and despite the fact that total intercity passenger transportation by all kinds of carriers grew more than twice as fast as population.

In the railroad industry, the average ratio of operating income to operating revenue declined from 1929 to 1956 from about 18 percent to about 10 percenteven though ton-miles of intercity freight carried by the railroads increased. The administration is convinced that, while the special problems of the railroads are in part due to increased competition and ill-advised practices of management and others, they are also due to long-standing governmental policiesFederal and local, regulatory and otherwise-which have served to decrease their revenues, increase their costs and foreclose to them and to the public the benefits of increased efficiency which otherwise might have been achieved.

The administration, accordingly, makes the following recommendations and urges their prompt consideration by the Congress:

1. Enlarged ICC jurisdiction over curtailment of services.-The Interstate Commerce Commission should have original and appellate jurisdiction over all curtailments of service and facilities affecting interstate commerce, including curtailments of passenger and commuter service and facilities.

2. Redefinition of private motor carriage.-The definition in the Interstate Commerce Act of "private carrier by motor vehicle" should be amended to preclude the unfair competition which occurs today when certain for-hire carriers operate in the guise of private carriers.

3. Clarification of the agricultural exemption.-The agricultural exemption in the Interstate Commerce Act should be clarified with the object of accommodating the real needs of agriculture while preventing undue diversion of traffic from regulated carriers.

4. Revised Federal ratemaking policies.-Federal ratemaking policies should be revised to encourage more service and price competition while providing adequate minimum regulation.

5. Temporary financial assistance.-Federal guaranties (1) of short-term private loans for cost-saving capital additions to, and improvement of, plant, facilities, and equipment other than rolling stock (not to exceed $500 million); and (2) of equipment obligations for purchase of improved freight cars, up to 10 percent of the purchase price (not to exceed $200 million).

The administration recognizes that, even if immediately effective, the first four recommendations will not for several years fully achieve their intended results. The railroads, however, must be able at once to commence cost-saving programs which are not possible, without interim assistance, until the first four recommendations achieve substantial results. Recommendation No. 5 is intended to make such cost-saving programs immediately possible.

The last recommendation must be regarded, however, as integral with the others. Its financial soundness depends on the increased earnings expected to result from the preceding measures.

The repeal of Federal excise taxes on the transportation of persons and property, and the shortening for income-tax purposes of depreciation schedules, while advantageous to transportation interests, should be considered only as part of a general tax-revision program consistent with overall fiscal policy. No recommendations are, therefore, being made in this area at this time. There follows a detailed explanation of each recommendation.

ENLARGED ICC JURISDICTION OVER CURTAILMENT OF SERVICES

Rail carriers suffering deficits from the operation of persistently unprofitable services and facilities have requested that the Interstate Commerce Commission be authorized to permit the discontinuance or curtailment of such services and facilities when public need therefor no longer exists. Competing air, motor,

and water carriers, as well as shippers, have supported the railroads in this request.

Continued operation of unprofitable services and facilities places an unreasonable burden on shippers as well as on carriers. For example, losses from passenger-train services, which has been estimated to be as high as $750 million a year, must be recouped to the extent possible from freight operations. The result is higher freight rates. Moreover, increased freight rates divert traffic to carriers not encumbered by these unprofitable operations, thus deepening the railroads' troubles by depriving them of the traffic they are best adapted to carry at a profit.

Rail carriers have been unable to avoid these burdens primarily because of the inability or failure of State regulatory bodies to act promptly or at all in authorizing the discontinuance or curtailment of unprofitable operations. The Interstate Commerce Commission has jurisdiction to authorize the abandonment of "all or any portion of a line of railroad, or the operation thereof," but it does not have authority to permit carriers merely to discontinue or curtail a service. This authority, where it exists at all, is vested in State regulatory commissions. Even where they do have the authority, State commissions, because of pressure from local interests, have too often been reluctant to permit a discontinuance or curtailment. In some instances, such as those involving commuter traffic, the State commissions have not acted to evolve an alternative form of relief for the railroads.

The Presidential Advisory Committee on Transport Policy and Organization, recognizing the need for such relief, recommended that the Interstate Commerce Commission be empowered to set aside certain State service requirements if continuance of such service would result in a net revenue loss or otherwise unduly burden interstate and foreign commerce and if reasonably adequate alternative service would be available. Legislation to implement this recommendation was incorporated in bills submitted by the Department of Commerce during the 84th and 85th Congresses. Extensive hearings were held on the House bill during the 84th Congress, but no action has been taken on the Senate bill, S. 1457.

S. 1457 would vest the Commission with authority over railroad services or facilities in intrastate commerce comparable to that which it now has under the Interstate Commerce Act over State imposed intrastate rates, fares, charges, etc., which are found to be an undue burden on interstate commerce. Such authority would be appellate in nature, for the Commission could not act until a State regulatory body denied an application for discontinuance or curtailment of a service or facility, or failed to act within 180 days after the filing of such an application.

The administration is convinced that the Interstate Commerce Commission should also be given original jurisdiction over the discontinuance or curtailment of services and facilities. The continued operation of an unprofitable rail service ceases to be a problem for exclusive State or local solution when it imposes an undue burden on interstate commerce. It would also appear that the interests of interstate rail carriers or shippers should not be determined, even initially, by State commissions where concurrent action by several State commissions would be required to effect the curtailment or discontinuance or where a State commission has previously demonstrated a clear inability or unwillingness to give proper recognition to interstate interests.

Giving the Interstate Commerce Commission both original and appellate jurisdiction would permit carriers to apply either directly to Federal authority or to a State commission without losing their Federal remedy.

The administration recommends, therefore, that the Interstate Commerce Commission be given both original and appellate jurisdiction to authorize the curtailment or discontinuance of rail services (including commuter services), and the abandonment of facilities used in connection therewith, which are in intrastate or interstate commerce and which impose an undue burden on interstate commerce, provided that reasonably adequate alternative services are available.

REDEFINITION OF PRIVATE MOTOR CARRIAGE

Rail carriers have protested that for-hire transportation performed under the guise or subterfuge of private carriage is unjustifiably diverting traffic from regulated for-hire carriers and is disrupting their rate structures. The railroads have been joined by other regulated for-hire carriers in requesting that the Interstate Commerce Act be amended to afford relief from this abuse.

The activity denounced by the railroads usually takes the form of what is known as the "buy-and-sell" method. Bills of sale, invoices, etc., are issued to make it appear that the property being transported belongs to the owner of the vehicle transporting it. Also, manufacturers and mercantile establishments, which deliver in their own trucks articles they manufacture or sell, quite frequently purchase merchandise at or near their point of delivery and transport it to their home terminal for sale to others.

The Interstate Commerce Commission has stated that private carriage used as a subterfuge for public transportation constitutes a growing menace to shippers and carriers alike, is injurious to sound public transportation, promotes discrimination between shippers, and threatens sound rate structures.

Although certain of these operations have been struck down by the courts, there is no uniformity in the decisions. The Commission, in its annual reports since 1953, has stated that it cannot "effectively cope with this problem without some changes in the act." Last year the Commission for the first time submitted legislation to meet this problem. Hearings on the bill (S. 1677) were held in the Congress, but no further action has been taken.

The Presidential Advisory Committee on Transport Policy and Organization previously had recommended relief from these evils by an amendment of the Interstate Commerce Act definition of "private carrier by motor vehicle." Leg islation incorporating this recommendation (S. 1457) was introduced in the 84th and 85th Congresses. Except for hearings in the House during the 84th Congress, no further action has been taken.

The Commission and the Department of Commerce have repeatedly made it clear that the legislation submitted by them is not designed to affect bona fide private carriage. Despite these assurances, certain groups of private carriers oppose this legislation. They contend that the problem is one of enforcement rather than legislation, and that any modification of existing law would upset the "primary business test" applied in Brooks Transportation Co. v. United States (340 U. S. 925).

No extended comment on the first of these objections is required. The Commission has stated time and time again that it cannot cope with the problem without legislation. The Commission reiterated this view in testimony on March 28, 1958.

To meet the second objection, the Transportation Association of America at the hearings on S. 1677 presented an alternative proposal which would amend the Interstate Commerce Act to incorporate the primary business test. The Commission stated on March 28 that it was already on record in support of either S. 1677 or the TAA proposal if modified in certain minor respects. Certain of the rail carriers have also endorsed the TAA proposal.

The Department of Commerce stated at the hearings on S. 1677 that certain phrases in that bill would be difficult to interpret and administer. The Department also stated, however, that it did not seek only its own bill (S. 1457), and that it would be agreeable to an alternative proposal which would accomplish the Advisory Committee's objective.

To enhance the probability of legislation in this field, the administration recommends enactment of the TAA proposal, modified as suggested by the Commission.

AGRICULTURAL COMMODITIES EXEMPTION

There has been considerable controversy with respect to the "agricultural commodities exemption" embodied in section 203 (b) (6) of the Interstate Commerce Act. The railroads and regulated motor carriers, as well as the Interstate Commerce Commission, contend that Congress did not intend that the exemption include processed commodities such as some of those declared by the courts in recent years to be exempt. They maintain that Congress intended the exemption merely to serve as an aid to the farmers in marketing their products. Some agricultural interests contend, on the other hand, that Congress intended that many processed (but not manufactured) agricultural commodities be exempt. They cite the need for flexibility in marketing agricultural commodities, including processed commodities.

The regulated transportation groups are also concerned lest the exemption be further broadened by judicial interpretation to include additional significant groups of commodities, such as canned foods. Major agricultural interests have indicated that they do not seek further substantial broadening of the exemption, and there appears to be no evidence that any producing groups desire such further broadening.

In view of the situation which currently exists, the administration recommends that Congress take action which would remove the threat of further expansion of the exemption while still retaining for agriculture the benefits which accrue from the use of exempt motor carriers in marketing those commodities presently considered exempt.

REVISED FEDERAL RATEMAKING POLICIES

The revolution which has taken place in the transportation industry is described in the report of the Presidential Advisory Committee on Transport Policy and Organization. Even as late as 1920, the railroads enjoyed a virtual monopoly of intercity transportation. Since that time, however, a wide selection of transportation facilities for the carriage of persons and property has developed. The result is that today extensive competition exists throughout the economy among modes of transportation.

The Advisory Committee's report noted that, notwithstanding this revolution, governmental policies still held "regulated competitive forces within a tight rein." The Committee recommended relaxation of those reins to reflect present-day realities. It held that the changed character of transport organization and the development of greatly increased regulated and unregulated service and cost competition made it unnecessary, in the public interest, to continue the contemporary scope of rate controls.

As a first and essential step it was recommended that the national transportation policy be revised so as (1) to assure the maintenance of a national transportation system adequate for an expanding economy and for the national security, (2) to place greater reliance on competitive forces in transportation pricing, (3) to reduce economic regulation of transportation to the minimum consistent with the public interest, and (4) to assure fair and impartial economic regulation.

The report also recommended repeal of the rule of ratemaking (section 15a of the Interstate Commerce Act) and continuation of regulatory authority:

(1) To prescribe for common carriers subject to the Interstate Commerce Act minimum rates which would not be less than just and reasonable; (2) To prescribe for such common carriers maximum rates which would not be more than just and reasonable; and

(3) To review existing and future rate relationships, including those between intrastate and interstate commerce, and where necessary, to require their adjustment to avoid unjust discrimination or undue preference. These recommendations were embodied in bills introduced in the 84th and 85th Congresses. None has been enacted.

The objectives underlying them, nevertheless, are still of the utmost importance today. Competition constitutes a main source of our economic strength. Unless regulatory policies permit maximum competition consistent with the admittedly necessary regulation of carriers who owe their existence to Government franchise, our transportation system will be still further weakened.

The Interstate Commerce Commission seems to regard some price and service competition as an effective means of channeling traffic to modes of transportation best adapted to handle it. The Commission, however, does not appear to realize the full value of price and service competition as a source of strength for the system. Predatory competitive practices are recognized by the Commission as evils it has a duty to eliminate; but it condemns as predatory, competitive practices which elsewhere in the Government and the economy would be considered legitimate and a source of strength.

For example, the Commission apparently holds the view that in order to maintain a strong transportation system, as it is directed to do by the Congress, it must protect the lower cost carrier by preventing the higher cost carrier from reducing its rates below those of the former more than is necessary to compensate for differences in service. The Commission seems to have applied this principle particularly where the commodity involved, because of value or other characteristics, can stand a higher rate than would otherwise be set on the basis of mere size, weight and shape. This theory appears to be justified by the Commission on one or more of several grounds. It is claimed that price wars can best be prevented by stopping them before they start; or that the low-cost carrier's profits must be protected to offset losses elsewhere; or that the public interest would not be served by a diversion of such traffic from a low cost to a supposedly less efficient (higher cost) carrier. Whatever the

reason, competition is outlawed which would not be considered predatory outside of the transportation industry.

Conceding that in some respects these policies are paternalistic, the Commission appears to justify them partly on the ground that competitors need this kind of protection to prevent them from destroying themselves by competitive

excesses.

This philosophy is not consistent with our basic economic principles and cannot be justified by the fact that carriers are public utilities which depend for their existence on Government franchise.

To be prevented from destroying itself, competition admittedly needs regulation, but not regulation that injures or destroys what it seeks to preserve. Beyond the utility and transportation fields, the antitrust laws prevent competitors from adopting practices which tend to eliminate competition or which have as an object the injury or destruction of a competitor. This type of regulation and this type alone is all that the Interstate Commerce Commission need apply (possibly with some adaptation) to prevent competitive excesses without preventing competition.

The legislation to implement the recommendations of the Presidential Advisory Committee in this area somewhat exceeded this limited requirement. It embodied the so-called three shall not rule which, if enacted, would have prevented the Commission, in determining what is less than a reasonable minimum charge, from considering (1) the effect of the charge in question on the traffic of another carrier, (2) its relation to the charge of any other carrier, and (3) whether the charge were lower than necessary to meet the competition of any other carrier.

Under this rule the Commission would appear helpless to prevent practices by carriers which could be stopped under the antitrust laws if the competitors were not carriers. A "three shall not" rule, if made applicable outside the transportation field, would seem to conflict with provisions of the antitrust laws applicable to the rest of industry, which require consideration of the effect of unreasonably low prices on competition.

The legislation to implement the Presidential Advisory Committee report was offered merely as a study document for the consideration of the Congress. The administration has also had it under study. As a result, it is now making a recommendation in place of the "three shall not" rule.

The recommendations of the Presidential Advisory Committee set forth above on page 9 are repeated. Instead of the "three shall not" rule, it is urged that the Congress enact legislation which would permit the Interstate Commerce Commission, in determining what is less than a reasonable minimum charge, to take into consideration the effect of a rate on competition or on a competitor only where its effect might be substantially to lessen competition or tend to create a monopoly in the transportation industry or where the rate was established for the purpose of eliminating or injuring a competitor.

Acting under the guidance of a revised policy declaration emphasizing a reliance on competitive factors in ratemaking, the Commission would then create an atmosphere in which price and service competition would produce better service at a lower cost and at the same time encourage the sound growth of all elements of the transportation system.

TEMPORARY FINANCIAL ASSISTANCE

For various reasons, many railroads have been unable adequately to modernize and improve their plant, facilities and equipment, including rolling stock. In times of good business, railroads have often sufferered from a shortage of freight cars; and, in periods of both good and bad businesses, substantial economies which could have been brought about by the purchase and use of improved facilities, equipment and freight cars have been deferred or given up because of lack of money. Many of these improvements would earn substantial rates of return on the investment, but the funds to finance them have not been available. 1. In order to assist in making additional investment capital available to railroads which have been unable otherwise to secure it, the Government should be authorized to guarantee up to 100 percent of loans by private lending institutions in an aggregate amount not to exceed $500 million, the proceeds of which would be available for capital additions to and improvement of plant, facilities and equipment other than rolling stock. Such loans should have a maturity of not more than 5 years. To be eligible for such a loan, the borrower should be required to establish that the anticipated savings from the additions of improvements would in 5 years be sufficient to equal or exceed the amount of the loan.