been heard of this argument from the railroads, we assume they have abandoned it in favor of their current line which appears to us to be equally without substance as the statistical data of the Commission

proves.

However, assuming for the sake of the argument that the Commission has on rare occasions placed minimum limits on the rates of one mode of transportation for the purpose of protecting another mode, we feel that any statutory limitation placed upon the power of the Interstate Commerce Commission in connection with the exercise of its minimum rate power, that is, to keep it "honest" in this respect, would do far more harm than good.

At the present time the Commission is simply directed by the Congress to see that all rates are just and reasonable. In the determination of just and reasonable rates the Commission presently looks at all pertinent facts, including the cost of the service where that is or can be known; the rates of both the carrier seeking a change as well as the rates of its competitors; the value of the commodity and the value of the service; and in the interest of preserving a reasonably uniform and equitable freight rate structure it considers whether the rate is lower than necessary to meet competition; whether the rates are so low as to destroy competition; whether the rates will throw an undue burden on other traffic; and whether the rates will jeopardize an entire rate structure.

Now, we submit that in the making of freight rates, which is essentially a legislative process, the rate-fixing body must be permitted to examine all the facts, just, as I might say, in the manner in which this committee examines all of the facts as a preliminary step in making a legislative recommendation. If the Commission must wear blinders and ignore facts such as the fact of competition, or the effect of rates on the existence of competition, it seems to us that it will be impossible to maintain either a sound rate structure or a sound national transportation system. It will also be extremely difficult, if not impossible, for the Commission to protect the public at large against discrimination, preference and prejudice, and unfair and unsound competitive practices in our economy at large.

As I will bring out in a moment, the objective the Congress has set is the establishment of just and reasonable rates for all. To arrive at this objective the agency to which you have delegated this responsibility must consider all facts bearing upon the accomplishment of that objective.

Now, every proposal that we have seen, including the one presently found in section 5 of S. 3778, would inject a negative element or elements into the exercise by the Commission of its quasi-legislative power delegated to it by you. Every such proposal, including of course the now discredited "three shall not" proposal, which was first advanced, but has now been repudiated by the Department of Commerce as freeing carriers to violate with impunity the principles of the antitrust laws, would prevent your agency, the Interstate Commerce Commission, from considering all of the facts in determining whether a rate is just and reasonable. All of these proposals that we have seen would place blinders on the Commission and force it in a great many cases to consider particular rates in a vacuum.

The problems in ratemaking have not changed since common law days when the judicial and later the legislative standard laid down

was that rates shall be reasonable. In more recent times the concept of justness as well as reasonableness was added to cover the problem of discrimination, preference, and prejudice.

In this connection it is interesting to note that in the year 1691 A. D., the English Parliament enacted a statute which authorized the justices of the peace in each county to determine reasonable rates by common carriers. The carriers were required to post such rates and punishment was prescribed for those who varied from them. Thus, it can be seen that the concept that regulation is needed to insure reasonable freight rates is centuries old.

Senator SMATHERS. Is the rate system in England today nationalized or socialized?

Mr. PINKNEY. Most of English transportation is today nationalized, Mr. Chairman. And I presume it would follow from that that their rates are, in a sense, nationalized.

Senator SMATHERS. Thank you.

I just wondered. That question just occurred to me.

Mr. PINKNEY. But I believe these same old principles to protect against discrimination still apply in the English law. I am certain that must be so. Although in England, as in many of the countries where the railroads have been nationalized, of course, the Government, owning the railroads, has taken every possible step to protect them from competition from other modes of transportation.

We know of but few instances in the history of regulation where a legislative body has attempted to prescribe in detail the affirmative standards to be applied in the determination of just and reasonable rates and we know of no instance where the legislative body has laid down negative standards such as have been contained in all of the recent railroad proposals. It obviously has been the experience and judgment down through the centuries that a broad standard should be laid down and the exercise of its application left to groups of experts.

As the late Joseph B. Eastman, one of our greatest transportation minds, put it in one of his opinions (Charges for Protective Service to Perishable Freight, 241 I. C. C. 503, 510):

The question (of fixing rates) cannot, however, be answered by any mathematical test, for, as all who are well informed on the subject know, reasonable freight rates have in the past been determined, not by any close adjustment to a finely calculated cost of service, but by the exercise of a judgment informed by experience after consideration of various factors which are deemed to be pertinent.

You have asked us to make suggestions as to how the act might be amended so as to remove the occasion for so much complaint by the railroads about a problem which we say does not in fact exist. I hope that I have demonstrated by what I have just said that it is not only nearly impossible but also dangerous to attempt to circumscribe the quasi-legislative work of a regulatory body by telling it that it must, in fixing freight rates which are just and reasonable in the interest of shippers and the sound growth of this country and its economy, ignore or close its eyes to the rates of competing carriers. Considering the tremendous differences in the conditions surrounding the movement of the different types of traffic, differences in the efficiency of carriers both within the same mode as well as the different modes, freight rates that are just and reasonable cannot be fixed on the basis of looking at a particular movement of particular traffic, nor can they

be fixed without regard to the competitive facts of life. Any attempt to do so would inevitably result in a rate structure which would not take into consideration the even development of our country, would favor the large community at the expense of the small, would favor the large shipper at the expense of the little one, and would tend toward the creation of monopolistic situations which would be extremely difficult to control, and I do not here refer to monopoly in transportation.

There can be only one reason why the railroads want a change and that is so they can, without restraint by any referee, engage in competitive warfare designed to capture the traffic of their competitors and by competitors I mean the regulated motor carriers of the United States. If the Congress should be disposed to free transportation from competitive restrictions (and it is unthinkable that that could be so), then Congress should remove all restrictions including those which control competition between railroads as well as competition between railroads and trucklines and let us all have at it. There would be few solvent responsible carriers of any kind left after a year of two if that were done just as there are apt to be few of our highly organized truck and barge lines left if you destroy the Interstate Commerce Commission control over minimum rates which all of the proposals we have analyzed would do in greater or less degree. Beyond that the results of our economy would be even more deadly. We would have the wildest sort of discrimination which would most certainly wipe out small businesses and areas and communities dependent upon some one carrier.

As stated above, all of these proposals that have been brought forward, including the proposal in section 5 of S. 3778, are subject to the same disability as the original "three shall not" proposal and must be condemned for the same reasons.

We have conscientiously searched for language which would put an end to the plaintive and, to us, monotonous cries of the railroads to the effect that the Commission holds an umbrella over the rates of the regulated trucklines. We have failed to find any meaningful language that will stand up under analysis which would, on the one hand, guarantee that the Commission would never strike down a rate solely to protect another mode, and, on the other hand, have no adverse effect upon the rate structure of the country.

We submit that the language under discussion-and I here refer to section 5-would put into the statute the first of the "three shall nots" and, by inference, the other two. Among other things, if these are in the statute and I quote from the report of Secretary Weeks of April 22 of this year:

the Commission would appear helpless to prevent practices by carriers which could be stopped under the antitrust laws if the competitors were not carriers (p. 11, Secretary Weeks report of April 22, 1958).

2. Force the Commission to act in competitive rate cases without benefit of all pertinent facts.

3. It would prevent effective regulation of rate relationships between railroads and their competitors which will result in the impairment of shippers' ability to reach markets on a fair competitive basis. 4. It would exclude in competitive rate cases the admission of evidence on anything other than rail facts. At least I am very fearful that that would be the effect.

5. Incline the Commission to permit rates to gravitate to dangerously low levels.

6. It would shift the burden from one type of traffic to another. The rates on high valued and luxury items would tend to be forced down; those on raw materials and agricultural products would be forced up.

There are a few additional facts that bear upon the railroad problem that we wish to call to your attention, and we think they are pertinent to a consideration of the question of competitive rates.

The problem of the rails is not one of rates-it is one of deficits in many of their services. They have an annual passenger deficit estimated to be approximately $700 million, and they lose money on their less-carload freight

May I call attention to an error in my prepared statement. That is included in the passenger deficit, "and they lose money on mail and baggage," that should be stricken.

Senator SCHOEPPEL. You want that part stricken?

Mr. PINKNEY. Yes, sir. These losses aggregate in the neighborhood of—and there, instead of a billion dollars, it should be a million dollars a year to class I railroads.

Now, those losses, plus the impact of the current business recession, are the cause of the plight of such of the railroads as are in trouble— notably the New York Central and the Pennsylvania.

This point is forcefully demonstrated by the following chart which shows that but for the passenger deficit alone, the class I railroads of the country would have had a rate of return on investment in excess of 6 percent, up to and including the figures for 1956, and I believe the figures for 1957 would show the same thing, although they are presently not available.

You will note from that chart that the railroads' freight service has constantly increased to a point where, in 1956, it was bringing in, in millions of dollars-I will use the figures on the chart, $1,764.9 million.

The passenger deficit in that year, which had been constantly going up since 1927, with the exception of the war years, had reached the tremendous figure of almost $700 million. Figuring in that passenger deficit, we find that the railroads' rate of return, for example, in the year 1956, was 3.95; in 1957, 3.35. Without that passenger deficit, their return on freight would have been in excess of 6 percent during recent years.

So one interesting sidelight on the more than three-quarter billion dollar passenger deficit is that if the railroads succeeded in taking from all of the regulated motor carriers all of their traffic-and then succeeded in making the same profit on it that all of those motor carriers made last year ($200 million), those profits would offset only onethird of their passenger deficit alone. In that regard, let me point to this fact:

We have just made a spot check of the 50 carriers, alphabetically selected, class I carriers, for the years 1957 and 1958, and we find the following interesting facts:

That in 1957 the net before taxes of those 50 motor carriers was $1,302,491.

We find that in 1958, the net before taxes was $241,129.

The profit was 3.79 percent of the gross in 1957; it was 0.73 percent of the gross in 1958.

Senator SMATHERS. Who was that, again, Jim?

Mr. PINKNEY. There is a selected sample of 50 carriers, alphabetically selected, for the first quarter of 1958, and compared with the first quarter of 1957.

Mr. BARTON. Those are motor carriers?

Mr. PINKNEY. Motor carriers.

And that shows that in 1957, in the first quarter, with a gross return of $34,325,368, their net before taxes was $1,302,491. In the first quarter of 1958, with a gross of $32,955,944, the net before taxes was only $241,129, indicating that my figure of $200,000 there, if the railroads got all of our traffic and made the same profit on it we did, would be sharply reduced in the year 1958. We do not see them taking all of our traffic as a solution to their problems.

(The chart referred to above follows:)

Effect on railway earnings of rail passenger deficits, 1921–57

1 Incomes for passenger and freight services will n t add to total net railway operating income in every. year owing to small amounts not related to either class of service.

2 Freight return on investment figures reflect net railway operating income from freight services as segregated by the ICC formula compared with total net investment in operating property regardless of whether. used in freight or passenger services; adjustment for assets used solely in passenger service would, of course, increase the rate of return for freight only.

3 Deficit.

4 Not yet available.

Sources: 1921-55 Railroad Transportation-A Statistical Record, Association of American Railroads, except freight-passenger breakdown for 1921-35 which is from testimony of John R. Turney, see the Case for the Trucking Industry, ATA. Data for 1956 through 1957, Yearbook of Railroad Information, Eastern Railroad Presidents' Conference and Transport Economics, ICC.