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Frank Albert Fetter.

Source book in economics, selected and ed. for the use of college classes online

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wholly within one State and not transmitted to or from a
foreign country from or to any State or Territory as afore-
said.

[1906] The term "common carrier" as used in this Act
shall include express companies and sleeping-car companies.
[1887] The term "railroad" as used in this Act shall include
all bridges and ferries used or operated in connection with
any railroad, and also all the road in use by any corpora-
tion operating a railroad, whether owned or operated under
a contract, agreement, or lease, [1906] and shall also include
all switches, spurs, tracks, and terminal facilities of every
kind used or necessary in the transportation of the persons
or property designated herein, and also all freight depots,
yards, and grounds used or necessary in the transportation
or delivery of any of said property; and the term "trans-
portation" shall include [1906] cars and other vehicles and
[1887] all instrumentalities [1906] and facilities [1887] of
shipment or carriage, [1906] irrespective of ownership or of
any contract, express or implied, for the use thereof and all
services in connection with the receipt, delivery, elevation,
and transfer in transit, ventilation, refrigeration or icing,
storage, and handling of property transported ; and it shall
be the duty of every carrier subject to the provisions of this



TilK INTIi;RSTATK COMMKRCE ACT 3G3

Act to provide aiul furuisli siu'h transportation upon reason-
able reciiiest Iherel'ur, and to establish through routes and
just and reasonable rates applicable thereto; [1910] and to
provide reasonable facilities lor operating such through routes
and to make reasonable rules and regulations with respect
to the exchange, interehange, and return of cars used therein,
and for the oi)eration of such through routes, and providing
for reasonable compensation to those entitled thereto.
[1887] All charges made for any service rendered or to be
rendered in the transportation of passengers or property,
[1910] and for the transmission of messages by telegraph,
telephone, or cable, [1887] as aforesaid, or in connection
therewith, shall be just and reasonable; and every unjust
and unreasonable charge for such service [1906] or any part
thereof [1887] is prohibited and declared to be unlawful:
[1910] Provided, That messages by telegraph, telephone, or
cable, subject to the provisions of this Act, may be elassihed
into day, night, repeated, unrepeated, letter, commercial,
l)ress, Government, and such other classes as are just and
reasonable, and diU'erent rates may be charged for the dif-
fei-ent classes of messages: And Provided further, That
nothing in this Act shall be construed to prevent telephone,
telegraph, and cable companies from entering into contracts
with common carriers for the exchange of services.

liniO. Classilication must be just and reasonable, so also must the
regulations and practices such as marking, packing, delivery, etc.]

11SS7. Free passes and free transportation proliibited. 1906. De-
tails of excepted classes, as cmi)loyees, charitable workers, etc.]

[190G. The Commodities Clause.] From and after May
first, nineteen hundred and eight, it shall be unlawful for any
railroad company to transport from any State, Territory, or
the District of Columbia, to any other State, Territory, or the
District of Columbia, or to any foreign country, any article
or commodity, other than timber and the manufactured prod-
ucts thci-eof, manufactured, mined, or i)roduced by it, or



364 THE INTERSTATE COMMERCE ACT

under its authority, or which it may own in whole or in part,
or in which it may have any interest, direct or indirect, except
such articles or commodities as may be necessary and intended
for its use in the conduct of its business as a common carrier.

[1906. Switch Connections.] Any common carrier sub-
ject to the provisions of this Act, upon application of any
lateral, branch line of railroad, or of any shipper tendering
interstate traffic for transportation, shall construct, main-
tain, and operate upon reasonable terms a switch connection
. . . where such connection is reasonably practicable and can
be put in with safety and will furnish sufficient business to
justify the construction and maintenance of the same; and
shall furnish cars for the movement of such traffic to the
best of its ability without discrimination in favor of or against
any such shipper . . . [1906 Switch connections may be
ordered by the Commission.]

§ 2. [1887. Unjust discrimination defined and forbidden.]
That if any common carrier subject to the provisions of this
Act shall, directly or indirectly, by any special rate, rebate,
drawback, or other device, charge, demand, collect, or receive
from any person or persons a greater or less compensation for
any service rendered, or to be rendered, in the transportation
of passengers or property, subject to the provisions of this
Act, than it charges, demands, collects, or receives from any
other person or persons for doing for him or them a like and
contemporaneous service in the transportation of a like kind of
traffic under substantially similar circumstances and condi-
tions, such common carrier shall be deemed guilty of unjust
discrimination, which is hereby prohibited and declared to be
unlawful.

§ 3. [18S7. Undue or unreasonable preference or advantage for-
bidden. Facilities for interchange of traffic. Discrimination between
connecting lines forbidden. 1903. By Elkins' Act only one shipment
at less than published rate necessary to constitute a violation.]

§ 4. [The Long and short haul section.] (As amended
Jime 18, 1910.) [1887] That it shall be unlawful for any



THE INTERSTATE COMMKUCE ACT 305

coiuiiu)!! (.'Jirricr subject to the provisions of this Act to charge
or roi-oivc any greater compensation in the aggregate for the
transportation of passengers, or of like kind of property,
[1910 "under substantially similar circumstances and con-
ditions" omitted] for a shorter tlian for a longer distance
over the same line or route in the same direction, the shorter
being included within the longer distance, [1910] or to charge
any greater compensation as a through route than the ag-
gregate of the intermediate rates subject to the provisions of
this Act; [1887] but this shall not he construed as authorizing
any common carrier within the terms of this Act to charge
or receive as great compensation for a shorter as for a longer
distance: Provided, however, That upon application to the
Interstate Commerce Commission such common carrier may
in special cases, after investigation, be authorized by the
Commission to charge less for longer than for shorter distances
for tiie transportation of passengers or property ; and the
Commission may from time to time prescribe the extent to
which such designated common carrier may be relieved from
the operation of this section: [1910] Provided, further,
That no rates or charges lawfully existing at the time of
the passage of this amendatory Act shall be required to be
changed by reason of the provisions of this section prior to
the expiration of six months after the passage of this Act,
nor in any case where application shall have been filed before
the Commission, in accordance with the provisions of this
section, until a determination of such application by the
Commission.

[1910] ^Yhenever a carrier by railroad shall in competition
with a water route or routes reduce the rates on the carriage
of any species of freight to or from competitive points, it
shall not be permitted to increase such rates unless after it
shall be found that such proposed increase rests upon changed
conditions other than the elimination of water competition.

§ 5. [1887. The anti-poolinir section.] That it shall ba
unlawful for any common carrier subject to the provisions



366 THE INTERSTATE COMMERCE ACT

of this Act to enter into any contract, agreement, or com-
bination with any other common carrier or carriers for the
pooling of freights of different and competing railroads, or
to divide between them the aggregate or net proceeds of the
earnings of such railroads, or any portion thereof; and in-
any case of an agreement for the pooling of freights as afore-
said, each day of its continuance shall be deemed a separate
offense.

§ 6. [1887, amended 1889, 1906, 1910.. 1887. Printing and posting
of schedule of rates, fares and charges, including rules and regulations
affecting the same (1906) and icing, storage and transit charges and
freight classiiications; stricter details. 1887. Freight carried through
a foreign country subject to customs duties in case of failure to publish
through rates. 1906. Thirty (formerly ten) days' notice must be given
of any change (formerly advance) in rates, etc. Proviso: Commission
may modify requirements of this section. 1906. Joint tariffs must
specify names of carriers participating. 1887. Every common car-
rier shall file copies of all contracts, agreements, etc. 1906. Fur-
ther sharpening of requirement to publish rates; transportation pro-
hibited until rates published; prohibited rates not to be deviated from.
Penalty for failure to comply with regulation. 1910. Carriers must
furnish written statement of rate. Damages for misstatement.]

§ 7. [1887. Carriage of freights from place of shipment to place of
destination must be continuous; contracts to evade forbidden.]

§ 8. [1887. Liability of common carriers for damages.]

§ 9. [1887. Persons claiming to be damaged may elect whether
to complain to the Commission or bring suit in a United States court.
Officers of defendant may be compelled to testify.]

§ 10. [1887. Penalties for violations of Act by carriers or when
the carrier is a corporation, its ofKcers, agents, or employees; for
false billing, etc., by carriers, their officers or agents; for false billing,
etc., by shippers and other persons; for inducing common carriers to
discriminate unjustly: fine and imprisonment. Joint liability with
carrier for damages.]

§ 11. [1887. Creating the Interstate Commerce Commission;
changed in 1906 by § 24.]

§§ 12, 13, 14. [1887, variously amended in 1889, 1891, 1906, and
1910; empowers the Commission to execute and enforce the Act, lay
down methods of procedure, etc.]

§ 15. [Original section wholly superseded June 29, 1906, and
amended June 18, 1910. 1906. Powers of the Commission. Com-



TllK INTKKSTA'l'F, TOMMKUCE ACT 307

mission niny dotonniiic nnd proscribe just and reasonable rates and
claasilications to be observed iis maximum cliarges, and just and rea-
sonable rej;:!! hit ions or practices; may order carriers to cease and
desist from full extent of violations found. Orders of the Commission
efTective as proscribed, but in not loss than thirty days. Orders shall
■Continue in force not exceeding two years, unless suspended or set
aside by Commission or court. When carriers fail to agree on divisions
of joint rate, Commission may prescribe proportion of such rate to
be received by each carrier. 1910. Commission may investigate new
schedules, may suspend Ihoin and extend suspension. Burden of proof
on carrier a^ to reasonableness of increased rates. 1906. Commission
may establish through routes and joint rates and classifications.
19111. Limitation on through route power. Siiipper may select route.
I'lilawful to give or receive information relative to rivals' sliipments;
exceptions; penalty. 1906. Commission may determine just and rea-
sonable charge or allowance for service rendered by owner of property
transported or for any instrumentality furnished by such owner and
used in such transportations. Enumeration of powers in this section
not exclusive.]

§§ 16-2.3. [Stipulate method of award, of appeals to courts, forms
of procedure, etc.]

§ 24. [Enlarging the Commission to seven members (not more than
four of one political party) with term of seven years. Compensation
ten tliousand dollars annually.]

[By Act of June 18, 1910, a Commerce Court was created to which
was given the jurisdiction possessed by circuit courts over appeals
to enforce or to annul the Commission's orders, certain cases under
the Elkins' Act, and mandamus proceedings. In June, 1912, Congress
voted to abolish the Commerce Court.]



RAILROAD VALUES AND RATES

[No railroad rate question ever brought before the Interstate Com-
merce Commission, it seems probable, has exceeded in importance that
involved "in the matter of proposed advances in freight rates by
carriers," decided Feb. 22, 1911. The question was as to the justness
and reasonableness of certain proposed (increased) rates, considered
as a whole, affecting a large part of the traffic throughout a large
part of the country. The inquiry was divided into two parts, the one
affecting the Western roads, and the other the Eastern roads, and
separate decisions were rendered; but fundamentally one issue was
involved, the right of the railroads in these territories, acting in
unison and exercising a certain degree of monopoly power, to put into
effect the new rates proposed. The decision of the Commission, which
was in both cases unanimous, was adverse to the railroads. It had
been generally predicted by railroad advocates that if an adverse de-
cision were rendered, it would greatly depress railroad securities. A
slight immediate decline did occur, followed by a quick recovery, and
later by an advance. The opinions of the Commission, and the evi-
dences presented showing the growing revenues and generally pros-
perous conditions of the roads, served as a certificate of soundness ac-
cepted by investors.

Among the far-reaching questions discussed in the decisions was that
whether rates may justly be increased to earn dividends either on
undistributed earnings in the past or on the increment of land values
in city terminals or on the rights of way. This question is to some
extent involved in every case of rates as connected with franchise
values of public-service corporations. Neither the courts nor the com-
missions seem as yet to have entirely solved the problem. The Inter-
state Commerce Commission said in the decision on the Western Roads
case (Senate Document, No. 725, 61st Congress, 3d session, in 10
volumes; extracts from pp. 5382-5391):]

The Burlington's claim of "legal right." The Chicago,
Burlington & Quincy Railroad Co. presents another ground of
justification for advancing the rates under consideration. It
is entitled "as a matter of legal right to a fair return upon

368



I{AILI{OAT> VAMi:S AND KATES 309

the actual value of its property used lor transportation,
w liic'li value, from whatever source iu the past created, is
measured in its ease by at least the cost of presently rei)ro-
(hicing its physical plant. To obtain sueh fair return, it
necessarily and e(|ually is entitled to charge in the aiigrcgate
rates of transportation which, subject to the one limitation
that the particular component rates are themselves reason-
able and just to tlie s]ii[iper, will produce such reasonable re-
turn upon the property employed."

From this postulate the. Burlington proceeds to the con-
clusion that it does not now enjoy a fair return, and finding
itself confronted with the need of additional revenues to meet
wage advances and otlier operation and maintenance charges
and to otl^'set diminishing net earnings, it may, as a matter
of legal right, advance the rates upon the commodities se-
lected, iiuismuch as the advanced rates would be reasonable
in view of the value of the service to the shipper. Logically
it refuses to have its position regarded as an attempt to
justify these higher charges, for in its theory it does not
need to justify them, and what it presents to the commission
is termed as "explanation of them and of the occasion for
their imposition."

Here is a proposition at once novel and searching. The
Burlington road may be taken as representative in that terri-
tory. Its traffic is diversified; its capitalization compara-
tively conservative; its credit excellent; its tonnage large;
and management capable. When asked by the Government
to explain why it has increased its charges, its reply is that
it has a right to do so because it is not now receiving a fair
return upon the value of the property which it uses; value
being estimated cost of reproduction. This leads to a few
questions: (1) AYhat did the Burlington road cost those who
built it? (2) "What is its present value? (3) Whence came
this value? (4) Is such increase in value a basis for increase
in rates?

The controller of the company- has given us the answer to

24



370 RAILROAD VALUES AND RATES

the first question. He testified that the total investment in
the property from the sale of stocks and bonds was $258,-
000,000.

To the second question the company answers that its present
value is $530,000,000.

The difference between these two figures represents (1)
investment in the property made out of earnings; (2) in-
creased value of right of way and terminals owned by the
company. This is the answer to the third question.

The position therefore taken by the Burlington is that it
has a right vested in it by law to add to its freight charges
such amounts as will yield at the present time a fair rate o£
interest upon more than $270,000,000 which does not repre-
sent either the proceeds from the sale of a share of stock or a
dollar of borrowed money, so long as the rate to the shipper
is not unreasonable.

This contention opens up the broadest field of inquiry,
as to the questions of law and fact upon which the commission
could enter. We have before us a property constructed by
private persons under authority of Government to be devoted
to a public use. These private persons invest in that property
the issues of certain sales of stocks or bonds amounting to
$258,000,000. They capitalize this property at $320,000,000,
one-third of which capitalization is represented by stock and
two-thirds by bonds; they carry upon their books the cost of
road and equipment at $364,000,000; and they now insist
that the law gives them the right to a return upon $530,000,-
000. ...

Under its present capitalization, $320,000,000 ($110,000,-
000 of which was in stock), this corporation had available for
distribution as dividends $13,975,620 in the year 1910, or 12.61
per cent, on its capital stock outstanding. "This," says the
Burlington, *'is an insufficient return, because it is based
upon a capitalization which represents much less than value,
and the courts have decided that under the Constitution prop-
erty of this character is entitled to a reasonable return upon



i;.\ll.U(»Al) VALl KS AM) KA'I'KS 371

tlu' pri'stMit l';iir' value o\' its [iropci! y tiiiitloycd in the service
ol' tlie i)ublic."

lu support ol" tliis proposition the leatliiig case of Sniythe
V. Ames (167 U. S., 446) is cited:

Wo liolil, l)o\vcvor, tliut tlic haais of all caUiilationa as to tlie rca-
Koiml)leiicss of rates to be cliargod by a lorpoiatioii inaiiitaiiiing a
liigiiway under legislative sanction must bo the fair value of the
proporly being used by it for the oonvonioncc of tiio public.

Again, iu Wilcox v. Consolidated Gas Co. (212 U. S.,
19):

It is no longer open to dispute that under the Constitution what
the company is entitled to demand in order that it may liave ju.st com-
pensation is a fair return upon the reasonable value of the property at
the time it is being used by the public.

Relying upon these cases, the Burlington's i'uU position is
that it is immaterial how the property was acquired, what it
originally cost, whether the present value may be claimed to
be in part the result of earnings put back into the property
in betterments, or is due to growth of trat^c and development
of the country served. "The sole in([uiry open at this time is
the actual fair value of the railroad as it exists to-tlay as a
going concern. The company cannot be lawfully required to
take less than a fair and reasonable return upon this value.
To be denied such return will be to appropriate in i)art a
value that belongs to the owners for the use and benetit of
the public without just compensation therefore being first paid
or secured." [Cases cited.]

Notwithstanding these decisions, it remains for the Supreme
Court yet to decide that a public agency, such as a railroad
created by public authority, vested with governmental au-
thority, may continuously increase its rates in proportion to
the increase in its value, either (1) because of betterments
which it lias made out of income, or (2) because of the growth
of the property in value due to the increase in value of
the land which tiie company owns.



372 RAILROAD VALUES AND RATES

If the position of the Burlington is sound and is a precise
expression of what our courts will hold to be the law, then, as
we are told, there is certainly the danger that we may never
expect railroad rates to be lower than they are at present.
On the contrary, there is the unwelcome promise made in this
case that they will continuously advance. In the face of such
an economic philosophy if stable and equitable rates are to be
maintained, the suggestion has been made that it would be
wise for the Government to protect its people by taking to
itself these properties at present value rather than await the
day, perhaps 30 or 50 years hence, when they will have multi-
plied in value ten or twenty fold.

The books of the Burlington road now show some $76,000,-
000 in surplus, which is the accumulation from operating reve-
nues of many years. This surplus is not all held in the form
of cash, but has in part been put into the property in one
form or another of additions and betterments. The stock-
holders, it is said, have chosen to waive their right to dis-
tribute this to themselves in the form of dividends and have
reinvested it in the property. Without questioning the right
of the stockholders to exercise this option, and without de-
nying to them the right to a return upon any investment
which they make, this much seems clear : That if the invest-
ment in a railroad at a given time is $100,000,000, upon
which it yields a net revenue of $25,000,000, the stockholders
may take that $25,000,000 entirely to themselves. But if
they choose to take but one-half of this amount as their re-
turn upon their investment and to reincorporate in the same
property the remaining half of the net earnings, they may
not for this reason increase rates during the succeeding year so
as to give them a return upon $112,500,000. It is idle to
spend time in nice processes of reasoning over such a con-
dition of fact. Public policy — the welfare of the State —
forbids the adoption of any such working theory. Because
of the addition of the $12,500,000 a carrier may be entitled to
an additional return upon the property, but is it entitled to



KAll.UOAD \AUKS AND KATKS 873

increase rates so as Id make lliat retuni .' ll" the stockholders,
as in the last sense trustees for the public, exercise their
right to reiiivcst the ooinpany's nioucy in the iuiprovenient of
tile property, the company may be entitled to an earnin<^ upon
the value of that property without it in any way following
that the rates out of which this surplus was accumulated shall
still further be increased so as to proviile that additional in-
come.

Any new money put into the property, whether derived
from the sale of securities or from surplus, whieli mitiht have
been appropriated to dividends, represents new value — an ad-
dition to the property — and on this addition the stockholders
interested are entitled to a reasonable return if that can be
had for an additional service given, but it is not equitable that
because the directors of a corporation see fit to distribute to
the stockholders less than the amount which the company
earns and may be appropriated to dividends, the shippers
who made this large dividend and surplus possible shall be
increasingly taxed in geometrical progression to make return
upon it. New improvements should bring new revenue. The
risk of the stockholders in investing their money in these im-
provements is the same risk that they took when they invested
their original funds in the original property. (San Diego
Land & Town Co. v. National City, 78 Fed. Rep. 87). . . .

The shippers . . . cannot be compelled to continuously pay
higher rates because the directors of the company have not
seen fit to distribute their full earnings in dividends. , . ,
[Otherwise] it is within the power of a board of directors to
indefinitely increase the shipper's rates, for all that is needed



Online LibraryFrank Albert FetterSource book in economics, selected and ed. for the use of college classes → online text (page 29 of 30)