today. Most of the commodities which are now carried by the railroads at less than out-of-pocket cost are either bulk or agricultural commodities, on which the railroads propose to make still greater reductions, if they are exempted from minimum rate regulation.

My next statement, "Carload Freight Tonnage Revenues and Out-of-Pocket Cost," shows for all the years for which the Commission has compiled cost statistics the carload tonnage and revenues, and the amounts revenues exceeded the Commission's computed out-of-pocket costs, and in the last column on the right, the rate of return to the railroads. The significant figures here are those showing the continuous decline in rate of return, as margins above out-of-pocket cost grew smaller. The railroads have never earned as much as 4-percent return when their carload rates yielded less than 142 percent of the computed out-of-pocket costs. In every year since 1956, as revenues declined from 139 to 129 percent of out-ofpocket cost, the rate of return declined steadily from 32 percent in 1957, to 2.2 percent in 1960.

My next statement shows the percentage increases in rail freight rates authorized by the Interstate Commerce Commission since 1946, compared with actual carload rates. It shows that the postwar decline in railroad earnings has not been due to the Commission's failure to grant increases sufficient to cover rising costs, but to the railroads' failure to apply the full increases. Reductions on competitive traffic have been so extensive that average carload revenues have gone much lower than the levels authorized. This trend is especially noticeable in the years from 1955 to the present. From 1947 to 1954, average carload rates were within 10 percent of the authorized increases. But in 1955 the authorized rate exceeded the actual by 19 percent. The authorized rate in 1960 was $7.73. The actual rate went down from $6.42 in 1958 to $6.09 in 1960, and thus brought the excess of authorized over actual rate to 27 percent. In 1961 the authorized rate went up to $7.85, and, while we do not have the 1961 actual rate, we know that rate reductions have been continuing since 1960, so that the average actual and authorized rates continues to widen. Accompanying this statement is a chart showing graphically how the gap has widened from year to year between the rates authorized and the rates actually charged.

My final statement is a summary of recent trends of carload freight costs, rates, revenues, and rate of return, on which I have recapitulated the figures showing how costs have gone up, revenues have not kept pace with costs, and margin of profit and rate of return have drastically fallen.

I think it is clear from what I have presented that low competitive freight rates have been in the past, and are now, the main cause of the railroads' low earnings, and certainly of the drastic slump in earnings since 1955. It is impossible, of course, to show in detail the vast number of rate reductions the railroads have made in the past few years, but I have here some charts which I think fairly represent how far the railroads have already gone, with Interstate Commerce Commission approval, in cutting competitive rates below cost and below noncompetitive rates.

My first chart deals with rate reductions the southern railroads made on coal to Tampa, Fla., in 1958, and again in 1960, to meet water competition. The electric utility company at Tampa, and other large industrial users, had been depending largely on oil for their fuel, up to about 5 years ago, when a coal mine at Uniontown, Ky., began to ship coal by water down the Mississippi River to New Orleans, and thence across the gulf to Tampa, at a rate competitive with oil; and the utility and another large industry at Tampa began using large quantities of coal. The water rate was $3.14 per ton. The railroads at that time had a rate of $6.20 per ton from East Tennessee, and $5.97 per ton from Alabama mines to Tampa. When the coal movement began by water, the railroads went to the Tampa consumers to find out what rate they would have to make from East Tennessee and Alabama to compete with the water movement from West Kentucky. They were told that a reduction of $1.65 per ton would be sufficient; whereupon the railroads established the reduced rates, and they were approved. by the Commission in 1958. Later the consumers said it would be necessary for the railroads to make further reduction of 86 cents a ton if they wanted to stay in business; whereupon in 1960 the railroads made the reduction asked, and have continued to move large quantities of coal to Tampa at lower rates. They have, however, maintained the higher former level of coal rates at the intermediate points which do not have water transportation, so that now the Southern Railway hauls coal to Tampa-a distance of 802 miles from East Tennessee for $3.76 a ton; and from Birmingham, 715 miles, for $3.46, which are lower rates than to Atlanta, Ga., which is only 166 miles from Birmingham, and

226 miles from East Tennessee. Grading upward from the Atlanta rate of $3.96 from East Tennessee, is a rate of $5.06 to Jacksonville, Fla., which is $1.30 higher, for a distance 245 miles shorter, than Tampa. Between Jacksonville and Tampa the rates grade still higher, so that the rate from East Tennessee to the nearest stations inland from Tampa is now $6.27-7 cents higher than the old, and $2.51 higher than the present Tampa rate. Similar rates and rate relationships are in effect from Alabama. The chart shows the water route from Uniontown, Ky., the Southern Railway's route from East Tennessee and Birmingham through Atlanta and Jacksonville to Tampa, and the intermediate territory where the rates are now higher than the Tampa rates.

My next chart shows the relationship of the Tampa rate to ICC out-of-pocket cost and full cost, and how the rate compares with the average coal rates of the southern railroads. The vertical scale on the chart shows the rates per ton, and the horizontal scale, the distance; the straight lines sloping upward on the chart show out-of-pocket and full costs; the jagged line shows the average coal rates by mileage blocks; the rates to Tampa are shown by the circled dots on the chart. The chart shows that while the average coal rates are considerably higher than out-of-pocket costs, for the shorter distances which most coal moves, the Tampa rate is $2 per ton, or 35 percent below 1960; and the Alabama rate 33 percent below out-of-pocket cost. The Tampa rates are more than 50 percent below the full costs. I think these charts show how far the Southern Railway is willing to go, and how far the Interstate Commerce Commission permits it to go, in cutting rates to take traffic from the water lines. And I hardly need comment on how different this picture is from that given to you by the president of the Southern Railway when he said that it is the policy of the Southern Railway never to go below costs in cutting rates, and to extend to communities off the water the same low rate as communities located on the water.

The next chart deals with a water-competitive rate on limestone from Prairie du Rocher, a point in southern Illinois on the Mississippi River, to Baton Rouge, on which large tonnages of stone have moved to a chemical industry in Baton Rouge, La. In 1960 the Missouri Pacific Railroad, in order to prevent the limestone from moving by barge, established a multiple-car rate of $2.30 per ton, leaving, in effect, however, higher rates on single-car movements to shorter distant intermediate territory. This rate was approved by the Interstate Commerce Commission, although its cost experts found that it was below out-ofpocket cost.

The chart compares the rate with Western District out-of-pocket cost and full cost; also with the average carload rates on crushed stone in the southwestern region and in the United States as a whole. The rail rate, as you will notice by the chart, is far below Western District costs, is only 43 percent of the out-ofpocket cost of $5.40 and 25 percent of the full cost of $9.08 per ton. Since the rate was established, the entire movement has been by rail.

The average stone rates, are, as indicated on the chart, above or slightly below out-of-pocket costs for the shorter distances, and grade upward according to distance, except for the sharp dip in the southwestern rate in the 700-mile block, which shows the influence of the Missouri Pacific's below-cost rate to Baton Rouge. The western lines say they want to reduce rates still further. This chart shows how low they would have to go below out-of-pocket cost to make further reductions on stone.

The next chart deals with another multiple-carload rate established by the railroads, with Interstate Commerce Commission approval, from New Orleans to Peoria, on blackstrap molasses. This was also established to keep the traffic from moving by barge, and has had that effect. The rate is below the regional out-of-pocket cost of the railroads, and lower than the rates on single carloads in the intermediate and surrounding territory. The chart compares the rate from New Orleans to Peoria, which is 321⁄2 cents per 100 pounds for the 820mile haul, with the nonwater competitive rate from Houston to Amarillo, Tex., which is 14 cents per 100 pounds higher than the Peoria rate for a haul 224 miles shorter. The rate per ton-mile to Amarillo is twice as high as the rate to Peoria. This comparison is typical of differences between the railroads' competitive and noncompetitive rates, and indicates, I think, how much weight should be given to statements that the railroads' policy is to keep their inland rates competitive.

The next chart deals with a water-competitive rate the railroads established on newsprint paper after barges began to haul newsprint from Calhoun, Tenn., to Houston, Tex., which received considerable newspaper publicity because newsprint is an important item of expense to newspapers. When the railroads re

duced the rate to Houston, they refused to make reductions to cities in the intermediate inland territory, such as Oklahoma City, Dallas, and Fort Worth. The newspapers there could not see why, if the railroads could make a profit on the lower rate from Calhoun to Houston, they should maintain higher rates to other points which depended exclusively on the rail service. If the lower rate to Houston was profitable, the other cities wanted like treatment, and if it was not profitable, they objected to subsidizing the railroads' low rate to keep the traffic off the waterways. The chart shows how the present rate to Houston, 56 cents per hundred pounds for 854-mile rail haul, compares with the rate to Oklahoma City, which is 85 cents a hundred for 828-mile haul. The Oklahoma City rate is 29 cents per hundred, or 52 percent higher than the Houston rate for a haul which is 3 percent shorter. This is typical of the present disadvantages of the inland rates on newsprint.

The next chart indicates how much higher noncompetitive rates of the railroads on grain are than water-competitive rates. The rate from St. Louis to New Orleans, 261⁄2 cents per hundred pounds for a rail distance of 890 miles, is compared on the chart with the rate of 28 cents per hundred from Lamonte, Mo., to St. Louis, 191 miles. You will notice that the railroad charges more for a non-water-competitive haul of 191 miles than for a water-competitive haul of 890 miles.

The next chart deals with the rail rates on grain from Buffalo and Pittsburgh to eastern markets, and points out how the rates from Pittsburgh discriminate against moving grain by barge into Pittsburgh from the West. A large part of the grain consumed in, or exported from, the eastern cities moves by lake vessel to Buffalo, thence rail beyond, making Buffalo one of the great grain and milling centers of the country. Pittsburgh is not a grain and milling center, although, since grain began to move on the rivers by barge, some effort has been made to develop a movement through Pittsburgh. The chart shows why that is impossible at the present time. The rail rates from Pittsburgh to the seacoast cities are so much higher than rates from Buffalo that Pittsburgh cannot compete. The chart gives a typical illustration-the rate from Pittsburgh to Philadelphia, 360 miles, is 472 cents per hundred pounds, and the rate from Buffalo to Philadelphia, 406 miles, is 371⁄2 cents per hundred pounds. The distance from Pittsburgh is 46 miles shorter, but the rate is 10 cents a hundred higher, which effectively prevents competition.

The last chart, dealing with rates on sugar from San Francisco to Chicago, shows how the rairoads have reduced rates on sugar from San Francisco to Chicago to compete with a water movement through the Panama Canal and Mississippi River. The present rate for the 2,258-mile haul to Chicago is 892 cents, in contrast with higher rates for shorter intermediate distances extending from Nevada, 300 miles from San Francisco, almost to the Mississippi River, within 200 miles of Chicago. The chart shows, as illustrative of the higher rates to intermediate points, Ogden, Utah, and Denver, Colo. The rate to these cities in 952 cents per hundred pounds, 6 cents higher than to Chicago, although the distance to Ogden is 1,400 miles less, and to Denver nearly 900 miles less, than to Chicago. As the chart shows, the rate to Chicago is below full cost, while the intermediate rates are above cost.

These discriminations against the intermediate territory effectively prevented competition between industries in the intermediate territory with similar industries at Chicago. I lived in Omaha at the time the railroads cut the rate to Chicago, and remember how a candy manufacturer at Omaha pleaded with the railroad that unless it could give him a rate as low as the rate to Chicago, he could not continue in business. But his request was denied and the consequence was that the Omaha factory moved to Chicago. So the effect was not only to hurt Omaha, but the railroad had to haul the sugar 500 miles farther through Omaha to Chicago, at a rate less than cost, instead of to Omaha at a profit above cost.

I hope the illustrations I have given will make clear how ratecutting on bulk commodities has already brought the rates down to or below the point of no return to the railroads and imposed on shippers in the interior a constantly increasing burden of higher and discriminatory rates. The argument is sometimes made that industries on the waterways have the lower rates anyway, but the fact is that the rate reductions of the railroads increase the disadvantage of the inland industries. Establishment of joint barge-and-rail rates would enable the people in the interior to participate in the benefits of low-cost water transportation, but the railroads refuse to enter into such arrangements.

May I say, in conclusion, that, in my opinion, the transportation situation today is indeed a serious one. The illness of the railroads cannot be called a crisis-it is a chronic, deep-seated disease which, for want of a better name, could be called what-the-traffic-will-bearitis. The only hope for cure is regulation. Elimination of regulation would be fatal. Stronger, not weaker regulation is necessary. I am personally convinced that the only effective remedy is to require that rates of all modes of transportation, including rates on bulk and agricultural commodities, bear a reasonable relationship to their costs. I respectfully recommend for your consideration that, in addition to eliminating bulk and agricultural exemptions, there be added, to the declaration of policy and the ratemaking provisions of the act, language defining reasonable rates as "related to the full cost, with due consideration of the value of the service," and that the provisions dealing with unfair and destructive competitive practices be amended to prohibit specifically the reduction of a competitive rate to a point below the full cost of the service that would require a lower-cost carrier to reduce its rates below its full cost, in order to compete.

1943. 1944. 1945.

1946.

1947 1948. 1949.

1950.

1951.

1952

1953

1954

1955

1956

1957

1958

1959

1960.

1961

How the railroads fared before and after regulation—Continued

1 Association of American Railroads' statement.

REGULATION HIGH SPOTS

Period of nonregulation: Before 1903 there was no effective governmental regulation. In the 1860's to 1890's railroads were subsidized by land grants, bonds, cash, and other aids.

1890's to 1903: Railroad rate associations partly succeeded in controlling, rebating, and maintaining rates by agreements.

1903: Elkins Act prohibited rebating.

1906: Hepburn Act gave ICC power to fix rates and require published tariff rates to be charged and collected.

1910-18: Railroads given first general freight rate increases by ICC.

1911: Railroads required by ICC to set up reserves for depreciation.

1918: Government took over and operated railroads, under guarantee of prewar earnings. Freight rates increased 25 percent.

1920: Congress restored railroads to private owners; authorized payments to restore properties to good physical condition; directed ICC to maintain rates that would yield fair return; ICC granted general increases in freight rates of 25 to 35%. (These were more than traffic could bear, and reduced 10 percent in 1922. 1932: road credit supported by creation of RFC.

1932-35: Congress established Office of Federal Coordinator of Transportation to determine ways of helping railroads.

1935: Motor carriers placed under ICC regulation.

1932-37: ICC tried to maintain railroad earnings by general freight rate increases, followed by reductions to avoid losses of traffic.

1938: ICC authorized 10 percent general increase in freight rates.

1940: Transportation Act defined national policy; placed domestic water carriers under ICC regulation; created Board of Investigation and Research to study taxation, public aids, economy, fitness of rail, motor, and water transportation.

1944-46 et seq.: Accelerated amortization of capital expenditures.

1948: Reed-Bulwinkle Act exempted from antitrust laws rate agreements between common carriers of like type.

1957: Railroads relieved from long-short-haul provisions over circuitous routes.

1958: Transportation Act amended providing for Government-guaranteed loans to railroads, giving ICC authority to discontinue unprofitable passenger trains, and directing Commission not to forbid rate reductions by one mode of transport to protect the traffic of another mode.

1946-61: Series of percentage freight rate increases authorized by ICC totaling 115 percent. 1951-62: Selective competitive rate reductions by railroads offset rate increases granted.

Source: "Transport Statistics in the United States," Interstate Commerce Commission.