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and unprecedented growth in traffic which seriously taxed the railroads' carrying capacity and yielded gross revenues greater than had ever before been earned in a single year.

In fact, the year 1920 was one of superlatives. It had the greatest traffic, the largest operating revenues, the heaviest operating expenses, and the smallest net railway operating income since the Interstate Commerce Commission (in 1888) began to compile railroad statistics on a national scale.

The transition from federal to private control was accomplished with but little shock or confusion. The continuation of the Government guarantee of pre-war net income gave the railroads time to put their financial affairs in order and to reorganize their forces for individual operation under competitive conditions. The tendency was to discontinue most of the unification and other measures adopted by the United States Railroad Administration, and to restore the general order of things as they had existed in 1916. Trafficsoliciting agencies, advertising, and other activities of a competitive nature were resumed on an effective scale. So far as it was practicable to do so the railroads entered upon maintenance programs which were designed to make up a part of the work deferred in 1917 and during federal control."

*Under the terms of the Transportation Act the carriers, during the 6 months' guarantee period were restricted to expenditures no greater than those of the test period equated for the higher wage and material costs of 1920. Expenditures in excess of that maximum were not to be taken into account in determining the amount of the guarantee to be paid by the Government.

In one important respect other than in physical condition the railroads which were turned back to their owners on March 1, 1920, were not the same railroads which were taken by the Government on January 1, 1918. The corporate officers found a profound change in the morale of the working forces. This subject has already been dealt with in Chapter XVII. Further discussion here is unnecessary.

Within a week or two after the passage of the Transportation Act with its new rule of ratemaking the Interstate Commerce Commission invited the railroads to an informal conference on rate increases. It will be recalled that the need for substantial advances in rates to meet the greatly increased operating costs had been recognized during the last year of federal control, and that the railroad executives, looking forward to the return of the roads (as announced by the President), had appealed to the Director General to exercise his authority and initiate rate increases which would place the railroads on a selfsustaining basis when private operation would be resumed. The Director General, however, decided in October that no further rate increases would be made during the period of federal control, believing it to be in public interest to incur a deficit from operation to be met from general taxation rather than run the risk of disturbing commodity prices by a further inflation of transportation charges.* He held to the view that the needs of the railroads after the termination of federal control should be decided by the Interstate Commerce Commission under whatever plan Congress might adopt in the meantime, but in order that the railroads might be prepared to present their case intelligently to the Commission when private control was restored, he placed his traffic organization at the disposal of the corporate officers to assist in preparing the railroads' petitions.

*See Chapter XIV.

When the Commission entered upon its new duties, as defined by the Transportation Act, the railroads had already made studies from which their revenue needs were estimated, and they were therefore prepared to respond to the Commission's invitation to a conference on the subject. The first point to be decided was that of territorial groupings. The railroads suggested that the rate scales should be established for but three districts, corresponding to existing freight classification territories, viz., Eastern, Southern and Western. This recommendation was adopted by the Commission with one modification. The Western district was reduced by the exclusion of the roads west of Colorado common points and those roads were designated as the Mountain-Pacific group.

In the formal hearings which followed the informal conference the railroads presented their petitions for rate increases which, based on the volume of traffic during the year ended October 31, 1919, and the operating expenses of March 1, 1920, would yield 6% on the property investment accounts of each group of carriers. Before the Commission had reached a conclusion the Labor Board announced general wage advances, effective from May 1, and the Commission then invited the railroads to submit revised estimates which would take the higher wage rates into account.

The property investment account, or “book value", was used by the railroads as their property value because the data then available in the Commission's Bureau of Valuation were not sufficiently complete to be employed as the basis for the roads as a whole. In the small number of cases in which tentative values had been found for individual systems those values corresponded closely to the property investment accounts.

In its decision of July 29, 1920, the Commission authorized substantially what the Eastern district roads had asked, but withheld a part of the rate increases requested by the Southern and Western carriers. Passenger rates were advanced uniformly (about 20%) throughout the country. Parlor and sleeping car fares were also advanced uniformly but in greater degree. Freight rates, with certain exceptions, were increased 40% in the East, 25% in the South, 35% in the West, and 25% in Mountain-Pacific territory.

The cut in the requested increases in the South and West was the result of writing down the property investment account as the basis for property value. The railroads as a whole had asked for rate increases which would yield 6% on the property investment account of slightly more than $20,000,000,000. Without indicating

clearly how it arrived at a lower valuation, the Commission assumed a property value of $18,900,000,000, or about $1,100,000,000 less than the book value presented by the carriers. This reduction was equivalent to reducing the estimated return from 6% to 5.7% on the property investment account. The railroads had asked for rates which would yield net railway operating income of approximately $1,200,000,000. The Commission's award was intended to yield about $1,134,000,000.

The new scale of rates became effective on August 28, 1920, three days before the expiration of the guarantee period and the complete resumption of private control.

The newly created Railroad Labor Board did not start out auspiciously. Shortly after the Transportation Act was passed, the President invited the railroad executives and the railroad labor unions to nominate several candidates. The nominations were sent in promptly, but there was much delay in making the appointments. When finally presented to the Senate they were quickly approved, on April 15, a month and a half after the passage of the Act.

In the meantime there was acute unrest and agitation among the employees whose wage demands, presented to the Director General during the previous summer, had been held in abeyance to be acted upon by the board to be created under the then pending legislation. Early in March the President attempted to settle the controversy by bringing together the railroad executives and the labor leaders, but nothing came of the effort.

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