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dened during the first two years of the test period by extensions, enlargements or other improvements which were not completed until late in the test period and consequently affected the net earning power of the property during but a part of the test period although they added to net revenues during the entire period of federal control.* In such cases it is obvious that something should be added to the net railway operating income of the test period if the standard return were to represent the true earning power of the railroad during federal control.
There is little ground for the criticism often made that the rental was based upon the three most prosperous years of railroad history. It is true that the net income in 1916 was unusually large. On the other hand, however, the net income of 1915 was sub-normal. In 1917, it was about normal. The test period, therefore, included one poor year, one normal year, and one good year. The average of the three furnished a fair basis for compensation.
Out of this compensation, plus other corporate income such as that from investments or nontransportation activities, the companies were to pay their corporate expenses, interest charges, and other corporate deductions from income. The remainder was to be available for dividends (at regular rates), other appropriations, or surplus. by the companies, but if work under way was continued with the approval of the Director General, or if new work was ordered by him, the companies were to be paid interest on the cost from the completion of the work. Additions and betterments ordered by the Director General for war purposes, if of no permanent value to the companies, were to be made the basis of claims against the Government.
The cost of additions and betterments to the properties during federal control was to be paid
*Such was the case with the Southern Railway. It refused to sign the contract.
All expenses relating to the existence and maintenance of the corporate organization were to be paid by the corporation from its standard return.
The section of the contract which deals with upkeep is discussed at length in Chapter XV. In brief, the contract required the Director General to expend and charge to operating expenses, or by payments into funds, such sums for maintenance, repair, renewal, retirement and depreciation, as might be requisite in order to return the properties to the company at the end of federal control in substantially as good repair and in substantially as complete equipment as it was when the road was taken by the Government.
The foregoing discussion mentions only a few of the important features on the contract. The complete text of the standard contract will be found in the Appendix to this volume.
Even after the form of the contract had been accepted by the committee of the Association of Railway Executives, and recommended to the individual companies for acceptance, there was much delay and controversy before agreement was reached between the Director General and the individual companies. Up to January 1, 1919, contracts had been executed by but 23 of the 160 or more Class 1 companies. At the end of federal control 147 contracts had been executed and 83 were still under consideration. Of these, 49 had agreed with the Director General as to compensation, while 15 had declined to accept the compensation offered and had filed applications with referee boards to fix compensation. Six roads had declined to make contracts and seven had never made application therefor.
The foregoing discussion applies entirely to the contract with Class 1 railroads. A separate form of contract was drawn for the so-called "short lines.' In most cases these roads were entirely local in their character, were independently owned and operated, and for the small amount of interline traffic which they handled, as well as the cars in which it moved, they depended almost entirely upon their Class 1 railroad connections. A large proportion of the short lines were unable to earn more than their charges and many were in even greater financial straits.
The statute under which the President took over the railroads authorized him to take all or any of the properties. In his proclamation of December 26, 1917, the President announced that he had taken possession of “each and every system of transportation and appurtenances thereof located wholly or in part within the boundaries of the continental United States," with the proviso that “by subsequent order and proclamation, possession, control, and operation in whole or in part may also be relinquished to the owners thereof of any part of the railroad systems. . . . possession and control of which are now assumed."
Very few of the short lines, which in the aggregate numbered about 2,500 separate properties, were necessary for war transportation purposes. The Federal Control Act, in giving legislative effect to the President's proclamation, placed independently owned and operated railroads competing or connecting with the railroads taken over within the class of federally controlled roads, but it provided that roads which proved to be unnecessary or undesirable might be relinquished prior to July 1, 1918.
Investigation showed that very few of the large number of short lines were necessary for the purposes of federal control and, on June 29, 1918, 2,161 out of the 2,500 short lines were relinquished from federal control. A few of the relinquished roads were subsequently retaken.
At the time of the relinquishment it was announced by the Director General that on the part of the Railroad Administration a policy of cooperation with the relinquished roads would be maintained, that they would be accorded fair divisions of joint rates, an adequate car supply, and assured of the preservation of routings so far as consistent with national needs.
Following a series of negotiations with representatives of short lines, who feared that the change in the relationship between the short lines and the individual connecting lines now unified on a non-competitive basis as between themselves under federal control, particularly in the matters of car supply and routing of competitive traffic, threatened the existence of a large number of the short lines, the Director General offered what was called a cooperative contract. By its terms the order of relinquishment was recalled, the road would be operated by its own officers, it would retain its own receipts and pay its own expenses, would be assured an equitable car allotment on a liberal per diem basis (two days free time per freight car), and would be guaranteed the preservation of the routing of competitive traffic in the same ratio that such traffic bore to the total traffic in the three years ended December 31, 1917. Provision was made for reimbursement for diverted traffic, for fair tariff publicity, and the short lines were to be free to avail themselves of the advantages of unified purchasing under federal control.
Up to the end of 1919, but 133 short lines elected to execute the cooperative contract, which was open to voluntary signature. In a letter from the Director General to the President of the American Short Line Railroad Association, dated February 19, 1919, the Director General defined the relative positions of the signatory and the nonsignatory short lines:
"I am advised by our general counsel that the short line railroads which sign the contract secure all the advantages of railroads which are under 'federal control' as specified in the Federal Control Act, including increases in rates and freedom from levy of attachment on their property. In addition thereto they will