Transportation Costs Stifle Fair Competition
RAILROAD RATE-MAKING PROCEDURES
By HENRY A. WALLACE, Vice President of the United States
Delivered before Civic and Labor Groups, Dallas, Tex., October 20, 1943
Vital Speeches of the Day, Vol. X, pp. 42-45.
OUT of our natural and industrial wealth we are producing the sinews of war, the purchase price of victory. We are meeting the challenge of war. We have yet to measure and meet the challenge of peace. Whether we shall preserve the essentials of our American life and build an abundance in which all men may share depends primarily and fundamentally upon the wisdom with which we organize and administer our resources. There is one simple key to the kind of domestic peace we must have. It is the full use of our physical and human resources to produce for a better standard of living. There must be no hidden strings, no unwarranted restraints on the freedom to use our productive facilities.
But abundant production has only one destination, and that is abundant consumption. We must be as vigilant in maintaining the free flow of goods between producer and consumer as we are in maintaining the free flow of capital and invention into productive enterprise. It is for this reason that I discuss today the vital role of public transportation.
The history of transportation has been a continuing battle against monopoly controls. From the Granger laws of the Eighteen Seventies to the present time the people of the South and the West have fought in State and Federal Legislatures and in the courts to harness the railroads to serve the public interests. The battle has been without permanent victory; financial interests, through court appeals, legislative rules of ratemaking, corporate manipulations and conspiracies, have continued to exact their tolls. The early victories of the Sherman Anti-Trust Act have not been vigorously followed up, and new restraints have appeared with the outlawing of the old.
Condemns Financial "Exploiting"
The financial exploitation of our railroads, which has placed an unbearable burden on the people, is without parallel in our American life. It is the source and center of the railroads' difficulties and of many of the nations ill's. The plundering of the Erie, the New Haven and other Eastern railroads has been equaled only by the looting of certain Western railroads, the greatest of which was the Milwaukee. How these plunderers could have escaped the consequences of their evil acts is incomprehensible. They or their successors rule the railroad empire today as they did in the heyday of their financial manipulations. They are even strengthening their grip. So I say to you that the people's battle has not been won, that the battle is on, and that it will never cease until these evils are uprooted altogether.
Public transport is again being brought under monopoly control. Competition has already been effectively eliminated in the making of transportation rates. The evil consequences are everywhere apparent:
Excessive transportation rates burden agriculture and industry and trade.
Non-competitive rates deprive agriculture and industry of the benefits of more efficient and cheaper forms of transportation.
Discriminatory rates are keeping the South and the West in a colonial status.
Newer forms of transportation are being brought under monopoly control.
Monopolistic conditions already present in transportation are fostering monopolies in industry.
These are serious charges. Let us examine them in the light of the known facts.
Recalls the "Years of Plenty"
The people, not only of Texas, but of the entire South and West, have experienced the effects of excessive transportation charges—the high cost of the necessities of life and the inability to market the products of their labor. You recall years of plenty when it was impossible to move crops to market because the prices would not bear the cost of transportation. Your grapefruit has rotted on the ground, as have peaches in Colorado .and Utah, potatoes in Minnesota and Wisconsin, and other farm products elsewhere. All other elements which affect the farmers' costs go up and down with changing conditions, but the high rate barrier remains the same.
The empire of the West and the South which has produced so much of the wealth of the nation has been drained dry by the tolls of monopolies, the most important of which is transportation. Consider what happened to the consumer's dollar spent for representatives agricultural products in a typical year. Of every dollar paid by consumers for Texas onions, 28 cents went for transportation and 12 cents went to the farmers.
In like manner, out of every dollar spent for Texas cabbage, 36 cents went for transportation charges and 14 cents were paid to farmers. The growers of Georgia and Carolina peaches received only 31 cents in each dollar paid by purchasers; the railroads and other transportation companies received 22 cents.
Transportation Rates Hit
When Dallas consumers bought Idaho potatoes they paid 32 cents of each dollar to the growers and 27 cents for transportation; and of each dollar spent in Dallas chain stores for Pacific iceberg lettuce, 14 cents went to the growers at the packing house and 26 cents were required to pay for transportation. What is true of onions, cabbage and peaches is also true of virtually everything the farmer grows. These disproportionate and high rates have limited consumption and have penalized the farmer for producing abundantly.
Who makes these excessive rates? There is a widespread misconception that the Government or, more particularly, the Interstate Commerce Commission, prescribes each and every rate for public transportation. This is not the fact In reality, the actual transportation charges, with few exceptions, are made by private rate bureaus and conferences of the carriers. In no year during the past ten years did the Interstate Commerce Commission review as many as 1 per cent of the tariffs filed with it; that is more than 99 per cent of the tariffs filed became effective without action by the commission.
Calls Rate-Making "Private"
The private rate-making machinery of the railroads is highly organized along geographic lines into three principal territories-eastern, southern and western. Approximately fifteen railroad associations and conferences determine the freight rates of the country. This private rate-making machinery, which surpasses in size and complexity that of the Interstate Commerce Commission, has arrogated to itself that control over rates which Congress sought to vest in a public agency. With few exceptions, these private rate bureaus determine what transportation rates shall be filed with the commission and successfully block at their inception virtually all rate reductions that threaten carrier profits. Although competition in rate making is the national legislative policy, it is in fact dead as the dodo.
These rate bureaus are not even democratically organized with respect to their own membership. Many of the decisions with respect to what rates shall be charged in the southwest have to be referred for final decision to Chicago. One of the important bureaus, the Trans-Continental Freight Bureau, is controlled by the nine railroads reaching the Pacific and fixes the transcontinental rail rates for the entire country.
Though these conferences and bureaus make pious declarations to the effect that individual railroads have the right to quote rates independently, the fact is that this right has long since become an empty fiction. Instead of responding to the recent expose of their cartel methods by the Department of Justice by conforming to the law of competition which all business must observe, the railroads have rushed to Congress seeking special legislation to permit them to continue their illegal private rate-making practices which have been so costly to the entire nation.
Holds Competition Eliminated
The second charge is that the elimination of competition between competing forms of transportation has deprived the nation of the benefits of newer and cheaper forms of transport. In an attempt to develop cheaper transportation, the farmers and the businessmen have joined forces in promoting a national system of highways and waterways, and under the vigorous leadership of President Roosevelt we have completed a vast network of highways and waterways. More recently public funds have been directed to the development of airways and airports.
Public patronage has been responsive to the inherent advantages of these newer forms of transport, particularly to the low-cost appeal of highways and waterways. But the early promise of cheap transportation by highway and by waterway has been largely nullified. Under the slogan of "Equality of Regulation," Congress was persuaded to adopt legislation which placed waterways and highways under the jurisdiction of the Interstate Commerce Commission.
The consequences of this legislation were foreseen. On Feb. 16, 1940, the then Secretary of War, the Chairman of the Maritime Commission, and I addressed a letter to the Chairman of the Commerce Committee of the United States Senate in opposition to certain provisions of the Transportation Act of 1940. In that letter we stated:
"Farmers and other shippers should not be required to pay rates based on transportation costs of properties improvidently built, wastefully operated, or partially obsolete. The advocacy of thorough regulation of the minimum rates of motor and water carriers by a centralized agency appears to represent an attempt to use Government power to bring competing transportation agencies into a cartel, and in this manner, to share traffic and adjust rates in such a way as to earn a return upon all transportation capital of these agencies.. . . .
New Rate Bureaus Developed
These fears were realized. Private rate bureaus were developed by motor and water carriers; indeed, these private rate bureaus have been encouraged both by the requirement that carriers publish tariffs and by the minimum rate orders of the Interstate Commerce Commission.
Once competing forms of transportation were organized into private rate conferences, agreements and conspiracies were easily promoted. Through conspiracies between motor and rail carrier conferences, motor-carrier rates have been raised to the level of the rail rates. The activities of water-carrier rate conferences have resulted in relating water-carrier to rail rates. In thus eliminating all competition in rates, the public is deprived of the savings from cheap highway and water transport.
If the public has any illusions on this score, they can be readily dissipated by a reading of the recent decisions of the Interstate Commerce Commission and the courts whereby the farmers and shippers of the Middle West are virtually compelled to use expensive rail instead of cheap barge transportation for the eastward movement of grain.
Not satisfied with eliminating competition in surface transportation, the railroads have even extended their control to the airways to prevent any competition from the carriage of air cargo. Through an exclusive contract between Railway Express Agency (which is owned by the railroads of the country) and the domestic airlines, air express rates have been maintained far above the competitive level, and the movement of cargo by air has been effectively retarded. Despite the assertion of aviation authorities that cargo planes can be operated at 8 to 10 cents per ton mile, air express rates are artificially held at 80 cents per ton mile. This rate is five to seven times the rail express rates.
The coming of the air age can bring to the people of this country new industries, new outlets for goods, and greater freedom of movement. But if monopoly interests are successful in keeping air rates high, we shall be barred from this new frontier, and our nation's development will suffer.
Says South, West Are Retarded
The third charge is that discriminatory rates have helped keep the South and the West in a colonial status.
The people of the West and South have long fought against discriminatory freight rates. They have asked and are asking pointed questions about the transportation practices and the governmental policies which permit such inequalities to persist. They have watched with deep concern the loss of local industries. They have been profoundly discouraged by the futility of their attempts to attract industrial capital. They have watched the continuing drift of the younger generation to regions promising greater opportunities.
They have witnessed a reduction of their purchasing power and the loss of their homes and their farms. Despite the abundance with which Providence had blessed the land, they could not produce sufficient income to cover their costs. They have witnessed a deterioration in the services supplied by the State and local governments, the closing of schools, the neglect of public health and housing, and the delay of sanitation projects.
They have become increasingly dependent upon Federal funds for carrying on essential government services. During the war, many of these communities are witnessing what local industry can mean in terms of larger incomes and higher living standards for the whole community, but they are aware that with the coming of peace the old trend of industry to seek productive centers with favorable freight rates will deprive them of this temporary prosperity.
As those most immediately victimized by these conditions, the people of the South and West have a right to demand that the public transportation industries and their Government take steps necessary to secure for them that equality of
opportunity which is the foundation of economic and political democracy and the first step toward freedom from want in the midst of plenty.
Refers to Appeal of Governors
The Southern Governors' appeal to the Interstate Commerce Commission in 1937 highlighted some of these discriminations.
Studies of various governmental agencies have fully supported the charge of discrimination. Packing houses in Chicago have been able to ship fresh beef to Birmingham, Ala., at a lower rate than packers located at Fort Worth, Tex.; this difference is equal to 50 per cent of the available profit margin. Manufacturers of milk bottles at Santa Anna, Tex., had to absorb freight equal to one-third of their net profit margin in order to sell in the St. Louis market in competition with producers at Elmira, N. Y.
The height rate on tractors from Pueblo, Col., to Baton Rouge has been substantially higher than the rate from Cleveland to Baton Rouge. From typewriters to laundry soap to paint in nearly every class of manufactured goods the South and the West must pay unequal freight rates in comparison with the North and the East. These disadvantages have been major factors in stifling the industrial development of the South and the West and thus have undermined our whole national economy.
No time need be spent on the specious arguments by which those who benefit from these discriminations have sought to justify their continuance. It is true that only a small proportion of the traffic moving from the South and West to the Northeast consists of manufactured products. This will always be the condition so long as these discriminations continue. For years we were told that higher rates were necessary in the South and West because of higher transportation costs. Now the investigations of the Interstate Commerce Commission's staff reveal that costs are lower in the South than in the Northeast, and that even in the West they are only slightly above the level of costs in eastern territory. Cost differentials may no longer be advanced in defense of rate discriminations.
"United Front" Is Alleged
How has it been possible to maintain these rate discriminations over the years? The answer is found in the private rate-making machinery of the railroads. Railroads with established industries on their lines have naturally opposed any rate adjustments which would in any way detract from the preferred position of the industries which create a large volume of traffic Individually, these railroads would have been powerless to prevent a readjustment of rates, but organized into bureaus they present a united front against any change in the existing situation.
Consider the so-called Western Agreement, which was recently exposed by the Anti-Trust Division of the Department of Justice in testimony before the Senate Committee on Interstate Commerce. Thirty-five railroads operating west of the Mississippi River adhered to the Western Agreement. The basic purpose of this agreement was to "avoid practices which will dissipate railroad earnings in the Western District." Under this agreement there was created a czar, the powerful Western Commissioner, responsible to no public authority. Under him rail rates were made with the sole objective of preserving the net earnings of the railroads as a whole within the Western District.
To this end, services were restricted in the name of eliminating wastes; technological developments were delayed; and all competition was stifled. The effects of their acts upon agriculture and industry are not even considered. The spirit of this agreement was truly, "The Public Be Damned." I hope the Justice Department expose of this agreement in May of this year has really knocked the agreement out, but I still have my fingers crossed.
But this is not the whole story. If in any particular instance the railroads or their bureaus failed to cooperate, the matter was referred by the Western Commissioner to a Committee of Directors for action. The Committee of Directors held its meetings at 40 Wall Street, New York City, the headquarters of its most powerful members. Thus, the transportation policies for the West were made in Wall Street. Is it surprising under all these circumstances that rate discriminations against the South and the West have been perpetuated and that the industrial development of these regions has been retarded?
Attacks "Obsolete" System
The American people should know that the Western Agreement and the private rate-bureau machinery of the entire country function for the purpose of making the public pay a return upon an obsolete railroad capitalization. The origins of the financial control go back into the early financing of the railroads, one of the blackest pages of American financial history. Although the period of high finance in railroads occurred prior to the establishment of government control over railroad securities, its consequences linger on, not only in the huge capitalization of the railroads of more than $24,000,000,000, but also in the unbalanced capital structure, which consists of bonded indebtedness to the extent of 50 or 60 per cent.
If the railroads are to be able to serve the public they must set their financial house in order so that their rates may move in harmony with other prices and not forever constitute a barrier to full production in business and agriculture.
The fourth charge is that the railroads plot to seize control of the newer forms of transportation.
Those who guide the destinies of the railroads and seek to preserve their financial position are not content with the cartel controls which they now exercise over all domestic transportation. They propose to solidify and make permanent their empire through the enactment of legislation designed to permit the creation of a permanent monopoly of public transportation under the control of the railroads.
The plot has been sugar-coated to deceive the people. In the name of efficiency and economy, and under the slogan "Preserve the enterprise system," it is proposed that Congress permit the creation of "integrated transportation systems," each of which would control and operate all rail, motor, water and air transportation facilities throughout large geographic areas. If the railroads are able to establish such regional monopolies controlling air, water and highway rates they will be in position to hand out favors or penalties to every community in the United States. They can determine the location of industry and population.
Asks Congress Guard Rights
Under such a system they could freeze ancient injustices and stifle new opportunities. If they should unhappily persuade Congress to set up such a series of regional transportation monopolies I am convinced the public would arise in its wrath and insist on public ownership of all transportation. In my opinion transportation methods have not yet reached that state of static perfection which lends itself either to monopoly control or Government ownership. Therefore I hope Congress will be on guard to fight the transportation monopoly whenever this Wall Street inspired creature lifts its ugly head in Washington.
The people of Texas are particularly aware of the charge that monopoly control of transportation breeds monopoly in other industries.
Among Texas' great treasures is the untold wealth of oil which lies beneath your land. The independent oil men of Texas know what the fight against monopoly means. They know that nearly all the great oil fields of this country were discovered and brought to life by small independent producers and wildcatters willing to risk their labor, their meager resources and their hopes. They also know that the giants in the industry have employed price wars to drive them from the market, and that they have used conservation measures as a competitive screen to conceal their attempts at domination of the industry. By their control of railroads and pipelines the oil trusts have sought since the Eighteen Seventies to fasten their grip on the oil resources of the nation.
It is an irony of history that the first pipelines were built by independent producers attempting to escape the domination of the railroads by the oil monopoly. But the people, not only of Texas but of the nation, know what happened to the pipelines. Instead of having equal access to the pipeline facilities they discovered that it was the major oil companies who owned and operated this vital artery. To the independent producer pipelines have become common carriers in name only, not in fact.
Says Pipelines Are Controlled
Control of pipelines by the major oil companies strangles the industry. This device is used by monopolistic interests to maintain their grip on the crude oil resources of the nation. As long as they own the lines and are able to discriminate against the independents, and can arrange supply, refining and distribution to suit themselves, the great oil companies can hold down the independent producer and make the public pay the cost. Only through determined action by the people to break this stranglehold can any relief be obtained.
In the light of these facts the people of the West and South are asking, insistently, what are we going to do about it? Are the policies and the practices of the past going to be perpetuated? Is there no relief from high transportation costs and discriminatory rates which have reduced the West and the South to a colonial status? Is competition in transportation at an end? Are the newer forms of transportation to be made subservient to the old? Are the American people to be victimized by the scheme for integrated transportation systems? Are they to pay tribute to maintain an obsolete railroad capital structure? Is Washington once more to become a way-station for Wall Street?
The day of accounting has come. Destructive practices in transportation and suppressive governmental policies under which monopoly thrives must now yield to the needs of the common man. These practices and policies must be reversed. The double talk in legislation which has permitted these conditions to exist must give way to clear and understandable provisions which protect the public. Private rate bureaus and rate-making conferences through which railroad bankers and railroad managers have been able to exact from the people unconscionable rates for rendering an indispensable service must be stripped of their power and their activities confined to legitimate practices in the public interest.
For Restoring Competition
A clean-cut declaration of legislative policy must insure to the newer forms of transportation an opportunity to develop without suppression. Competition must be restored. This does not mean chaotic competition as some would have you believe. These are regulated industries, and the Interstate Commerce Commission should protect the public interest in transportation in accordance with the direction of Congress. We can cry out against the existing evils in transportation, but this is futile unless we do something about it. The industry has failed to offer anything constructive and, therefore, the people must look to their duly elected representatives in Congress. Our greatest need is to recast our transportation laws to insure the utmost development of each form of transportation. Thereby present and prospective monopolistic controls will be broken; regional rate discriminations will disappear and transportation will then truly serve the public interest. In this struggle for economic freedom Congress will not fail the people.
If and when Congress does its duty, the people of the West and South will have more industry. Their children will find opportunity at home. The output of the entire nation will increase as the surplus labor of the South and West becomes more skilled in the full utilization of southern and western natural resources for the benefit of the entire nation.