and foremost by correction of outstanding abuses of private monopoly power; and, second, by preservation of interline and interagency competition to prevent growth of monopolistic elements in the transport market. It was recognized that competition was not serviceable as the only market regulator in the railroad industry, yet the public was unwilling to place its faith solely in public control. Though the original powers proved weak and means were found to impair railroad competition, public policy in this period had the virtue of simplicity and consistency both in terms of basic philosophy and the administrative problem. The tangle so evident in current policy of trying to protect and foster carrier and consumer interests at the same time was avoided. Moreover, the enormously difficult task of directing to a considerable extent the development and management of the entire transport system by positive price-control standards, entry limitation, and other regulatory devices of today was not attempted. It was assumed that earnings of private enterprise would be sufficient to draw capital into the railroad industry adequate to insure continuous and dependable service. With sources of such competition as existed safeguarded and monopolistic rate and service abuses curbed, rate-making and investment decisions could be left in the hands of the carrier. Nor was there a legislative intent to restrict competition, except in the case of rail activities seeking to eliminate water carriers as competitors.15

The Post-World War Adjustment Period

Marked changes in both the character and degree of regulation accompanied the return of the railroads to private control after the World War. The Transportation Act of 1920 is notable for introducing carrier protection as an objective of regulation and for giving policy a promotional and positive task to perform. The new philosophy of control placed emphasis upon sufficient earnings to the carriers in order to insure adequate and efficient service under private ownership. Though this change represented a distinct innovation in regulatory legislation, recognition had earlier been given to sufficient earnings to the carriers by the courts in cases involving alleged confiscation of carrier property without due process of law and by

15 It is noteworthy that Congress did not bestow the minimum-rate power in this period, although recommended by the Commission as early as 1893. Cf. Seventh Annual Report of the I. C. C. (1893), p. 78. By 1904 the Commission had discontinued its recommendation as to the minimum-rate power, which was not revived until 1919. Nor did Congress respond to the early suggestion of the Commission that fuller regulation of water carriers be enacted in order to control rail-water competition more effectively. The competitive pressure of the water carrier upon rail rates was not to be restricted as was that of the more powerful rails upon the water carriers.

the Commission in observing such constitutional safeguards.

These innovations grafted upon earlier regulatory policy had their root in a growing dissatisfaction after 1910 with some of the results of enforced competition and negative regulation.18 Seasonal car shortages and regulatory hindrances to advancing rail rates to meet increased costs from a rising price level contributed to a growing attitude that rate regulation should give positive consideration to the carriers' need for additional revenue. But a more immediate reason lay in impaired railroad credit after the World War. Of importance, too, were the lessons learned by operating the many competing railroads as a more unified system during Federal control. All factors seemed to point to regulatory action to improve railroad credit and to streamline and strengthen the system as a whole.

Rate controls became the leading instrument for encouraging investment and an adequate supply of railroad facilities. The Commission was directed by the new rule of rate making 18 to initiate or modify rates with specific (but not exclusive) regard for the adequacy of net railway operating income for carriers as a whole or in suitable groups. Thus the Commission was given direct responsibility for a positive exercise of the maximum-rate power. To prevent rate competition from undermining the adequate income sought for the railroads,1o the Commission was given the minimum rate power for the first time. Henceforth, exact rates could also be prescribed.

The introduction of a system of supervised cooperative action by carriers also represented a sharp break with earlier regulatory policy. With Commission approval, acquisition of control, voluntary consolidation of independent railroads, and pooling were encouraged. Moreover, Congress directed the Commission to prepare a plan for consolidation, and granted it power to control construction of new lines and abandonment.20 Control of securities issuance and stronger powers over service were also given the Commission. In theory these new powers would enable the Commission to promote the development of an economical plant.

Whether the solutions expressed in the Transportation Act of 1920 should be viewed as provisional policy to meet an emergency railroad credit and supply situ

18 Cf. Edgar J. Rich, "The Transportation Act of 1920,” American Economic Review, vol. X, No. 3, September 1920, pp. 507–527. 17 Cf. Part I, Section I. 1, this report.

18 Cf. Part I, Section III, 1, this report, for a discussion of the actions taken and problems encountered in giving effect to this standard. 10 Ibid., for an account of policies and extent of exercise of the mininum rate power over rail rates.

20 Direct control of this kind over supply came after most of the development of railroad plant had taken place. Cf. Part I, Section I, 1, this report.

ation in an inevitable post-war readjustment period or as evidence of an emerging attitude that regulated monopoly should be fostered in preference to enforced competition is a puzzle not easy to unravel. Yet it is clear that a more comprehensive regulatory structure and a new philosophy of positive control had emerged. Even though greater restriction of managerial prerogatives was now possible, the railroads were active supporters of the Act. The probable reasons for this reversal in their traditional opposition to regulation were that little additional direct implementation of the shipper interest was involved and the possibility of financial gains was implicit in a thory of control which sought to promote adequate service for the public by fostering carrier welfare, too.

By 1920, then, a more significant and much more difficult role had been assigned economic regulation. It had to protect both shippers and carriers. It had to assist other kinds of public action and private enterprise to provide adequate transportation in terms of more uniformity of service and rates, fewer breakdowns in service in periods of peak demand, and greater economy. It had to plan and work toward reorganizing railroad plant and systems developed under a regime of governmental aid and great freedom for private enterprise. These complex tasks demanded a different kind of knowledge and judgment, bordering closely upon that required of sucessful entrepreneurship. A belief that Government should assume greater responsibility for the railroad system was the basis for attempting these economic functions by rate and other regulatory controls.

Present Period of Extension of Regulation

Before long a conviction developed that the serious problems of regulation were again changing character. New problems of interagency coordination and readjustment of railroad rates and services came to the fore. The financial difficulties recently experienced by the railroads and rail unemployment have constituted the immediate reasons for the almost continuing consideration given regulatory policy by Congress during the period 1933-40. The underlying factor has been the marked structural changes in transport deriving from technological developments.

The transportation situation occasioning readjustments in regulatory policy after 1933 was basically different from that of 1920. The encouragement to railroad investment given by the 1920 act and Government promotion of airways, highways, and waterways had resulted in such large investments in new facilities that a popular impression developed that supply had become excessive rather than insufficient. Technological

changes had extended the area of competition, providing attractive new alternatives to rail service and thereby lessening monopoly elements. Though shippers and user groups were generally well satisfied with these new conditions, the carriers, especially the railroads, were not. The conditions of competition were the chief source of carrier dissatisfaction.

The first Federal regulatory response to this new transportation situation was considerable de facto relaxation of railroad regulation by the Commission and minor legislative action in the same direction. The Commission soon realized that it was no longer possible for the railroads as a whole to earn the statutory fair return on a fair value of their properties; and it insisted that practical rate adjustments must give consideration to the effect of proposed rates upon traffic. In recognition of the need for allowing the railroads to meet the acute competition from other agencies, the Commission permitted thousands of reductions in specific rates upon short notice and numerous exceptions to the long-and-short-haul prohibition.

22

Some relaxation by Congress of the 1920 standards was effected by the Emergency Railroad Transportation Act of 1933. Noteworthy modifications of this kind were the adoption of a new rule of rate making and the elimination of the recapture clause. The power of the new competitive forces as a regulator was legislatively recognized by abandonment of a statutory fair return. and substitution of a standard which emphasized the effects of rates upon traffic. Except for serious consideration of a proposal to strip the long-and-short-haul prohibition of its teeth," little further consideration was accorded this direction of policy. Yet there was evi

21 According to the Federal Coordinator of Transportation "In the past 10 or 15 years of transportation development in this country, we have followed, unconsciously for the most part, a policy of encouraging an oversupply of transportation service in the years 1920-32 approximately 25 billion dollars were put into new transportation facilities." [Italics supplied.] Regulation of Transportation Agencies, 73d Cong., 2d sess., S. Doc. 152, p. 22.

Ibid., pp. 59-63. The Commission's Annual Reports show that the total rail applications for authority to change rates on less-than-statutory notice for the actively competitive years 1932, 1933, and 1934 were approximately double those in 1925. The number of such applications granted showed a somewhat greater increase. The number of such applications filed rose from 5.560 in 1925 to a high of 12,569 in 1933 and the number granted from 4.387 in 1925 to 11,190 in 1933 (includes pipe-line rates). It is probable that a large percentage of the applications granted were to permit railroads to reduce their rates quickly to meet truck competition. The percentage of the applications granted to total applications filed rose from 78.9 in 1925 to from 86.3 to 89 in the period 1932-34.

23 Thus the Pettingell bill to amend Section 4 was twice passed by the House (1935 and 1937), although rejected by the Senate. This proposal was strenuously opposed by coastal, intercoastal, and inland water carriers, who feared competitive annihilation, and commercial interests in western intermountain territory, who feared their rates would be increased absolutely or relatively. Protection of existing and promotion of additional locational advantages definitely influenced the votes on this proposal. Stuart Daggett, Principles of Inland Transportation, 3d ed., 1941, pp. 440-448.

dence of a considerable shipper receptiveness to further statutory relaxation in preference to the extension of regulation to other agencies.

In seeking desirable modification of regulatory policy, primary legislative consideration was given to the extension of regulation, roughly comparable to that applying to railroads, to other agencies. Without a widespread public demand and in face of vigorous opposition from many shippers and carriers, Congress acted to extend such regulation to common carriers by motor vehicle and water (not already regulated) in interstate commerce; regulation of a somewhat different character and of less intensity to contract carriers; and safety regulation to private carriers by highway." Most State legislatures had taken similar action with respect to motor carriers previous to 1935 when the Motor Carrier Act was passed. The Interstate Commerce Commission was also made the regulatory body for all domestic carriers, other than the air lines, whose regulation also increased in this period.

This enlargement of the scope of regulation reveals an interesting reversal in source of support as compared with earlier enactments. Increased support came from carriers, but shippers as a rule were mostly content with existing controls or wanted even less regulation." The explanation for the new attitude of shippers lies in their relatively stronger bargaining position today in dealing with carriers. The availability of a large variety of

24 Numerous exceptions to certain classes of motor and water carriers, especially where non-competitive with common carriers, were granted by the Motor Carrier Act of 1935 and the Transportation Act of 1940.

25 Shipper support was either conspicuously absent, fainthearted in character, or limited to certain shipping groups whose interests are peculiarly tied to the railroads. With respect to motor-carrier regulation, the facts show that the leading farm organizations, such as the National Grange and American Farm Bureau Federation, expressed their opposition. In his report to Congress on transport regulation in 1934, the Federal Coordinator of Transportation noted the opposition of the National Industrial Traffic League, a powerful organization of industrial shippers, to "any Federal regulation that goes beyond the keeping of records, the filing of reports, and joint arrangements for complete service between railroads and trucks." (Regulation of Transportation Agencies, op. cit., p. 26.) This organization did, however, change its position to one in favor of "reasonable and logical regulation of highway transportation for hire, both as to rates and services" in November 1934, but by a close vote of 58 for and 55 against. (A. T. A. News Bulletin, Nov. 19, 1934, p. 4.) A qualifying statement was adopted to impress upon Congress that regulation should not extend to private carriers; that the natural advantages of highway transportation should not be destroyed; and that motor rates should not be adjusted to those of other agencies so as to require the public to support "* that part of the transporta

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tion investment which cannot be justified from a sound economic standpoint (Cf. statement of L. F. Orr, Chairman of the Highway Transportation Committee, before the Senate Committee on Interstate Commerce, 74th Cong., 1st sess., Hearings on S. 1629 et al., part I, Feb. 25 to March 6, 1935, p. 285.) Certain established dealers in agricultural products, e. g., grain and fruits and vegetables, favored this regulation, because the merchant trucker and other truck operations were tending to develop new channels of distribution for these products. However, the continued apprehension of shipper groups in general is further shown by the action of the National Grange and other farm organizations and the National Industrial Traffic Legue in opposing extension of regulation to water carriers by the Transportation Act of 1940.

services and at most points alternative carriers, as well as a marked increase in the ability of both small and large shippers to provide their own transportation by operating private trucks, are factors.

The demand for economic regulation of motor carriers originated with the railroads 26 and the State commissions, which, as in 1887, found State control administratively difficult without Federal regulation of interstate commerce. Throughout the period 1925–35 these groups were the most ardent proponents of motorcarrier regulation, which also commanded the support of rail labor, investors in rail securities, and railroad supply industries. Some large motor common carriers joined hands in this movement, but many such carriers, contract carriers, and small operators generally opposed regulation. Significantly, a change of heart, at least so far as the large operators were concerned, occurred directly after the self-regulation and association effort made possible by the N. I. R. A. from 1933-35.

The real sources of rail complaint lay in the readjustments involved in coping with a growing competitive situation. These troubles led railroads to question public policy on the ground that it did not give them an equality of competitive opportunity." They advocated comparable regulation for their major competitors as one way to restore such a condition,28 but also to provide public relief from unsatisfactory results ascribed to widespread "destructive and wasteful" competition, such as financial demoralization of all agencies, excess capacity, disorderly market conditions, rate and service instability, increased business risks, uncoordinated transport, and poor and undependable service. Such consequences and a threatened breakdown of common-carrier service were also emphasized by the

26 Commissioner Eastman, Interstate Commerce Commission, recently remarked: "Take the Motor Carrier Act, 1935, as an illustration

It was advocated by Federal and State authorities, of whom I was one, but the railroads were among its strongest backers and I doubt whether it would have been passed, if it had not in the end received large support from the motor carriers themselves." Regarding extension of Federal regulation to air and water carriers, he adds: "The Civil Aeronautics Act of 1938, which brought air carriers under Federal regulation, received its chief impelling support from the air carriers and their employees. The transportation legislation which is now pending in Congress, the most important feature of which is increased regulation of water carriers, resulted from a report made to the President by a committee made up of three railroad executives and three railroad labor executives, and it is favored by important groups of water carriers. although opposed by others." Address before Western Transportation Conference at the University of Southern California, April 11, 1940, pp. 5 and 6 (mimeograph copy). Cf. also, Regulation of Transportation Agencies, op. cit., p. 33.

27 For a discussion of the relation of promotional and public finance policies to inequality of competitive opportunity, cf. Part I Section VII, this report.

28 For a good summary presentation of the railroad program, see the Memorandum Containing Suggestions as to Needed Federal Legislation, submitted to the Federal Coordinator of Transportation by the Association of Railway Executives, August 4, 1933.

Federal Coordinator of Transportation and the Interstate Commerce Commission in their support of a policy of unified and nearly uniform regulation.

These views reflected a changed conception of the primary regulatory task as compared with the 18871920 period. The emphasis was now placed upon the so-called objectionable features of "excessive" or "savage" competition. Shipper protection against monopolistic rate and service practices was no longer stressed as the important objective of public control. Rather, the contention was that the public interest required protection of stable and dependable common carriers against discrimination from other firms, especially contract carriers, and an excessive number of competitors. Shippers received rates so low as to be destructive to the carriers. Hence, floors to rates must be established and limitations must be placed upon the number of firms entering transport industries. Unified application of the minimum rate and control of entry powers would prevent "excessive" competition and modify its working so as to substitute a higher degree of economic coordination for the wastes of such competition.

The underlying general objective in 1920 of promoting an adequate transportation system by regulatory action to implement carrier profits was continued in the Motor Carrier Act of 1935 and the Transportation Act of 1940. But a change of emphasis occurred as to the chief tools for achieving this purpose. In 1920 it was assumed that the carriers could and would raise their rates sufficiently to earn a fair return on the system as a whole, if maximum rates were not prescribed at too low a level. Hence, a positive exercise of the maxmum rate power was considered the chief tool for attaining this objective, even though the minimum rate power was available for use in special cases where railroad control of competition broke down. On the other hand, after 1935 regulatory effort sought to prevent rates from falling to a point where sufficient earnings could not be realized. Therefore, emphasis shifted to the minimum-rate power and to limitation of entry, so as to curtail the revived competitive pricing in transport that had impaired the earlier method of control.

More specific objectives of recent regulatory legislation are revealed by the declaration of policy in the Transportation Act of 1940:

It is hereby declared to be the national transportation policy of the Congress to provide for fair and impartial regulation of all modes of transportation subject to the provisions of this act, so administered as to recognize and preserve the inherent advantages of each; to promote safe, adequate, economical, and efficient service and foster sound economic conditions in transportation and among the several carriers; to encourage the establishment and maintenance of reasonable charges for transportation services, without unjust discriminations, undue

preferences or advantages, or unfair or destructive competitive practices; to cooperate with the several States and the duly authorized officials thereof; and to encourage fair wages and equitable working conditions-all to the end of developing, coordinating, and preserving a national transportation system by water, highway, and rail, as well as other means, adequate to meet the needs of the commerce of the United States, of the Postal Service, and of the national defense. All of the provisions of this Act shall be administered and enforced with a view to carrying out the above declaration of policy.

Clearly, Congress has definitely subscribed to the popular theory that the transformation of competition in transport requires provision for "fair and impartial regulation of all modes of transportation." Reference to the substantive provisions of the new act indicates that “fair and impartial” regulation has been defined as requiring a system of public supervision of all agencies according to the railroad pattern. But neither the statement of policy just quoted nor most standards established to guide the Commission in regulating rates, entry, and other key controls provide a clear-cut and wholly consistent set of economic objectives for this regulation.29 Left undefined, for example, are the phrases "unfair or destructive competitive practices," "sound economic conditions in transportation and among the several carriers," "developing, coordinating, and preserving a national system," or "fair wages and equitable working conditions," all general standards having primary reference to conditions within transportation as they affect investors, management, and labor in this industry. Nor are the requirements of an "adequate" service for commerce and other purposes specified.

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Congress apparently recognized the possibility of too restrictive a use of the powerful controls extended over the transport market in order to protect either railroads or all regulated transport at the expense of other agencies or society as a whole. Thus such safeguards as the general admonitions "to recognize and preserve the inherent advantages of each" agency, "to pro* economical, and efficient service," and "to encourage the establishment and maintenance of reasonable charges for transportation services, without unjust discriminations, undue preferences or advantages," have been included in the general standards established. Moreover, certain safeguards appear in the rate and certificate provisions, but these need not be detailed here.30 Within the general framework of

29 For a discussion of the conflicts in recent regulatory policy with specific reference to the Motor Carrier Act of 1935, and conflicts between regulatory and promotional policy, cf. Charles L. Dearing's treatment in Government and Economic Life, op. cit., pp. 831-857.

30 For example, the proviso in the rules of rate-making limiting the Commission in its consideration of the effects of rates upon traffic may be cited. In giving weight to this factor, the Commission may consider only the effects of rates upon the traffic of the carriers for which rates are specifically prescribed. Thus, in considering motor-carrier rates,

a market protected by minimum rate and entry controls, Congress undoubtedly expects the Commission to allow transport agencies to develop on their relative merits and to afford the public the lowest cost transportation consistent with protection of the rights of both capital and labor in established concerns in all fields. This expectation will require the striking of a reasonable balance between public claims for rapid development of new agencies and techniques to lower costs and improve services and investor demands for stability and protection of capital invested in older agencies and established firms.

If the specific objectives of regulatory policy are indefinite, the principal powers granted to the Commission are not. To reiterate, its two most significant powers at present are those over minimum rates and entry. It is chiefly by the exercise of these powers that carrier protection can be accomplished in the competitive markets of today. Offhand, it would seem that their exercise must result in some, and possibly much, restriction of competition. Any of several theories of "constructive coordination" involving some restriction of competition can also be implemented by those powers.

To summarize, the effect upon the regulatory structure of the recent transformation of competition in transport has been a noteworthy increase in the scope and intensity of regulation rather than statutory or further administrative relaxation to allow recently released competitive forces greater freedom. This development seems paradoxical, in view of the fact that we continue in our regulatory policy to affirm our traditional public faith in competition. With this increase in the spread of regulation and in the positive powers of the Commission, the economic tasks to be undertaken have become more complex and difficult to perform. For unless the vital powers now in the hands of the Commission are only slightly used, this body must establish definite standards of profitability, risk, and social need to guide it in interfering with managerial judgment in quoting rates and expanding or contracting service and investor judgment in entering or withdrawing from the transport business. In controlling integration of the dynamic motor-carrier industry, it must also appraise the economies of scale, that is to say, find the point of bigness involved in the economist's term "optimum" size firm. These basically economic problems will demand an intelligent and forward-looking type of authoritative supervision.

In conclusion, this sketch demonstrates that ideas

for instance, the Commission is limited to considering the effects of rates upon the traffic of motor carriers. If motor rates are reasonable for motor carriers according to this test, they cannot be found unlawful because they might divert traffic from rail or water carriers.

dominating national regulatory action tend to change with new technological, economic, and political conditions. If any generalization is tenable, it is that modification of public regulatory policy is a continuous process. Therefore, the question is pertinent: Are the recent far-reaching extensions of regulatory powers, made in a period of deep depression and rapid social change, of such worth as to justify making the new direction of policy a permanent one? Factors in reaching a dependable decision on this vital element of public policy to be discussed are: (1) the question of the effectiveness of competition in transport markets not subject to present standards of control; and (2) the types of economic effects resulting from the current system of "controlled competition."

The Problem of the Effectiveness of Competition

The leading supposition of our regulatory policy, common to periods of widely different conditions of competition and monopoly, has been that unregulated or non-uniformly regulated transport markets function unsatisfactorily in terms of economic results and equity. In a private-enterprise economy, regulation of the character and degree found in transport would not receive public support if the dominant view were otherwise. An attendant assumption is that public control will remedy undesirable market results.

The alleged and genuine failures of competition as a market regulator in transport form the principal bases of the present regulatory policy. Hence a re-examination of recent trends in policy poses the problem of surveying critically the features thought undesirable under the highly competitive conditions which inhere in the modern transport structure. This section will be devoted to such analysis.

It is the degree to which competition operates effectively in modern transport markets that is in issue. The workability of competition 31 is a matter for judgment, upon which opinions will naturally differ. But there should be general agreement on the proposition that perfect results cannot be expected reasonably either of competition or public control. It should also be agreed that factors of overpowering impact, such as the progress of invention, war, or depression, are not relevant to the issue. Because markets always function under dynamic economic, political, and social conditions, not all defects of market results are to be traced to absence of the conditions essential to effective competition.

31 As Professor Clark points out in a recent article, it is important that the factors favorable to a working approximation of the ideal of "perfectTM competition be discovered in order that we may have a standard more practicable than the unrealistic one of "perfect competition." J. M. Clark, "Toward a Concept of Workable Competition," American Economic Review, Vol XXX, No. 2, June 1940, pp 241-256.