The Esch-Cummins Act directs the Commission to prepare, as soon as practicable, a plan for the consolidation of the railway properties of the United States into a limited number of systems. Under the plan competition is to be preserved as fully as possible, and wherever practicable the existing routes and channels of trade are to be maintained. The plan prepared by the Commission is to be regarded as tentative, and ample opportunity is to be afforded to everyone to present objections thereto. Subsequently the Commission is to adopt a complete plan, and no consolidations are to be authorized that are not in harmony therewith.

Railroads desiring to consolidate are to make application to the Commission for the necessary permission. If, after a hearing, the Commission finds that the public interest will be promoted by the consolidation, and enters an order authorizing it, the consolidation may thereupon be effected, "the law of any State or the decision or order of any State authority to the contrary notwithstanding". Any corporation organized to effect a consolidation approved by the Commission is thereby relieved from the operation of the anti-trust laws and of all other prohibitions, State or Federal, in so far as may be necessary to enable it to do anything authorized by the order of the Commission. However, no consolidated corporation may have a capitalization exceeding the value of the consolidated properties as determined by the Commission.

What is the purpose of these consolidation provisions, which constitute such a sharp break with the past? The primary purpose, without a doubt, is to promote the successful operation of the rule of rate making. This rule, incorporated in the EschCummins Act, provides that the Interstate Commerce Commission shall initiate and establish rates so that the railroads as a whole (or as a whole in such rate groups as the Commission may designate) will, under honest and economical management and reasonable expenditures for maintenance, earn, as nearly as may be, a fair return on the aggregate value of their property. The satisfactory administration of this rule could hardly be anticipated, however, if there continued to be numerous railroads of widely varying strength. This is because a level of rates that is adequate for the stronger roads will be quite inadequate for the

weaker ones; and a level of rates that is adequate for the weaker ones will enable the stronger ones to make extortionate profits. Accordingly, Congress authorized the consolidation of the railroads in accordance with the plan of the Commission. The intention of Congress was that the weak roads should be consolidated with the strong in such manner that there would be created in each rate group a limited number of large systems of approximately equal strength, and able under uniform rates upon competitive traffic to earn substantially the same rate of return upon the value of their properties. Thereby the task of rate regulation in accordance with the rule of rate making would be facilitated. Moreover, there would be attained a more evenly balanced competition among the railroads, and consequently a higher grade of transportation service. The Esch-Cummins Act contains other provisions designed to promote the operation of the rule of rate making-for example, the recapture clause and the division of joint rates among the parties thereto-but they are less important than the consolidation provisions.

The consolidation programme as a device for meeting the problem presented by the weak roads has been criticized in several respects. It has been urged that our objective should not be the elimination of the weak roads, but the elimination of weakness. Some roads are weak because of inefficient management, and while consolidation might lead to better management, such a drastic remedy is not required to remove the cause of weakness. Some roads are weak because of an ill-balanced financial structure, an excessively large proportion of the earnings being absorbed by the fixed charges, such as interest on bonds; but the remedy here is a readjustment of the capital structure, and not consolidation. Some roads are weak because their main source of traffic (mineral products, for example) has become exhausted; but the best policy in such cases is the abandonment of the road, and not its consolidation with another system, upon which the weak line might be expected to feed, like a parasite.

The desirability of eliminating weakness is conceded, and also the possibility of eliminating some weakness without resort to consolidation. None the less the consolidation programme can still be justified as a device for evening up earning power, and thus

promoting the operation of the rule of rate making. There are other causes of weakness than poor management, unwieldy capital structure, and exhaustion of traffic. Some roads are weak because they lack access to the points of traffic origination or interchange, or because they run at right angles to the normal currents of trade, or because they serve regions of relatively sparse traffic, or because they encounter active water competition. Such roads are likely to remain weak, yet they may be indispensable to the communities that they serve. These roads can best be placed in a position to perform satisfactorily their common carrier obligations by being linked up with a stronger system. The consolidation may or may not eliminate the weakness, but it will eliminate the weak road by uniting it with a system able to maintain the proper service standards.

The consolidation programme is further criticized on the ground that even though we succeed in building up large systems of comparatively equal strength it will be only a matter of time before the systems are again of quite unequal strength. The New Haven was once a very strong road, and may become so again, but it certainly can not be regarded as such at this time. The Pennsylvania and the Chicago and Northwestern are not nearly so strong today as they once were. On the other hand, the Southern Railway has greatly improved its condition, and may soon be regarded as a strong road. So long as population and trade continue to expand, and expand unevenly, so long may we expect shifts in the strength of roads and the emergence here and there of weakness. This is particularly true in view of the fact that the process of consolidation involves at the outset the saddling of the weak roads upon the strong. There are numerous examples in railroad history of prosperous roads that have failed because of an unduly far-reaching combination or an overload of unprofitable extensions or branches. And may not the same prove to be the outcome if the Government, through the exercise of persuasion or pressure, brings about the consolidation of roads against the best judgment of their managers? There is always the danger, of course, that some of the systems thus created may prove to be too large for the most effective

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operation, unless the management is unusually capable; and here again an inequality of strength may subsequently appear. requirements of the rule of rate making apparently make it necessary for us to run these risks, but in assuming them we should not close our eyes to the possible dangers.

Though the primary purpose of consolidation is to build up systems of more uniform strength, and thus promote the administration of the rule of rate making, there are those who believe that through consolidation numerous economies could be realized, and thereby the level of rates reduced or the quality of service improved. That certain economies could be achieved, there can be no doubt. It is agreed on all sides that consolidation would permit a saving through the reduction of intercompany accounting. For example, under present arrangements a person making a trip from New York City to San Francisco via the New York Central, Chicago and Northwestern, Union Pacific, and Central Pacific would normally buy a through ticket from the New York Central; and this road would settle with the other three roads for their portion of the haul. Essentially the same arrangement is followed as to freight; one railroad (the originating road or the delivering road) collects the entire charge, and apportions it among the roads that participated in the haul. Under consolidation, however, there would be less of this intercompany accounting, and the more far-reaching the consolidation, the greater the saving.

Consolidation would also effect a saving through the reduction of car interchange. Whereas locomotives seldom leave the home tracks, freight cars travel freely over the entire country; indeed they may be off the line of the owning road for months at a time. Though this same arrangement would be followed under consolidation, the reduction in the number of systems would bring it about that a larger proportion of a railroad's cars remained “at home". The diminution in the amount of car interchange would cut down the volume of intercompany accounting and facilitate the making of repairs. As regards the former, if one railroad holds or uses the cars of another it must make payment therefor, the present charge being one dollar a day. In view of the fact that there are more than 2,400,000 freight cars, a considerable proportion of which are off the line of the owning road, it is clear that

much labor is involved in keeping the necessary accounts. Consolidation would not eliminate this expense, but it would greatly diminish it. As regards repairs, if a "foreign" car is in need of repair, the tendency is for the using road to patch it up, and to let the owning road make the major repairs that are necessary. The postponement of the necessary repairs, however, may shorten the life of the car. Therefore, the larger the proportion of a railroad's cars that is at home, the greater the likelihood of prompt and effective repair, and the lower the cost of car maintenance and replacement.

Consolidation would admit of still further economies, as, for example, the more direct routing of freight, the joint use of facilities, and the standardization of materials and equipment. Additional savings suggested by advocates of consolidation are: the purchase of materials and supplies in larger quantities; the repair of locomotives and cars in fewer and larger shops; the reduction of traffic solicitation (with the abolition of certain off-line agencies); the greater use of solid trainloads; the elimination of some switching; the discontinuance of duplicate train service; the diminution in the number of tariffs; the consolidation of car inspection forces; and the reduction in the number of general officers.

Upon a superficial examination this list may seem imposing, and to some convincing. Upon closer examination, however, legitimate doubt arises as to the importance of these economies. The largest single item of railway expense is the wage bill, which accounts for approximately half of the total expenditures. This item would hardly be greatly affected by consolidation. Second in amount is the cost of materials and supplies, and this would be lowered but a fraction, if at all. Taxes would certainly be no less. Rentals of leased lines would be less, but this would be merely a matter of accounting, as the owners of the leased line, if it became a part of a consolidated system, would have to be recompensed adequately, as before. Interest payments on outstanding indebtedness would be the same, though if the effect of the rule of rate making (combined with consolidation) were to improve railroad credit, new funds could be secured from time to time on more favorable terms, and the amount of revenue required by the rail