portation must not only be flexible, sufficient and efficient but also reasonable and non-discriminatory in its charges and services.

Transportation should be able to provide full benefits to people. It should do this without being a burden either on the nation as a whole through taxation, or on its owners. If the only way to attain this extremely desirable and beneficial result, the various forms of transport must be placed in a position of monoply, then it should be done. Any abuses which might arise from such a posture of monopoly can be controlled through governmental regulation. However, the first and most important objective is to insure its most perfect development because it so profoundly influences the political, economic and social life of a nation.

It is clear that there is a strong public interest in the operation, the facilities, services and equipment of transportation. Its vigor and health are of national concern. To assure that the national welfare is protected and that all will receive, and continue to receive, safe transportation in an adequate amount and on equal terms is the duty of Government. Such duty makes it imperative that responsible officials in Government and a large segment of the public know and intimately understand the fundamental importance and significance of transportation to the individual and national welfare.

In their earlier history railroads were essentially confined to local interest and local operation. The concept of the function of transportation can be no longer considered as a local or provincial matter. Transportation is the key to breaking down artificial lines based on political subdivisions, be they local, regional or even national. Present conditions require maximum fluidity of movement with a minimum of artificial restrictions. Freight rates can be just as effective as customs duties in raising barriers against participation in common markets. Such barriers operate to the disadvantage of all parties. It is not customs or cartels alone which have the power to allocate markets and limit production or permit dual pricing. These impediments to free markets can just as effectively be created by rates which unfairly discriminate.

The artificial division and comparative isolation of economic areas, however achieved, has, through experience, affected the price of commodities, the level of production, employment, and the standard of living. The high standard of living of the United States can be largely attributed to the fact that, although it comprises a large area consisting of forty-eight sovereign states with varied conditions, natural resources and climate. yet trade is unrestricted bv tariff barriers or by equally effective artificial obstacles such as unfair and discriminatory transportation costs.

The vast majority of peoples todav do not accept the once common restrictive practices such as dual pricing or discriminatory freight rates. They now know that such artifices are too damaging to their ultimate welfare. The progress, happiness and even the peace of the world depend on the free flow of commerce. and the spreading of the production of man's inventive genius. Clearly, by this I do not imply that conditions of production and use are or should be equal in every state or coun

try. Such a theory would be unrealistic since we know that taxation, natural conditions, manpower and skills, raw materials, services and credit all vary even within the states or the provinces of a single country. If such conditions were identical everywhere, there would be no need for commerce, in fact, no progress.

Competitive opportunity by all persons and localities in the natural common markets is one of the chief benefits the interstate commerce clause of the Constitution of the United States has insured to all shippers in the United States. It has permitted a pervasive development of all sections of the country and has permitted the free play to the economic forces which ultimately make for better products at cheaper prices, in other words, more things for more people. The interstate commerce clause of the Constitution of the United States, implemented by the Interstate Commerce Act and administered by the Interstate Commerce Commission, insures that, through the availability of a ready forum, distortions and abuses which might affect the national or individual interests of shippers, cannot arise, or, if they arise, cannot continue. Without this machinery, the few words in the Constitution guaranteeing the benefits of the free flow of commerce between the states would have been meaningless, as history before and after effective regulation has incontrovertibly shown.

This same result can be achieved between contiguous nations as well as within nations by voluntary action. Whether within national boundaries or beyond them, depending on the objective to be sought, it can be done, in the absence of coordinated government policy, by delegating necessary powers to an independent institution with the capacity to act. Such an authority can act as the instrument for the development of mutually beneficial economic growth.

Through a sincere desire to raise the standard of living and to serve the cause of peace by promoting cooperation between nations, a beginning, at least, can be made. It is not necessary to destroy national interest to accomplish such a desirable end. The fusion, rather than the wiping out, of sectional or national interests should be the key to its achievement. Ready examples of how this can be accomplished exist. The States of New York and New Jersey, by compact, have established the Port of New York Authority which is able to administer and manage common transport facilities of two sovereign states to their mutual benefit without prejudice to the sovereign rights of either of them. On a larger scale, the European coal and steel community is demonstrating that the welding together of mutually beneficial objectives can be accomplished without the undue sacrifice of fundamental sovereign rights.

Thus, in addition to such things as physical and mechanical perfection, improvement in operations, uniformity of facilities and equipment, what is needed is a larger and deeper common understanding of the contribution of transportation to the general welfare of peoples. Under modern conditions, there is no nation which can be economically self-sustaining. It is through the facile movement of materials and commodities and the exchange of services that each can help the other. To shelter a country's economy from the fullest impact which transportation

can make can result only in relative stagnation for itself and retard the progress of all.

The orthodox thinking of the past no longer corresponds to present needs. To illustrate, the expression, "Carrying coals to Newcastle" was supposed to express the ultimate in futility. Today coal is almost literally being carried to Newcastle, from a distance of three thousand miles, and is actually serving the consumer in England.

The challenge of the atomic age makes it imperative that each of the freedom-loving nations search for the most effective methods to make its utmost contribution through efficient transportation to a common prosperity and contentment which is a precursor to world peace and tranquility.

MR. VERNON V. BAKER NAMED DIRECTOR I. C. C. BUREAU OF FINANCE The Interstate Commerce Commission announced on October 11, the appointment of Mr. Vernon V. Baker to be Director of its Bureau of Finance. He has been Acting Director of the Bureau since the retirement of Mr. Roger T. Boyden on August 1.

I. C. C. VOLUMES WANTED

One of our members wishes to purchase the following volumes of I. C. C. Reports and Annotations:

Motor Carrier Reports-Volumes 1 through 57, or later.

Interstate Commerce Acts Annotated-Volumes 1 through 16.

Communications should be directed to Mr. Arthur M. Marshall, 145 State Street, Springfield 3, Massachusetts.

Fair-Return-on-Value Theory in Rate Making

Loses Force

By CLYDE B. AITCHISON

A most controversial question which has plagued carriers and the rate regulating commissions is as to what measure must be used to gage the adequacy of carrier earnings. In the United States a development in theory has gone on underneath much squabbling over "value,” and "rate of return based on value," the elements of value, such as reproduction cost, original cost, investment, depreciation, intangibles, good will and going concern, earning power, and "other relevant facts" which are but vaguely defined.

The most persistently urged of these "physical values" or elements, namely, reproduction cost new, or less depreciation, had an origin quite contrary to the latter day use made of the concept. The theory originated late in the last century, at a time when a rate schedule prescribed by the legislature of Nebraska was taken into court by a stockholder and director of the old Union Pacific. This was in a period of depression, low prices, and hard times. The case got to the Supreme Court of the United States. There the attorney general of the state, later Judge Smyth of the Court of Appeals for the District of Columbia, was enjoined from enforcing the state law, which the Court found was confiscatory. The case was the ever after famous Smyth v. Ames—Ames being the Union Pacific director.

The question was whether the act of the state legislature would yield enough revenue to the carrier. A young lawyer with political ambitions named William Jennings Bryan, interjected himself into the case in support of the state law, and against the railway. The Union Pacific claimed the law would give it an inadequate return on its investment, and therefore the legislature was taking its property without due process. of law. The Union Pacific had been built at a time the prairies traversed were crowded with Indians, and with buffalos, which resented the intrusion of the white man on the prairie by construction of a railroad. All supplies and materials had to be transported long distances to the eastern terminus of the line, and then to railhead as the line was built westward. In addition, the financing of the line had been a national scandal which had all but wrecked the Administration, and had brought the words "Credit Mobilier" into the language.

The original cost of the Union Pacific was staggering, and no state law could be contrived which would have yielded an appreciable return on the first cost. It is no wonder that the railroad contended for earnings commensurate with its risks and based on its high construction costs.

Editor's Note: Clyde B. Aitchison, for many years, was a member of the J. C. C. Reprinted from Transport Topics, September 9, 1957, by special permission.

Bryan's Argument

Bryan-against the advice of the state's attorney general, who was officially in charge of the defense of the state law-was opportunist enough to counter with the claim that the road could be worth no more than what it would cost to reproduce it-obviously a much less sum than the original cost. Judge Smyth, always claimed this proposition was advanced without his approval, and against his advice. But Bryan argued it to the court.

The decision of the court was a masterpiece of straddling. The law was held to be invalid, because a fair return was not possible under it at that time. The court announced the basis for ascertaining whether a return was adequate was the "fair value" of the property being used for the convenience of the public, and that in determining that value, the original cost, amount expended in permanent improvements, present as compared with the original cost of construction, probable earning capacity, amount and market value of stocks and bonds, and the sum required to meet operating expenses, were all matters for consideration and to be given such weight as may be just and right in each case.

The italicized words, which trace back to the argument of William Jennings Bryan, in time came to be the cornerstone of the whole valuation theory of the railroad industry.

A decade or two after the decision in Smyth v. Ames, a demand for railroad regulation swept over the country. About 1905-1910, numerous state regulatory commissions were created, or the powers of existing "weak" type commissions were strengthened. Two-cents-a-mile passenger fare statutes were enacted in many states and were proposed in others. Maximum rate statutes were enacted, against the bitter opposition of the railroads, and often against the advice of the state commissions. It was all a piece of the mood of the times. Resisting these statutes, the railroads relied on Smyth v. Ames, and claimed the benefit of the cost of reproduction theory of valuation to establish the confiscatory character of return under these statutes. The cost of reproduction came to have wide acceptance, not only as to railroad properties, but as to other public utilities, such as electric plants, telephones, street railways and interurbans, water plants, and the like. It met general acceptance by the state commissions at the time, but not for long.

Valuation Formula Re-Examined

The public service agencies were so successful that the state commissions began to examine the valuation formula more carefully; and they came to rely more upon the depreciated original cost, or the prudent investment (the two are not the same), as a guide to value. Always there was to be considered "the probable earning capacity of the property under particular rates prescribed by statute," and "the sum required to meet operating expenses." Fierce fighting over theories of valuation developed the weaknesses of the reproduction cost yardstick. This controversy in time pervaded the Supreme Court itself. Justice Brandeis was merciless in his excoriation of the fallacies and weaknesses