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Published online by Cambridge University Press: 03 February 2011
Before 1920, the year in which railroad consolidation received Congressional sanction, three periods in the history of rail development the time of the Civil War the chief purpose of consolidation seems to have been to unite short connecting lines to form through routes between important terminals, usually with the approval and assistance of state legislatures. A good example was the chartering of the New York Central Railroad in 1853 by the New York legislature following the amalgamation of ten companies operating short lines in a chain of roads between Albany and Buffalo, New York. A second stage of consolidation developed from the unparalleled construction and intense intercompany competition that followed the Civil War when railroads felt the need of large systems both to offer effective service over widening geographic areas and to offset the disastrous effect of competition upon an industry of expensive, fixed, and specialized capital. It was during this period that the major eastern trunk and western transcontinental systems were formed. State laws designed to prevent the combination of competing lines were widely circumvented, or made inoperative, and the prohibition of pooling in the Interstate Commerce Act of 1887 and of trade (and traffic) associations in the Sherman Act of 1890 gave new impetus to the use of consolidation as a means of escaping the enervating effects of competition. In the years following the Panic of 1893, when one fourth of the country's rail mileage passed into the hands of receivers, the use by the railroads of several new legal devices, including the interlocking directorate, the holding company, and the community of interest, not only counteracted antimonopoly legislation but produced a third and still more impressive phase of consolidation.
1 Interstate Commerce Commission, Annual Report (Government Printing Office, 1900), p. 11.Google Scholar
2 Johnson, E. R., American Railway Transportation (New York: D. Appleton & Co., 1903), pp. 62–63.Google Scholar
3 Interstate Commerce Commission, Annual Report on the Statistics of Railways in the United States (Government Printing Office, 1902); and Interstate Commerce Commission, Report on Intercorporate Relationships of Railways in the United States as of June 30, 1906 (Government Printing Office, 1908), pp. 36–37Google Scholar.
4 ibid., p. 40.
5 Moody, John, The Truth About the Trusts (New York: Moody Publishing Co., 1904), p. 431Google Scholar
6 “Plan for Railway Consolidation,” North American Review, CLIII, 277–78.Google Scholar In 1887 he had Icblificd to similar effect before the United States Pacific Railway Commission.
7 Lewis, G. H., National Consolidation of the Railways of the United States (New York: Dodd, Mead U Co., 1893).Google Scholar
8 12 l C. C. 277.
9 Interstate Commerce Commission, Abstract of Statistics of Steam Railways in the United States (Government Printing Office, 1916), p. 10.Google Scholar
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11 U. S. V. Northern Securities Co., 193 U. S. 197.
12 226 U. S. 61.
13 Control of Central Pacific by Southern Pacific, 76 I. C. C. 508 (1923).
14 Federal control “not only did not cost more than private control would have cost during the same period but cost considerably less on account of the economies growing out of unifications.” —Report of Director General Hines to the President, February 20, 1920, p. 45. See also the review of operating measures introduced by the government by McAdoo, Secretary in Extension of Tenure of Government Control of Railroads. Hearings before tie Committee on Interstate Commerce, United States Senate (Government Printing Office, 1919), I, 15–16.Google Scholar
15 At p. 2.
16 Senator Cummins of Iowa, who had more to do with the framing of the Transportation Act than any other individual, at a later date stated: “There was one great concern when we formulated the Transportation Act, to take care of the short lines and keep them running in the service of the people. That is the object of consolidation, and I think it is the one thing that will determine whether we are to have public or private ownership.”—Consolidations of Railway Properties. Hearings before the Committee on Interstate Commerce, United States Senate, on S. 2224 (Government Printing Office, 1924-25), p. 137Google Scholar.
17 The commission sanctioned the consolidation by granting a certificate to operate under Section 1 (18) of the act and by approval under Section 20a of the issuance of securities. Commissioner Eastman wrote a strong dissent concurred in by two associates.
18 For a fuller account of the consolidation activities of this period, see Leonard, W. N., Railroad Consolidation under the Transportation Act of /920 (New York: Columbia Press, 1946)Google Scholar.
19 In Nickel Plate Unification, 105 I. C. C. 425 (1926), the commission revolted against the financial legerdemain of the Van Sweringens, and, in Proposed Control of Erie RR Co. and Pere Marquctte Ry. Co. by Chesapeake & Ohio Ry. Co., 138 I. C. C. 517 (1928), the held that joint control of die Erie and die Chesapeake & Ohio would disrupt channels of trade and prejudice the consolidation plan.
20 The commission in 1930 found the control of die Western Maryland by die Baltimore & Ohio to be illegal (160 I. C. C. 785); later it permitted the latter to deposit its Western Maryland stock with a trustee (183 I. C. C. 165).
21 Section 7 of die Clayton Act excepted “corporations purchasing such stock solely for investment and not using the same by voting or otherwise to bring about, or in attempting to bring about, die substantial lessening of competition.” See Pennsylvania R.R. Co. v. I.C.C.. 66 F.(ad) 37 (1933), sustained by the United States Supreme Court in I.C.C. v. Pennsylvania RR. Co., 291 U. S. 631 (1934).
22 As far back as January 23, 1926, Commissioner Eastman had testified that holding offered railroads a convenient escape from commission review and the antitrust laws. —Hearings on S. 1870 before the Committee on Interstate Commerce, United States Senate (Government Printing Office, 1926), pp. 46–47Google Scholar.
23 The Gulf, Mobile & Northern's acquisition of the New Orleans Great Northern (1930) and the Mobile & Ohio (1939), the Southern Pacific's purchase of the Cotton Belt (1931) and the lease by the Denver & Rio Grande of the Denver & Salt Lake (1931) were among the more important acquisitions of the period.
24 In Great Northern Pacific Ry. Co. Acquisition, 162 I. C. C. 37 (1930), the commission permitted unification of the Great Northern and Northern Pacific but required these roads to divest themselves of control of the wealthy Burlington, their entrance into Chicago. Acquisition of the Minneapolis & St. Louis was denied the eight western railroads primarily because the plan called for extensive abandonment opposed by railroad labor and numerous communities in the area.—Associated Railways Case, 228 I. C. C. 277 (1938).
25 The Prince Plan, the work chiefly of railroad engineer John W. Barriger, proposed seven consolidated systems: two in the East, two in the South, and three in the West. This plan was studied since it offered more opportunity for savings than the plans of the commission which called for nineteen to twenty-one systems. The coordinator‘s staff of railway men, however, watered down the estimates of annual economies made by the proponents of the Prince from $743,000,000 to $218,000,000.
25 Said Mr. Eastman of the attitude of railway executives: “Their habit of mind is intensely individualistic and suspicious of collective action. When such action is proposed, notwithstanding that it may be for the good of the industry as a whole, the normal executive will at once seek to determine how it may affect his road in comparison with others. It is easy for him to fear that it may have an adverse effect from that point of view, and if he does, he is against the proposition. He is particularly wary of any collective proposal which has a Nation-wide aspect, for he sees in it what he regards as a tendency toward ‘nationalization’ of the railroads, and, at all events, a decrease in the importance of the local managements.”—Report of the Federal Co-ordinator of Transportation, 1935 (74th Congress, 2d Session, House Document No. 394, 1936).
26 Said Mr. Eastman of the attitude of railway executives: “Their habit of mind is intensely individualistic and suspicious of collective action. When such action is proposed, notwithstanding that it may be for the good of the industry as a whole, the normal executive will at once seek to determine how it may affect his road in comparison with others. It is easy for him to fear that it may have an adverse effect from that point of view, and if he does, he is against the proposition. He is particularly wary of any collective proposal which has a Nation-wide aspect, for he sees in it what he regards as a tendency toward ‘nationalization’ of the railroads, and, at all events, a decrease in the importance of the local managements.”—Report of the Federal Co-ordinator of Transportation, 1935 (74th Congress, 2d Session, House Document No 39. 1936).
27 First Report of the Federal Co-ordinator (73d Congress, 2d Session, Senate Document No. 119, 1934). PP- 23–24.Google Scholar
28 Transmitted by the President of the United States to Congress, 75th Congress, 3d Session, House Document No. 583
29 Omnibus Transportation Bill. Hearings on H.R. 2531 before the Committee on Interstate Commerce, United States House of Representatives (Government Printing Office, 1939), pp. 1714–15.Google Scholar
30 Members of the committee representing management were Carl Gray of the Union Pacific, E. E. Norris of the Southern, and M. W. Clement of the Pennsylvania; representing rail labor, George Harrison of the Railway Labor Executives Association, B. M. Jewell of the Railway Employees, A. F. of L., and D. B. Robertson of the Locomotive Firemen and Enginemen.
31 In 1941 the Board of Investigation and Research was given the subject of interterritorial freight rates to study. While reports on this subject, on economy and fitness, and on public aids to transportation were issued, the board did not, presumably for lack of funds, publish study of consolidation.
32 Omnibus Transportation Bill. Hearings on H.R. 2531, p. 1634.
32 Ibid., p. 1325.
34 “Senator Shipstead: Mr. Eastman, I have been very much interested in many statements you have made about the transportation industry. I notice you have repeatedly from time to time stated that a great harm was done to the railroad industry by lack of integration of transportation facilities, operating waste, and also through financial transactions which have been to the detriment of the railroads. Under this bill would we give you any added authority’ to eliminate that waste and so help the financial conditions of the railroads?
“Commissioner Eastman: No; my understanding is that this bill does not go into these matter;, with the exception that it would open up the door a little wider than it is now open to railroad consolidations, which might well have the effect of eliminating some of the waste.”
Omnibus Transportation Bill. Hearings on S. 2009 before the Committee on Interstate Commerce, United States Senate (Government Printing Office, 1939), p. 767.Google Scholar
35 Control of the Pere Marquette by the Chesapeake & Ohio was approved in 1928 (138I. C. C. 517). Full consolidation was authorized on April 1, 1947 (267 I. C. C. 207).
36 Wabash Railroad Co. Control, 252 I. C. C. 319 (1942).
37 Some applicants suggested a three-system plan for the East, the third-system based upon the Baltimore & Ohio, Virginian, Erie, and other lines not in the first two combinations.
38 Surprisingly, the decision carried a notation to the effect that Commissioner Alldredge, if he had been present, would have voted for the petition.
39 Wall Street Journal, May 21, 1948.
40 Both the Lackawanna and Lehigh Valley have felt the effect of traffic diversion from the Wabash to the Pennsylvania. President White of the Lackawanna pointed out that of four direct routes from New York to Buffalo, only the Lackawanna and Lehigh Valley are Buffaloto-New York lines only, and a majority of the latter's stock is owned by the Pennsylvania andth'e Pennsylvania-controlled Wabash.— The New York Times, 01, 24, 1948Google Scholar.
41 The New Jersey tax was based in part upon net railway operating income.
42 Central Railroad Co. of Pennsylvania, Lease, 261 I. C. C. 755 (1946).
43 Florida East Coast Ry. Co. Reorganization. 267 I. C. C. 295 (1947). In February 1949 the federal district court at Jacksonville, Florida, rejected the plan of reorganization of the Florida East Coast approved by the commission and referred the proceeding back to the commission. Among other things, the district court questioned the commission's decision to approve the merger with the Coast Line if the debtor (controlled by the St. Joe Paper Co.) had not consented. The commission had taken the position that the insolvency of the debtor was such that the stockholders were not interested parties.
44 Gulf, Mobile & Ohio RR. Co. Purchase, Securities, Etc., 261 I. C. C. 405 (1945).
45 Chicago, Burlington & Quincy RR. Co. et al. Control, Etc., 267 I. C. C. 295 (1947).
46 These were the Missouri Pacific, Rock Island, Frisco, and Cotton Belt.
47 Ibid., p. 86.
48 Ft. Worth & Denver City Ry. Co. et al., Lease, 247 I. C. C. 119 (1941)1 p. 127.
49 Ibid., pp. 131-32.
50 Bureau of Statistics, Interstate Commerce Commission, Annual Report on the Statistics of Railways in the United States (Government Printing Office, 1946).Google Scholar
51 The absence of coal and the expense of providing adequate water facilities on line have been two additional arguments for dieselization of western roads.
52 While such terms are controversial, it is believed they hold true of the Chesapeake & Ohio, the Santa Fe, the Burlington, the Gulf, Mobile & Ohio, and more recently the Lackawanna.
53 Compare Mr. Eastman's views on this point in 1936 when the provisions of the Emergency Act of 1933 safeguarding labor's interests in consolidation, Section jb, resembled those in today:“It is beside the point to talk about labor restrictions when the managements are themselves unable to agree, or for other reasons are unwilling to act constructively. As a matter of-fact, Section 7 (b) has never been an insuperable obstacle. It does not prevent but only defers economies, and its effectiveness in this respect has steadily lessened with the passage of time since its enactment.” —Report of the Federal Co-ordinator, 1935. p. 38.Google Scholar
54 Coast-to-coast systems are in line with this country's main lines of commerce and with use of equipment at maximum efficiency, providing through freight and passenger service, with a minimum of terminal delay.
