Pride, principle, determination

By Frank N. Wilner, Contributing Editor

	Above: This Norfolk & Western 0-8-0 rolled out the Roanoke, Va., shops in 1953. It was the last steam locomotive built in the U.S.

Through war and peace, recession and plenty, and in every extreme of weather and manner of adversity, railroads during the 20th Century have fueled the American economic engine. With fewer exceptions than any other form of transportation, railroads delivered civilian freight and defense supplies where they were needed, when they were needed, and in the condition they were needed. And until highways and jetliners displaced the passenger train after World War II, people also depended upon trains-and are again returning to the rails as traffic and airport congestion increase. History records that the 20th Century was the American century. It couldn't have been so without America's railroads.

The American railroad experience is one of private enterprise. Only during the final decade of the 20th Century did other nations recognize the overwhelming efficiency of such an approach to railroading. So as the Third Millennium dawns, American railroaders may be found about the globe transforming former government-owned rail operations into more efficient market-driven enterprises mirroring the U.S. model.

Private ownership has not meant laissez faire. Federal regulation-drawing its authority from the Constitution's Commerce Clause-is less pervasive today than in previous years, but still exists. The Interstate Commerce Commission was created by Congress in 1887 to regulate railroad pricing and treatment of customers. Initially, obedience was voluntary. It wasn't until later that the ICC gained power to compel reporting, require a uniform system of accounts, institute investigations on its own motion, suspend tariffs, and prescribe reasonable rates and divisions of revenue.

The quest to improve safety
Railroad safety also has been regulated for most of the 20th Century. As the 19th Century closed, the number of railroaders killed annually in on-the-job accidents was measured in the hundreds.

The Safety Appliance Acts, a series of laws passed by Congress between the late 19th Century and 1910, mandated substitution of automatic couplers for link-and-pin devices, installation of compressed-air train brakes applied by the engineer rather than brakemen climbing atop moving cars, and the addition to rolling stock and locomotives of sills, steps, ladders, running boards, and grab irons.

Congress urged railroads in 1907 to utilize telegraph and telephones to institute an automatic block system. Automatic train stops and other train control devices were ordered for passenger trains in 1920.

The caboose, now virtually extinct, was a safety device. American railroads retained the caboose until the 1980s, primarily to house brakemen and conductors who assisted with track and switching functions. Collectively-bargained agreements between railroads and their labor unions in 1982 and 1985 spelled the end of the caboose.

Hospital and rehabilitation insurance was unavailable to the working classes at the dawn of this century. Widows and disabled employees were reduced to depending upon assistance from relatives and friends. In this environment, Congress passed the 1908 Federal Employers Liability Act, which permitted injured rail workers (or survivors of those killed) to sue railroads for negligence in federal court and have a jury of peers determine damages. Railroad workers remain under this plan today.

Labor gets a voice
Rail unions began as 19th Century fraternal organizations dedicated to helping injured railroaders with medical bills and providing assistance to widows and orphans of railroaders. As railroads became a dominant industry with two million employees and most families counting at least one rail employee, Congress in 1926 passed the Railway Labor Act. It was the first legislation guaranteeing to railroad workers a right to organize and bargain collectively without interference from employers.

The RLA is unique in that it requires railroads be organized along craft lines-a reason for the existence of some one-dozen principal rail unions.

The move toward consolidation
Railroads began as short line enterprises during the 19th Century and efficiency suffered. A passenger journey from New York to St. Louis, for example, required a traveler to pass over nine different railroad lines and board two steamboats. Railroads also employed an abundance of gauges from as narrow as two feet to as wide as six, frustrating physical interchange of freight and passenger cars. Unifications encouraged a single gauge and reduced the number of physical interchanges.

The nation's more than 2,000 railroads in 1900 began to consolidate in the 20th Century. Where there were but 11 railroads with more than 1,000 route-miles in 1877, the number reached 48 by 1900 as railroading became big business. In 1906, 85% of the bonds and 50% of the stocks traded on the New York Stock Exchange were those of railroad companies.

Railroads required immense amounts of capital to build, maintain themselves, and grow. Economies of scale in both purchasing and management encouraged unification. Where the Sherman and Clayton antitrust laws were used to break apart or prevent unified rail systems during the first decade of the 20th Century, lawmakers reversed course in 1920 and actually encouraged unification. This followed World War I, which left railroads with substantial deferred maintenance and huge capital demands.

When the U.S. entered World War I in 1917, troops and all combat supplies moved to ports almost exclusively by rail. But disruption of Atlantic shipping by German submarines caused massive congestion at East Coast ports, leading to unprecedented gridlock in Eastern and Midwestern rail yards and intolerable empty-car shortages nationwide.

Railroads were nationalized under the Army Appropriations Act of 1916-still in effect-which permits the President, during time of war, to take control of any transportation system. The United States Railroad Administration, under the direction of a director general appointed by the president, took centralized operational control of the nation's railroads.

Nationalization lasted for 26 months through March 1, 1920-more than a year after the Nov. 11, 1918 armistice. Congress gave thought to nationalizing the railroads permanently, but shippers began clamoring for a return of competition and its attendant efficiency. Railroads had lost $2 million a day during the war and government overseers failed to invest in sufficient maintenance during the period of federal control.

The Transportation Act of 1920 restored railroads to private ownership with congressional encouragement to merge. Actually, the ICC was instructed to help plan orderly mergers. To prevent the Justice Department from meddling by invoking the Sherman and Clayton Acts, ICC-approved mergers were exempted from antitrust laws.

Alas, healthy railroads were unwilling to absorb unprofitable carriers and their debts. So Congress considered compulsory mergers-but retreated.

Depression-era reforms
When the Great Depression commenced during the 1930s, weak railroads failed by the dozens as carloadings and passenger boardings declined by some 40%. The percentage of railroad mileage being operated in bankruptcy reached a record 31% by 1938. Exacerbating the railroads' earnings decline was federal promotion of highways and waterways. As freight and passengers were siphoned off by competing and subsidized modes, railroads endured financially- crippling excess capacity.

The ICC, which gained regulatory authority over line abandonments in 1920, authorized the scrapping of more than 21,000 miles of track during the 1930s-a record that would hold until the 1970s when more than 30,000 miles were abandoned. The nation's rail route mileage, which reached a record 254,037 in 1916, commenced a shrinkage that would continue to the end of the 20th Century.

In the midst of the Great Depression, Congress crafted the 1933 Emergency Railroad Transportation Act, which scrapped central planning of rail mergers. It also created a federal coordinator of transportation with broad powers to order equipment and traffic pooling and track sharing-all aimed at cost-saving efficiencies and shielded from antitrust laws. President Roosevelt recommended greater voluntary coordination among railroads-and so was born in 1934 the Association of American Railroads.

But the hope for voluntary mergers still failed to materialize because of another provision of the 1933 law-job protection for rail workers. The incentive to consolidate was removed when carriers were prohibited from eliminating redundant tasks.

Railroads recognized that nationalization loomed if they did not achieve increased traffic density and other cost savings through merger. So they sat down with their unions and crafted the Washington Job Protection Agreement, which provided temporary income protection in exchange for a scrapping of mandatory job protection. It remains in force today.

Attempts by government to design railroad mergers ended formally with passage of the Transportation Act of 1940. Public policy continued to encourage rail mergers, but limited government's involvement to regulatory approval and oversight.

The Great Depression was devastating in economic terms. Yet much like a forest fire it cleared smothering underbrush and less productive old growth so that progressive ideas might take hold and flourish. More than a year before the advent of Social Security and unemployment compensation became available to workers generally, Congress moved toward providing these benefits to rail workers: Railroad Retirement provided cash benefits to encourage older workers to retire and make way for younger workers in an economy offering few jobs.

Wartime prosperity
World War II put the U.S. back to work and created unprecedented demand for rail service. Unlike in World War I, railroads were better prepared for the task. The endemic car shortages and yard congestion of World War I were mostly avoided and railroads posted an enviable 67.7% operating ratio during the war years. The weight of rail had been increased, freight cars had greater carrying capacity, automatic block signals were becoming common, centralized traffic control was in place, and steam engines, requiring labor-intensive maintenance, were being replaced by diesels. By the mid-1950s dieselization was virtually complete.

Railroads carried 50% more freight during World War II than World War I and nearly 100% more passenger traffic. Rationing of fuel and rubber limited truck transportation, so some 90% of military equipment and more than 95% of military troops moved by rail during World War II.

The rail industry was not nationalized during World War II, although labor disruptions did cause a 27-day government takeover during the winter of 1943-1944. There was, however, substantial federal coordination of rail service through the Office of Defense Coordination, which worked closely with the AAR and shipper advisory boards.

Post-war decline
Railroad profits and employment soared during World War II, but slow and steady decline followed it. Returning soldiers began families, moved to the suburbs, and created a formidable constituency for substantially increased highway subsidies that benefited truckers and coaxed passengers from trains to automobiles. Airmail, air traffic control, and airport construction subsidies spawned growth of the airline industry. Growing inland waterway subsidies permitted barge operators to make inroads in hauling bulk commodities. By the late 1950s a jet fleet was in the air and construction of the Interstate Highway system had begun. Disparities in economic regulation prevented railroads from competing with barge and truck operators on the basis of price and service offerings.

The railroad's decline was persistent and painful. Between the end of World War II and the mid-1970s, the federal government spent more than $81 billion on highways and another $10 billion on inland waterways. Not surprisingly, rail freight market share tumbled from more than 60% to 44% and the rails' passenger market share of more than 70% in 1947 evaporated to less than 8% by 1970. Excess capacity was so pervasive that 33% of the nation's rail route-miles carried only 1% of the freight.

Desperate for economies of scale, railroads were propelled to use every cost-cutting tool available and began a stampede to the marriage altar beginning in the late 1950s. By 1970 each of the nation's 25 largest rail carriers was involved in at least one significant unification. Almost 60 merger applications involving two or more Class I railroads were filed between 1957 and 1970 and the ICC denied only six. Where 110 Class I railroads operated in 1957 there were 71 in operation in 1970. It was believed that railroad consolidation was essential to achieving greater efficiency of equipment utilization, routing of long-haul traffic away from congested terminals, concentration of traffic over fewer route-miles, modernization of maintenance practices, and reduction of duplicate facilities.

Railroads also sought to eliminate money-losing passenger trains. With the industry fast approaching financial ruin, Congress passed the Rail Passenger Service Act of 1970, which created the federally-owned and subsidized Amtrak, to which railroads transferred their passenger trains on May 1, 1971. In exchange, they were required to give Amtrak access to their track-at reasonable fees to be arbitrated by the ICC in the event of dispute-and dispatching priority.

Freight operations continued to falter as subsidized truckers cherry-picked the most valuable freight by offering premium service. In desperation, the New York Central and the Pennsylvania merged in 1969, but this largest rail marriage in history soon became the nation's largest corporate bankruptcy. Failures of the Milwaukee Road and the Rock Island followed and it appeared nationalization was the only light at the end of the tunnel.

Deregulation prompts a renaissance
With 21% of the nation's rail route-miles being operated in bankruptcy, the industry's deferred maintenance at more than $4 billion, a capital shortfall estimated at more than $16 billion, and freight rates rising in double digits, Congress reacted with loans even though railroads insisted that only regulatory relief was necessary.

The 1973 Regional Rail Reorganization (3-R) Act set the stage for the creation of Conrail from the ashes of Penn Central and other bankrupts. It provided $1 billion in new loan guarantees, $558 million in direct grants, and $85 million in operating subsidies for routes deemed essential. The U.S. Railway Association was formed to oversee the transfer of federal aid to Conrail. It was viewed, however, as too little too late and served only to bandage over a systemic problem of huge subsidies to trucks and barges coupled with excessive regulation of railroads.

The 1976 Railroad Revitalization and Regulatory (4-R) Act offered the first dose of deregulation since railroads first came under price controls in 1887. The 4-R Act's objectives were to infuse much needed capital into the rail industry and encourage the ICC to provide railroads with greater ratemaking so they could regain financial independence. A recalcitrant ICC refused to cooperate. Conrail continued to lose money, the Rock Island ceased operations, and the Milwaukee Road exhausted its cash.

Regulatory relief finally came in 1980, when Congress passed the Staggers Rail Act. Staggers imposed specific regulatory reform intended to permit railroads to function more like their truck and barge competitors. For the first time, railroads were permitted to enter into confidential rate and service contracts with their customers.

This time the ICC did cooperate. In the 20 years since passage of Staggers, railroads shed tens of thousands more miles of excess and unprofitable track-most of it converted into successful short line railroads-substantially improved profitability, reversed decades of market-share decline, invested $230 billion in improved service, almost tripled intermodal volume, and placed 70% of traffic under long-term contract. The industry eliminated deferred maintenance and made record capital investments. Railroads entered into business partnerships with shippers who made substantial investment in freight cars and loading and unloading facilities.

A cooperative ICC-succeeded in 1996 by the Surface Transportation Board-permitted a series of cost-saving mergers that reduced the number of major rail systems to just seven and permitted unprecedented concentration of most rail traffic on a route-mile network that has declined by 40% since 1980.

What the next century holds
As railroads enter the 21st Century, problems persist, but they are seen as temporary and nowhere on the magnitude of the 1970s. Union Pacific, whose service levels stumbled badly following its 1996 merger with Southern Pacific, is recovering, and CSX and Norfolk Southern, which stumbled to a lesser degree in assimilating Conrail, are similarly expected to restore pre-transaction service levels.

Other problems remain to be solved. Highways and inland waterways still receive massive federal subsidies and trucking interests continue to push Congress for liberalization of truck length and weight limits. But the most pressing railroad concern on the eve of the 21st Century is with bulk commodity shippers having limited transportation alternatives. These so-called captive shippers complain that the STB has largely ignored invoking its residual regulatory authority where railroads remain market dominant and has placed too much emphasis on improving railroad profitability and not enough on encouraging rail-to-rail competition. The outcome will be the first major congressional pronouncement on railroads of the 21st Century.

Looking back on the 20th Century, one constant among perpetual change and sometimes-sudden upheaval was railroads. With very few exceptions, railroads delivered on the advertised and with pride, principle, and determination. This will be an admirable objective in the next 100 years.