needs of commerce and the national defense. This is a recognized fact, well known to the members of this committee, and unchallenged even by those who oppose the pending bill. I have reviewed the facts, and brought them down to date, so you will understand that the problem is even more serious than it was when you urged enactment of an earlier identical bill. The need for action is greater now than ever before.

I turn now to the conditions and causes which created this important problem. The cause

The basic reasons for our depleted inventory of freight cars, and the inefficiency and inequity which go with it, are not difficult to state or understand. They rest upon the sound and simple principle that one who must use a particular article in his business will either own it, or rent it from others, in the light of his own selfish interests. Other factors being equal, he will rent, rather than own, if the rented article will serve his purpose and cost him less in the long run. This is particularly true if the article comes into his possession fortuitously, without effort or negotiation, and he is lawfully permitted to use it by payment of a rental which is below its value to him or to the owner. This is true whether the article is an apartment, an automobile, or a freight car. As I shall demonstrate in due course, this obvious principle explains the existence of our depleted inventory of freight cars, as well as the misuse and maldistribution of those now in service. Per diem charges are too low to reflect the value of such cars, to their owners, especially during car shortages. Present per diem charges do not cover the full current costs and risks of ownership, to say nothing of profit, and, generally, are substantially below the amount which a car owner could earn daily by the use of the car on his own railroad, when a shortage exists.

To us, this seems most unjust, on grounds of common fairness, but from the standpoint of the national interest this theory is fraught with dangers which transcend injustice to a particular railroad. This is so because the policy referred to actually discourages the construction of new freight cars, and places a premium upon inadequate car ownership.

Just so long as it is cheaper to rent a car than it is to buy or build one, underbuilding will be the policy of strategically situated railroads, and construction will be held to minimum requirements.

Under present conditions, we have a form of involuntary leasing and rent control which discourages car ownership, and, conversely, encourages those which can do so to appropriate and use the cars of others instead of making a fair contribution to the national inventory of such equipment.

The situation is not unlike that which prevailed in this country, and in some other countries, when residential rent control was in effect; that is, when a tenant could sit in an apartment which he had rented at a relatively low rental, and could continue its occupancy without regard to the interests of the landlord. You did not then get, and you could never get under such controls, the rental housing which we now have. When rent control was abolished, you thereby provided the incentive for construction of residential housing. You had a surge of homebuilding such as this country had never seen, and it is my opinion that if you tell the Interstate Commerce Commission that you favor some ownership incentive in the per diem charge, you will get an adequate freight car fleet.

The Interstate Commerce Commission has pointed out (Senate report of June 30, 1965, on S. 1098) that the present policy "discourages construction of new freight cars and, in effect, places a premium upon inadequate car ownership and will continue to do so as long as it is cheaper to rent a car than it is to own one."

The so-called Doyle Committee Report of January 3, 1961, on National Transportation Policy, at page 722, said that "a terminating railroad has no incentive to own modern freight cars for interchange service, and will not have unless charges are raised beyond the break-even level.”

We endorse the foregoing statements of the "basic and fundamental cause" of our inadequate national supply of freight cars.

The solution

The solution is to encourage the establishment of per diem charges which will make it more attractive to buy and own cars.

That part of a railroad's net income which is retained in the business can be used for many worthwhile purposes, including acquisition of diesel locomotives, construction of modern classification yards, installation of modernized signal systems, reduction of grades and curves, et cetera. Any such project

will yield a far greater return on the investment than acquisition of new freight cars. Under these conditions, little if any incentive exists for further investment in freight cars, which often are not available when they are most needed. The prospective purchaser of freight cars wants and needs reliable assurance that per diem charges will be fixed sufficiently high for car ownership to be a profitable and desirable form of investment. Conversely, every railroad should be put on notice that it will no longer pay to shrink from the duty of owning and maintaining a fleet of freight cars adequate to carry its proportion of the traffic moving over the Nation's rail network. Unless this is done, the shipping public will continue to suffer from recurrent car shortages.

The statutory powers of the Interstate Commerce Commission, with respect to car service, are extremely broad, if not plenary, in character. In my opinion, as a lawyer, they are broad enough to permit the Commission to consider national freight car requirements, and to put some profit into car ownership. Congress must have intended this result when, in 1920, it gave the Commission full authority to fix the level of car hire charges. But this conclusion has been questioned in some quarters because of a Federal court decision in 1947, Palmer v. U.S., 75 F. Supp. 63.

The question of adequate car rental charges was not even an issue in that case. Instead, it involved a temporary increase in per diem charges of almost 100 percent ($1.15 to $2) to be assessed, as an emergency measure, for the stated purpose of obtaining better distribution and quicker return of freight cars to their owners. It involved a penalty, characterized as "prohibitory," as distinguished from a long-range attack upon the inadequacy of the national car supply.

H.R. 7165 adopts a wholly different approach. In effect, it simply tells the Commission that in the exercise of its continuing nonemergency powers over car hire charges, it should give effect to the national car supply and the public interest in rental charges which will provide incentives for car ownership. In short, it involves compensation in a wholly remunerative sense, including factors such as earning power, risks of ownership, increment to attract capital, profit, and other factors which necessarily must be considered if car ownership is to become an attractive investment.

I repeat my opinion that the Palmer case, properly construed, is not inconsistent with the objectives of this legislation, but it has been misconstrued by those who do business on the car investments of others. For this reason, and others, Congress should clarify its intent that car rental charges should be fixed on a level which will "encourage the acquisition and maintenance of a car supply adequate to meet the needs of commerce and the national defense."

I have just quoted the concluding phrase of H.R. 7165. The railroads for which I speak endorse this bill as sound and constructive legislation. In effect, it would simply authorize the Commission, as a part of its continuing regulatory power, to prescribe compensation for the use of freight cars on a basis which will put some profit into car ownership and, by that process, tend to assure an adequate national supply of freight cars.

Per diem charges established in conformity with these principles would (1) provide an incentive to all railroads to procure and maintain an adequate car supply, (2) encourage more expeditious movement of all such equipment, and (3) provide partial reimbursement to car owners for losses suffered when their equipment is appropriated by other railroads.

The first of these objectives has been discussed. It can and should be attained by a method so obvious, simple, and effective that it should have been adopted long ago.

The second objective is more complicated, and more difficult of attainment. It is generally conceded that higher daily rentals would expedite car movements during periods of light or normal business. It can be argued that higher per diem charges during a car shortage will not expedite the movement of freight cars, or hasten their return home, because the user can still make money by using them at a relatively high rental. This argument has some substance, but it is nevertheless clear that a higher per diem charge would, in some degree, operate to expedite the movement of freight cars, because that would be the only way to reduce the incidence of the charge. In fact, the court decision mentioned above recognized the soundness of the principle that "any charge upon a time basis furnishes an incentive for prompt return of the property." Be this as it may, simple justice suggests that the improvident railroad should not profit from its own wrong, when it takes from the provident car owner not only the car itself but also the profits resulting from its use. This gross in

equity could be partially corrected by the Commission under the provisions of H.R. 7165. This is the third objective of the bill.

A railroad which owns an adequate supply of cars will not suffer from the imposition of higher per diem charges, because its payments for the use of foreign cars will be offset, substantially, by receipts from the use of its cars by foreign lines. On the other hand, the improvident railroad, which owns few, if any, cars and is doing business on the car investments of others, will have a debit balance in its per diem account, until such time as it acquires more cars. This is as it should be.

It may be argued by the "improvident" lines, which do business on the car investments of others, or by certain railroads which find themselves, fortuitously, in possession of cars unloaded on their lines, that higher per diem charges would place upon them a severe financial burden, in the form of increased car rentals. In the first place, this burden does not exist during periods of car shortage, which are now practically continuous, because a railroad which finds itself in possession of a freight car, during a car shortage can earn from its use from 3 to 10 times the amount of the car rental charges.

In the second place, even if some slight additional burden were thus placed upon a few railroads, that fact would not justify confiscation of the car owner's property. "Confiscation may result from a taking of the use of property without compensation quite as well as from the taking of the title," Chicago, M. & St. P. Ry. Co. v. Minnesota, 134 U.S. 418, 458; Chicago, R.I. & P. Ry. Co. v. United States, 284 U.S. 80, 96-97.

Third, machinery is available in the Car Service Division of the Association of American Railroads, and, indeed, in the Interstate Commerce Commission, to correct any true inequity which may result from application of these sound principles. So-called per diem reclaims, which permit readjustment of car-hire charges under special circumstances, are frequently adopted for this purpose. In connection with the alleged burden upon the so-called debit railroads, which do not own enough cars to take care of their requirements, it is important to bear in mind that payments for the use of cars are deductible as operating expense for Federal income tax purposes, whereas the rentals thus received by a car owner are taxable income. Of course, this compounds the injustice to the

car owner.

Still another element of this injustice is the fact that the improvident railroads, which own few, if any, cars, thus avoid the risks inherent in capital investment, as well as payment of interest charges during times of light business. Even if we indulge the unjustified assumption that current per diem charges cover barebones ownership costs, such charges clearly do not include any "profit" or any "increment to attract capital to the venture" (see El Paso Natural Gas Company v. Federal Power Commission, 281 F. 2d 567, 572).

Perhaps a brief word should be said about the contention that during a period of car surplus, a terminating railroad cannot earn per diem on freight ears which it may own because the Car Service Rules contemplate the loading of foreign cars for homeward movement in preference to the loading of a home ear for offline movement. This contention has little substance in fact, notwithstanding its theoretical plausibility. In the first place, Car Service Rule 1— the rule thus invoked-is somewhat ambiguous, and subject to interpretation, because the originating carrier is privileged to decide what constitutes a "suitable" car for offline loading. More important, perhaps, is the fact that, according to recognized records, those railroads which invoke this argument somehow find a way to maintain a relatively low percentage of home-owned cars on their lines. This is demonstrated by exhibit C attached, which shows that the principal advocates of this fallacious argument (B. & M. and New Haven) consistently maintain a somewhat lower percentage of "home" boxcars on line than the average percentage for all railroads.

The arguments of those who would perpetuate the present injustice completely overlook the fact that if each railroad in the United States owned the cars which it ought to own to take care of its requirements, no serious national car shortage could occur, and the level of car-hire charges would become a factor of little importance. In other words, per diem debits and per diem credits would tend to offset each other.

We believe that legislation like H.R. 7165-if implemented by proper action of the ICC-would encourage the construction and maintenance of an adequate national car supply; and promote the expeditious distribution, interchange, movement, and return of freight cars to their owners. Accordingly, and without reservation, we recommend its enactment.

Most, if not all, of the limited opposition to this bill is based upon a assumption that if Congress tells the Commission to make carownership attractive, the Commission automatically will take action which would be distasteful to the car user, or car renter, or distinguished from the car owner. Maybe so. Maybe not. The bill itself would not produce that result. If this occurs, it will come about only after a hearing and investigation by the ICC, and a finding that the prescribed charges will tend to further the sound objectives stated in the bill.

Under these conditions, is it not obvious that anyone who opposes a congressional statement of sound objectives, such as appear in H.R. 7165, seeks thus to preserve a selfish advantage, and is afraid his position cannot stand the scrutiny of an impartial tribunal under proper standards and guidelines.

You know and I know that we have had recurrent freight car shortages for generations, and that your constituents have appealed to you, year after year, for help in solving this problem. You know also, I think, that such appeals or complaints are exceedingly rare with respect to semitrailers which, in the trucking industry, are the counterpart of the railroad freight car. Why is this so? The first reason is that although truckers may and do frequently interchange equipment, they are not required by law to do so, whereas the railroads must permit their freight cars to move beyond their lines, on other railroads, regardless of their wishes, their need for the equipment, or the rental which they receive for use of their cars by other railroads.

In times of heavy business a trucker can maintain complete control over all of his equipment, refuse to part with its possession, and thus preserve to himself and his patrons the use of equipment which is far more valuable, under such conditions, than any "reasonable" rental. The railroads cannot do this. We can put a new freight car into service today, and never see it again for months. Meanwhile, it will earn for "user" railroads from 3 to 10 times the amount of rental which they pay to the owner.

A new modern boxcar costs $12,000 to $15,000, and, once it leaves the lines of its owner, can be "taken" by other railroads for a rental of only $4.50 per day. On the other hand, a new "dry van" semitrailer can be bought for about $6,000, and. if the owner chooses to let it go beyond his lines, he receives a rental (generally) of about $10 per day. In other words, for a trailer worth less than half as much as a boxcar, the owner-trucker receives in daily rental more than twice as much as the owner-railroad, and-if he chooses to do so-can keep his equipment for his own use at all times.

These facts explain why we have an adequate national supply of highway trailers, and a continuing inadequate supply of railroad freight cars. Here, also, is one of the most powerful arguments which can be advanced in support of this legislation, which would authorize the Commission to give effect to such facts in fixing the level of railroad per diem charges.

I want to mention a few further developments which have occurred since your earlier consideration of an identical bill.

Of course, the intervening change of transcendent importance is the continuing downward trend in the number of boxcars available for movement of the Nation's traffic. Each year, each month, and each day produces a "new low" in the boxcar fleet, and the end is not yet. As indicated by figures given earlier in this statement, we have "lost" since January 1, 1945, over 15 percent of the total car fleet; about 17 percent of all cars, excluding refrigerators; over 20 percent of all boxcars: and—of major importance-29.43 percent of the plain boxcar fleet. Despite the cushioning effect of larger cars, this downward trend is a serious threat to the national economy, and particularly to the great majority of shippers who must depend upon the general-purpose, plain boxcar for their transportation requirements.

But other recent developments cry aloud for early enactment of this legislation. Litigation now pending before the Interstate Commerce Commission (dockets 31358 and 33145) involves the level of freight car rentals and, in fixing such charges for the future-as it must-the Commission should have no misconceptions of congressional intent. Congress should tell the Commission clearly that in fixing car rentals it should give consideration to "the adequacy of the national freight car supply" and prescribe such charges as will "encourage the acquisition and maintenance" of an adequate car fleet. This is the essence of H.R. 7165.

In conclusion, I want to give you the current level of per diem charges, and a word about the significance of changes which have occurred since January 1, 1964. The present charges, with other pertinent data, are shown below:

The foregoing charges, with minor exceptions, became effective January 1, 1964, prior to which date (and for the preceding 5 years) the charge had been $2.88 for all cars, regardless of age or value. The multilevel scale, above, was an important step in the right direction because it provides some incentive for acquisition of new cars, and constitutes some recognition of the economic principles expressed in H.R. 7165, but this action simply emphasizes the importance of such legislation.

Notice particularly that more than 90 percent of the fleet, including all cars with a value of $10,000 or less, still can be "taken" and used, by nonowners, for a weighted average charge of less than $3 per day.

This is a shocking fact when you consider—

The daily rental of about $10 which you pay for a $3,500 automobile, or The fact that a $6,000 truck-trailer generally commands a rental of $10 per day, or

The fact that a $6,000 farm tractor generally rents for $3 per hour. The current charges are based upon accounting theories which give no recognition to income taxes (which are costs to the car owner and deductions to the car user); nor to "profit" in addition to "return on investment"; nor to risks of ownership, such as obsolescence, and the owner's lack of control over his car fleet.

For example, if income taxes were included in the owner's costs, covering cars in the $10,000 to $15,000 bracket, the per diem charge would be $6.56 instead of $4.550—with no other changes in the formula which produced the current charges. With respect to ownership risks, a 2-year study by the Burlington, covering 600 new boxcars, showed that we had the use of these cars, on our own lines, only 12 percent of the time, i.e., that they were beyond our control, on the lines of other railroads, 88 percent of the time.

It is obvious, I submit, that the current charges are too low to make new car ownership a truly attractive investment. But a further powerful reason for early enactment of this legislation is the fact that some roads have refused to pay the current charges, others have attacked them before the ICC and, in any event, the Commission must and will prescribe proper charges for the future in the pending litigation now before that tribunal. It should approach this task with a clear understanding of the congressional intent that such charges be fixed upon a basis which will make car ownership attractive.

H.R. 7165 would provide this clarification. The railroads which I represent urge this committee promptly to submit a favorable report on H.R. 7165 and thus make it crystal clear that freight car rentals should be established on a basis which will, in the words of the bill itself, "encourage the acquisition and maintenance of a car supply adequate to meet the needs of commerce and the national defense."

Just a word in conclusion about the Senate bill, S. 1098, which passed the Senate. June 30 last, and which, except for an unfortunate committee amendment, is exactly the same as H.R. 7165. The effect of the Senate committee amendment is stated in the committee report as follows:

"A committee amendment to S. 1098 adds a new sentence empowering the Commission to apply selectively incentive elements in any increased per diem charge. Under this amendment, the Commission would be authorized to make such incentive element or any part thereof, in applicable (1) to carriers determined by the Commission to own an adequate number of cars to meet their responsibilities, (2) to carriers terminating a substantially higher percentage of interline traffic than they originate, (3) to types of freight cars of which 54-899-65-8