If refrigerator cars are eliminated-as they should be, because the supply is adequate and they are not generally subject to per diem charges-the comparable figures are as follows:

Finally, if the tabulation is limited to boxcars-the general-purpose car which is the workhorse of the fleet-this is the picture:

As indicated in the foregoing tables, the serviceable ownership of freight cars has declined more drastically than the number of cars owned. On May 1, 1963, almost 125,000 cars-124,494-were out of service, awaiting or undergoing repairs.

It is thus apparent that, viewed from any angle, our depleted national car supply is a problem of major importance which poses a most serious threat to the 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 these 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 more urgent 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 far 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. The present per diem charges of $2.88 per car day do not cover the full current costs and risks of ownership, to say nothing of profit, and are far 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 oneand that is the situation today-underbuilding will be the policy of strategically situated railroads, and construction will beheld to minimum requirements.

Under present conditions we have a form of involuntary leasing and rent control which discourages car ownership, places a penalty upon those railroads which buy or build new cars, 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 incentive in the per diem charge, you will see a similar surge in freight-car building.

This committee, in its favorable report on S. 1789, 86th Congress a bill identical with S. 1063-stated the causes of this important problem in the following language:

"Inadequate earnings by some of the railroads are an important factor. The high cost of new freight cars, coupled with unrealistic depreciation allowances, is doubtless a contributing factor. But, at the heart of the matter will be found a basic and fundamental cause; namely, the simple, economic fact that for many years it has been cheaper for a railroad to rent a freight car than to own one, with the result that freight-car ownership has become increasingly unattractive, as an investment or otherwise." [Emphasis supplied.]

We endorse, without reservation, the foregoing statement of the "basic and fundamental cause" of our grossly 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. Now, and for many years in the past, the charge has been so low as to make it more profitable to use cars owned by other lines.

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 the current per diem rates.

Under these conditions, little if any incentive exists for further investment in freight cars, and the railroad president who authorizes such an investment is necessarily hard put to justify to himself and his stockholders an investment in property which will produce little or no return and which often is not available when it is 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 compliance with 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 severe 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 put some profit into car ownership.

whole is going to be able to operate far more profitably than has been the case in the past?

Mr. MARTIN. Senator, the question would suggest that the problem here is how are we going to help some roads, and is it necessary to hurt others. That's not the question.

The question is how are we going to get enough freight cars in this country. And the method we have suggested is the one which we think will do it. And it won't make the rich richer and the poor poorer, as perhaps your question implies. I don't think it will. It will get the freight cars, we believe. We must get them. The national economy is going to be in a terrible shape, I think, if this downward trend continues for very much longer. It has got to be reversed.

I have the greatest sympathy for the roads to which you have referred, some of which are in your territory, and a good many other roads in the East which are having a difficult time financially. But this doesn't mean that you cannot affect them if the result is going to be a national tragedy from the standpoint of available freight car equipment.

As the chairman said, there are other ways of trying to take care of the needs of the financially distressed roads. The Commission just got through trying to do some of that in a division's case. The Supreme Court said in one of the cases involving car rental charges, where some of the same suggestions were advanced which Your Honor just advanced, this is beside the point. If financial distress is your problem, cure it by some other means, by an adjustment in the division of through freight charges. But if you are going to try to maintain an adequate freight car ownership, make freight car ownership attractive.

Senator PROUTY. I think Mr. Grinstein has some questions.

Mr. GRINSTEIN. Mr. Martin, according to your testimony here the decision in the Palmer case is not necessarily clear insofar as deciding the question of whether or not the per diem could be increased to some higher level. In other words, there you were faced with practically a double increase in rate.

Mr. MARTIN. Yes, sir. I think it has been widely misconstrued, and not too many people realize exactly what that Palmer case involved and what the court was dealing with. There was a lot of dicta in it. that confused the issue, too.

Mr. GRINSTEIN. This was, I take it, since it is cited by Federal supplement, a district court case. It never went to a higher court? Mr. MARTIN. That's correct.

Mr. GRINSTEIN. Why wasn't it taken up?

Mr. MARTIN. I don't know. I wasn't mixed up in this problem at that stage. I think if I had been I would have taken it up.

Mr. GRINSTEIN. Since the decision is not conclusive, and since it was made in a district court and not appealed to the highest tribunal, is it possible that there is enough leeway in the law now for the Commission to take such action as in the bill?

Mr. MARTIN. Mr. Grinstein, it is possible, but it is a long way from being probable, because some of my friends whom you will hear from on the 25th are going to say, "Oh that is the bible, and that forbids the Commission to do any more than include the barebones out-ofpockets of car ownership." And they might frighten the Commission

into believing that they were right, even though I am confident they are 100-percent wrong.

What you need here, gentlemen, is for Congress to tell the Commission, "We probably meant this in 1920 when we gave you full power to prescribe car rental charges. But some people have apparently misunderstood what we meant in 1920. We are telling you now, gentlemen, that if and when you are called upon to prescribe these car rental charges, for God's sake, make them high enough to make car ownership attractive and stop these recurrent freight car shortages."

That is the purpose of it.

It is in part psychological, Mr. Grinstein.

Mr. GRINSTEIN. You are saying to the Commission now, "We mean it"?

Mr. MARTIN. Yes.

Mr. GRINSTEIN. So really the problem is a Commission fearful to act because of the uncertainty of the Palmer case?

Mr. MARTIN. That comes very close to stating it correctly, Mr. Grinstein.

I might add a few words to your statement, but that is substantially

correct.

Mr. GRINSTEIN. How do you arrive at a per diem charge? How did you advance from $2.40 to $2.75 to $2.88?

Mr. MARTIN. This is a very involved accounting process. I wouldn't bore you with it, if I knew enough to state it fully, which I don't.

They take original cost, they take reproduction cost, they take depreciation

Mr. GRINSTEIN. Who does this? Does the Commission do it?

Mr. MARTIN. Not yet. So far, it is the committees of the Association of American Railroads. The Commission is going to have to do it in pending cases. But up to this moment their formula, if you please, hasn't been the adoptive formula. The Commission hasn't really had a formula up until now. They are going to have to evolve one in the current litigation.

But up until now this has been worked out by committees of the Association of American Railroads. And I might say, just because I think it is important, these committees always have come up with compromises. I don't care what the charge was, if you go back to $2.00 or $2.40, or $2.75, or $2.88, in the first place there is a lag of about a couple of years on the figures you are using, and this is harmful to the interests of the car owner because he is getting less, he is working on outdated figures. Then, when they come up with elaborate computations, to say, as I think they did when $2.75 was prescribed-they came up with $2.78 as the proper cost-"We will round it out to $2.75," but the rounding out is always in the downward direction, and always the poor car owner gets stuck, and the car user gets the benefits, and that is why you have this national car shortage.

This is an elaborate accounting point which considers various factors that I think have been prejudicial to the car owners.

This idle-car day is, I think, an important factor. When you have determined all the money that ought to be allocated to car ownership costs, you have to then convert that into a per day figure somehow.

You do that through the use of what the experts call a car-day divisor, and it is intended to reflect a proper measure of active car days during the 365-day year, and the current charges and the variable system charges that have been projected are based on a car-day divisor of 91.12 percent. And this is ridiculous. The proper car-day divisor ought to be in the range of 75 percent.

The lower the divisor, the higher the per diem charge. And 91.12 divisor creates this too low per diem charge. That is one element. I wouldn't attempt to get into it all. This is the Commission function under this bill.

Mr. GRINSTEIN. Whose divisor is that? The Commission's or AAR?

Mr. MARTIN. The AAR divisor.

Mr. GRINSTEIN. And that is the association, voluntary association, to which you committed yourself?

Mr. MARTIN. What do you mean committed myself?

Mr. GRINSTEIN. You are a member.

Mr. MARTIN. Certainly we are members. And we voted for the variable system. But we are on record as stating that this is only a step in the right direction. It doesn't do the job properly. We just think it is better than what we have now, which is God-awful.

Mr. GRINSTEIN. In other words, through this voluntary association in the AAR, you haven't been able to come to the right decision insofar as the per diem goes?

Mr. MARTIN. Correct. And I don't think we ever will be able to do that. That is another reason why S. 1063 is needed legislation, because there is litigation pending before the Commission in which they must now exercise that authority. That is telling them to exercise it in the right direction so we will get more freight cars.

Mr. GRINSTEIN. The Commission has to work out the formula now, I take it?

Mr. MARTIN. That is my opinion; yes, sir.

Mr. GRINSTEIN. And we have no idea what that formula might be. It might be extremely favorable to the owning railroads, such as the Burlington?

Mr. MARTIN. It might be. We might be unhappy about it, too. I don't know.

Mr. GRINSTEIN. You want to take the chance?

Mr. MARTIN. I am certainly willing to take the chance. Whether I am willing to take it or not does not seem to me to be important from the viewpoint of this committee. I don't want you to consider what is good for the Burlington Railroad or good for the 20 roads I represent, or bad for somebody else. I don't think that is your function; nor is it the function of the Interstate Commerce Commission. You shouldn't be too much concerned about the effect of right action.

The right action here is to enact this bill and tell the Commission that you want to get more freight cars in the United States, and tell them that that is their function. That is in the public interest, the national interest, regardless of its effects on individual roads.

Mr. GRINSTEIN. Probably the statement of fact is that there is a great car shortage. But when you are working through these things