western roads had been in favor of making some reduction, at least temporarily, in an experiment to attract people back to the railroads from automobiles. However, in view of an investigation which the Interstate Commerce Commission was making into freight rates, it was decided that it might not be desirable to take any action voluntarily reducing the basic passenger fare for reason of its possible effect upon the freight rate case. It was also thought desirable that any movement to reduce passenger fares should be made on a national basis and a committee of executives was appointed to consult with similar committees from the eastern and southeastern territories to ascertain and advise, after which the subject will again be referred to the Western Association of Traffic Executives for consideration. From these representative examples, it is obvious that the indirect and informal effects of the western agreement extended far beyond the formal acts taken by the Western Commissioner and the committee of directors. The Western agreement was usually successful in preventing competition from developing between the Western roads, and thus it withheld from the public the benefits of that competition in the form of reduced rates and improved service. It is questionable whether the operation of the western agreement was in the interests of the railroads themselves from a long-run point of view. Senator MURRAY. Did not the fear of losing freight business to trucks and passenger business to automobiles and busses cause the railroads to do everything they reasonably could to reduce rates? so. Mr. BERGE. In my opinion, it is clear that the railroads did not do At times the executives of competing roads would disagree as to what was required in order to meet such competition, and the western Commissioner often ruled in favor of the road which felt that the reduction was not necessary. If the roads had acted individually, there doubtless would have been many such reductions. I should state that the rate-making controls provided for in the western agreement were superimposed on a hierarchy of private rate bureaus and rate-making conferences established by railroads in the West. These bureaus and conferences are similar to those established in other sections of the country, and together constitute the Nationwide private rate-making machinery of the railroad industry. The results of the Antitrust Division's investigations of this method of private rate fixing in the railroad industry and in other fields of public transportation were fully presented before the Senate Interstate Commerce Committee during May and June 1943 and are contained in the printed record of the hearings relating to S. 942, a bill to regulate rate bureaus and rate-making conferences, parts I and II, Seventy-eighth Congress, first session. Dr. SCHIMMEL. Did that earlier material presented to the Interstate Commerce Commission contain examples of technological improvements? Mr. BERGE. No; that has been developed since. Following the hearings of last spring, the Antitrust Division went into the files of the western Commissioner and these examples which I have given are taken from them. I am through dealing with the western agreement as such and I will take up other restraints in technological developments, particularly in regard to lightweight sleeping cars. The introduction of the new type lightweight, high-speed trains was seriously hampered by the determination of the Pullman Co. to continue the use of its old heavyweight equipment even beyond the time when that equipment was fully depreciated. Senator MURRAY. What was the date of the first streamlined trains? Mr. BERGE. The first streamlined trains were delivered to the Union Pacific and the Chicago, Burlington & Quincy in 1934. They were built by the Edward G. Budd Manufacturing Co., a newcomer in the passenger-equipment field, and by the Pullman-Standard Car Manufacturing Co. Senator MURRAY. Were they a success? Mr. BERGE. Froin the very beginning they were popular and profitable. Their success was phenomenal. For example, the first Burlington Zephyrs running between Chicago and Minneapolis are reported to have paid for themselves in 20 months. Soon both were making two trips a day, and when even this proved inadequate, two larger Zephyrs were installed. Son even the enlarged Zephyrs were inadequate and they were replaced by a third pair. The competing roads between Minneapolis and Chicago did not suffer. They built lightweight "Hawathas" and "400's," and then larger "400's." Equally impressive results were obtained on the Chicago-west coast runs and with the New York-Florida trains. Senator MUPRAY. Everybody wanted to ride on the new cars? The facts which I shall present in regard to Pullman matters are largely based upon the record developed in the trial of United States v. The Pullman Company et al. This was a civil suit instituted by a complaint filed July 12, 1940, and tried before an expediting court sitting in the Eastern District of Pennsylvania. The relief sought by the Government included the separation of the sleeping car company, the Pullman Co., from its manufacturing affiliate, Pullman-Standard Car Manufacturing Co., which is the largest builder of railroad cars in the United States, and the revision of all contracts whereby the Pullman Co. maintained its monopoly of sleeping-car service on American railroads. The court, in a far-reaching opinion handed down on April 20, 1943, ruled in favor of the Government. The facts material to this hearing developed during the course of the Department's investigation and the trial of this case are as follows: When incorporated in Illinois in 1867 to take over the sleeping-car business developed by George M. Pullman, the Pullman Co. was a small organization with relatively few contracts. Early in its history, however, it embarked upon a program of acquiring competitors, and in 1900 it was the only sleeping-car company in the United States. From its inception the Pullman Co. had manufactured some railway passenger cars. Through the establishment of a large car building plant at Pullman, Ill., and the acquisition of its principal competitors, it achieved a dominant position in this field. All new cars used in furnishing Pullman service since 1881, with the exception of 15 light-weight cars to be discussed subsequently, have been manufactured by the Pullman Co. or by its manufacturing affiliate. With the acquisition of the Standard Steel Car Co. and its affiliates in 1930, Pullman became the largest builder of railway cars, both passenger and freight, in the United States. Prior to 1924, the Pullman Co. manufactured railroad equipment in addition to operating sleeping and parlor cars, but in that year the manufacturing properties were transferred to a newly created subsidiary. In 1927 Pullman, Inc., was created to hold the stock of the Pullman Co., the operating organization, and of the manufacturing subsidiaries. The Pullman Co. has been subject to the jurisdiction of the Interstate Commerce Commission since 1906 with reference to berth and seat fares charged the traveling public, but it has been subject to no Commission regulation of its contract relations with the railroads, other than the requirement that these contracts be filed with the Commission. The Pullman Co. has had an enviable financial record throughout this history. It has had no funded debt since 1892; it has issued no stock for cash since 1893; and it has paid dividends every year since 1868. This financial record becomes even more impressive in view of the close relation of the Pullman Co. to the railroad passenger busiThe railroads, as a whole, sustained a loss on passenger traffic in every year from 1927 to 1940. The Pullman Co. purchases its rolling stock from its manufacturing affiliate, Pullman-Standard Car Manufacturing Co., under a cost-plus10-percent contract. During the period 1924-40 over $180,000,000 of railroad equipment was purchased by the Pullman Co. in this manner without competition. The Pullman Co. furnishes sleeping cars to every American railroad having any substantial passenger business, under terms which give it the exclusive right to supply sleeping cars. Under these contracts, Pullman becomes the arbiter of the types of equipment and the standards of construction used in sleeping car service. The Pullman Co. is prone to describe itself as the partner of the railroads in a joint enterprise, or as a concessionaire operating on the railroads subject to their will. But in 1936, Mr. Eastman, as Federal Coordinator of Transportation, made the following statement, after having considered the passenger traffic report prepared by his staff and the criticisms of it submitted by a committee of the Association of American Railroads: * there is little clear support for the theory that the railroads and the Pullman Co. are partners in a joint enterprise. I find no obligation and only partial incentive for Pullman to join the railroads in promotion of reservedcar traffic. Pullman generally is guaranteed car earnings sufficient to pay operat ing expenses and it shares in any surplus over that amount. Invention to provide distinctly improved reserved car equipment and accommodations seems to be retarded rather than encouraged by the terms of the agreement * The contracts should be so drawn that the railroads, as well as the Pullman Co., will have adequate opportunity to initiate and test new and improved types of reserved cars.' This latter is precisely the right which the railroads found that they did not have with respect to light-weight equipment. Lightweight passenger equipment came into use on the railroads in 1934, and since then relatively few heavyweight passenger cars have been built. No new heavyweight Pullman cars have been built since February 1931. Prior to 1933 there had been experiments with high-speed lightweight, self-propelled rail cars which led to new developments in design, structural materials, and motive power. I have 1 Conclusions of the Federal Coordinator of Transportation on Passenger Traffic (June 1936). already discussed the introduction of streamlined trains in 1934, and their immediate popularity and profitability. When in 1933 and 1934 a demand arose for lightweight sleeping cars, the Pullman Co. was not disposed to meet the demand. It deliberately retarded the development of lightweight trains in order to protect the earning power of its old heavyweight equipment. This policy was pursued despite the fact that much of its heavyweight equipment was wholly depreciated and that the company possessed large cash reserves with which the new equipment might have been acquired. Senator MURRAY. Wasn't there a time when they considered it absolutely necessary to have those cars heavy? My recollection is that they used to lay big heavy rails at the bottom of those cars in order to weight them down. Mr. BERCE. You mean from the safety standpoint? Senator MURRAY. Yes. Mr. BERGE. I haven't an expert opinion on that, although I believe that is so. Senator MURRAY. If they didn't have it heavy, it would jump the track? Mr. BERGE. It was later discredited by new scientific developments and improvements which particularly within the last 10 years have come to the fore. It is suggested that now that problem is met in construction by lowering the center of gravity in the architecture of the car. At the beginning of 1933 the Pullman pool consisted of 7,889 cars of riveted carbon-steel construction and 1,369 wooden cars, most of which had been provided with steel underframe and vestibule. These cars were carried at $233,000,000, and after deducting accrued depreciation of $137,000,000, represented an undepreciated investment of approximately $96,000,000. These heavy steel cars ranged in age from 2 to 23 years, averaging 12 years, and although they had an estimated service life of over 27 years, they have run for considerably longer periods. The Pullman Co. had been depreciating them on a 5-percent, or 20-year, basis. Mr. David Crawford, president of Pullman, reported at a meeting of the executive committee in September 1934 that several railroads had broached the question of procuring lightweight sleeping cars.2 At a recent antitrust trial Mr. Crawford testified We recognized that a considerable part of the public traffic in these cars would come out of the standard cars already available and in operation.3 Pullman was able to pursue a restrictive policy only because of its monopoly position. Under the contract then in effect with the several railroads, Pullman had the exclusive right to furnish all sleeping cars, and it was also obligated to furnish cars in sufficient number to meet the requirements of travel over the lines of the contracting roads. 2 The minutes of the executive committee for September 19, 1934, recite in part: The president reported that several railroads having Pullman service contracts have broached the question of procurement of new Pullman cars of type adequate for operation in light-weight streamline passenger trains, with either Diesel-electric or steam power, at higher speeds than those now scheduled for the heavier trains of so-called standard-type Pullman cars: that this involves decision as to advisability of Pullman investment in such new-type sleeping and/or parlor cars, requiring probably double the present original capital investment per unit, at a time when there is evident surplus of about 2.000 standard-type cars in the Pullman pool. See record, U. S. v. The Pullman Co. et al., 50 F. Supp. 123 (U. S. Dist. Ct., E. D., Pa.), p. 2898. Pullman took the position that lightweight cars were not known when the contracts were entered into and that it was therefore not obligated to furnish this new equipment. Nevertheless, it interpreted the exclusive service clause so as to prevent the railroads from securing their own lightweight sleeping cars from independent manufacturers. It was entirely successful in maintaining this position, with the exception of 15 sleeping cars acquired by the Burlington and the Santa Fe from the Budd Manufacturing Co. Such lightweight equipment as was furnished under the old contracts went to the Union Pacific, the Southern Pacific, and the Chicago & North Western under supplemental excess-cost agreements, the terms of which were designed both to discourage railroad interest in the new cars and to shift to the railroads accepting these terms the full financial risk of the investment in the cars. Under these agreements the cost of a lightweight car was fixed at $80,000 and that of the heavyweight car at $31,000. The difference of $49,000 was designated excess construction cost, and the railroads were required to amortize 75 percent of the excess cost during a period of 121⁄2 years, to pay interest at 5 percent on the unamortized balance, and to pay 75 percent of the excess taxes. These railroad payments were completely outside and irrespective of settlements made under the principal operating agreements. As the contracts came up for renewal, Pullman retained its restrictive control of lightweight equipment by offering the railroads an illusory opportunity to secure the new equipment. A provision was inserted in the contracts to the effect that the supplying of lightweight cars should be subject to mutual agreement between Pullman and the railroad as to number, design, basic construction material, and interior arrangement. Memoranda passed among Pullman officials clearly indicated that in their interpretation this mutual-agreement clause gave the railroads no right to demand any cars, although it was recognized in contracts with strong roads, such as the Sinta Fe, that these railroads were to receive their proper share of such lightweight cars as might be supplied to the various railroads. Weaker roads merely received the illusory mutual-agreement clause without the waste of any language to delineate their "proper share.” Starting with the Sinta Fe contract in February 1937, changes were made in the contract form covering railroad payments with reference to light-weight equipment which might be thought to represent a more liberal policy on the part of Pullman. However, Mr. Crawford, with great frankness, recognized that these changes were changes in form rather than substance. Thus, in August 1936, he wrote to five members of his staff as follows: * * I have also been wondering if we might not develop some specific plan or provision for taking the railroad proportion of excess cost out of their part of surplus revenue and thereby avciding the suggestion that we are asking any railroads to pay us any part of our excess cost. Of course, it does not make any real difference in the end whether we pay over the surplus revenues to the railroad and the railroad then turns around and pays us out of its surplus revenue receipts, the share of excess cost apportioned to the railroad, but I think we all realized in our talks with the Western group of railroad presidents, particularly with those having a slant exhibited by Mr. Sargent and Mr. Donnelly, that they are making a lot of fuss about the railroad "paying" any part of Pullman's expenses. If we could devise some way of sugar-coating the excess cost pill, it might be very well worth while spending some words to do it. Under the new form contracts with the strong roads having dependable earnings, light-weight cars were brought within the frame |