Evening star., 1922-06-04
Reduction in Freight Rates
And Readjustment of Business

Improvement will in turn SO increase
the freight traffic of the railways as
to offset the loss in net income re-
sulting from the lower rate level
Whether this hope will be fully real
lied remains to be seen, but the de-
cision is at any rate an earnest at
tempt toward solving our difficult
problem of economic readjustment
The decision of the commission was
followed within a week by the first OF
a cycle of wage reductions author
ized by the Railroad Labor Board.
which will apply to all classes of
railway employees except those in
train service. 1t is estimated that
these wage reductions, which will be-
come effective simultaneously with
the rate reductions as of July !, will
approximate sl5o.000,0 900 per year, or
ss0,o00,o00 less than the rate reduc-
tions. That is, railway revenues have
been cut s240.000.000 and their ex-
penses $3.50 100000: the difference
must be made up by increased traffic
or by enforced economies.
One feature of the decision has re-
ceived comparatively little attention,
although in some ways il is of more
vital Importance than the question of
rate adjustment. Under. the trans
portation act the commission must,
from time to time. fix the fair rate of
return, against which the level of
freinght and passenger rates is to be
measured. Up to March l. 1922. this
fair rate had been fixed by the COM
mission at 6 per cent. Under the re-
cent decision the rate is reduced to
5& per cent. In reaching a determi-
nation of the rate of return, the com
mission took into account the fact
that it is taX-free return. under the
accounting rules of the commission,
and also took notice of the fact that
interest rates in the open market
have declined. In itself. A reduction
of Y of i per cent in the fair rate OF
return may not seem important al
though it means a loss of S50.000.0o0
of annual net income to the railways.
In it's psychological aspect, however.
the reduction was of grea' impor-
tance and may have decided effect
on the credit of the railways. and of
public utilities generally. in the Sc
curity markets of the world. The
psychology of this lies in the attitude
of investors, who will refuse TO buy
railway securities, except at rate of
return which they consider attractive.
At present the level at which the
fair rate of return is fixed is an aca-
demic question. because the railways
have earned only 3ls per cent per
annum on their value during the
twenty lone months that the increased
rates OF 1920 have been in effect.
This is despite the fact that those
rates were designed to produce 6
per cent return. The time is coming.
however, when the railways may rea-
sonably expect a higher actual rate
of return than 3b per cent. When
their actual rate approaches the theo-
retical fair rate fixed by the COM
mission this reduction of the fair rate
from 6 per cent to 5% per cent will
have much greater significance than
may seem to be the case at present.
In fact. the change in the fair rate,
Of return Is. in my opinion, the mostl
r. = t>s<
will undoubtedly play a part not onlyl
in rate readjustments in the future.'
but also in the general economic re.
adjustment now under way.