RAILWAY VALUATION AND THE COURTS THE I HE railways of the country have now secured a statutory rule of rate-making, which requires the Interstate Commerce Commission to fix such rates as will bring five and a half per cent (or at its discretion six per cent) upon the "fair value" of the aggregate railway property within a given district. Upon this clause the hopes of the financial community are centered. It is to bring stability and certainty of return, to restore railway credit, to place rigid restraints upon a supposedly hostile regulating body. It is to substitute an inflexible rule for an uncertain administrative discretion. Whether or not these hopes are well founded obviously depends upon whether the clause does contain a rule which may be applied with certainty and precision. Five and a half per cent is definite enough, but what is the "fair value" of the railroads? For the present it is obvious that the Commission can do little more than arbitrarily assign a value to the railway property in each rate district. But for the future “fair value" must be derived from the findings of the Commission in its gigantic task of valuing the railroads of the country under the Valuation Act of 1912. How certain and stable a result does this valuation promise? For better or for worse, we must now take it to be settled that under our American system of jurisprudence the problem is a constitutional one, and the Supreme Court the final arbiter. The Interstate Commerce Commission will before long complete its task of inventorying and appraising every item of railroad property in the United States. Field parties are making engineering surveys of every mile of track, appraisers are examining land values, accountants and experts are digging into historical records and corporate accounts. So far as a vast expenditure of money and indefatigable zeal can accomplish the task, the facts in the case are being brought to light.1 As to findings of fact, it may be assumed 1 See "Railroad Valuation by the Interstate Commerce Commission," by H. B. Vanderblue, in 34 QUART. J. OF EC. 22. RAILWAY VALUATION AND THE COURTS 903 that the conclusions of the commission will be deemed well-nigh conclusive, in actual practice if not in legal theory. But these underlying facts constitute merely the raw material out of which the final decision must be made. The principles according to which the raw material is to be combined must be passed upon by the Supreme Court, and must square with the Supreme Court's conception of constitutional theory. The object of this paper is to inquire into the premises upon which the court's function, as final court of review in valuation cases, must rest. I shall not attempt any detailed analysis of cases, nor any voluminous marshaling of economic data. The inquiry will lead, necessarily, into an analysis of the nature of the problem which will confront the court, and an examination of those decisions of the court which will throw light upon its own conception of the premises upon which it must act. The inquiry into the nature of the relation between the public utility and the community will lead to certain conclusions which seem to me to have a practical bearing upon some of the problems now agitating the legislature and the courts. When railroad regulation first became a subject of political and legal controversy, the constitutional issue was simple. The railroads claimed that they were entirely exempt from rate regulation. They operated under charters granted by the states, which in so many words gave them the right to fix their own passenger and freight rates, and these charters were contracts, sacred from the touch of state legislatures. Their property was private, they were in private business operating for profit, and any state interference not specifically authorized in their charter violated those general guarantees in the Fourteenth Amendment, the sweeping character of which lawyers and courts were just beginning to appreciate. The claims on the other side were just as clear cut. The lawyers of the anti-railroad forces claimed that any regulation of rates, however drastic, was valid. The charter provisions giving the railroads power to fix rates meant no more than power to fix rates in accordance with, or in the absence of, state legislation. And apart from charters, the railroad business was a public business, resembling in many ways the businesses of trucking, ferrying, carriage driving, and the like, which the British Parliament had traditionally regu 2 Cf. Van Dyke v. Geary, 244 U. S. 39 (1916). 904 HARVARD LAW REVIEW lated. Regulation of railroad rates was therefore a proper legislative function and quite beyond the jurisdiction of the courts. No one ever heard of a British court inquiring whether a schedule of rates for wagoners or ferrymen, fixed by Parliament, was reasonable. If a legislature fixed unreasonable rates, the people had their remedy at the polls, not in the courts. In the granger cases,3 in 1876, a majority of the Supreme Court sustained to its full extent the popular view. It not only upheld the power of the legislature to fix rates, but it declared that the legislature alone was the judge of what was a reasonable rate. "The controlling fact is the power to regulate at all. If that exists, the right to establish the maximum of charge, as one of the means of regulation, is implied." If the rate has been improperly fixed, the legislature, not the courts, must be appealed to for the change. The argument that the charter protected the corporations against rate regulation was met by pointing to the general clause in state constitutions reserving the right in the legislature to alter all corporate charters. One point in this early controversy it is important to understand. There is much discussion whether rate fixing is in its nature a "judicial" or a "legislative" function. This was a period in the history of American jurisprudence when discussions of this sort were popular. The separation of powers into executive, legislative, and judicial was looked upon as more than a mere differentiation of functions based upon practical considerations; it was thought to be the manifestation of an inherent truth. The pseudo-philosophy of the period regarded certain governmental acts as in their nature judicial, and hence never to be exercised, under the constitution, by either the legislative or the executive branch. The opponents of legislative rate regulation tried to bring rate fixing into this category. At common law, in the absence of legislation, a public utility was bound to charge no more than a reasonable rate, and if a shipper or a passenger complained of an act of extortion, it was for the court to decide whether in fact the rate was unreasonable. In such a case reasonableness was a judicial question. So much the court in the granger cases readily admitted. But it declined to draw the conclusion that a rule of the common Munn v. Illinois, 94 U. S. 113 (1876); Chicago, B. & Q. R. Co. v. Iowa, 94 U. S. 155 (1876); Peik v. Chicago, etc. Ry. Co., 94 U. S. 164 (1876); and cases following. law, leaving to the courts the issue of reasonableness, could never be changed by the legislature. Chief Justice Waite pointed out that as soon as the legislature had changed this common-law rule by substituting a specific schedule of rates, reasonableness ceased to be an open question on which courts could pass. Potentially, rate regulation was a legislative question; it was merely by default of the legislature that the courts had anything to do with it. If the matter had rested there, the constitutional history of rate regulation would have been brief. If a legislature had uncontrolled power over railroad rates, it could delegate this power to an administrative tribunal, and make the decision of that tribunal conclusive on all questions of reasonableness. The courts would have nothing to do with the matter. But the railroads represented immense property investments. The granger legislation aroused bitter political passions, and grave fears among those who believed that the welfare of the country depended upon the security of property. In case after case, as it came before the Supreme Court, the leaders of the bar appealed to the court not to leave the vast interests of private stockholders at the mercy of radical state legislatures. To have withstood this appeal would have been utterly inconsistent with the individualistic spirit which pervaded American jurisprudence in the latter part of the nineteenth century. Some method must be devised by which the courts could check the assaults of western legislatures upon established property rights. The court obviously could not go back on its decision in the granger cases, and hold that railroads were completely free from legislative interference. The principle was too firmly established in the precedents. The problem was to find some midway course which would preserve the power of regulation, but would put a reasonable check on the exercise of that power, when it attempted to cut too drastically into property values. How the Supreme Court, in the series of cases culminating in Smyth v. Ames, finally hit upon what seemed a solution of this problem, is a familiar story. When Munn v. Illinois 5 was before the court, the juristic development of the Fourteenth Amendment was still in its infancy. Only four years before, in the Slaughter House cases, the court had seemed reluctant to extend its protection to other classes than to Negroes. To hold that a statute on a subject 4169 U. S. 466 (1898). 94 U. S. 113 (1876). 16 Wall. (U. S.) 36 (1872). 5 which was in its nature legislative, conferring power which the British Parliament had traditionally exercised, and in which the forms of due process were observed, was lacking in due process, would at that time have seemed a bold step for the court to take. Where the legislature had delegated its power to a commission, and made the decision of that commission final, there was at least a possible argument that the railroad was deprived of its traditional right to due process by judicial inquiry.' But where the legislature itself fixed fares directly, or where a commission fixed rates under a law which provided for a judicial review, there were obvious difficulties in holding that the state was acting without due process. The argument which finally prevailed, rested on the analogy of the law of eminent domain. If the federal government were to take physical possession of a railroad, obviously it would be necessary under the Fifth Amendment to pay just compensation. If instead of taking possession it issued an order compelling the railroad to give the use of its property to the public free of charge, this would virtually be taking the property for public use without just compensation. If it allowed the railroad to receive compensation for its services, there would still be a question for the court whether the compensation was just. It required, perhaps, a slight wrench to make a doctrine which required the government to pay just compensation, serve the purpose of requiring the government to permit the railroads to collect just compensation from their patrons; but the matter was never very minutely inquired into. Another difficulty also had to be overcome. The cases that came up to the Supreme Court involved state laws, not federal laws. There is no clause in the Constitution expressly forbidding a state to take property for public use without just compensation. It was necessary to go a step further, and hold that to take property without making what the Supreme Court thought to be just compensation, was to take it without due process of law, and this even where the forms of due process were faithfully adhered to. Through this difficult pathway the court had to find its way, and it is no wonder that its progress was slow and hesitating. It threw up a kind of ballon d'essai in 1886, in the form of a dictum that "under pretense of regulating fares and freights, the State cannot require a railroad corporation to carry persons or property 7 Chicago, etc. Ry v. Minnesota, etc. Ry. Co., 134 U. S. 418 (1890). |