:L¿.
The Crux of
The Railroad Difficulty
By IVY L. LEE
ABSTRACT OF AN ADDRESS
DEUVERED AT ANNUAL DINNER
TRAFFIC CLUB OF NEW ENGLAND ON MARCH 8, 1916
AT THE COPLEY PLAZA HOTEL
BOSTON, MASS.
The Crux of
the Railroad Difficulty
The outstanding features of the railroad situation
to-day are these:
First Many roads are blocked, others are short of
cars. The transportation machine is creak¬
ing. Manufacturers and merchants find
their profits curtailed because they cannot
get goods to market.
Second Railroad earnings—both gross and net—are
the largest in the history of the country.
Third Yet, railroad building has practically ceased.
The year 1915 saw less new railroad con¬
struction in this country than in any year
since the Civil War, and the beginning of
the year 1916 also saw less new track under
way than on any New Year's Day in fifty
years.
That means that double tracking, sidings,
etc., necessary to prevent in the future such a
congestion as that now prevailing, are not
being built.
Railroad managers are just as eager as ever
to build and improve railroads, and the
reason they are not embarking upon great
improvement plans, is that they cannot get
the money.
[3]
The Crux of the Railroad Difficulty
Fourth Though industrial companies are now ex¬
tending plants and issuing large blocks of
securities, it is difficult if not impossible to
induce investors to embark in new railroad
enterprise.
In 1915 out of $693,482,770 in new railroad
securities listed on the New York Stock Exchange,
only $91,535,070 were for new work. The rest was
to refund old securities. Of the new money raised,
only $12,910,570 was obtained through issues of
stock, where the investor takes his chances and
becomes a partner rather than a creditor in the
enterprise.
One cannot properly judge railroad credit by the
existing prices of old securities : the real test is the
price which the railroads must pay for new money.
The fact that new money is not being obtained in
substantial quantities from the investors of the
world, is the best proof of the fact that it cannot be
obtained upon terms which railroads can over a
period of years promise to pay.
* * *
Recognizing the existence of an abnormal situa¬
tion, the President of the United States in his last
annual message made a recommendation, which
Congress is now considering, that a Commission
[4]
The Crux of the Railroad Difficulty
be appointed to review all the circumstances in
which the railroads now find themselves.
While aU this is going on, railroad executives are
luging that our present system of regulating
railroads through forty-nine masters—-the Federal
Government and forty-eight individual States-
give way to a unified and consistent scheme of
regulation under a single master.
Why the Railroads
Prefer Federal Regulation
Why is it that the railroads seek to escape the
rule of forty-nine masters and submit themselves
to a single regulative authority?
Not merely to secure logical perfection. There
is no objection to regulation by the Federal
Government and forty-eight States as such.
The fundamental necessity is that some method
be worked out of co-ordinating railroad earnings
and expenses.
At present the railroads have little control over
either their expenses or their earnings. Both are
thoroughly regulated.
15]
The Crux of the Railroad Difficulty
The vital defect is that at no one point is focussed
responsibility for regulating both earnings and
expenses, so as to make it certain that expenses
shall not increase faster than earnings.
The behef is that if the same authorities who
are responsible for regulating rates were likewise
responsible for regulating expenses, practical and
intelligent recognition would be given to the fact
that if expenses are increased provision must be
made to meet the cost.
What Has Happened
in Ten Years?
That there is a very real need for considering the
problem from this angle may be indicated through
noting what has happened to the railroads since
August, 1906, when, through the passage of the
Hepburn Law, railroad regulation in earnest began
in this country.
On July 1, 1907, the Interstate Commerce Com¬
mission required the railroads to institute a new
accounting system. Since then, all figures relating
to railroads are more strictly comparable than
[6]
The Crux of the Railroad Difficulty
before, especially in the matter of investment in
raihoad facilities.
For the year ended June 30, 1915, the figures for
which are just to hand, the railroads of the
United States carried 66,000,000,000 more tons
of freight one mile than for the year ended June
30, 1907, and carried 4,000,000,000 passengers
one mile more than in 1907.
During the eight years in which the facilities to
handle this increased traffic were being provided,
and for that pmpose, our railroads expended
upwards of $4,800,000,000 in new money.
In 1907, before this increased investment had
been made, the net operating revenues of all
railroads were $840,589,764. After paying taxes
amounting that year to $80,312,375, the railroad
net operating income—that is, all money available
for paying interest on bonds, dividends on stock,
making improvements out of earnings, and pro¬
viding a surplus against further needs—amounted
to $760,277,389.
For 1915 preliminary estimates of the Bureau of
Railway Economics indicate that the net operating
revenues were about $872,000,000; taxes were at
[7]
The Crux of the Railroad Difficulty
least $133,000,000; leaving net operating income
of $739,000,000.
Thus, having rendered the increased service
referred to, with the new facilities supplied at such
great expenditure, the railroads, nevertheless,
found that at the end of 1915 their net operating
income was $21,000,000 less than for 1907, before
that $4,800,000,000 had. been spent.
The People
Have Not Known
Anyone will of course agree that if railroading is a
business—and it is a very real business—any such
situation as that just disclosed is logically impos¬
sible, and cannot continue indefinitely.
Yet the American people are fair, and undoubtedly
want to pay a proper price for what they get.
Why is it, then, that such a contradictory situation
as that described has been allowed to arise?
The answer must lie in the fact that the people
have not realized what they were doing.
[8]
The Crux of the Railroad Difficulty
Railroad totals are so large, so like the figures of
astronomy, that people little realize that these
totals are comprised of a vast number of small
items.
The people have felt the desirability of certain
improvements in railroad facilities and practices,
and have reasoned that as the cost of each of these
items was relatively small when compared to the
huge total earnings of the companies, the addition
of one or another particular small item could not
affect the situation seriously.
At no one point was there concentrated considera¬
tion of all the demands upon the railroads, and
determination reached as to which demands should
be agreed to and how the expense should be met.
The Chaos
Which Now Prevails
Just how chaotic the present situation is may be
indicated very briefly.
Expenses may now be arbitrarily increased by law,
by awards in wage arbitrations, by taxing authori¬
ties, or by public pressure.
[9]
The Crux of the Railroad Difficulty
Rates may not be increased, however, except by
authority, not alone of the Interstate Commerce
Commission, but also of every state through which
the lines of a railroad run.
The result of this system is that expenses are
increased without regard to how the money is to
he obtained to meet them. This happens in several
ways, among others :
First Individual States pass fuH-crew laws, grade
crossing laws, and other measures, all adding
to expense but not to earnings.
Second Local authorities assess taxes regardless of
how they can be paid.
Third The postmaster general may impose heavy
burdens on the railroads in carrying the
parcel post, without obligation to meet the
expense involved.
Fourth Public opiidon forces the roads to make
enormous expenditures for steel cars, new
passenger stations, and such hke—all
desirable no doubt, but adding practically
nothing to net earnings.
Fifth Public opinion forces railroads to arbitrate
wage disputes, but the umpires have no
responsibility for obtaining the money
necessary to pay the bill.
[10]
The Crux of the Railroad Difficulty
When the railroads seek to obtain money to meet
these and other expenses forced upon them, they
find the following conditions;
First Even if the Interstate Commerce Commission
authorizes advanced rates, the increase may
be nullified by action of state commissions.
Second Even if an increased rate is, and is subse¬
quently declared to be, reasonable, the com¬
mission may have suspended the rate for ten
months, without later recourse by the
railroad.
Third Neither the interstate nor the state com¬
missions have established standards whereby
the carrier or the public may be able to
determine what shall probably be declared
to be reasonable rates.
Nothing Certain
But Uncertainty
Under our present plan of regulation, there is
"nothing certain hut uncertainty."
The railroad manager has neither precepts nor
precedents to guide him.
Yet he must always face the fact that in the money
markets of the world, where he must go for all
funds for improvements or new facilities, he must
[11]
The Crux of the Railroad Difficulty
submit to an inexorable arithmetical equation.
The railroad manager must show investors where
further expenditures wiU be productive of larger
net earnings. If he cannot meet that test, the
investor says to him, "Thou hast been weighed in
the balances and been found wanting."
The fundamental difficulty in our treatment of the
railroad problem has been a failure to recognize
the nature of just what we were doing. The exist¬
ing rate structure grew up on the basis of a railroad
system designed to supply simply the elements of
transportation. The railroads were expected to
carry a man or a thing from one place to another,
and not much consideration was given to the
safety, the speed or the comfort with which the
service was rendered.
Public Demands a
New Kind of Transportation
Then, as the tendency developed to hold rates
stationary, the pubhc demanded a constantly
higher standard of railroad operation. For a
time, the efficiency of the American railroad
[12]
The Crux of the Railroad Difficulty
manager made it possible to meet the cost of the
many improved methods out of economies.
In recent years, however, the demand for higher
standards has been accelerated, whereas the
difficulties of increasing rates to meet the increased
cost have become extraordinarily tedious and
difficult, indeed usually insiumountahle.
The situation is somewhat as if in a small town a
modest hotel had been built to supply merely
the elementary comforts—a bedstead, washstand,
bureau and a chair. After this hotel was built,
the authorities of the city passed a law that
charges for the rooms in that hotel should not he
more than $2 a day.
After passing that law, the demands of law and
puhhc opinion compelled the hotel to install fire
escapes, hollow tile partitions, elevators, individual
drinking cups, and other facihties designed to add
to the safety and comfort of the guests.
It is obvious that while the hotel keeper might up
to a point he willing to do all these things in order
to protect his original investment, there would
he no inducement whatever to others to go into
that town and to put up a new hotel.
[13]
The Crux of the Railroad Difficulty
Railroads Give
Without Receiving
So we in this country are demanding better
raihoads. We want steel cars, block signals,
grade crossings eliminated, new passenger stations,
and high wages for employees.
All these features are desirable, and raihoad
managers are very glad to provide them. But
the public so generally fails to realize that all
these things cost money. The raihoad treasury is
not inexhaustible, and no more money can be
spent than is taken in.
If the public wants a railroad system with every
modern improvement, it should have it. But the
people when demanding such a railroad should
make up theh minds to pay for it.
There is no more reason why we should expect to
have better railroads than we are willing to pay
for, than that we should expect to have better
dwelling houses than we are willing to pay for.
The obligation of the individual tenant to the land¬
lord is clearly understood, and is enforced by law.
The obligation of the people en masse to pay the
[14]
The Crux of the Railroad Difficulty
carrier a fair price for what they demand is not
fulfilled because our system of regulation does not
make the precise nature and meaning of that
obligation clear to the public through the medium
of a single, responsible regulating body.
Has Prosperity
Corrected the Evils?
But it is said that conditions are better now, the
railroads are making quantities of money, and the
situation is solving itself.
No more complete fallacy could he uttered. It is
true earnings are much greater than they were
last year. Net earnings always increase when a
burst of railroad activity follows a period of
depression.
It is of course doubtful to what extent the end of
the war will curtail present gross earnings. But
net earnings would have to be far greater than they
are even now, or can be under present rates, to
earn an adequate return upon the new capital
invested during the past ten years.
More important still;
There has been no fundamental change in the
system and practices which have produced the
[15]
The Crux of the Railroad Difficulty
failure to consider railroad expenses as governed
and limited by earnings.
Our system of regulation is just the same, and has
not been corrected.
The case is just as if a spendthrift with only a
dollar left in his pocket, expecting to go to the
poorhouse next day, should find a ten-dollar bill
in the middle of the road. He might not have to
go to the poorhouse quite so soon, but if he did
not change his habits, his ultimate destination
would be no less certain.
Pressure Growing
More Insistent
The war has brought to the railroads a sudden
semblance of prosperity. But the pressure to
enlarge expenses is already growing daily more
insistent. At the moment, this pressure exerts
itself against railroad managers in:
Demands for local improvements and increased
t£txes; and
Demands for increased wages.
[16]
The Crux of the Railroad Difficulty
It may be that both kinds of demands are justified.
I do not argue the desirability or the justice of
the demands. I do urge, however, these three
considerations, as in the broadest public interest:
First That assessments for expenses to benefit any
particular locality or class of people should
not be levied as a burden against those who
will not participate in the benefits.
Second That if wages are to be increased, the deserts
of all classes of railway employees should be
considered.
At present demands have been made by some
25 per cent of railway employees. Those
demands if acceded to, would cost the rail¬
roads upwards of $75,000,000 a year.
Those demands may be justified—I do not
argue that point. But whatever may be
their justice, public opinion should insist
that they should not be considered except in
connection with the rights and deserts of
100 per cent of the men.
Third If raiboad expenses are to be steadily
increased, no matter in what manner, provi-
sion should be made by the public to meet
the cost.
[17]
The Crux of the Railroad Diffieulty
Why One Regulating
Master is Best
It is that an effective method may be developed
for meeting the proper costs of providing the
facihties the people need, that the railroads urge
the adoption of a unified, consistent and responsi¬
ble system of regulation.
The American people do not desire government
ownership, and they are equally and properly
determined not to relax their regulation of railroads.
But if private capital shall continue to be attracted
into railroad enterprise, the railroads must be
permitted to earn revenues which will pay a satis¬
factory return. Otherwise capital will go into
other forms of investment.
It is the belief of railroad officers that the people
are wilhng and glad to pay a fair return upon
capital actually invested.
It will only be certain, however, that that fair
return will be paid when there is a single regulating
body supervising both earnings and expenses and
able to determine whether a proper return has
been earned, and if not, why not.
[18]
The Crux of the Railroad Difficulty
The public to-day has no authoritative method
of finding out just why new money invested in
railroads does not earn a proper return.
Likewise, even if the cause of the trouble were
made clear, the people have not endowed any
regulating authority with full and final power to
see to it that adequate rates are provided to earn
that proper return.
Regulation Has Not
Had a Fair Trial
Until we have a unified system of regulation instead
of our present inconsistent rule of forty-nine
masters, the sound and valuable principle of
private ownership under public regulation will
not have had a fair trial.
The failure of regulation up to now has not been
due to the principle of regulation, for regulation
when competent and impartial is most desirable.
The present failure of regulation is due to the fact
that it is now contradictory, inconsistent, and
self-destructive.
[19]
The Crux of the Railroad Difficulty
Successful regulation wül be unified and consistent,
stringent and definite. The investor, the manager
and the public will know precisely what to expect.
The investor will be assured of a full opportunity
to earn a reasonable return upon his capital; the
manager wiU be assured of the proper reward of
industry and enterprise ; the public will be protected
against discrimination and unwarranted burdens.
Such a scheme of regulation will focus at one point
consideration of all demands upon railroads, and
there wiU be ample power to deal with those
demands in the interest of the pubfic.
Such regulation will result in the continued
development under private ownership of an eflS-
cient railroad system.
[20]