THE RAILROAD
PROBLEM
An Address by
The Hon. CHARLES A. PROUTY
DIRECTOR OF VALUATION OF THE INTERSTATE
COMMERCE COMMISSION
Delivered at
A Dinner Given Him by the
ASSOCIATED INDUSTRIES OF MASSACHUSETTS
At the
Hotel Somerset, Boston,
Monday, February 2, 1920
THE RAILROAD PROBLEM
An Address by
The Hon. CHARLES A. PROUTY
The best consideratloa which I have been able to give the matter
leads me to believe that for the last five years additions to railroad
facilities, both road and equipment, have not been as great as for previ¬
ous years nor suificient to keep pace with the growth of the country
and its business. The accounts of the Interstate Commerce Commission
and the Director General have been so kept that it is impossible for
me to give you without long explanations the figures, but what I have
in'mind is very strongly indicated by the number of units of equipment
which have been purchased and retired in recent years as to which the
figures are. available .since 1907.
Eor the eight years ending June 30, 1914, our railroads put into
service an average of 3,225 locomotives each year, and retired during
the same period an average of 1,435.
From June 30, 1914, to December 31, 1917, the average added for
twelve months was 1,353, while retirements for the same period were
1,573. During the two years and two months of federal control the
Railroad Administration will add 2,000 locomotivc.s ; the retirements
cannot be stated. There has also been during that period a small addi¬
tion of locomotives ordered previous to government control, but not
delivered until afterwards, which were paid for l>y the corporation.
It will be noted that for the first eight years the number added was
more than twice the number retired whereas during the three and one-
half years preceding federal control the number added was less than
half that in the previous period and less than the number retired.
For the eight years ending June 30, 1914, there were added on the
average 137,994 freight cars each year and retired 70,388. For the
three and one-half years following Juno 30, 1914, the average added for
twelve months were 83,287, and the number retired 75,027.
The Director General purchased 100,000 freight cars most of which
will be added during the period of government control. There were also
some freight cars added during that period which had been previously
ordered by carriers. The retirements cannot be given.
After making all due allowance for greater capacity of cars recently
purchased it is evident that there has been a marked letting-down in
O
tliG purchase of equipment both for the years immediately preceding
federal control and during such control itself.
Inquiries which I made when acting as Director of Pubiic Service
under the Federal Administration lead me to believe that our railroads
upon tiie average had not been, owing to the shortage of labor, main¬
tained up to their former standard for three years preceding govern¬
ment control. Whether they have iieen maintained during government
control is a disputed question. In my own opinion it will be found
that upon the average their condition at the end of federal control will
bo about what it was at the beginning.
It is impos.siide to avoid the conviction that when these propertie.s
go back on March 1 into private control they will not be either in the
extent of their facilities or tlie condition of the property much improved
over June 30, 1916, nor capable of handling much more traffic than they
could have handled then.
Turn now to the other side of this picture and inquire what de¬
mands arc likely to be made upon our railroads during the first years
of private control.
While facilities have not materially increased in the last five years,
traffic lias steadily grown. I am unable to give you the exact figures,
Imt certain it is tliat the business handled by the Federal Administra¬
tion during the month of January just gone exceeded by considerable
that of any January in tlie past. The government acting as a unit can
undouiitedly handle more business with the same facilities than could
the private owners, but even so great difficulty is being found in meeting
the transportation requirements of to-day, and shippers assert in several
quarters that a most seriou.s .shortage of rail transportation exists.
Looking to the future the situation is altogether unprecedented.
Europe, the source of manufactured supplies in the past, has been
devastated and is no longer for the time being a considerable producer.
The whole civilized world is hungry for raw materials and manufac¬
tured articles. The United States alone has the money and the means
with which to supply that demand. It is not to be questioned that if
we ever get onto a normal working basis, and we must and shall, the
demands upon our railroads will very much exceed those of any previ¬
ous period, and it is equally certain that these demands cannot be met
unless additional facilities are provided.
From what source, then, is the money to be obtained with which
to provide these facilities? It is suggested by many railroad operators
that rates should be sufficient to provide a considerable portion of this
needed capital, but no such suggestion can be for a moment entertained.
While it is true that there is a certain kind of non-productive expendi¬
ture which must occur in the development of these railroads and which
might well to some extent be taken care of by earnings, that is an
insignificant part of the whole. The greater part of this expenditure
is to handle additional business which should bring in additional income
and yield a return upon the investment necessary to take care of it.
There is no reason why this generation, in addition to paying the
4
enormous taxes of to-day, sïioulcl also pay for the transportation facili¬
ties which the next generation is to enjoy. The Interstate Commerce
Commission has decided that such expenditures should be out of new
capital, and the Supreme Court has approved that decision. This means
that our railroads must borrow the necessary sums. The cost of this
money is in the last analysis a part of the cost of furnishing the plant
and must be paid for by the public. Unless the needed capital can be
obtained at a reasonable rate of interest, private ownership must go,
for the public cannot afford to pay from five hundred million to a
billion dollars a year for that luxury. A fundamental condition to the
success of private operation is good railroad credit.
That railroad credit has steadily declined in recent years cannot
be denied. When I came onto the Interstate Commerce Commission
almost twenty-five years ago, a Boston & Maine debenture, a mere
promise of the Boston & Maine to pay unsecured by any mortgage, sold
on a basis of 3% per cent. When Mr-. Mellen began his career in high
finance upon the New Haven he borrowed money at your Boston banks
upon the mere promise to pay of that company at 3 per cent. To-day
no railroad in New England could borrow a hundred dollars at any
reasonable rate, let alone the financing of any considerable proposition.
While a few strong roads of this country still enjoy good credit, the
history of most of them is parallel with those of New England. What
has produced this astonishing fall in railroad credit?
The carriers declare that the cause is to bo found in the parsimony
of the Interstate Commerce Commi.ssion ; that sufficient rates have not
been allowed. This I most earnestly deny. Until very recent yeara'
the Interstate Commerce Commission has exercised very little influence
over the revenues of carriers.
Down to 1007 that Commission had no power to establish a rate.
Few cases can be found in the history of that Commission where re¬
ductions have been ordered by it which could materially affect the
revenues of our carriers. A few years ago Congress enacted that no
rate should be advanced without the permission of the Commission,
and this, in view of the fact that it was necessary to make advances
in the transportation charge to offset the increased cost of operation,
has given the Commi.ssion a real control of the revenues of our carriers,
and from the time that power existed down to the beginning of federal
control, rates were sufficient.
The so-called test period covered the three years ending June 30,
1917. During these years it may be fairly said that the Commission
was responsible for the earnings of our railroads, and during tliose
years it can be aflinned confidently that those earnings were ample. I
believe that no three con.secutive years can be found, during all the
time when carriers had complete control of their rates, when the net
result was more favorable than during these years of the test period,
and yet during that period railroad credit steadily declined. It can¬
not he said, therefore, that insufficient rates are re.sponsible for the
decadence of railroad credit.
5
Consider for a moment from wliat the financial .strengtli of a rail¬
road springs. This property has heen brought into existence for a spe¬
cific purpose, the transxiortation of passengers and property. It should
have and generally does have no other l)usiuess. Its only income Is
derived from charges for the performance of this service. The amount
of those charges detenninos the amount of that income, and since costs
of operation are the same whether rates are high or low it follows
that a very slight change in the rate may convert tlie finanoial state
of a railroad from ailluence to bankruptcy.
The l'ennsylvania Itailroad system is a wonderful property, a worthy
example to the world of a great railroad. Tet this magnificent property
operated for the first three month.s of this year at an absolute lo.ss. If
the rates of that company were to Ite .so adjusted that it could not
pay its operating expense,«, it would become worthless, a idle of junk.
What I am endeavoring to impress upon you l.s that the nerve centre
of our railroads is the rate, and that wlioevcr controls the rate holds
absolutely tbe financial de.stiuy of tbese railroad,« In the hollow of his
hand.
The source of all credit is confidence. A man will lend his money
at a low rate of interest in proportion as he feels certain of receiving
that money back. A quarter of a century ago no one doubted the ability
or the disposition of a prosperous railroad, like the Pennsylvania or
the Boston & Maine or the New Haven, to pay what It promised. While
the Supreme Court of the United States had deculcd that the rates of
our railroads were subject to public regulation, such regulation had not
on the whole produced uiiieh effect, and its real significance was not
generally apprehended. It was not until with advancing co.st of opera¬
tion it became necessary to advance rates that tbe meaning of inter¬
ference by the government came to be understood.
When at last it became evident that increase in cost of operation
would speedily exhaust the entire net of the past and that no additional
revenue could be obtained without the consent of the public authority,
the whole situation stood clearly revealed. Everything depended upon
the attitude of the government and what the policy of the government
was to be in its treatment of these carriers was doubtful both as to the
amount upon which a return should be allowed and the rate of return
itself.
As I see it, it is this uncertainty more than everything else which
has. demoralized railroad credit, and if that Is right, such credit can
only be restored by removing tbe uncertainty. In some way the gov¬
ernment must determine first the value of the property of each carrier
upon which a fair return shall be allowed, and second, that rate of
return.
I was so clearly convinced of this six years ago that I resigned
as an Interstate Commerce Commissioner to take charge, under the
direction of the Commission, of the valuation of our railroads, believing
that to be the most important piece of railroad work then under way.
That valuation is well advanced. The field work is nearly completed,
6
and within the next two years the Commission should be in position
to state a value upon most of the railroads of significance in this
country. When this is done the first condition will be met; there will
be a definite statement of the amount upon which every carrier is
entitled to earn and a method provided for the keeping of that value
good from year to year.
The second thing, a declaration by the government of the rate
which these carriers shall be permitted to earn upon that value, is of
even greater importance, and this must properly come from the law¬
making body itself. While some rule adopted and promulgated by the
Interstate Commerce Commission would undoubtedly be of assistance,
nothing except an authoritative pronouncement by the supreme law¬
making authority can adequately meet the situation. This the Cummins
Bill aims to accomplish. I do not altogether agree with the figures
of that bill which proposes to allow a return of 5% per cent upon the
value fixed by the Commission. When I first began to advocate this
theory I felt that 5 per cent was sufficient. A good railroad bond
could then be easily sold upon a 4 per cent basis, and if a road was
capitalized half bonds and half stock, this would enable the payment of
a G per cent dividend upon the stock. At the present time money
rates are distinctly higher and returns from all kinds of property are
greater, and this should justify a higher return upon railroad property.
I have felt that to-day 6 per cent would be a proper figure, but 5%
per cent will probably permit in case of the half-bond-and-half-stock
railroad a payment of 5 per cent on the bond and a 6 per cent dividend.
Another thing should always be thought of in this connection.
There is with every railroad an invisible loss, so to speak, which is
never taken care of by retirements and also a functional depreciation.
There is still further a certain non-productive investment as the property
is developed, of which the elimination of grade crossings is an apt
illustration. These items, especially the depreciation, cannot be exactly
provided for in any accounting system, but they must in some way be
recognized or the carrier will find itself at the end of a half-century
bankrupt. I have urged that something should be included in the
earning permitted on this account. For example, I have In the past
thought that a total earning of 6 per cent should he permitted, 5 per
cent to the security of holders and 1 per cent to be expended upon the
property, without, however, increasing the value upon which a return
should be allowed. To-day this should be somewhat larger. This feature
is also included in the Cummins Bill, % per cent being allowed for
that purpose.
Having clearly stated the amount of return to which these carriers
are entitled, the next thing is to devise a way in which such rates can
be established as will yield that return and no more. This plainly
must be by instructing the Interstate Commerce Commission to estab¬
lish proper rates for that purpose and give the Commission the necessary
authority to do so.
The difficulty of this problem Is comprehended in the three words
7
above italicized, "(nul no more." The rate must yield the carrier
enough or it cannot function ; it must not yield too much or the public
is unjustly burdened. If the Interstate Commerce Commis.sion were
given, as it should be, the fullest authority over the making of rates
and divisions, it would still find itself beset with certain practical diffi¬
culties as to which it must have the aid of legislative enactment. These
difficulties would be of two general classes, arising, first, from the
competitivo situation, and, second, from tlie fact that net carning.s
cannot be accurately forecast and must vary from year to year.
The railroads of this country in a given .section are generally com¬
petitive ; that is, they must charge the same rate. But the application
of that rate upon all the railroads in the competitive territory produces
widely divergent results. Koad AB earns a return of 20 per cent upon
its value, and road XY only 3 per cent. The Cummins Bill proposes
to appropriate the earnings of road AB beyond a certain point and to
use these earnings in assisting the weaker roads in tlie territory. This
is earnestly opposed as unfair to AB and un-American.
The owners of this railroad have devoted its property to the public
service. They are entitled to a fair return upon the value of tliat
property and no more. Twenty per cent is manifestly an utterly ex¬
travagant return. This road has no vested right to prey upon the
community which it serves. It is the duty of the government, not to
single out that particular road and appropriate its property, but to
provide by general enactment that the net earnings of no railroad shall
exceed what is reasonable. It may do this by fixing the rates which
the road may charge, or by fixing the net income which it may earn,
or by combining the two processes. The provisions of the Cummins
Bill would allow this railroad an earning of between 9 and 10 per cent
upon its value, which certainly is most munificent to those stockholders
and not un-Amcrican unless it be un-American to restrain the rapacity
of wealth.
■\Vhat shall be done with the surplus seems to me immaterial. It
should be covered Into the United States Treasury and appropriated
for any proper purpose. ^Yhat should he done for the weak road, I am
not now considering. That road under the proposed legislation would
be vastly better off in the future than it has been in the past, although
it will probably require additional assistance.
The second embarrassment under which the Commission would
act arises out of the fact that it is impossible to accurately forecast
the net earnings which w-ill be produced from year to year under any
given scale of rates. A hundred factors enter into this problem of net
earnings which never can be known to the Commission when It makes
the rate, as the amount of traffic, the kind of traffic, the conditions of
operation, etc., etc., almost without end.
Again, if the Commission did know exactly what all these changing
conditions were to be, and could for that reason vary these rates
from time to time as those conditions vary, nevertheless that ought not
to he done. Stability In transportation charges is most desirable. Busi-
8
ness requires a rate the same year after year, so far as may be, to
which it may adapt itself. Rates ought not to advance as business falls
off, nor decline as it again increases.
Now if rates are to be uniform and stable as they should be, it
necessarily follows that net earnings will vary materially from time
to time ; there will be lean years and fat years. In what way can the
one be made to offset the other?
It has always seemed to me that if in any year the earnings of
a particular carrier exceeded the amount to which it was entitled under
the declaration of Congross, then the surplus should be put into a
fund to be held for the payment of future interest and dividends in
those years when its earnings did not equal the amount prescribed.
If, then, the Commission should prescribe rates which yielded in excess
of the requirement of Congress, the public would lose nothing, for the
overplus would be impounded for its benefit. If in future years the
Commission felt tliat rates were too high, it could reduce the same
without danger of depriving security holders of their customary returns.
In other words, you have here a reservoir which is filled up in good years
and drawn down in poor years and which enables the Commission to
fix Its rates without much danger of exacting in the long run an un¬
reasonable charge from the public, or of falling to provide a reason¬
able return to the carrier. Under such a plan the Commission would be
relifcved from the tension which it now experiences owing to the
uncertainty of the effect of its decision; the public would be protected
against the payment of unjust rates ; and the carrier, while not perhaps
receiving more in the aggregate, would find in its financial transactions
an element of certainty which would improve its credit and the credit
of railroads in general.
It would happen in case of some roads that after this dividend
fund had been made up to a reasonable amount the surplus earnings
would still be In excess of the earnings permitted. In which event these
excess earnings should bo divided between the government and the
carrier. If the government were to take the whole beyond the per
cent fixed, no inducement would be afforded the carrier for efficient or
economical operation beyond what was neces.sary to yield to It the
return permitted, and this would make for laxness and extravagance
of operation ; but if the carrier were given a quarter or a third of
the overplus, the Inducement to efficient operation would be almost as
great as though it retained the wliole. Road AR already referred to,
for example, miglit increase its earnings from 514 to 9 per cent upon
It.s value, which certainly would be suflicient Incentive to secure the
highest economy of operation.
The foregoing principles are embodied in the Cummins Bill. For
many years I have been an advocate of these ideas, and it is extremely
gratifying that they have at last found favor with the Senate Committee,
which has given this whole subject the most painstaking and intelligent
consideration. Personally, I believe that Section 0 is more important
than any other item in the pending legislation, for I do not believe
9
that private operation can he xjernaanently successful without some plan
of this sort. It is cliliicult to understand why shippers who bitterly
oppose government operation and who demand private operation at any
co.st should oppose these provisions.
Their objection seems to spring from the thought that the Com¬
mission acting under a plan of this kind would impose higher rates
than otherwise. This is not at all certain. While no man knows to-day
the value which the Commis.sion will ßnally fix for the railroads which
have been operated by the government for the la.st two years, it is, in
my opinion, quite possible that G lier cent upon the value would not
exceed what the goverament will be required to pay for the use of
those properties. But if it wore to be assumctl that the rates estab¬
lished by the Commission under such a plan would bo somewhat higher
than those otherwise established at the outset, that is no objection to
the plan the very purpose of which is to enable the Commission to
treat these carriers with reasonable liberality without danger to un¬
duly taxing the public. For one I believe that the public interest
requires that initial rates prescribed by the Interstate Commerce Com¬
mission shall be somewhat high rather than too low. I do not see
how these carriers witli their property and their liusiness more or less
demoralized, and with their credit gone, can be expected to re-establish
themselves unless they are at the outset accorded liberal treatment by
the public. What wc want is a plan under which this may be done
without ultimately impo.sing an undue burden upon the same public.
If we are going back to private ownership, let us go in such a way as
win give to the private owners a fair opportunity to demonstrate the
superiority of their operation. Personally I do not believe they can
do this, but if tbc experiment is to be tried at all, let it be fairly tried.
The success of railroad operation depends largely upon the attitude
and elliciency of labor. Xot only does the efBciency of labor profoundly
affect the net income of the carrier, but its attitude largely determines
the character of the service which is rendered to the public.
To-day all labor, including railroad labor, is inefficient. This is
duo to underlying causes. The war has unsettled through the civilized
world social and economic conditions. JIany excellent people believe
that our whole social and industrial fabric must be made over and that
now is the time to do it. Labor especially insists not only that it has
been unfairly treated in the past, but that the entire relation between
labor and capital has been wrong. It demands not correction but
revolution.
From all this I personally dissent. Society has developed under
the influence of certain laws of human nature. Those laws will remain
exactly the same in the future as in the past. Xou can correct, you can
improve, but you cannot alter basic conditions.
For example, It is one of the laws of human nature that the average
man is a predatory animal and will appropriate to himself what he can.
Therefore, it will always be necessary to restrain by law this disposi¬
tion. Even though ilr. Rockefeller, Jr., should succeed in establishing
his Sunday-school class in every community, it would still be necessary
to provide in some form that the monopoly which Mr. Rockefeller owns,
and from which he is said to profit to the extent of $10,000,000 or
$12,000,000 a month, should not be permitted to exact from the public
whatever it sees fit. The time will never come when it will do to
permit the railroads of this country to impose without restraint what¬
ever transportation charges they may choose. Wealth, acting through
monopoly, must always be held in check.
It is another law of human nature that the average man will not
work unless he is obliged to. Therefore, labor cannot bo permitted to
say what a fair day's work shall be, what shall be paid for that day's
work, and whether the amount of work called for has been rendered,
and this is what these much used phrases "industrial justice," "the
democratization of industry," etc., etc., come to in the final analysi.s.
In the past I have stood among the so-called friends of labor. I
have favored most laws enacted for the benefit of labor. Among other
things, I have always been a most earue-st advocate of the right of
labor to organize. Capital is organized. The owner of a factory is a
single entity acting as a unit; unle.ss the latior of that factory has the
right to get together and act as a unit also, it cannot fairly compete
with capital. I still implicitly believe in this right, and I would not
object to a law which punished an employer who discharged an employee
for fhe rea.son that ho was a member of a labor organization.
I have further insisted in the past upon the right of organized
labor to strike. I favored making labor in this respect an exception
to the general rule against monopolies and couspiracie.s. I am still
for that exception. While we should by the creation of lioards of con¬
ciliation and in every other proper way remove the iiuluccmeut to strike,
still the final right must remain. The strike is tlie offensive weapon of
labor, and to take it away is to rob labor of its only effective mcaii-s of
self-protection.
While, however, this should be the general rule, there are certain
exceptions to that rule. Just as the control of certain kind.s of prop¬
erty is taken out of the hands of its owners, so certain kinds of labor
must forego this right to strike, and for exactly the same reason. Of
this the railroad is the mo.st conspicuous instance.
■you all perfectly understand that the private property which is
Invested in our railroads is not controlled by its owners but by the
government. The government determines, or may determine, how a
railroad shall be constructed and cauippcd, upon what schedule its
trains shall be operated, and above all, the amount which it may charge
for its service. All this is for the reason that the railroad is perform¬
ing a .service of such immediate importance to the entire community
tliat the pulilic must in tliis manner protect itself.
What is true of the money invested in these railroads is true of
the labor which operates them. The government cannot s.ay to a dollar
of private capital. You shall invest in a railroad, nor can it say to an
individual, A'ou shall work for a railroad, but it can say and should
11
say both to the man aud to the dollar that when once embarked in
railroad service it shall so conduct itself as not to inflict injury upon
the public which It serves.
Consider for a moment what this situation is. The railroad labor
of thi.s country is SO organized that it can at any given moment stop
operations by rail in any section of this land, or throughout the country
as a whole. And what does a strike of that character mean? What
would it mean to you here in Boston? It would mean death from cold
and starvation. It would mean riot and bloodshed and whatever else
goes with the letting loose of famished hura.anity.
So long as that is po.ssible, and so long as the government has no
power to protect itself against that po.ssibility, there is no government.
If one clas.s in tliis community can say to every other class, pay us so
much more for our services or you shall starve, there is no longer a
democratic form of government.
And such a possibility is no mere fancy. Within sixty days re.spon-
sible labor loaders have declared that a general strike should come
unless their demands were comi)lied with. The President said the
coal strike was unthinkable, but it came.
The Cummins Bill deals with this situation by prohibiting strikes
upon the part of the men, and lockouts upon the part of the employer.
A tribunal is provided to which the claims of lioth parties may be
presented, and the decision of that tribunal is final. The right of the
individual to quit work is not interfered with, but the conspiracy to
quit by concerted action is made unlawful aud prohibited.
It has been .said that railro.ad labor would not permit the pas.sage
of such legislation, that it would prevent it by a general .strike. The
l)rovision is right. That or its equivalent must be enacted if we are
to live under a government by law aud not by force. For my own part
I do not for a moment believe that the railroad labor of this country
would decline to obey such an act although it would earnestly oppose
its passage. I eaniiot believe that the railroad employees of my own
little State, Vermont, probably the best paid and the most Intelligent
of any class of lal)or in that State, would wilfully defy a statute of
the United States even though called upon to do so by radical labor.
But if I am wrong, if the enactment of this legi.slation means a railroad
strike with or without sympathetic strikes, let it come. Wo can meet
it now better than we can later on. If society cannot survive that con¬
test it is not worth preserving.
The situation presented by these two provisions of the Cummins
Bill, the revenue provision and the strike provision, is illuminating and
suggestive. On the one extreme stand.s Mr. Lovett insisting that his
Union Pacific may prey ad Jihitum upon the people of this country and
that no practical way can he found to effectively prevent it. Upon the
other extreme is Mr. Gompers asserting his right to demand and obtain
from the public whatever he sees fit. Just where in all this do you and
I come in? Just who protects the interest of the great mass of the
public which must have this service and which pays the rate?
12
This country is passing to-day through a state of social hysteria.
Its latest manifestation is the campaign against the so-called "Eeds."
We are deporting, imprisoning, and proposing to electrocute these advo¬
cates of radical ideas for the purpose of preventing the spread of those
ideas. Now I have no sympathy for the men who will be deported, or
imprisoned, or even possibly electrocuted, but I do doubt whether the
purpose will be accomplished, whether this social situation can be dealt
with in that manner. For years that system was tried in Russia ; it
was enforced a hundred times more effectively and more completely
than it ever can be here,—^and behold the result !
This government of ours is a democracy. The interest of every
class must give way to the common interest, and what is the common
interest must be determined by the will of the majority. Personally, I
have always entertained an abiding conviction that a majority of our
citizens were sufficiently intelligent to understand the right, and suffi¬
ciently honest to vote for the right when understood. Let every propo¬
sition be brought to the bar of right and subjected to the broadest and
freest di.scussion. If that be done, the majority of our people will, in
my opinion, think right and vote right; otherwise our government is a
failure.
It never has been right in the past to permit wealth, through
monopoly and otherwise, to prey upon the body politic, and the fact
that this wrong has been allowed to continue unchecked is largely
responsible for the spread of these revolutionary ideas to-day. It will
not be right in the future to permit any class of labor to exact its un¬
restrained demands, and to make this possible is to subvert the present
order. Looking to the two propositions under review, it is right to
allow the Union Pacific a fair return and no more. It is right to require
Mr. Gompers and those whom he represents to subordinate their own
desires to the general welfare.
What this country needs is less talk and more work. Let us stop
investigating and conferring and do something. The enactment of
the.sc two provisions in the Cummins Bill would have a most whole¬
some effect upon the whole railroad situation and indeed upon the whole
social situation, for it would .serve notice upon the extremists so much
in evidence that this nation had still the power of constructive and
.self-protective legislation.
Altogether too much time has been spent in discussing the general
railroad situation. What I liave particularly desired in accepting your
invitation was to say something touching railroad coudition.s here in
New Kngland, which in some respects are more acute than elsewhere.
It is easy to state and comprehend those conditions, but extremely diffi¬
cult to find a remedy.
There arc in New England five principal railroads,—the New Haven,
the Boston & Albany, the Boston & Maine, the ISiainc Central, and the
Bangor & Aroostook. Of these the Bo.ston & All)any is leased to the
New York Central. It is a part of that systim and may be disregarded;
the other four roads are independent.
13
During the year 1019, tlie New Haven, the largest of the five, oper¬
ated 2,000 miles of first track and earned gross about .f 100,000,000, of
which, after paying its operating expenses and its taxes, it had
$10,000,000 remaining. It is my understanding tliat a certain portion
of the sum would be used up in the payment of joint facility rents and
hire of equipment with which its gross was earned, but I am not suffi¬
ciently familiar with the intricacies of Xew Haven accounting to be
certain of this. $10,000,000 is the outside figure. The government is
now paying that company al)out $17,000,000 annually, with which the
New Haven manages, I believe, to meet the interest upon its funded
dclit witli nothing to its stockholders. Its present earnings would fall
far short of enabling it to pay the interest upon its bonds and the rental
for the proi)erties which it leases.
The Boston & Maine system includes about 2,100 miles, and the
gross earnings of that mileage during the year 1019 were .$75,000,000.
After the payment of its taxes and joint facility rents it had left of
this sum .$3,000,000.
As you know, the Boston & Maine has been recently reorganized,
and the mortgage Indebtedness of the new corporation is somewhat in
excess of $100,000,000. The earnings of that system w-ould be slightly
more than sufficient to jiay one-half the interest called for by that
mortgage indebtedness without anything in the way of a dividend to
any class of stock. The government pays about $10,000,000 for the use
of those properties.
The Maine Central operates 1,200 miles of railroad. Its gross
revenues from transportation during 1919 were $17,400,000, while its
operating expenses, not including taxes, were $17,500,000, an actual
operating deficit of $100,000. Its taxes during the year were $900,000,
so that this railroad did not earn enough for the year to pay its oper¬
ating expenses and taxes by $1,000,000.
The United States Government pays the Maine Central nearly
$3,000,000 for the use of this property.
The Bangor & Aroostook operates approximately G30 miles. Its
total operating revenues for the year were ,$5,280,000, and its total
operating expenses, not including taxes, $5,010,000, leaving a net rev¬
enue of .$240,000. Its taxes exceeded this amount and when deducted
there remained a deficit in railway operating income of $13,000. The
government pays the Bangor & Aroostook about $1,500,000 annually.
These are the operating results of your independent New England
railroads for the year just elapsed. Not one of these railroads is earn¬
ing anything like enough to pay the interest upon its mortgage indebt¬
edness. Two of them failed to make earnings sufficient to pay the cost
of operation and taxes. Had they depended for the year upon their
earnings every one of them must have gone into the hands of a receiver.-
These railroads -will go back into private control on March 1. It
is probable that they will have the benefit for pos.Mbly six months of
the amounts now being paid by the government, but after the expira¬
tion of that guaranty they must rely entirely upon their own resources.
11
What is to be done with them? In this the industries of Massachusetts
and New lOngland are almost as much interested as the security holders
of the railroads themselves, for unless you have an adequate service
you cannot compete in your industrial activities. The people of New
England should interest themselves actively and immediately in the
solution of this problem. You cannot safely leave it to be worked out
by the Interstate Commerce Commission and the railroads alone.
It sometimes happens that a railroad ought not to earn the interest
upon its mortgage indebtedness. It may be that the railroad never
should have been built. It may be that it was extravagantly built
and that its bonds represent no honest investment. In such case it
ought to go into the hands of a receiver and through a proper reorgan¬
ization. Unfortunately, the financial history of the New Haven is such
that we cannot speak with confidence of the relation between its
securities and honest investment, but I believe that the other three
properties referred to, namely, the Boston & Maine, the Maine Central,
and the Bangor & Aroostook, are not open to imputation of this sort.
The Boston & Maine was for a long time under the same baneful
influence which wrecked the New Haven,' but the period of Mellen
control does not seem to have produced much permanent effect upon
the financial condition of that company. Our investigations show that
the bonds of the Boston & Maine system were for the most part issued
for money, or money's worth. The common stock of the original Bos¬
ton & Maine company, which is now the only common stock of the
reorganized corporation, was largely issued for cash and almost with¬
out exception sold above par.
As you know, the Interstate Commerce Commission is making a
valuation of the railroads of the United States, and it has substantially
completed its work upon the railroads of New England. I have in my
cilice an engineering report upon every considerable railroad property
in New England except the Boston & Albany, showing the cost of re¬
producing that property and also the amount of depreciation. These
figures have not been given out except in case of the Boston & Maine,
and I will not therefore refer to them to-iiight. Copies of the various
reports covering the Boston & Maine have been served upon that carrier
and also upon your Public Service Commission and may be properly
referred to here.
The cost of reproducing the properties which earned the $75,000,000
in 1019 would have been June 30, 1914, as the properties then stood and
under prices then in effect, new $232,000,000, less depreciation $178,-
000,000. The value of the lands of these same railroads on the .same
date, estimated by the' acreage value of adjoining lands, was approxi¬
mately $45,000,000. On June 30, 1014, the cost of reproduction less
depreciation plu.s the present value of these lands of the railroads
operated by the Boston & Maine would have been about $223,000,000.
I have no idea how the Commission will determine the value of the
property which the Boston & Maine Kailroad is devoting to public ser¬
vice, but I have always had an abiding conviction that there must be
15
somG immediate relation between the cost of reproducing this property
and its value. It would be difficult to designate any portion of the
Iloston & Maine .system which is not to-day neces.sary and which would
not to-day be'built were it not already in e.vistence. I have never felt
that the carrier wa.s entitled to the unearned increment in the value of
its lands, l)Ut the Supreme Court has apparently decided that it is. It
seems to mo altogether probable that when a value for this property
is fixed it will equal at least $22.5,000,000. Six per cent upon that sum
would bo $13,500,000.
The above figures include certain property which is not a part of
the reorganized lioston & Maine corporation but which is operated by
that corporation under lease. The capitalization of the new Boston &
Maine does not cover these leased lines.
I have felt from my examination of tlie subject that the Boston &
Maine Railroad should be permitted to earn, if it can do so under
reasonal)le rates, enough to pay the interest upon its mortgage indebt¬
edness, the dividends upon its preferred stock, and a dividend of 5 or
C per cent upon its common stock, with something over and above this
to go and come on in the first years of private operation. This would
require, as I remember it, $12,000,000 or $13,000,000. In what way are
the net earnings to be increased to that amount?
It i.s perhaps a general impression that a very considerable part
of this increase should come from more efficient operation. The govern¬
ment is said to be wasteful, inefficient. The private operator by
greater economy will bo ai)le to save out of the same gross revenue a
much larger amount. It is doubtful if this element can be much relied
upon in case of tlie B.oston & Maine or the New Haven.
For the purpose of determining whether government operation
was or was not efficient, 1 made certain investigations into the opera¬
tions of tlie Boston & Maine. I selected the month of February, and
ascertained the amount of business transacted during that month and
the number of man liours required in the various departments to
transact that business, for the years 1919, 191S, 1917, and 191G. This
was not done in a hasty or perfunctory way. 7Tg went back to the
original payrolls and secured the man hours, both time and overtime,
from the original record. All this consumed considerable time and
money, but 1 felt tliat the inquiry was an important one. MTthout
specifying the details 1 may say to you that to my own surprise it appar¬
ently turned out that the number of hours required to transact a certain
amount of business was less in April, 1919, than it had been under
government control in 1918, or under private operation in 1917, and
just about the same as in 1910.
1 then called in Mr. Hustis and Mr. Pollock, who had operated this
property when it was under private control, and who were operating
it for the government, and 1 asked of them in what essential particular
the expenses of operation could be reduced if the property were then
operated by its owners. Their answer was that no substantial saving
could be made.
16
I should say, to aTokl misapprehension, that a similar investigation
conducted in a somewhat different way upon the Pennsylvania Lines
East showed that labor upon that system was inefficient as compared
with private operation, the per cent of inefficiency running all the way
from nothing up to 33%.
The cost of operation ought gradually to decline in the future.
The efficiency of labor should improve. The price of most materials
should decline. That should bo so either under private or government
control, but these declines will be gradual and cannot be relied upon
to greatly improve net earnings for the first year after private opera¬
tion begins.
To my mind there is no way in which to take care of the Boston
& Maine and these other lines except by an increase in their gross
revenues. There ought to be some increase in traffic which may help,
but in the main this must come from an advance in their transporta¬
tion charges.
It is said that rates have already been advanced and that business
cannot endure a further advance. MTiile it is true that both passenger
and freight rates have been increased, it is also true that those rates
are still relatively low. They are high measured in dollars, but are
low measured either by the cost of the service or the value of the article
transported.
Cost of transportation has ordinarily increased less than any other
considerable Item of cost entering into a manufacturing total, lleck-
oned in per cent of the value of the things transported, the freight
rate is to-day lower upon most articles than it has been for the last
twenty-five years. While passenger fares upon the railroads of Southern
New England have been advanced time after time, there never was a
period when so many people travelled and paid their fares with such
apparent ease as to-day.
Nor do I believe that the business of New England would be
seriously crippled by a further advance in freight rates, provided that
your competitors were forced to bear the same increase in their trans¬
portation charges. But if your transportation charge is for any reason
increased more than that of your competitor, you are at once placed
at a disadvantage. It is this feature of the situation which has
troubled me, and it is to this which you gentlemen should give the
most earnest attention.
Do not infer that I am advocating any wild increase in rates. Some
increase must, in my opinion, bo made. That increa.se should bo just
as little as it can be and serve the purpose. The public should de¬
mand of the Boston & Maine efficiency and economy, but it must permit,
if private operation is to continue, a reasonable return upon the lair
value of the property which is being used in the public service, and
for the first year tliat return, in the interest of the public, should
be too great rather than too small. Whether this advance should be
upon both passenger and freight traffic, whether it should equal lü.
17
or 20, or 2j per cent, must bo detennmed by a painstaking investiga¬
tion in which you gentlemen should participate.
Slanifestly, it is impossible here to enter into any detail as to
this rate situation, but there are certain general facts which as business
men dealing with this situation you should have in mind and which
may be briefly referred to here. Kew England is primarily a manu¬
facturing community. Large sections of it are devoted to agriculture
and never can be devoted to anything else, but the products of these
sections are entirely consumed by near-by New England markets.
Considering this territorial division as a whole, it is a manufacturing
centre.
And this means that it will especially require from its railroads
transportation of three classes of commodities,—fuel, raw materials
including food, and the carriage of its manufacturcxl products.
AVe have in New England a considerable amount of water power,
and tliat power should he fully developed ; but when every ounce of
falling water in New England has been converted into power, only a
fragment of that reqnired has been provided. The great bulk of the
energy which will be required to turn the wheels of commerce and
of manufacture in New England must ho supplied by some sort of fuel,
to-day either by oil or l)y coal.
The raw materials which the manufacturers of New England use
must Ijo brought in from the outside. AVe have to-day our granite.
AA'e have a certain amount of wood which is rapidly diminishing. Our
cotton, our wool, our iron, for the most part our wood, must come from
abroad and usually for long distances. The food consumed by New
England for man and beast is grown in the main many miles away,
hut a fragment of it is still produced at home.
AVhcu our mauufactures have been produced they must be trans¬
ported to the market of consumption, which means a short haul if they
are to go by water and a long haul if by rail. All this indicates that
New England is vitally interested in a low long-distance rate, especially
upon those commodities which can and should he transported for long
distances in heavy car-loads, and frequently in' solid train-loads.
And in this the interest of New England agrees with sound rate-
making. It is often said that long-distance rates are too low in com¬
parison with those for short distances. In the past there have been a
few ridiculously low transcontinental rates, but considered as a whole
it is my conviction that rates for short distances have been too low
rather than too high in comparison with those for longer distances.
The profitable business of carriers has not been that to which high rates
per hundred ijounds have been applied for comparatively short hauls,
but rather that business which has moved long distances in heavy
car-loads, and frequently in train-loads, at extremely low rates per ton
mile. Figures which I have seen but with which I 'will not trouble
you indicate this. The shippers of New England should in my opinion
insist that short-haul rates, especially merchandise rates, be advanced,
but that long-distance rates remain where they are, if possible.
IS
It may be objected, too, that a further advance in short-distance
rates will divert traffic from the railroads to truck, and this without
doubt would finally and, in my opinion, ought to result. A large part
of the traffic between the cities of Southern New England and points
from twenty to one hundred miles distant, depending upon the character
of the traffic, should move by automobile rather than by train. In the
past it has been a cardinal principle with railroads to get all the traffic
upon the best terms possible. A more discriminating policy will pre¬
vail for the future. It is coming to be understood that it costs money
to handle traffic, and that in the interest of the general public. Includ¬
ing the carrier, business should be handled by whatever means a satis¬
factory service can be rendered with the greate.st economy. Sometimes
this is by water, sometimes by rail, sometimes by automobile ; and it
is my conN-iction that In the near future there is bound to be a marked
development in the direction of the latter.
The cost of rendering this terminal service is not adequately ap¬
preciated. If you will look with me into the Inventories of the Boston
& Maine and the New Haven you will come to understand the tre¬
mendous initial expense of supplying these facilities. "We have not
yet completed our land work upon tbe New Haven, and I do not there¬
fore' know what value will he placed upon the lands of that company
in the city of Boston, but I recently saw a statement from a high
official that the company would claim a value of ?50,000,000 in this
city of Boston alone. Think of it! The lands of a single railroad
company in this one city cost more than all the railroads of Vermont
and New Hampshire put together. And this is only for the land; it
does not include the expensive structures placed upon that land. One
of the most serious problems which our railroads must meet in the
future is tbe supplying of tliose expensive terminals, and just in so
far as tbe necessity for such facilities can be properly relieved will tbe
burden be lightened.
There is another reason wliy tlie railroads of New England should
insist upon a proper recognition of these terminal costs. New England
is really a great railroad terminal. The major part of the freight
which is received from without lias been transported long distances
up to the borders of New England, The railroads of Now England
haul it a short distance and perform the dclivciT. The reverse is
true of most traffic out of New England. I have always insisted in
the past that the e-xpense of this terminal service was not properly
recognized in the division of the through rate accorded to these
terminal lines. It has Ijcen and is my profound belief that these divi-
■sions should be revised. In the past tlierc have been various reasons
why such revision could not well he insisted upon. In the future,
matters of this sort will be disposed of more upon a basis of what is
right with less regard to the policy of the situation. Now England
cannot object to sustaining tlie burdon of whatever natural disad¬
vantage she may have, but slie may and should insist upon just
treatment. Something ought to be gained by our railroads through
a more favorable division.
19
AVliat sliftll bo clono for tho immédiate assistance of our New Eng¬
land railroads is a burning ciuostion, but wliat is to be the final dis-
liosition of those ■same railroads is a much broader and more important
one.
x\fter years of effort to enforce competition between railroads
it has finally come to tie generally realized that there can be no com¬
petition in the rate and that competition in tlie service often co.sts more
than it is wortli. Students of the subject generally agree that there
should be a putting together of the weaker and the stronger propcr-
tio.s, and that without this it will be found extremely difficult to
care for the weaker road, which must in some way he done if private
ownership is to be permanent. Now when this unification comes, what
is to be done with our railroads? That question not only will arise; it
has arisen and is before us.
Two things should be kept in view in all discussions of a trans-
l)Ortation situation, rates and service. New England is a transporta¬
tion unit, and I have always felt that rates in ail portions of New Eng¬
land should he the same. Just as the transportation charge upon the
liranch line onglit to be the same as that upon the main line, so the
charge upon the thin line in a section like New England should be no
higher than that upon the more dense line. The whole territory is one
Industrial unit, and each part should contribute to the other.
So long as the railroads of New England are independent it is
impossible to accomplish this. Itates which are ample for the New
Haven would not pay the cost of operation upon the Maine Central,
as abundantly appears from the results of the last year which I gave
you. If, however, llie.se roads were merged into a single unit, the
.same rate might be applied nor would tlie section of heavy traffic feel
appreciably the added burden.
I have also always felt that the rates of New England ought to be
substantially the same as those of the trunk-line territory and Central
Freight Association territory. It may be that the cost of building
and operating a railroad in New England is somewhat higher than in
terntory between tbe Hud.son Klver and the Missis.slppi, but the dif¬
ference is not considerable, and the application of the rule which I
have above stated would call for the same rate in substantially aU
territory east of the Mississippi and north of the Potomac and Ohio.
Now the plan most likely to secure for New England the same
rates as prevail generally east of the Mississippi would bo the con¬
solidation of our New England lines with some strong East-and-West
line. If, for example, the New Haven were turned over to the Penn¬
sylvania, and the Boston & Maine were to become a part of the New
York Central, that result would be very likely to follow.
Looking to the matter of service, there are arguments both ways.
If, the East-and-M'est consolidation plan was to be adopted, turning
the New Haven over to the Pennsylvania, leaving the Boston & Albany
with the New York Ccnti'al as it is, and combining the Boston & Maine
either with the New York Central or possibly with the Erie and the
20
Delaware & Hudson, provided some system sufficiently strong could
be worked out upon that basis, we should have two or three strong
East-and-West lines competing for that business in which New England
has the greatest interest ; namely, the export business through the port
of Boston and the transportation of raw materials, food, and manufac¬
tured articles from and to the "West.
Upon the other hand, if the railroads of New England could be
put into a single unit, that system could stand off all lines bringing
traffic up to the confines of New England, one against the other, and
in addition might have the benefit of Canadian competition. Tbis
last consideration is not to be idly dismissed. In the past these
Canadian roads have been of the greatest service to this section. They
would entirely disappear from the competitive field if the Boston
& Maine were consolidated with any American East-and-West line.
It should also be kept in mind that all these lines reach the port
of New York, and while they might not sacrifice Boston to New York,
they would hardly take the same active interest in our port as would
a New England system.
There is still another factor of extreme importance in all con¬
siderations of our New England transportation, and tliat is the ocean.
If you can go back to the beginnings of New England, you will find
that its strength sprang from the ocean. In those early days New
England was the builder and operator of ships and its wealth and
prestige came from them. That condition may never return, but this
same ocean is to-day the one clement of transportation advantage
which New England has over its manufacturing rivals. While Chicago
is nearer by rail to the sources of its supplies and the markets for
its products than New England, in all territory east of the Rocky
Mountains, New England has a distinct advantage in case of all mar¬
kets of exports and in the markets of the Pacific Coast. It is a
thousand mile.s from Chicago to the ocean, while New England is upon
tlie ocean. I have no time to develop this thought now, but it is a
fact of tremendous importance which should never be forgotten. If
the roads of New England wore an independent system they could
perhaps be of more assistance in connection with your water transpor¬
tation than as if they were yoked up with other lines of railroad
which are competitors with that ocean.
I shall not attempt to-night to suggest the solution of this problem.
I have no clear idea how it can be or ought to be solved. The financial
condition of the two principal systems of New England will make
any consolidation difficult. The very I'corganization of the Boston
& Maine which has been recently perfected will be a possible obstacle.
But in some way this thing must be done and I desire to impress upon
you as representatives of the business interests of New England that
the solution of this problem should not he left with railroads and
hankers. It is your problem and you should bring to its consideration
the very be.st talent which you can command.
It is almost a quarter of a century since I first had to do in a
21
practical way with this railroad problem. Within a year after be¬
coming a member of the Interstate Commerce Commission I said that
the only complete solution of that problem was government ownership,
and that while I would individually oppose it until private operation
had been fairly tried and clearly failed, nevertheless it would finally
come. My belief and position has never changed and is the same
to-night.
The real question is whether the government can operate these
railroads efficiently, and that question can only be answered by an
actual working test. When the war ended I urged that the railroads,
being in control of the government, be retained for a sufficient time
and under suitable conditions to make that test. I still think this
should have been done ; but an overwhelming public sentiment has
decreed otherwise.
On March 1 private operation enters upon its final test. If it
makes good, it will become the permanent policy of this country. If
it fails, public operation in some form must come. I believe it will
fail, but I hope it will succeed and shall do everything in my power
to make it succeed.
Whether it Is to be success or failure depends partly upon the
carrier and partly upon the public. The carrier upon its side must get
over this notion that it is to have an unlimited amount of money with
which it can do anything it pleases and pay anything it pleases. The
expenditure of every dollar must be watched. There must be the
strictest economy, both at the top and at the bottom ; and if there i.s
extravagance at the top you are certain to find it at the bottom.
The public upon its side must become thoroughly saturated with
the idea that the carrier has no dollar except what is contributed by
the public, and that no great business can be economically run with¬
out sufficient revenues. If we are to further try the experiment of
private ownership, let us make that trial a fair one.
22
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