THE TRÜTK
173
ABOÜT THE RAILROADS
RAILWAY RATES AND PRICES
OF COMMODITIES
WHY RATES HAD TO BE
ADVANCED
WHY RATES SHOULD NOT BE
REDUCED NOW
THE SO-CALLED
"GUARANTEE" OF NET RETURN
RAILROAD CAPITALIZATION
AND VALUATION
SOME RESULTS OF GOVERN¬
MENT OWNERSHIP
TYPICAL
EXAMPLES OFANTI-RAILROAD
MISREPRESENTATIONS
LíBRAíír OF COfíGííFSS CÁH¡3 1-081
V/ESTERN RAILWAYS COMMITTEE ON
PUBLIC RELATIONS
PREPARED UNDER THE SUPERVISION
of the
TRANSPORTATION BUILDING
4
CHICAGO
MAY, 1923
THE TRUl H
ABOUT THE RAÏEROADS
RAILWAY RATES AND PRICES
OF COMMODITIES
WHY RATES HAD TO BE
ADVANCED
WHY RATES SHOULD NOT BE
REDUCED NOW
THE SO-CALLED
"GUARANTEE" OF NET RETURN
RAILROAD CAPITALIZATION
AND VALUATION
SOME RESULTS OF GOVERN¬
MENT OWNERSHIP
TYPICAL
EXAMPLES OF ANTI-RAILROAD
MISREPRESENTATIONS
Prepared Under the Supervision
of the
WESTERN RAILWAYS COMMITTEE ON PUBLIC RELATIONS
Transportation Boii-dinq
CHICAGO
May, 1923
THE TRUTH ABOUT THE
RAILROADS.
"l^TEVER in the history of the United States have
' any subjects been more persistently and
recklessly misrepresented than the provisions of
the Transportation Act of 1920, their administra¬
tion by the Interstate Commerce Commission, the
operating results secured and the rates charged by
the railways in the three years since this law was
enacted.
The propaganda which has been carried on
against the Transportation Act and private man¬
agement of the railways under it has been plainly
intended to secure changes in railway legislation
and regulation to prevent restoration of the normal
earning capacity of the railroads. This would
make it impossible for the railroads adequately to
expand their facilities and remedy the great short¬
age of transportation which has resulted from re¬
strictive regulation, government operation during
the war, and the business depression of recent
years. Most of those who are carrying on this
propaganda have been, or even are now, avowed
advocates of government ownership and govern¬
ment management of the railways, or employes'
management under the Plumb plan. Their obvious
purpose is to make adequate development and suc¬
cessful management of the railways under private
ownership impossible and government ownership
unavoidable.
It is desirable that many of the facts bearing
upon the provisions of the Transportation Act and
3
other matters which are the subjects of anti-rail-
road propaganda should be presented in under¬
standable and convenient form, and placed in the
hands of railway officers and others who are inter¬
ested in order that they may be used to counteract
the effects of this propaganda.
That is the purpose of this booklet. It is not
meant to be a comprehensive discussion of the
entire railroad situation and railroad problem, bul
merely to give information and arguments bearing
upon the principal matters now in controversy.
The main ground upon which the railways are
now criticized is that their freight rates are too
high, especially in proportion to the prices of com¬
modities, and particularly of farm products. For
this reason the facts regarding the present rela¬
tionship of railway rates to prices are quite fully
presented herein. It is also shown by incontro¬
vertible evidence that the principal reason why
freight rates are and must be higher than before
the war is that railway operating expenses are
much higher, and that most of the increase in oper¬
ating expenses which made advances in rates
necessary occurred under government operation.
It has been repeatedly and widely charged that
the Transportation Act "guarantees" a net return
to the railroads. The valuation placed upon the
railways by the Interstate Commerce Commission
is attacked upon the ground that it is several
billion dollars too large. These points are discussed
herein, and facts and quotations from official sources
given, answering the misrepresentations mentioned.
There are also given a number of typical exam¬
ples of misrepresentations of the railways which
4
, are being constantly disseminated, together with
answers which have been made to the particular
misrepresentations that are quoted.
It is hoped that those who receive copies of this
booklet will read it carefully and make all the use
of the information it contains that they have oppor¬
tunity to. Any reader who desires additional copies
of the booklet or additional information regarding
railway matters will be furnished it if he will send
request to the address below.
WESTERN RAILWAYS' COMMITTEE
ON PUBLIC RELATIONS,
764 Transportation Building,
Chicago, Illinois.
5
RAILWAY RATES AND PRICES
OF COMMODITIES.
The freight rates of the railways continue to be
the object of many attacks based upon various
grounds.
Since the argument most persistently urged at
present in favor of reductions of freight rates is
that they are too high in proportion to the prices of
commodities, the first subject to be discussed here
is how high freight rates actually are now in pro¬
portion to prices. The figures to be used here are
those for the so-called Class I railroads, they being
the latest figures available and covering about 94
per cent of the total railroad mileage. The whole--
sale prices of the year 1913 and of February, 1923.
will be used as a basis because the Bureau of Labor
Statistics of the United States Department of Labor
regularly publishes statistics comparing current
wholesale prices of commodities with the prices of
the same commodities in 1913, the year before the
war.
The average rate (or revenue) per ton per mile
charged and received by the railways in 1913 was
7.19 mills. The average rate per ton per mile in
January, 1923, according to the statistics of the
Interstate Commerce Commission, was 1.078 cents.
This is the latest figure available, and is 50 per
cent higher than the average freight rate in 1913.
How does this increase in the average rate per
ton per mile charged by the railways compare with
the increase in the wholesale prices of commodities
during the same period. The accompanying table
and diagram show the percentages of increases in
the average freight rates and in the average whole¬
sale prices of the various groups of commodities
^s reported by the Bureau of Labor Statistics in
6
February, 1923, compared with the average freight
rates and prices of 1913:
Increases in Average Freight Rates and in Average Whole¬
sale Prices of Commodities, February, 1923,
as Compared with 1913.
IncreasQ
(%)
Average freight rate (January, 1923, latest figures
available) SO
Average viiholesale prices of farm products 42
Average wholesale prices of foods, etc 41
Average wholesale prices of cloths and clothing 99
Average wholesale prices of fuel and lighting 112
Average wholesale prices of metals and metal products 39
Average wholesale prices of building materials 92
Average wholesale prices of chemicals and drugs .... 32
Average wholesale prices of house furnishings 84
Average wholesale prices of miscell. commodities .... 26
Average wholesale prices of all commodities 57
ñrrCfnf
¡20
too
30
60
40
20
Fu4f
and
ins
%
Building
MatfiriaU
9^
%
Furn
3
use
iMings
AU
Commod-
/lies Freight
Fa
Prod
42
rm
ueh Fo
% 4L
od
%
rtef
.M
a!»
Drugs
and
Si
%
3À
%
Ml
sc.
%
(a) >Jar>uory 1323
The above table and diagram show that the in¬
crease in the average freight rate of the railways,
compared with that of 1913, is more than the in¬
crease in the average wholesale price of farm prod¬
ucts, foods, metals, drugs and chemicals, and mis¬
cellaneous commodities. It shows, also, that the
increase in the average freight rate is less, com¬
pared with that of 1913, than the increase in the
average wholesale prices of cloths and clothing,
fuel and lighting, building materials, house furnish¬
ings, and of all commodities during the same period.
7
Why the Public Thinks Rates High.
Why is it that most people believe that at present
railway rates are relatively much higher than prices
in general when, on the contrary, the average rail¬
way rate is not as high today, in proportion, as the
average wholesale prices of all commodities? The
explanation undoubtedly is to be found in the way
in which freight rates and prices were increased.
There was no increase but actually a slight de¬
cline in railway rates from 1913 to 1917. On the
other hand, during those years there was an in¬
crease in the average price of farm products of 89
per cent, metals and metal products 108 per cent,
and in the average wholesale prices of all com¬
modities 76 per cent, all as shown in the accompany¬
ing diagram. People became accustomed during
these years to paying low railway rates, while they
were themselves charging and receiving greatly in¬
creased prices.
Per Cent of Increases in Average Wholesale Prices and
Decrease in Average Freight Rates.
1917 Compared With 1913.
fítrCent
100
60
60
40
¿0
Me
10,
tats
%
Pro
a.
^ucta
%
AH
Commodifies
/
Freight ra fei decrease 6ot/%J
In 1918, under government operation, and again
in 1920, after the roads were returned to private
operation, advances in freight rates were made.
These advances in rates never were nearly so great
as the increases in prices that occurred. The last
advance in freight rates—that made in 1920—put
the average freight rate only 78 per cent higher
8
than in 1913, although in that year, 1920, prices of
farm products were 118 per cent higher than in
1913 ; building materials 208 per cent higher ; fuel
and lighting 138 per cent higher; cloths and cloth¬
ing 202 per cent higher, and the wholesale prices
of all commodities 143 per cent higher, all as shown
in-the following diagram : '
Per Cent of Increases in Average Wholesale
Prices and Average Freight Rates.
1920 Compared With 1913.
^rCtnf
ZZO
ZOO
leo
¡60
¡40
IZO
¡00
80
60
40
zo
BuHdinß
Mate
riots
3% Clot
ZO
hing
é%
and
Light
/38%
A
Comn
14
n
oditiss
Form
Products
freight
Rates
78%
If there had not come the great decline of prices
which began in 1920, railway rates, despite the ad¬
vance made in them in that year, would still have
been so low as compared with prices that it is
probable another advance in railway rates would
have had to be made.
The record shows that throughout the entire
period of seven years from 1913 to September, 1920,
the producers and shippers of the country enjoyed
freight rates which never were more than 36 per.
cent higher than in 1913, while receiving prices for
9
their commodities which steadily and rapidly in¬
creased until they averaged 142 per cent higher
than in 1913. Then, just as the last and largest
advance in railway rates was made in 1920, prices
began suddenly and violently to decline.
When the conditions suddenly were reversed and
railway rates were for a very short time relatively
higher than prices, there was a loud outcry upon
the ground that railway rates were too high for
shippers to bear them.
As already shown, even this temporary disparity
between railway rates and the average wholesale
price of commodities has now been completely re¬
moved. Freight rates have been reduced until in
January, 1923, they were only 50 per cent higher
than in 1913. Meanwhile, since January, 1922, there
has been a general increase of prices as the result
of which, in February, 1923, they averaged 57 per
cent higher than in 1913. There is now no justi¬
fication whatever for any complaint that freight
rates are relatively higher than prices in general.
The reverse is true at present.
Freight Rates and Prices of Farm Products.
Neverthless many complaints still continue to be
made regarding railway rates, based upon the
ground that they are too high in proportion to the
prices of some commodities. These complaints
come chiefly from the western farmers, and those
who speak for them. It is declared the rates on
farm products are so high in proportion to the
prices being received for them that many farmers
cannot afford to ship their products, or that they
ship them at a loss.
This raises, the question, "How high are railway
rates as compared with the prices of farm prod¬
ucts?" As already shown, the average wholesale
price of all farm products in February, 1923, was
42 per cent higher than in 1913, while the average
freight rate in January, 1923, was 50 per cent higher.
10
But these figures do not present a true picture of
the situation with respect to farm products. Most
agricultural products are produced in and shipped
from the western and southern states. Now, the
increases in the freight rates of the railways in
the western and southern territories have not been
as large as the increases in the rates of the rail¬
ways in the eastern territory. The average freight
rate of the western railways is now only 36 per cent
higher than in 1913; and the average freight rate of
the southern lines is only 41 per cent higher. The
average freight rate in both these territories is,
therefore, relatively lower than the average price
of all farm products.
The "Survey of Current Business" issued by the
United States Department of Commerce ifi April,
1923, gave statistics (p. 5) showing how much
higher in February, 1923, were the prices of thir¬
teen kinds of farm products than in 1913. The fol¬
lowing table shows the increases in average rail¬
way freight rates in January, 1923, and, also in the
prices of various farm products in February, 1923,
as compared with the year 1913 : ^
Freight rates—all Class I roads 50
Freight rates—western roads 36
Freight rates—-southern roads 41
Wheat, No. 1, northern, spring (Chicago) 36
Wheat, No. 2, red, winter (Chicago).. 38
Corn, contract grades. No. 2, cash (Chicago) 18
Oats, contract grades, cash (Chicago) 22
Barley, fair to good, malting (Chicago) 7
Rye, No. 2, cash (Chicago) 36
Tohacco, hurley, good leaf, dark red (Louisville).... 108
Cotton, middling upland (New York) 126
Wool, unwashed, fine (Ohio) 136
Cattle, steers, good to choice, corn fed (Chicago).. 10
Hogs, heavy (Chicago) Dec. 6
Sheep, ewes (Chicago) 43
Sheep, lambs (Chicago) 88
The foregoing figures show that there are very
wide differences in the extent to which the prices
of farm products have increased. Cereals show in¬
creases for barley, of only 7 per cent and for rye,
36 per cent. Spring lambs show an increase of 88
per cent, cotton 126 per cent, tobacco 108 per cent,
and wool 136 per cent.
11
'06 i?7 '08 '03 )0 '// )Z 1313
300
230
g) £60
K
' Z40
M
0
1
8"
f >80
O
8
P 160
p
? 140
5
)00
I""
/i'Af
/Ä<5"
1916
1917
1918
1919
1920 /92I 7922
—Relative receipts per ton-mile obtained by converting actual receipts per ton-mile, as reported by the Interstate Commerce Commission, into index numbers
baaed upon the average of the ten years, 1900-1909. Receipts per ton-mile, for the years 1900 to 1915, are reported by the Interstate Commerce Commission on a
fiscal year basis (years ending June 30th), and for subsequent years on a calendar basis (years endi^ December Slst). In order to have the averages on a comparable
basis throughout, the fiscal year returns were convertea to a calendar year basis by the method indicated in the following example: The calendar year figure for
1900 was obtained by taking an average of the two fiscal years 1900 and 1901. Monthly average receipts per ton-mile are not available prior to March, 1919.
• .•p^elative prices of farm products have been obtained by converting the wholesale prices of farm products reported by the bureau of Labor Statistics, U. S. Depart->
ment of Labor, into index numbers based upon the average of the ten years, 1900-1909.
In all that has been said in the foregoing discus¬
sion, comparisons between present freight rates and
prices of commodities have been based upon the
freight rates and prices of the year 1913. But, as a
matter of fact, these comparisons are wholly unfair
to the railways because for some years prior to 1913
railway rates had been declining, while prices had
been increasing. When the average freight rate of
the railways in the ten years 1900 to 1909, inclusive,
and the average prices of commodities in that ten
years, are taken as bases for comparison, it is found
that the average freight rate of the railways at pres¬
ent is not only much lower than the average price
of commodities, but is relatively lower than the
average price of farm products.
There is published herewith a chart entitled "Rela¬
tive Receipts Per Ton Mile Compared With Rela¬
tive Prices of Farm Products." It is based upon the
average railway rate per ton per mile and the aver¬
age wholesale price of farm products in the ten
years 1900 to 1909, inclusive. The statistics of the
census show that in the ten years 1900 to 1909, in¬
clusive, the farming industry of the country was so
prosperous that the total value of all farms and
farm property actually doubled. Their total value
in 1900, $20,000,000,000, increased by 1910 to $40,-
000,000,000. Since the agricultural industry was so
highly prosperous in those ten years, it cannot, with
any reason, be argued that railway rates were too
high in proportion to the prices received by the
farmers for their products in those years.
Rates Below Farm Prices.
A glance at the accompanying chart shows that
from 1906 to the beginning of the year 1921, the
prices of farm products were always relatively
higher than the average rate of the railways. In
1918, when the first advance in freight rates was
made, the average price of farm products, as this
chart shows, was almost 190 per cent higher than
13
in the years 1900 to 1909, inclusive and at the be¬
ginning of the year 1920, in which year the last
advance in freight rates was made, it was over 200
per cent higher. The increase in freight rates and
the decline in prices in the latter part of 1920 made
the average freight rate somewhat higher than the
average price of farm products during 1921 and dur¬
ing part of the year 1922. But as the result of reduc¬
tions of rates and increases of farm prices the aver¬
age freight rate in the last half of the year 1922 was,
and it is now, actually lower compared with the
year 1906 than the average price of farm products.
It certainly is an astounding thing that, in view
of the fact that for almost fifteen years prices of
farm products were relatively higher, and during
most of this time very much higher, than railway
rates, spokesmen for the farmers should have been
demanding recently that railway rates be reduced
because for a period of only a little over a year
freight rates were relatively higher than the prices
of farm products.
If the farmers have a right to complain because
for a year and a half the prices of their products
were relatively lower than freight rates, then cer¬
tainly the railways have a much better right to
complain because for fifteen years railway rates
were kept relatively much lower than the prices of
farm products.
High Prices of Many Commodities.
The argument is made that the freight rates on
certain farm products, especially cereals, should be
reduced because the rates on these commodities are
relatively higher than the prices that can be ob¬
tained for them. This argument, logically, can
mean only one thing. This is, that the freight rate
that should be charged upon a particular commodity
at any given time should be based on the market
price of that commodity at that time. If this is
sound, then the rate should be reduced on each
14
commodity when its price declines, and also in¬
creased when its price increases. The prices of
commodities fluctuate all the time. If the rate on
a commodity were reduced every time its price went
down, and never increased when its price went up,
obviously the result would soon be that the rate
upon it would be wiped out altogether.
Furthermore, the application of this principle to
the price conditions which prevail at this very time
would make it necessary not only to reduce the
rates on many commodities, but also immediately
to increase them on many other commodities. As
has already been shown, the average freight rate
per ton per mile is now 50 per cent higher than it
was in 1913. Data given in the "Survey of Cur¬
rent Business" of the Department of Commerce for
April, 1923, shows that the prices of the commodi¬
ties listed were the following percentages higher in
February, 1923, than in the year 1913:
Per cent
higher
Tobacco, hurley, good leaf, dark red (Louisville).... 108
Cotton, middling upland (New York) 126
Wool, unwashed, fine (Ohio) 136
Sheep, lambs (Chicago) 88
Sugar, granulated (New York) 58
Cotton yarns, carded, white, northern, mule spun, 22-1
cones, (Boston) 98
Cotton, print cloth, 27 inches, 64x60, 7.60 yards to
pound (Boston) 132
Cotton, sheeting, brown, 4/4 Ware Shoals, L.L. (New
York) ..106
Worsted yarns; 2/32's crossbred stock, white, in skein
(Boston) 125
Women's dress goods, storm serge, all-wool, double
warp, 50 inches (New York) 76
Suitings, wool, dyed blue, 55-56 inches, 16-ounce Mid¬
dlesex (Boston) 127
Silk, raw Japanese, Kansai No. 1 (New York) 141
Leather, chrome calf, dull or bright, "B" grades
(Boston) 67
Boots and shoes, men's black calf, blucher (Massa¬
chusetts) 110
Coal, bituminous, Pittsburgh, mine-run-Kanawha
(Cincinnati) 122
Coke, Connellsville (range of prompt and future) fur¬
nace—at ovens 192
Pig iron, foundry No. 2, northern (Pittsburgh) 83
Pig iron, basic, valley furnace 79
15
Per cent
higher
Lead, pig, desilverized, for early delivery (New York) 85
Lumber, pine, southern, yellow flooring, 1x4, "B" and
better (Hattiesburg district) 121
Lumber, Douglas fir. No. 1, common, sis, 1x8x10
(State of Washington) 112
Brick, common red, domestic building (New York).205
Brick, common building, salmon, run of kiln (Chicago) 77
Cement, Portland, net without bags to trade, f. o. b.
plant (Chicago district) 73
The price of each of these commodities, and
of numerous others that might be cited, was
higher in February, 1923, as compared with the
average railway freight rate, than in 1913. In most
cases the increase in the price of the commodity was
very much greater relatively than the increase in
the average railway rate.
Obviously, if the freight rates should be reduced
on those commodities the prices of which have not
increased as much as the railway rate on them, then
the railway rate should be increased on all those
commodities the prices of which have increased
more than the railway rate on them.
But, as already stated, the prices of commodities
fluctuate constantly. In May, 1920, the price of
granulated sugar in New York was 498 per cent
higher than in the year 1913. In February, 1923,
it was only 58 per cent higher. In May, 1920, the
price of No. 1 northern spring wheat in Chicago
was 254 ijer cent higher than in 1913. In February,
1923, it was only 36 per cent higher. In March,
1918, the price of No. 2 rye in Chicago was 351
per cent higher than in 1913. In February, 1923,
it was only 36 per cent higher. If it is logical to
contend that the railway rate on No. 1 northern
spring wheat should be reduced because the price
of it in Chicago in February, 1923, was only 36
per cent higher than in 1913, then how much should
the railway rate on it have been increased when this
same kind of wheat, in May, 1920, sold in Chicago
for 254 per cent more than in 1913?
16
"A Poor Rule That Works Only One Way."
The grain farmers of the west and their spokes¬
men are especially insistent in arguing that the
rates on cereals should be reduced because they are
selling for only 10 to 40 per cent more than they
were in 1913. But if the rates on some agricultural
products should be reduced because the prices are
low, then on the same reasoning, the rates on other
such products should be increased if there are other
agricultural products that are selling at high prices.
Now, as already has been shown, there are other
agricultural products that are selling at high prices.
The price'of lambs in February, 1923, was 88 per
cent higher than in 1913; of wool 136 per cent
higher ; of cotton 126 per cent higher ; of tobacco 108
pèr cent higher. The prices of these farm products
are relatively much higher than the railway rates
upon them. Will the farmers who produce cotton, to¬
bacco, lambs and wool agree that their freight rates
should be largely increased, while the rates of the
farmers who produce principally grain should be
reduced? There are organizations of farmers which
include in their memberships both cotton growers
and wheat growers. None of these organizations,
however, has as yet advocated an advance in the
rates on cotton which is now selling for 126 per
cent more than in 1913, or on wool which is 136
per cent higher, as well as a reduction of the rates
on barley, the price of which is only 7 per cent
higher.
The railways in 1917 tried to make a general ad¬
vance in freight rates. The average price of farm
products at that time was 89 per cent higher than
four years before. Nevertheless, the representatives
of the farmers then opposed all advances in rates
on farm products as strongly as they would have
done if there had been no increase in their prices
at all.
Suppose freight rates were now advanced on all
the commodities the prices of which are high, and
17
reduced on all the commodities the prices of which
are low. Undoubtedly, the general tendency in
future will be for prices to be equalized by rises in
some and declines in others. It is easily conceivable
that changes in general business conditions may
cause the prices of things that are now cheap to ad¬
vance, and the prices of things that are now high to
decline. If that should be the case, then upon this
theory it would become necessary immediately to
advance the freight rates on the commodities on
which prices had been reduced, and to reduce the
freight rates on the commodities on which prices
had been advanced.
Such a scheme of rate making obviously is im¬
practicable. Freight rates always have been and
always should be made roughly in proportion to
the value of commodities. The rate per ton on silk
obviously should be much higher than the rate per
ton on coal. Furthermore, when the general tend¬
ency of prices is to increase, as it was from 1910 to
1920, freight rates should be advanced in propor¬
tion. But to prevent freight rates from being ad¬
vanced as much in proportion as prices when prices
increase, and then require them to be reduced as
much in proportion as prices when prices decline
would in time wipe freight rates out altogether.
How Much Freight Do Farm Products Pay?
The argument for immediate reductions in freight
rates on farm products is based upon the theory that
freight rates as a whole constitute a very large part
of the total expenses of the farmers as a whole, and
that, therefore, a reduction of say, 25 per cent in
freight rates will do much to restore the prosperity
of the farmers. This is a complete misapprehension.
Freight rates do constitute a substantial part of the
expènses of farmers who produce their crops at long
distances from the great centers of population and
who, therefore, have to ship them long distances.
Freight rates must be relatively high for long
18
hauls, because the cost of rendering transporta¬
tion service long distances is high. But all farms
are not located far from the large markets, and
the fact is that the freight rates on all farm
products do not constitute anywhere nearly as
large a part of the farmers' total expenses as those
who are agitating for reductions in freight rates on
farm products seem to believe. The Department of
Agriculture in a recent statement estimated the total
farm value of all farm products in 1922 at $14,310,-
000,000. This was about $2,000,000,000 more than
the total in 1921. According to the closest estimate
that can be made, the total freight charges paid
on all farm products in 1922 was less than $600,-
000,000. Therefore, the mere increase in the value
of farm products in 1922 was more than three times
as great as the total freight charges paid on them,
and the total freight charges in 1922 amounted to
only about 4 per cent of the total value of these
products.
The American Farm Bureau Federation has esti¬
mated that for machinery, clothing, house furnish¬
ings and other commodities the farmers spend about
$7,000,000,000 a year. A 2 per cent reduction in the
prices of these things, the average price of which is
now relatively higher than freight rates, would re¬
duce the farmers' expenses as much as a 25 per cent
reduction in freight rates on their products. Ac¬
cording to the Farm Bureau Federation, the farm¬
ers pay for interest, annually, about $1,000,000,000.
Assuming that the average rate paid by them is 7
per cent, a reduction of their average interest rate to
6 per cent would save them annually $143,000,000 or
about the same as a 25 per cent reduction in their
freight rates. According to the same authority,
they pay in taxes annually, approximately $663,-
000,000. A reduction of 22 per cent in their taxes
would save them more than a 25 per cent reduction
in freight rates on their products.
19
Increase in Farm Products Transported.
The American Farm Bureau Federation estimates
that the total expenditures of the farmers annually
amount to $9,784,000,000. Therefore, the freight
rates they pay on their own products amount to less
than 6 per cent of their total annual expenditures,
and a reduction of 25 per cent in freight rates would
reduce their total expenditures only about li per
cent.
It has been declared that the freight rates in effect
since 1920 have been so high that the farmers could
not afford to ship their grain and other products to
market—that the rates operated as an "embargo"
upon the shipment of farm products. What are the
facts? The total number of carloads of grain, grain
products and livestock shipped in the year 1919,
before the last advance in rates was made, was
3,745,558; in' 1920 it was 3,396,442; in 1921, 3,789,-
707; and in 1922, 4,105,281.
The total number of carloads of fruits and vege¬
tables shipped in the year 1920 was 640,068. In
1921, it was 731,875, and in 1922, it was 798,997.
This was an increase in the total shipments in two
years of 25 per cent.
There are 22 different kinds of fruits and vege¬
tables, the statistics regarding the shipments of
which, within the last three years, are available.
Of these the shipments of 17 increased in both
1921 and 1922.
In the two years immediately following the last
advance in rates more farm products were shipped
by the farmers and actually carried by the railroads
than in any previous years in the history of the
United States. These cold and indisputable facts
completely refute the assertion that the freight rates
were so high that the farmers could not ship their
products to market.
20
WHY RATES HAD TO BE
ADVANCED.
Many persons ask why it was necessary to ad¬
vance rates to points so high as those reached in
1920. Many ask why they have not been reduced
more than they have been since then. One charge
often made is that the passage of the Transporta¬
tion Act caused them to be advanced, and upon this
ground the repeal of the Act is advocated.
It is desirable that the facts showing why railway
rates had to be advanced in 1920, and why there is
at present no justification for reducing them more
than they have been, shall be presented to the pub¬
lic in a simple, understandable and convincing way.
First, how much have rates been advanced?
There has been much exaggeration about this. All
the important advances in rates were made after
the year 1917. Substantial reductions in freight
rates were made in 1922, most of them on July 1 of
that year. The following figures giving statistics
of the Interstate Commerce Commission for the
average receipts per ton per mile and per passenger
per mile for certain periods show the effects of the
various increases and reductions made since 1917 :
Average Receipts Per Cent Average Receipts Per Cent
Per Ton Increase Per Passenger Increase
Year Per MUe Over 1917 Per Mile Over 1917
(Cents) (Cents)
1917 715 2.090
1919 973 36.1 2.540 22.0
1921 1.263 76.6 3.088 47.7
Last 4 mos.
1922 1.125 57.3 3.086 47.7
The year 1917 was the last year under private op¬
eration which preceded government control. The
year 1919 was the last year of government opera¬
tion, and the only year of government operation
throughout all of which the advances in rates made
by the Railroad Administration in 1918 were in
effect. The year 1921 was the only one throughout
which the advances in rates made in 1920 were in
effect.
21
Large Advance in Rates Made Under
Government Operation.
It will be seen that the advances in rates made
under government control averaged 36 per cent for
freight rates and 22 per cent for passenger rates.
In 1921, the only complete year that the advances
in rates made in 1920 v^^ere in effect, the average
freight rate per ton per mile was 76.6 per cent
higher and the average passenger rate about 48
per cent higher than in 1917. In the last four
months of 1922 the average freight rate was 57.3
per cent higher, and the average passenger rate
about 48 per cent higher than in 1917.
The foregoing figures show that a very large part
of the entire advance in freight and passenger rates
made after the year 1917 was made by the Railroad
Administration while the railroads were being op¬
erated by the government.
The railways were returned to private operation
under the provisions of the Transportation Act on
March 1, 1920. Why was it necessary after that to
make advances in rates in addition to those which
had been made by the Railroad Administration
under government control?
The answer usually made is that this was due to
a large increase in operating expenses. The total
operating expenses of the railways in 1917 under
private operation were $2,858,212,210. In 1919
under government operation they were $4,419,441,-
949. This represented an increase in operating ex¬
penses in two years of government operation of
$1,561,229,739. In 1920, in the last ten months of
which the railways were privately operated, there
was -a further increase in operating expenses of
$1,406,755,525. This made the total operating ex¬
penses for the year $5,826,197,474, or more than
double what they were in 1917.
Railroad managers have been subjected to much
criticism because the last large advance in rates was
made in 1920 after the railways were returned to
22
private operation. It is very easy to demonstrate,
however, that nothing either done or left undone by
the managements of the railways under private
operation created the necessity for the advance in
rates in 1920.
To make this demonstration not only conclusive,
but simple and clear, let us consider the operating
expenses per day of the railways of the United
States in three months, the figures for which are of
vital significance. One of these months is Decem¬
ber, 1917. This was the last month of private op¬
eration during the war. Another of these months is
February, 1920. This was the last month of gov¬
ernment operation. The third month referred to is
September, 1920. This was the first month when
the advance in rates made in 1920 was in effect.
The total operating expenses per day in these
months were as follows;
Operating Expenses Increase Per Day Compared
Per Day with December, 1917
December, 1917.... $ 8,106,521
February, 1920 14,310,450 $6,203,929
September, 1920.... 17,049,432 8,942,911
These figures show that the total increase per day
in operating expenses between December, 1917, and
September, 1920, when the last large advance in
rates was first put in effect, was $8,942,911. They
also show that of this total increase, $6,203,929, or
69.4 per cent, had taken place before the railways
were returned to private operation on March 1,1920.
What caused the rest of the increase in operat¬
ing expenses, amounting to $2,738,982 a day, which
had occurred when the advance in rates went into
effect in 1920? It was due almost entirely to two
things, first, to the large increase in wages granted
to railway employees by the Railroad Labor Board,
effective May 1, 1920, after the roads had been re¬
turned to their owners, and, secondly, to an increase
in the price of coal, which was $3.58 a ton when the
railways were returned to private operation, and
23
$4.55 per ton when the advance in rates went into
eflfect.
Per D»t
The increase in operating expenses under gov¬
ernment control was $6,203,929
The increase in wages granted by the Railroad
Labor Board was running in September, 1920,
at the rate of 2,100,000
The increase in the amount the railways paid for
coal because of the increase in price between
February, 1920, and September, 1920, was.... 414,000
Total .....$8,717,929
The remainder of the increase in expenses was
due to advances in the prices of materials and sup¬
plies and to an increase in the amount of business
handled.
There was another thing which helped to make
necessary the advance in rates in 1920. This was a
great increase in railway taxes.
Taxes in the year 1917 averaged $500,763 per day
In 1920 taxes averaged 768,799 per day
An increase of 268,036 per day
Thus the total operating expenses and taxes per
day of the railways were $8,607,284 in 1917, before
government control, and $17,818,231 per day when
the last advance in rates went into effect in 1920.
The increase per day in total operating expenses
and taxes was, therefore, $9,210,947, or 107 per
cent.
Of this total increase in operating expenses and
taxes 93 per cent was due, first, to increases in op¬
erating expenses under government control; sec¬
ondly, to the advances in wages granted by the
Railroad Labor Board, effective May 1, 1920, and
thirdly, to increases in taxes made by the tax au¬
thorities. In other words, all but 7 per cent of it
was due to the action of government authorities,
and the remainder was due to increases in the prices
of coal, and materials and supplies. Most of the
materials and supplies the railways used during the
first year after they were returned to private opera¬
tion were bought during government control at
24
prices that were accepted by the Railroad Adminis¬
tration. Thus, almost the entire necessity for ad¬
vances in rates was created directly by the action
of government authorities.
Now, although the operating expenses and taxes
of the railways, chiefly owing to the action of gov¬
ernment bodies, had been increased 107 per cent,
their freight rates had been increased under govern¬
ment control only 36 per cent and their passenger
rates only 22 per cent. It was this wide difference
between operating expenses and taxes, on the one
side, and rates on the other, that rendered it abso¬
lutely necessary to make large advances in rates in
1920 after the railways were returned to private
operation.
Why Expenses Increased Under Government
Control.
The charge has been made that the reason for the
large increase in operating expenses under govern¬
ment control was that railway officers deliberately
increased operating expenses to discredit govern¬
ment control. What are the facts? The reasons for
the large increase in operating expenses under
government control were as follows:
First, advances in wages and increases in num¬
ber of employees. The first advance in wages under
government control was made by a commission ap¬
pointed by Director-General McAdoo that did not
have a railway officer on it. All other wages were
fixed under government control by a board created
by Director-General McAdoo, one-half of whose
members were railway officers and one-half repre¬
sentatives of the labor unions. This board had its
office and held all hearings in Washington, and the
Director-General himself approved all the advances
in wages made by it. No railway officer, outside of
the Director-General's office in Washington, had
anything to say about them. The large increase in
the number of railway employees, according to
25
Statements made by both Director-General McAdoo
and Director-General Hines, was due almost en¬
tirely to the establishing of the eight-hour working
day. Railway officers outside the Director-General's
office in Washington, had nothing to do with this.
Second, another large part of the increase in
operating expenses was due to the advance in the
prices of coal. The prices paid for coal were fixed
by the Fuel Administration, a government body.
Railway officers outside of Washington, and even
the Director-General himself, had no part in the
fixing of these prices.
Third, the rest of the increase in expenses was
due to increases in the prices of materials and sup¬
plies. The purchase of these things was under the
supervision of a board of purchasing officers with
offices in Washington, who reported directly to the
Director-General.
When Operating Costs Increased.
The only way that railway officers outside of
Washington could have increased expenses sub¬
stantially would have been by deliberately using
equipment and other facilities inefficiently. The
fact that in 1918 there was two per cent more
freight business and a substantially larger pas¬
senger business handled than in 1917 shows that
railway officers did not use the physical facilities
under their direct control inefficiently.
As has already been shown, operating expenses
and taxes had, in September, 1920, been increased
107 per cent more per day than they were when
government operation was adopted, although the
increase in freight rates made under government
control was only 36 per cent and in passenger rates
only 22 per cent. Statistics for the full year 1921
show that in that year the average freight rate was
76.6 per cent higher than in 1917 and the average
passenger rate about 48 per cent higher. Thus, the
total increase in rates made was relatively much
26
smaller than the total increase in operating ex¬
penses and taxes that had occurred.
In 1920, when the last advance in rates was
made, the average wholesale price of all commodi¬
ties was 142 per cent higher than in 1913.
These statistics demonstrate that the increases in
rates made up to the end of 1920 were relatively
much less than the increases in operating expenses
and taxes that had occurred, or than the increases
in the wholesale price of all commodities.
Senator Cummins's Explanation of Advances
in Rates.
It has been charged repeatedly that it was the
passage of the Transportation Act which caused the
advance in rates in 1920. One of the best answers
to this charge is afforded by the following state¬
ments made by United States Senator A, B. Cum¬
mins, one of the authors of the Transportation Act,
in an address at Des Moines, Iowa, on October 30,
- 1922:
"The Government operated these roads for
26 months. Its net loss for the entire period,
assuming that settlements yet to be made are
made upon the same basis as those already
made, was at the rate of about $45,000,000 per
month. The law provided and the agreements
stipulated to return the roads to their owners
at the end of federal control in as good condi¬
tion as they were when taken over on first of
January, 1918.
"It will be remembered that the railroads
were being returned to their owners with an
average monthly deficit of substantially $45,-
000,000 per month. And also, that for six
months before the return applications had been
pending before the Director-General for a fur¬
ther increase of wages amounting in the agré¬
gate to $8OO,OOO,OO0 per year. It was well
known that all or a large part of this increase
would be granted, and in fact when the appli¬
cations came to be heard by the United States
Railroad Labor Board increases in wages were
27
granted on the 20th day of July, 1920, amount¬
ing in round numbers to $650,000,000 per year.
"I ask you to bear in mind that if rates had
not been increased the railroads as a whole
would have incurred after the first of Septem¬
ber, 1920, for a time at least, a monthly deficit
of $100,000,000 per month and this upon the
assumption that nothing had been expended for
extraordinary rehabilitation. If additional rev¬
enues had not been provided every railroad in
the United States would have been in the hands
of a receiver before the first of January, 1921,
and our system of transportation would have
been practically destroyed.
"The subject would not be complete if I
were not to express my opinion with respect to
the cause or causes of these rates. They are
due wholly to the increased cost of maintaining
and operating the railroads.
"Upon the same volume of business the cost
of maintaining and operating a railroad was a
great deal more than twice the cost of main¬
tenance and operation in 1917, and the situa¬
tion was not essentially changed in 1921. To
this fact, and to this fact alone, must be at¬
tributed the high freight rates of which ship¬
pers complain so bitterly."
Expenses and Rates Cut Under Private Operation.
The foregoing facts demonstrate conclusively
that the passage of the Transportation Act was not
in the slightest degree responsible for any of the
increases in operating expenses which made neces¬
sary the advance in rates in 1920, unless it was for
the advance in wages granted by the Railroad La¬
bor Board effective May 1, 1920; and this advance
in wages caused less than one-fourth of the total in¬
crease in operating expenses that made necessary
the advance in rates. Furthermore, the facts show
that private operation of the railways, after they
were returned to private management under the
Transportation Act, was not responsible at all for
the increase in operating expenses which made nec¬
essary the advance in rates.
28
Let us now see what has occurred since the
Transportation Act was passed and the railways
were returned to private operation in 1920. With
regard to operating expenses—they were $14,310,-
450 a day in February, 1920, the last month of gov¬
ernment operation, and only $13,422,329 a day in
February, 1923, the last month for which figures are
available. Thus, in less than three years of private
operation of railways, expenses were actually re¬
duced $888,121 a day below what they were at the
termination of government operation, although the
railways handled more freight business, paid higher
average wages to their employees and higher prices
for fuel in February, 1923, than in February, 1920.
Computed on an annual basis, the reduction of oper¬
ating expenses that has thus far been made since the
railways were returned to private operation would
amount to over $324,000,000 a year.
THE PUBLIC ALREADY IS RECEIVING
THE BENEFIT OF THIS REDUCTION OF
OPERATING EXPENSES. IN THE YEAR
1922 FREIGHT RATES WERE REDUCED AN
AVERAGE OF 13 PER CENT. ON THE BASIS
OF THE FREIGHT BUSINESS NOW BEING
HANDLED THIS MEANS A TOTAL SAVING
TO THE SHIPPING PUBLIC OF OVER
$700,000,000 A YEAR. (See note.)
Note—The average revenue per ton per mile in 1921
was 1.275 cents
The reductions in freight rates made in 1922 brought
about a reduction, in the five months ended in
.January, 1923, the latest figures available, of the
average revenue per ton mile to 1.113 cents
A decrease per ton mile of 162 cents
Or 12.7 per cent.
In the year 1920 the railroads hauled 410,306,000,000 tons of
freight one mile, a greater volume than ever before or since. Dur¬
ing the first four months of 1923 the increase in freight cars
loaded for shipment over the same period of 1920, was more than
i 1 per cent.
If such increase of 11 per cent during the first four months
of 1923 obtains through the last eight months of this year the
revenue tons hauled one mile during 1923 would probably be at
least 450,000,000,000.
If now we apply the above decrease in average rate per ton
mile of .162 cents to such prospective business of 450,000,000,000
ton miles this year it means a loss to the railroads and a gain
to the shippers of $729,000,000 due to the reductions in rates
of 1922.
29
Cost of Transportation Reduced $729,000 a Day.
When the railways were returned to private op¬
eration the public was not only paying freight and
passenger rates for its transportation, but in addi¬
tion was paying taxes to defray a large deficit that
was incurred by the Railroad Administration. In
February, 1920, the last month of government oper¬
ation, the public paid in rates $14,650,000 a day
for transportation, and, in addition $2,074,000 a day
in taxes to defray the deficit incurred—a total of
$16,724,000 a day. In February, 1923,. there was no
deficit for the public to pay, and the total amount it
paid in rates for transportation was $15,951,407 a
day. This was a total reduction in what the public
paid for transportation since the termination of gov¬
ernment control of $773,000 a day, in spite of the
fact that in February, 1923, the railways handled a
larger business, paid a higher average wage to their
employees,anda higher average price perton for coal.
To this saving should be added the fact that in
February, 1923, the railways paid back to the public
in taxes $155,000 a day more than in February, 1920.
This makes the net cost to the public of its railroad
transportation in February, 1923, $928,000 a day
less than it was in February, 1920, the last month
of government operation, or at the annual rate of
$339,000,000 less a year.
In other words, although rates are somewhat
higher now than at the termination of government
control, not only is the public paying relatively less
for its railroad transportation than at any time since
the Transportation Act was passed, but it is also
paying at the rate of a third of a billion dollars a
year less for it than it was before the railways were
returned to private operation, although more trans¬
portation service is being rendered. Certainly,
these cold and incontrovertible facts afford a con¬
clusive answer to the propaganda that is being so
widely carried on against the Transportation Act
and private operation of the railways under it.
30
WHY RATES SHOULD NOT BE
CUT NOW.
Various arguments are still advanced in favor of
reductions of railway rates.
First, it is declared by some persons that railway
rates are too high in proportion to the prices of
commodities. As has been shown in the foregoing
pages, however, the average freight rate, according
to the latest official statistics, is about SO per cent
higher than in 1913, while the average wholesale
price of all commodities is 57 per cent higher.
Therefore, present prices do not afford any valid
argument for any reductions in rates, unless the
reductions made upon some commodities are to be
fully offset by increases made in the rates upon
other commodities.
Statistician of Interstate Commerce Commission
Says "Rates Not Retarding Business."
Second, it has been declared that the rates inter¬
fere with the shipment of many commodities. The
figures of the American Railway Association and
of the Interstate Commerce Commission show, how¬
ever, that from the middle of October, 1922, to the
end of April, 1923, the total number of carloads
of commodities of all kinds shipped was much
greater than ever before in the same months. The
Interstate Commerce Commission said in its annual
report on December 1, 1922, (page 19), "Manifestly
the existing rates are no longer interfering with the
free flow of commerce as a whole, whatever may
have been the situation prior to the reductions of
July, 1922."
As a matter of fact the carloads of all commodi¬
ties shipped during the six months to April 30, 1923,
was about 23,166,000. This was an increase of 2,736,-
000 cars, or 13 per cent over the six months to April
30, 1920, which was the highest previous record.
Third, there are those who concede that as a mat-
31
ter of principle the railways ought to be allowed to
earn a "fair return" on their valuation, but who con¬
tend that reductions made in wages and other oper¬
ating expenses have resulted in an increase in the net
return being earned by the railroads which would
justify a reduction of rates. What are the facts?
In 1921 the railways earned a net return (net op¬
erating income) after paying their operating ex¬
penses and taxes, of only $615,945,614. This was
not enough to pay their total fixed charges. It was
only 3.33 per cent on the tentative valuation made
by the Interstate Commerce Commission and only
2.95 per cent on their property investment.
In 1922, they earned a net return (net operating
income) of only $777,000,000. This was only 4
per cent on their tentative valuation and about 3.54
per cent on their property investment. Doctor M.
O. Lorenz, Director of the Bureau of Statistics of
the Interstate Commerce Commission, February 23,
1923, gave to the press a statement reviewing the
operating results of the railways in 1922. In this
statement he said :
"In 1922, the net railway operating income,
in spite of a reduction of 10 per cent in freight
rates, effective July 1, 1922, was increased to
$777,000,000. The revival of business more
than overcame the handicaps of the strikes of
the miners and shopmen in 1922. When it is
considered that the interest, rents, and similar
deductions, commonly known as fixed charges,
of these roads are around $669,000,000, it will be
seen that, regardless of any disputes about val¬
uations, the roads did not earn enough in 1922,
even if account be taken of the non-operating
income, which before federal control averaged
about $200,000,000 for the Class I operating
steam roads.
"A substantial margin above fixed charges
obviously is necessary in any business. On the
whole, the present railroad situation, from the
standpoint of railroad finance, clearly does not,
on the one hand, warrant pessimism, nor, on
the other hand, at present, any radical reduc¬
tion in total charges to the public. From the
32
standpoint of the public, which is interested in
adequacy of the service and in the fairness of
the charges, two facts stand out prominently :
(1) An enormous traffic has recently been
handled in spite of the strike handicaps, and
(2) the average revenue per ton per mile is
pretty well in line with the general level of
wholesale prices and there is no reason to be¬
lieve that the general level of rates is retarding
the business revival, whatever may be the ad¬
justments which investigation may show to be
desirable in the relationships between com¬
modities or communities."
Recent Results of Railway Operation.
Some reductions of wages as well as of rates were
made effective on July 1, 1922. The coal strike
lasted until September, 1922, and it was not until
that month, when coal began to move in large vol¬
ume and traffic became relatively normal, that it be¬
gan to be possible to measure the effects upon earn¬
ings and operating expenses of both the reductions
in rates and the reductions in wages. Therefore,
the statistics for the last four months of 1922 afford
the best indication of how well financially the rail¬
ways have been doing on the basis of the new rates
and the new wages. In the following table the re¬
sults in the last four months of 1922 are compared
with the results in the last four months of 1917, the
last year before the government assumed the opera-
Per Cent
Inc. or Dec. I. or D.
over 1917 over 1917
5,725.129,000 4 0
$651,126,436 45.4
$634,469,755 62.4
$ 35,270,034 51.5
11.2
d $ 10,272,700 d3 0
D 30.4
Per Cent
Increase Increase
$ 94,632,532 61.8
58,063,476 60 0
tion of the railways :
Last 4 Months
of 1917
Net Ton Miles 142,057,871.000
Total Earnings $1,435,715,490
Operating Expenses., $1,017,415,224
Taxes $ 68,464,025
Ratio of Operating
Expenses and Taxes
to Total Earnings.. 75.6%
Net Operating
Income $ 339,009,101
Percentage of Return
on Property Invest¬
ment *5.13
( •) Entire year of 1917.
December,
1917
Total Wages $ 153,039,983
Other Operating
Expenses 98,262,163
Last 4 Months
of 1922
147.783.000,000
$2,086,841,926
$1,651,884,979
$ 103,734,159
84.1%
$ 301,736,410
3.57
December,
1922
$ 247,672,515
157,225,639
33
The foregoing table shows that in the last four ^
months of 1922 the railways handled more freight
business than in the same months in 1917, and that
their earnings were 45 per cent greater. It also
shows, however, that their operating expenses were
* 62 per cent higher and their taxes 51.5 per cent
higher than in the same months of 1917. In the last
four months of 1917 it took only 75.6 cents out of
each dollar they earned to pay their operating ex¬
penses and taxes, while in the last four months of
1922 it took 84.1 cents out of each dollar they earned
to pay their operating expenses and taxes. The re¬
sult was, that while within the last five years there
has been a substantial increase in the investment in
the railroads, the net operating income earned by
them showed a decline. In the entire year 1917, the
net return earned by them oil their property invest¬
ment was 5.13 per cent, while in the last four
months of 1922 it was at the annual rate of only
3.57 per cent.
The wages paid to employees were not published
monthly in 1917. It happens, however, that the
amount of wages paid in December, 1917, is known.
The comparison given in the table between the
wages paid in December, 1917, and in December,
1922, shows the principal reason why operating ex¬
penses continue to be so much higher than they
were five years ago. Wages in December, 1922,
were almost $95,000,000 more, or nearly 62 per
cent greater than in the same month of 1917, while
all other operating expenses were about $59,000,000
more, or 60 per cent greater.
Wages Still Up 62 Per Cent Since 1917.
The facts, then, at the end of year 1922 were as
follows :
First, railway employees were receiving 62 per
cent more wages than at the end of 1917, and other
operating expenses of the railways were 60 per cent
higher than they were then.
34
Secondly, the government was collecting 51.5 per
cent more taxes from the railways than in 1917.
Third, the railways were rendering the public an
increased freight service, and were receiving 45 per
cent more earnings, but because of the large in¬
crease in their operating expenses and taxes they
were paying 84 cents out of every dollar they
earned in expenses and taxes, as compared with
75.6 cents in 1917, while the percentage of return
being earned by them on their property investment
was only 3.57 per cent.
There has since been an increase in the percent¬
age of return being earned, this having been in
January, 1923, at an annual rate of 5.54 per cent.
This, however, was the first month since the Trans¬
portation Act went into effect that the return earned
has been at a rate exceeding 5j4 per cent on the
valuation as already shown. In 1921 the net
return earned was only 3.28 per cent and in 1922,
only 4 per cent on the valuation. The Interstate
Commerce Commission has held that the railways
are entitled to earn an annual return of per cent
on their valuation. They have not come anywhere
near doing this yet, and any substantial reduction of
rates would indefinitely postpone the time that they
would be able to do so.
Reduction of Rates Would Increase Shortage of
Transportation.
It is as desirable from the standpoint of the pub¬
lic as from the standpoint of the owners and man¬
agers of the railways, that the net return earned by
them should increase. Shippers and travelers are
not affected merely by passenger and freight rates.
They are also affected by the ability of the railways
to render them as much and as good service as they
need. The railways at present are unable to render
shippers the transportation service they need. In
every period of active business since 1916 there has
been what has been called a "car shortage," but what
35
really has been a shortage of all facilities of railroad
transportation. Every day from the latter part of
September, 1922, when coal mining was resumed
after the strike, until the present time, there has
been a "car shortage," and this car shortage has
been the largest ever known. All signs are that
there will be a shortage of transportation through¬
out the entire year 1923, and that it will reach its
maximum next fall.
Why Railways Cannot Handle More Business.
The reasons for this shortage of transportation
are well known to railway officers and ought to be
well known to the public. As a result of restrictive
railway regulation, and operation by the govern¬
ment for two years, there has been a great decline
in the development of the railways within recent
years. The increase in the tractive, or pulling,
power of all locomotives in the eight years ended
June 30, 1914, was over 62 per cent, while the in¬
crease in the tractive power of all locomotives in the
seven and one-half years ending with December 31,
1921, was only 21 per cent. The increase in the
carrying capacity of all freight cars in the eight
years ending with June 30, 1914, was 55 per cent,
while the increase in the carrying capacity of all
freight cars in the seven and one-half years ending
with December 31, 1921, was only 10 per cent.
Stated in numbers of locomotives and cars, the
figures are even more striking. The increase in the
number of locomotives in the country in the first
period mentioned, that ending in 1914, was 15,340,
and the increase in the number of freight cars was
511,820. In the second period mentioned, that end¬
ing in 1921, the increase in the number of locomo¬
tives in the country was only 1,706, and the increase
in the number of freight cars, only 28,948. In the
earlier period the increase in the railroad mileage of
the country was 27,742 miles, while between 1914
and the end of 1921 there was an actual decline of
36
61 miles in the amount of railroad mileage in the
country.
What the country needs, far more than a reduc¬
tion of rates, is an increase in the expansion of the
railroads so that they will become able to handle
more business. But additional tracks, larger termi¬
nals and more locomotives and cars can be paid for,
directly or indirectly, only out of net return (net
operating income). In other words, they must be
either directly paid for with earnings that are left
after paying operating expenses and taxes, or they
must be paid for with money derived from the sale of
stocks, bonds and other securities ; and more securi¬
ties cannot be sold unless increased net operating
income can be earned with which to pay interest
and dividends upon them.
Therefore, any reduction of rates which would
prevent the railways from increasing the net return
earned by them would do the shippers and other
people of the country much more harm than good,
because what the public would gain through reduc¬
tions of rates would be only a fractional part of
what it would lose because of resulting inability to
get enough transportation to ship its products.
Ten Years Ago — And Now.
In January, 1923, the average freight rate was
50 per cent and the average passenger rate 55 per
cent higher than in 1913.
The average wholesale price of all commodities
was 56 per cent higher.
The average cost of living in 32 cities was 69
per cent higher.
Railroad operating expenses in 1922 were 111 per
cent, and taxes 157 per cent higher than in 1913.
The average monthly wage of each railroad em¬
ployee in January and February, 1923, was 119 per
cent more than in 1913.
How, in view of such facts, can a valid argument
be made now for lower railroad rates?
37
THE ALLEGED "GUARANTEE"
OF THE NET RETURN OF
THE RAILROADS.
Ever since the Transportation Act was passed by
Congress early in 1920 the assertion has been made
repeatedly and persistently by certain classes of
politicians and labor leaders that under the provi¬
sions of this law the government "guarantees" to
the railroads a fixed net return. The net return al¬
leged to be "guaranteed" is stated as from Syí to 6
per cent.
As a result of this statement in numerous public
addresses and newspapers many persons have been
led to believe the government is bound by the pro¬
visions of the Transportation Act either, first, to fix
rates so that the railways will at all times earn the
net return said to be "guaranteed," or, second, if
the rates are not made high enough for this, to pay
to the railways from the public treasury any differ¬
ence between the amounts said to be "guaranteed"
and the net return actually earned.
The effect of this propaganda regarding the so-
called "guarantees," upon public opinion in many
parts of the country, was stated as follows by the
Honorable Sydney Anderson, representative in
Congress from Minnesota, chairman of the House
Committee on Agriculture, in an address at Chi¬
cago, December 8, 1922 ;
How the Public Has Been Misled.
"I have just been through a political cam¬
paign in which the Transportation Act was the
chief issue. I found that the people and
agencies that opposed the policies in the Trans¬
portation Act had been busy ever since its
passage, creating unfavorable public opinion in
regard to it.
"I suppose that it was generally understood
that when the government turned the railroads
back to their owners in March, 1920, it turned
38
them back with an operating deficit which
previously had been paid from the Federal
treasury, and that when they were so turned
back, payment of this deficit was of necessity
transferred from the public treasury to those
who 'pay the freight'. But I heard every pos¬
sible reason assigned for the increases in rates,
except this one.
"I had a right to expect that there would be
some public understanding of the fact that' the
government had in no way agreed to make up
the difference between what the railroads
earned individually or in the aggregate, and the
return prescribed in the law or by the Inter¬
state Commerce Commission. But I found
there were thousands of persons in the country
who believed the contrary, and that the gov¬
ernment was paying the railroads millions of
dollars, upon the supposed obligation created
by this provision."
The provisions of the Transportation Act do not
guarantee to the railways as a whole or to any in¬
dividual railway a net return of 6 per cent or any
other amount.
That this is true is clearly shown by the wording
of the Act. It is further shown by positive state¬
ments which have been made by the authors of the
Transportation Act, by other public men, by lead¬
ing economists, and by the Interstate Commerce
Commission itself, which has the duty of carrying
out the provisions of this law.
The So-called "Guarantee" Provisions.
The part of the Transportation Act in which it
has been charged that a "guarantee" of net return
is given to the railways is the part which is known
as "Section 15-A." Every person who undertakes
to participate in current discussions of railway
regulation should carefully study the wording of
Section 15-A; unquestionably it will be the subject
of much controversy during the next year inside
39
and outside the halls of Congress. The following
quotation gives the exact language of this Section:
"In the exercise of its power to prescribe
just and reasonable rates the Commission shall
initiate, modify, establish or adjust such rates
so that carriers as a whole (or as a whole in
each of such rate groups or territories as the
Commission may from time to time designate)
♦will, under honest, efficient and economical
management and reasonable expenditures for
maintenance of way, structures and equipment,
earn an aggregate annual net railway operating
income equal, as nearly as may be, to a fair
return upon the aggregate value of the railroad
property of such carriers held for and used in
the service of transportation ; Provided, That
the Commission shall have reasonable latitude
to modify or adjust any particular rate which it
may find to be unjust or unreasonable, and to
prescribe different rates for different sections of
the country.
"The Commission shall from time to time
determine and make public what percentage of
such aggregate property value constitutes a fair
return thereon, and such percentage shall be
uniform for all rate groups or territories which
may be designated by the Commission. In
making such determination it shall give due
consideration, among other things, to the trans¬
portation needs of the country and the neces¬
sity (under honest, efficient and economical
management of existing transportation facil¬
ities) of enlarging such facilities in order to
provide the people of the United States with
adequate transportation ; Provided, That dur¬
ing the two years beginning March 1, 1920, the
Commission shall take as such fair return a
sum equal to Syi per centum of such aggregate
value, but may, in its discretion, add thereto a
sum not exceeding one-half of one per centum
of such aggregate value to make provision in
whole or in part for improvements, betterments
or equipment, which, according to the account¬
ing system prescribed by the Commission, are
chargeable to capital account."
Now, just what do these provisions mean?
40
Those who wrote the law should be best able to
answer this question. The Transportation Act is
also called the "Esch-Cummins" Act because its
principal authors were Senator A. B. Cummins of
Iowa, chairman of the Senate Committee on Inter¬
state Commerce, and the Honorable John J. Esch,
formerly chairman of the House Committee on In¬
terstate and Foreign Commerce, now a member of
the Interstate Commerce Commission.
Senator Cummins Declares "There is No
Guarantee."
On October 30, 1922, Senator Cummins, in an
address at Des Moines, Iowa, made the following
statement regarding these provisions.
"It will be noted that during the first two
years of the operation of the Act, namely, until
March 1st, 1922, the Interstate Commerce Com¬
mission is directed to take as a fair return Syi
per centum upon the aggregate value of the
railroad property, and that, in its discretion, it
was authorized to add one-half of one per
centum to make provision in whole or in part
for improvements, betterments, and equipment,
which, according to the accounting system pre¬
scribed by the Commission, are chargeable to
capital account. This means, of course, that
not more than per centum could be raised
for distribution either as interest upon bonds
or dividends upon stock.
"It is to be observed, first, that this proviso
of the section expired on the first of March,
1922, and is not in any manner responsible for
the rates which now prevail. I do not, how¬
ever, say this in apology for it. It is absolutely
sound economically. It is in no sense a guar¬
antee. It is simply a declaration by Congress
that in its judgment a return of 5}4 per cent
would meet the Constitutional requirement that
private property shall not be taken for public
use without just compensation.
"I repeat that it is not a guarantee as at once
must be admitted when it is remembered that
during the year 1920 the net operating income
of all the roads was less than one-third of one
41
per cent, and during the year 1921 and the first
two months of 1922 the net operating income
of all the roads was substantially 3 3/10 per
cent, and ho one contends or has ever sug¬
gested that the government is under any obli¬
gation to make up the difference between the
actual net earnings of the railroads and the Syi
per cent.
"With this statement for the period ending
March 1, 1922, let us examine that part of the
law which is permanent in its duration. The
statute as now in force provides : Tn the ex¬
ercise of its power to prescribe just and reason¬
able rates the Commission shall initiate, mod¬
ify, establish or adjust such rates so that the
carriers as a whole (or as a whole in each of
such rate groups or territories as the Commis¬
sion may from time to time designate) will,
under honest, efficient and economical manage¬
ment and reasonable expenditures for mainte¬
nance of way, structures and equipment earn an
aggregate annual net railway operating income
equal, as nearly as may be, to a fair return upon
the aggregate value of the railway property of
such carriers held for and used in the service
of transportation: Provided, That the Commis- ,
sion shall have reasonable latitude to modify
or adjust any particular rate which it may find
to be unjust or unreasonable, and to prescribe
different rates for different sections of the
country.'
"In every respect save one the paragraph
just quoted is the declaration of the Constitu¬
tion as construed again and again by the Su¬
preme Court. That court has many times
announced a rate or body of rates prescribed
by a Congress, a Legislature, or a Commission
which does not allow a fair return upon the
value of the property which renders the service
is confiscatory and unconstitutional. It has
more than once set aside a body of rates which
allowed a greater rate of return than the rail- ■
roads have received since September 1, 1920.
"It is quite impossible to perceive the justice
of a criticism upon this part of the law for it is
nothing more than an accurate repetition of the
Constitution and the repeated decisions of the
Supreme Court interpreting it. If the Con-
42
gress had directed the Commission to do less
than to adjust rates that would make a fair re¬
turn, or if the Commission without direction
had done less, the Act of Congress or the act of
the Commission would have been in violation
of plain duty and the clearest commands of the
Constitution."
Interstate Commerce Commission Says "It is Not
a Guarantee."
As already said. Honorable John J. Esch, who
was one of the principal authors of the Transpor¬
tation Act, is now and has been since May, 1921, a
member of the Interstate Commerce Commission.
In October, 1921, after Mr. Esch became a member
of it, the Commission rendered a decision in the
Western Grain Rates case. In this case it ordered a
reduction of freight rates, despite the fact that the
railways were not earning, and never had earned in
a single month since the Transportation Act was
passed, the net return which Congress had said
should be regarded as a reasonable net return until
March 1, 1922.
In its opinion in the Western Grain Rates case,
the Interstate Commerce Commission said :
"The duty cast upon us by Section 15-A is a
continuing duty and looks to the future. It
does not constitute a guarantee to the carriers,
nor is the obligation cumulative. We are not
restricted by past or present statistics of oper¬
ation and earnings. These are serviceable only
as they illuminate the fu.ture. What is con¬
templated by the law is that in this exercise of
our rate-making power the result shall reflect
our best judgment as to the basis which may
reasonably be expected, for the future, to yield
the prescribed return."
In the same opinion it said:
"The transportation machine of the country
is being used for the benefit of the shippers and
railway employees, and the owners of the ma¬
chine are receiving much less for its use than
the law says they are entitled to."
43
A "Limitation," Not a "Guarantee."
On May 24, 1922, the Interstate Commerce Com¬
mission rendered a decision in a case involving the
question of general reductions of rates. It vi^as still
true up to that time that the railways never in a
single month had earned as much net return as Con¬
gress, in the Transportation Act, had indicated that
it would be reasonable for them to earn. Neverthe¬
less, in this case also the Commission ordered a re¬
duction of rates. In its opinion in this case the
Commission said;
"The carriers must attract money by rates of
return and stability of investment. While rates
must not exceed a reasonable charge against
the public served they must be such as to ob¬
tain the needed new capital. It is necessary to
determine and make public, as required by
Section 15-A, a percentage of fair return. De¬
termination of the percentage implies, or carries
with it, no guarantee. Read in connection with
the provision for recapture of one-half of the
excess above 6 per cent it is, instead, a limita¬
tion."
The Joint Commission of Agricultural Inquiry
was a commission composed of members of both
the United States Senate and the House of Repre¬
sentatives created to report upon the condition of
agriculture. Representative Sydney Anderson of
Minnesota was chairman of this Commission. Its
other members were as follows : Senators Irvine L.
Lenroot of Wisconsin, Arthur Capper of Kansas
(Leader of the farm" bloc), Charles L. McNary of
Oregon, Joseph T. Robinson of Arkansas, and Pat
Harrison of Mississippi, and Representatives Ogden
L. Mills of New York, Frank H. Funk of Illinois,
Hatton W. Sumners of Texas, and Peter G. Ten
Eyck of New York. This commission rendered its
report in October, 1921. In Part HI of its report,
(pages 402 and 403) which is entitled "Transporta¬
tion" the Commission made the following state¬
ment:
44
"Probably no section of the Transportation
Act has been more misunderstood in terms and
in application than Section 15-A. * * -The
provision fixing the fair rate to the railroads at
5^ to 6 per cent expired by the terms of the
Act, March 1,1922. There is no suggestion that
this provision should be revived or extended.
The purpose of this provision was to stabilize
railroad credit and permit a level of rates which
would produce revenues equal to operating ex¬
penses and a fair return upon the aggregate
value of railway property put to public use.
Notwithstanding this provision, the economic
conditions existing in 1920 and 1921 were such
that the net returns to the railroads, on the
tentative value fixed by the Interstate Com¬
merce Commission of $18,900,000,000, at no
time during this period exceeded per cent."
It will be noted that the report in which the fore¬
going statement was made was signed, among
others, by Senator Arthur Capper of Kansas, leader
of the farm bloc in Congress.
Net Return $1,201,000,000 Less Than
"Fair Return."
Even more conclusive proof that there is no
"guarantee" than is given by the foregoing quota¬
tions from the most authoritative sources is afforded
by the cold facts regarding the net returns which
the railways actually have earned and 'received un¬
der the provisions of the Transportation Act.
The rate making provisions directed the Inter¬
state Commerce Commission to fix rates that would
enable the railways "as nearly as may be" to earn a
"fair return" upon their valuation, and directed it
to take as a measure of fair return for the two years
ending with March 1, 1922, not less than per
cent. The Commission ruled in the 192Û rate case
that a fair return at that time would be 6 per cent.
In the 1922 reduced rate case, the Commission held
that a fair return after March 1, 1922, would be
per cent.
45
What have the railways actually got? In the
first year after their return to private operation,
that ended on March 1, 1921, they had a net return,
including government guarantees for six months of
that year, of only 3^ per cent. In the year ending
March 1, 1922, they had a net return of 3.65 per
cent. The average for the two years was 3.57 per
cent. For the entire two years it was $918,000,000
less than a return of six per cent on their valuation,
and $730,000,000 less than the 5^ per cent expressly
mentioned in the law.
Despite the fact that the railways during these
two years received $730,000,000 less than the mini¬
mum return mentioned by the law, the Commission,
immediately after the termination of these two
years, yielded to public demand and made a general
reduction of freight rates. During the next twelve
months, those ending with February, 1923, the rail¬
roads failed by $283,000,000 to earn the 5f per cent
fixed by the Commission as the fair return after
March 1, 1922. The net returns which the railways
received in the first three years after the Transpor¬
tation Act went in effect totalled $1,201,000,000
less than the amount determined upon by the Com¬
mission as a fair return on the valuation of the rail¬
ways. It has been, in fact, despite the provisions of
this Act, the smallest return they ever have re¬
ceived in any equal period since statistics for the
railways as a whole have been kept.
It is inconceivable that if the Act had never been
passed, regulation would have, or could have re¬
stricted them to a lower return than this. But
while the rate-making provisions thus far have done
the railroads no good, they have, in one respect,
done them harm. They have afforded pretext for
the widespread dissemination of propaganda to the
effect that the railways are "guaranteed" a return
of 5^2 or 6 per cent, and this propaganda has done
much to create a hostile public sentiment.
46
RAILWAY CAPITALIZATION
AND VALUATION.
The charge, made so frequently, that the rail¬
ways of the United States as a whole are over¬
capitalized is based upon the fact that some rail¬
ways are known to be overcapitalized, and ignores
the fact that some are known to be undercapitalized
—that is, to represent an actual investment and
value exceeding their total capitalization.
The charge of overcapitalization began to be
made persistently some years ago. The man who
made it most persistently and in the most exagger¬
ated form was Senator La Follette of Wisconsin.
Mr. La Follette, in advocating a valuation of the
railroads by the Interstate Commerce Commission,
contended that this valuation would support his
charge of gross overcapitalization.
How the Valuation Was Made.
In 1913 Senator La Follette secured the passage
by Congress of a law of which he was the author,
requiring the Interstate Commerce Commission to
make a valuation of all the railways, and specifying
in some detail just how this valuation should be
made. It was to consist chiefly of an inventory of
the physical properties actually used in rendering
the service of transportation.
In obedience to the La Follette law the Interstate
Commerce Commission began in 1914 to make a
valuation of the railways, most of the work on
which had been done in 1920 when the railways
were returned to private operation.
The Esch-Cummins Transportation Act directed
the Interstate Commerce Commission to so fix the
rates of the railways as to enable them to earn a
fair return upon the value of their properties, and
in arriving at such valuation to take into considera¬
tion all the facts it had collected in carrying out the
provisions of the La Follette Valuation Law. In its
47
decision in the Advanced Rate Case in 1920 the In¬
terstate Commerce Commission, for the purpose of
that case, placed upon all the railways a tentative
valuation of $18,900,000,000.
The Interstate Commerce Commission again took
up the question of valuation in the case involving
reductions of rates which it decided in May, 1922.
In that case the question was raised as to whether
the valuation made by it two years previously was
reasonable, and some representatives of shippers
and of state commissions sought to show that it
was too large. The Interstate Commerce Commis¬
sion, in its opinion in this case, expressly stated
that subsequent investigation had supported its
view that the valuation made by it in 1920 was
reasonable.
The fact should not be overlooked that the Inter¬
state Commerce Commission made this valuation
chiefly in accordance with the requirements of a
law the author of which was Senator La Follette,
who expected confidently the valuation would show
that the railways were overcapitalized. What was
the capitalization of the railways at that time?
The Real Capitalization of the Railways.
The nearest date for which complete statistics of
the Interstate Commerce Commission are available
regarding the total capitalization of the railways is
December 31, 1920; and these figures are published
in its statistics of railways for that year, pages 29
and 30. These figures show that for railways hav¬
ing a total of 247,052 miles of line there were then
in existence securities amounting to $21,891,450,785.
But as the Commission says on page 29, "Of this
amount $4,897,520,522 was held by reporting rail¬
way companies, so that $16,993,930,263, or $68,787
per mile of road, is the net sum that would be
necessary to purchase these roads, considered as
one system, on the basis of the par value of their
48
stocks and bonds not held under railway owner¬
ship." The Commission also says :
"The capital of switching and terminal com¬
panies actually outstanding w.as $565,563,744,
of which at least $145,515,533 was held by rail¬
way companies. Adding the difference, $420,-
048,411, to the $16,993,930,263, the total net
figure for railway capital becomes $17,413,-
978,674."
To summarize them the statistics of the Inter¬
state Commerce Commission show the following;
"Tentative valuation of the railways Sept. 1,
1920, $18,900,000,000; total net capitalization of
the railways December 31, 1920, $17,413,978,-
674."
These are not statistics made up by railway stat¬
isticians. They are made by the Interstate Com¬
merce Commission, the government body created
to ascertain the facts about the railways and give
them to the public, including facts about their valua¬
tion and their capitalization. Therefore, this gov¬
ernment body which represents the public, and the
public alone, is authority for the statement that the
value of the property of the railways in 1920 ex¬
ceeded their net capitalization by almost $1,500,-
000,000.
Attacks Upon the Interstate Commerce
Commission Valuation.
The tentative valuation made by the Interstate
Commerce Commission in deciding the rate ad¬
vance cases in 1920 was soon attacked by various
persons as excessive. Most of those who criticised
it were radical labor leaders, or persons pretending
to speak on behalf of the farmers. Clifford Thorne,
a lawyer who had appeared against the railways in
every important rate case before the Commission in
ten years, got the American Farm Bureau Federa¬
tion to adopt a resolution declaring that the valua¬
tion was $5,000,000,000 too large. He declared that
computations made by him, based on the market
49
prices of railway securities, showed that the total
value of railway securities in 1920 was only about
$13,000,000,000.
Glenn E. Plumb, author of the Plumb plan for
government ownership and employees' management
of the railways, took the figures regarding tentative
valuations of a few small roads which the Interstate
Commerce Commission had made public, and based
upon them a calculation from which he concluded
that the total value of the railways was $9,400,-
000,000. By another method of computation he
arrived at a valuation of $10,100,000,000.
The various "valuations" of the value of the rail¬
ways made by critics of the commission's valuation
differed among themselves by as much as $4,500,-
000,000. It was charged repeatedly, and is still
charged, that the Commission's valuation recog¬
nized a large amount of so-called "watered" securi¬
ties.
Conamission Sustains Its Valuation.
The Interstate Commerce Commission, in its
opinion ordering a general reduction of freight rates
on May 24, 1922, commented upon the attacks which
had been made upon its valuation, as follows:
"We have before us deductions made by cer¬
tain of the state commissions and shippers,
based upon the results of the valuation work
under Section 19a so far as announced, and also
computations based upon the market value of
outstanding stocks and bonds.
"More than 20 months have passed since our
former determination, and in that period the
valuation of the railroads under Section 19a
(the LaFollette valuation law) has gone for¬
ward. The work is still incomplete, but has
progressed to such an extent that we may ac¬
cept the results with fuller assurance, both as
to particular roads and as showing general
trends and principles. In our administration of
various sections of the act, and in our certifica¬
tion of standard return for the purposes of the
SO
Federal control act, we have had occasion to
make further investigation and corrections of
investment accounts of the carriers.
"The various other values and elements of
value, as set forth in Increased Rates, 1920,
have been re-examined in the light of the pres¬
ent record and the requirements of Section ISa.
We find no present reason to disturb the value
taken by us in that proceeding as approxi¬
mating the sums there* stated, except to the
extent that subsequent additions to or with¬
drawals from the property in service, including
materials and supplies and working capital, and
further depreciation, made adjustment neces¬
sary."
The additions made to the valuation because of
investments made in the properties of the railways
since the original tentative valuation was made
have increased the tentative valuation of all roads
to about $19,400,000,000, or about $2,000,000,000
more than their net capitalization was at the end
of 1920.
Chairman Clark Says Stocks and Bonds Were
Not Considered.
E. E. Clark, then chairman of the Interstate
Commerce Commission, in testifying in January,
1921, before the Senate Committee on Manufac¬
tures, made the following statements regarding the
way in which the tentative valuation placed upon
the railways by the Commission was made:
"Stocks and bonds were not considered at all.
The question of capitalization was not thought
of. It is the fair value as closely as could be
estimated and approximated at that time of the
physical property which was devoted to the
transportation service. We had a mass of in¬
formation gathered in our valuation work,
which is not in complete form to be given out
in the form of reports and findings, and the
Transportation Act specifically authorized us to
avail ourselves of that information. We availed
ourselves of all the information we could.
51
"The principal figures that were used in our
valuation are as of 1913 and 1914. We fixed
the unit price on a given railroad valuation as
of June 30, 1914."
In other words, the valuation was not based on
the wages of labor and prices of material in 1920,
but on the wages of labor and the prices of material
in 1913 and 1914, when, of course, they were less
than one-half as high as they were in 1920.
Commissioner Hall Tells How Valuation
Was Made.
One year later, on January 5, 1922, the attacks
upon the Interstate Commerce Commission's valua¬
tion having continued, Henry C. Hall, a member of
the Commission, appeared before the Senate Com¬
mittee on Interstate Commerce and gave details
not previously made public by the Commission as
to how it had made its tentative valuation. Mr.
Hall denied the assertion made frequently that the
property investment accounts of the railroads were
taken as a basis. Before the hearing on the rate
advance case in 1920 began, Mr. Hall stated. Com¬
missioner Aitchison was designated to take charge
of the compilation of the data to be used in fixing
the value. He read a statement prepared by Mr.
Aitchison outlining the methods used in preparing
the voluminous tables and schedules placed before
the Commission for its decision. The Commission,
he said, felt called upon to use to the fullest extent
the results of the investigation made under the
Valuation Act of 1913 in so far as they were deemed
available. The facts taken into consideration, as
required by the LaFollette law, were:
The original cost.
The cost of reproduction.
Depreciation.
Account of investment.
Corporate history of the property.
The value of lands.
Other values or elements of value.
52
The Commission also had before it the property
investment accounts, which had been under its
supervision since 1907, although it had not been
possible to police these accounts thoroughly during
that time, and a thorough study was made of the
results of such inspections of the accounts and cor¬
rections of errors as had been made in particular
investigations by the Commission. There was also
an investigation of the amount and distribution of
additions and betterments made since the date of
valuation, and of the amounts of working capital,
materials and supplies, etc., on hand. The Commis¬
sion also had the earning power of the carriers un¬
der different levels of rates and the results during
the three-year test period. Consideration was given
to all these matters and the resulting sums were
capitalized at various percentages.
"We had all these things before us and our minds
finally settled on a figure," Mr. Hall said. "We
didn't take $18,900,000,000 and then distribute it;
we worked up to it. We took all the testimony and
considered it and our judgment in weighing it rep¬
resents the composite of many minds."
He pointed out that the carriers had claimed as
their property investment, $20,400,000,000.
Senator Atlee Pomerene, of Ohio, said to Com¬
missioner Hall:
"In any event you are entirely satisfied that
your valuation of $18,900,000,000 was more
nearly correct than these valuations which are
spread broadcast based on the market value of
the railways securities?"
Commissioner Hall replied, "Certainly. I
am convinced of that. Senator."
"Any one who circulates that kind of report
is doing it for the purpose of deceiving the
public?" Senator Pomerene asked.
"It is not defensible in any sense," Com¬
missioner Hall replied.
53
Senator Cummins on the Valuation.
Senator Albert B. Cummins of Iowa, chairman of
the Senate Committee on Interstate Commerce, one
of the authors of the Transportation Act, has felt
very keenly the wholesale misrepresentation of cer¬
tain provisions of that Act, and in an address at
Des Moines, Iowa, October 30, 1922, he answered
these current misrepresentations, especially those
dealing with valuation, by saying in part:
"The last objection insofar as rates are con¬
cerned, involves a subject upon which there has
been more misapprehension and more misrepre¬
sentation, sometimes intentional and sometimes
unintentional, than upon any other, grows out
of the statement, current throughout the state,
that the Transportation Act validates seven or
eight billions of dollars in excess of the actual
value of the railroad property.
"This charge, flagrantly and obviously, is
untrue, but more honorable men and women
have been deceived and misled by it than by
any other part of the long continued campaign
against the measure.
"The argument is, that even granting that
the rate of return whether designated by Con¬
gress or designated by the Commission is rea¬
sonable or less than reasonable, when computed
upon a value of $18,900,000,000, it becomes ex¬
cessive, when computed upon a value of
$12,000,000,000 the alleged market value of all
railway stocks and bonds, and that rates could
be reduced even if the cost of maintenance and
operation is not reduced. The charge is ac¬
cepted by great multitudes of the people with¬
out reflection because they know that there
have been vast amounts of railway stocks
issued without any consideration. No one has
insisted more vigorously than I have that this
practice should come to an end, and finally in
the Transportation Act it was brought to an
end. Everybody knows, also, that beginning
with the first railway construction a very con¬
siderable amount of the funded or bonded in¬
debtedness was issued without consideration,
and I am glad to say that this vicious financing
cannot occur under the Transportation Act.
54
"It is, however, a moral and economic crime
to assert that because these things have been
true that the railroad property of the United
States which renders the service of transporta¬
tion, taken as a whole, was over-valued by
seven or eight billions of dollars by the Inter¬
state Commerce Commission when it fixed the
value for rate making purposes at $18,900,-
000,000.
"If I cannot make this so plain that any intel¬
ligent human being can understand it I shall
forever despair of establishing the simplest
problem in railway economics.
"Let us first examine the provisions of the
Transportation Act upon this subject. They
are found in paragraph 4 of Section 422, which
added Section 15a to the Act to Regulate Com¬
merce. I quote it:
"'(4) For the purposes of this section, such
aggregate value of the property of the carriers
shall be determined by the Commission from
time to time and as often as may be necessary.
The Commission may utilize the results of its
investigation under Section 19a of this Act, in
so far as deemed by it available, and shall give
due consideration to all the elements of value
recognized by the law of the land for rate-mak¬
ing purposes, and shall give to the property in¬
vestment account of the carriers only that con¬
sideration which, under such law, it is entitled
to in establishing values for rate-making pur¬
poses. Whenever pursuant to Section Í9a of
this Act the value of the railway property of
any carrier held for and used in the service of
transportation has been finally ascertained, the
value so ascertained shall be deemed by the
Commission to be the value thereof for the pur¬
pose of determining such aggregate value.'
Based on LaFollette Law.
"In a proceeding properly instituted, known
as Ex Parte 74, the Interstate Commerce Com¬
mission found, on the 26th of August, 1920,
that the railroad property of the United States
was as a whole, of the value of $18,900,000,000.
This value was found mainly, if not wholly,
under an act passed in 1913, and which now
;onstitutes Section 19a of the Act to Regulate
SS
Commerce. Senator Robert M. LaFollette, of
Wisconsin, was the author of the measure, and
it was proposed and passed for the sole pur¬
pose of giving to the Interstate Commerce
Commission a basis upon which to fix rates.
"In 1920 the Commission had been engaged
for seven years in making an inventory, and
assigning the values of both the real and per¬
sonal property of the railroads, and had sub¬
stantially completed its task. It disregarded all
stocks and bonds or other indebtedness, and
viewed the property just as it existed; in fact,
the amount of stocks and bonds which any
company had issued became absolutely imma¬
terial. The Commission looked upon the rail¬
roads as tangible physical property, no matter
from what source the money creating it had
been derived. It appraised the property pre¬
cisely as one would appraise his farm with the
buildings upon it, or a town lot with its im¬
provements. If there had been $100,000,000,000
of stocks and bonds issued by the railroad com¬
panies it would have neither added to nor taken
from the value of the property itself.
"The Supreme Court of the United States
had definitely and finally laid down the rule of
law for the ascertainment of the value of rail¬
road property. It had declared in many cases
that the value of personal property including
all structures and improvements is the cost of
reproduction less depreciation for age and use,
and that the value of the real property or land
was at least the value of similar areas of adja¬
cent lands or lots with such additions as would
represent the cost of acquiring the lands or
lots for railway purposes. Proceeding in this
way and in strict obedience to the Constitution
and the decisions of the Supreme Court the
Commission decided that the property was
worth $18,900,000,000.
"At the risk of repetition I venture to state
this proposition in another form, because the
thing that rankles in the hearts of the people
of this state is the feeling, induced by the
grossest misrepresentation, that they are asked
to pay a return to the owners of railroad capi¬
talization upon seven pr eight billion dollars of
watered stock and bonds. If this were true,
56
and if there had been any lawful way in which
the burden could have been lifted, I agree that
the Congress which passed the Transportation
Act and every member who voted for it merits
nothing but the severest condemnation.
"The only answer to the proposition is that
it is not true, and men who make the statement,
if they have studied the subject, are enemies
of good government, and men who accept it
without inquiry fail in their plain duty as citi¬
zens of the Republic."
View of Joint Commission on Agricultural Inquiry.
The Joint Commission of Agricultural Inquiry of
Congress was composed of five members of the
United States Senate and five members of the Na¬
tional House of Representatives. This Commission,
in its report (Part III, page 317) said:
"Under the Transportation Act the return is
computed on a tentative valuation determined
by the Interstate Commerce Commission, and
not upon the valuation of railroad stocks and
bonds. For that purpose, the Commission is
required to fix rates so that the carriers in rate
groups and territories will, under efficient man¬
agement and reasonable expenditures for main¬
tenance, earn a fair return upon the aggregate
value of the railway property of such carriers
held for, and used in the service of transporta¬
tion and, as already stated, the Commission de¬
termines such aggregate value of the property
of the carriers. In addition, the Commission
also regulates new issues of stocks or bonds,
construction of new lines and facilities, and the
leasing or consolidating of existing lines. This
is all helpful in the interest of the public, be¬
cause it assures that a return is not paid on any
watered stock, but only on the value de¬
termined by the Interstate Commerce Commis¬
sion."
A Farm Paper's Views on Valuation.
The Orange Judd Farmer, discussing the ques¬
tion of valuation editorially, said in a recent issue;
"Now, what about the water in railroad
stocks? We hear a lot about dividends upon
57
watered stocks, and we have every right to
object to paying dividends upon stock that does
not represent actual property value used in
transportation. Unfortunately again, the loud¬
est talkers either do not know the facts or
choose to ignore them. The truth is that under
present laws railroad earnings are permitted
only upon the basis of actual property value,
and capitalization cuts no figure in determining
what a road is allowed to earn.
"The Railway Valuation Act went into ef¬
fect March 1, 1913, and under it the Interstate
Commerce Commission is required to ascertain
and place a value upon each piece of property
owned or used for railway purposes. This is a
tremendous task, and for eight years the work
has been under way, with much yet to do.
Preliminary figures are announced from time
to time as they are completed. So far as com¬
pleted, the results are mixed, some roads show¬
ing a capitalization in excess of value, or, in
other words, showing watered stocks, while
others show capitalization much below the
actual value of the property.
"The point to remember, however, is that the
Transportation Act directs the Interstate Com¬
merce Commission to fix freight rates at a
figure which 'will under honest, efficient, and
economical management and reasonable ex¬
penditures for maintenance of way, structures
and equipment, earn an annual net railway
operating income equal as nearly as may be to
a fair return upon the aggregate value of the
railway property' used for transportation serv¬
ice. Under this authority the Commission tried
to fix rates that would give a net income of six
per cent on the actual property value. If under
the rates fixed any road should earn more than
six per cent upon its property value, one-half
of the excess must be paid to the government."
Secretary Hoover Answers Clifford Thome.
When Herbert Hoover, Secretary of Commerce,
appeared before the Interstate Commerce Commis¬
sion, February 3, 1922, he said, in discussing rail¬
road valuation:
58
"I see no occasion to go into the labyrinth of
past railroad finance, its propriety or its lack
of propriety, its foolishness or its skill. This
Commission approaches financial problems ol
the railways upon their actual value, not upon
their issues of securities. And I take it we are
living for the future, not the past. We want
transportation and we want it with the values
of private initiative and clean public service."
When Clifford Thorne, the well-known anti-
railroad lawyer, asked Mr. Hoover if he did not
know that most of the railways were financed by
giving stock bonuses with the bonds, Mr. Hoover
replied :
"Oh, yes, I have been hearing about that ever
since I was a boy, but we have got to live for
the future and not rehash the past. I believe
that the present amount of stocks and bonds is
less than the tentative value fixed by the Com¬
mission. We are faced with a practical ques¬
tion and the Commission is dealing with value,
not the mass of paper on the markets."
59
RESULTS OF GOVERNMENT
OWNERSHIP.
The question of government ownership of rail¬
roads is not and will never be a dead issue in this
country as long as we continue to have a large
number of persons who take advantage of every
opportunity to present government management as
a cure-all for every transportation difficulty. The
spectacular statements these men make attract at¬
tention, but one has only to look to Canada to find
the proof that their arguments are based on falla¬
cies and misrepresentations.
Huge Deficits in Canada.
What has Canada to teach us in the matter of
government ownership of railroads? Perhaps the
answer can be found in brief excerpts from an
article in the August, 1922, edition of "The Nation's
Business," prepared by no less an authority than
J. L. Payne, formerly Comptroller of Statistics of
the Department of Railways and Canals in Canada.
Mr. Payne informs his readers that the people of
Canada did not deliberately adopt public owner¬
ship. He says:
"They were not consulted about the matter.
They were not asked at the time to express
their judgment, nor have they been since. The
war was on when the trouble began, and they
were indifferent to everything else. Even
Parliament did not get a chance to pass on
what was done by the government. The elec¬
tors were simply told that these roads had been
cast at the door of the government by reason
of the guarantees, and that there was no alter¬
native to their being taken over. This ap¬
peared to be true, and superficially was true.
It is now as clear as noonday, however, that if
financial considerations alone had been permit¬
ted to control it would have been better to have
made an absolute gift of the two roads in ques¬
tion, with the National Transcontinental
thrown in, to a strong syndicate along with
60
$200,000,000 in cash, also as a gift, and in that
way to have got rid of those properties. At
this moment the public treasury would be more
than $400,000,000 ahead on the transactions.
Public Ownership is Costly.
"The announced deficits, beginning with
1918 (made up by advances from the Dominion
treasury), have been as follows:
"The salient feature here is the cumulative
character of the burden since public ownership
began. But even these huge losses are but part
of the truth. The figures given do not include
fixed charges on the National Transcontinental,
the Intercolonial, the Prince Edward Island,
the Hudson Bay, the Quebec Bridge nor the
branch lines in the Maritime Provinces mak¬
ing up about 4,500 miles of lines and covering a
capitalization of nearly a billion dollars. The
reason for this is that the government has an
accounting system all its own. It utterly ig¬
nores interest on capital liability. Of course,
it does not by that convenient and unsound
method get rid of such a proper and genuine
charge. If correct bookkeeping had been ap¬
plied to the situation, it is within the mark to
say that the deficits during the past two years
would have averaged $125,000,000.
"The distressing story of deficits is not
all. In order to pay operating shortages
fixed charges, bolster weak links in the system,
provide needed equipment, standardize de¬
fectively built sections and maintain the organ¬
ization set up by the government, the official
records show that since 1914 over $600,000,000
has been advanced from the Dominion treasury.
This has added to fixed charges.
"Thus it came about in 1921 that while oper¬
ating loss was reduced by over $19,000,000 as
compared with the preceding year, interest
charges on increased capital liability consumed
nearly the whole of the saving. If accruals had
1918
1919
1920
1921
$27,769,577
47,993,312
67,505,059
, 56,673,934
61
been taken into account at the date of the state¬
ment it would have done so fully. For the cur¬
rent year the outlook is no less unfavorable."
Mr. Payne then asks:
"What have been the results of public ownership
in respect of efficiency?" And answers his own
question by saying, in part:
"Under government operation, conditions al¬
though bad to commence with, have grown im¬
measurably worse. It would be utterly impos¬
sible to point to a single betterment in operat¬
ing results under public ownership. Between
1918 and 1919, ton and passenger miles, which
always represent the total service of any rail¬
way, fell off on the Canadian Pacific from 15,-
395,279,049 to 12,708,173,379. On the Canadian
Northern the drop was from 4,516,544,184 to
4,014,384,482. This indicated a material shrink¬
age on both roads, and called for retrenchment.
The Canadian Pacific (privately owned and op¬
erated) met the reverse by cutting down its
staff of employees by 2,596. The Canadian
Northern (government owned and operated)
met it by actually increasing the number of
workers by 8,052, or 36.4 per cent.
Efficiency Declined 43 Per Cent.
"Between 1917 and 1920 the volume of busi¬
ness on this state unit increased but 3.9 per cent,
yet the number of employees was increased by
60.3 per cent. At the same time it got 35.1 per
cent less service per employee. In fact, during
the first two years of public ownership there
was a decline of 43.3 per cent in efficiency by
the ton and passenger mile test, than which no
more satisfactory or just test could be applied.
"Four things, it might be said, have been
established beyond cavil. We have (1) brought
on ourselves an economic policy of exceeding
gravity, (2) very heavy losses have been in¬
curred. (3) These losses must be met by in¬
creased taxation, and (4) no solution of our
problem appears to be in sight that would be
accepted by our Parliament as at present con¬
stituted."
62
Results in Europe.
The report of the Joint Commission of Agricul¬
tural Inquiry of Congress, submitted by Repre¬
sentative Sydney Anderson of Minnesota, says, in
discussing the situation prevailing in various for¬
eign countries, on pages 394, 424, 427, 429, 431 :
"Transportation throughout the world has
been affected to a greater or less degree by con¬
ditions created by the world war and is still
subject to the economic and political disloca¬
tions which followed it, but it is safe to say that
state-owned railways have not recovered from
the effects of the war, nor met the economic dis¬
locations with greater effectiveness than those
privately owned and operated. Indeed, state-
owned railroads have, as a rule, less nearly re¬
turned to norrnal conditions and readjustment
to changed economic conditions than privately
owned and operated railroads. In general, also,
service and facilities have deteriorated, notwith¬
standing enormously increased expense of op¬
eration and revenues. Deficits in operation
have been encountered on most of the state-
owned railroads, which have been met through
the imposition of taxes.
Sad Results in Other Countries.
"The labor situation and operating results of
the Canadian railroads have closely paralleled
those of the United States. The year 1921 was
the worst in Canadian railway history. In Jan¬
uary the ratio of operating expenses to gross
earnings was over 108 per cent for all railways
as a group. While the Canadian Pacific was
holding its own, the government system was
creating an adverse operating expense ratio of
125 per cent. Fifty-two per cent of the total
operating mileage of Canada was depending
more and more upon the treasury of the Do¬
minion.
"At the end of government control, in Eng¬
land, the deficit from unified operations in Aug¬
ust, 1921, approximated $250,000,000, although
rates of carriage were substantially increased in
the latter part of 1919 and at the beginning of
1920. Freight rates were increased a total of
63
112 per cent and passenger rates 75 per cent.
The railway statistics for all lines in England,
Scotland and Wales, from September 12, 1920,
to and including August, 1921, show that the
total gross receipts for Great Britain during
that year were $1,240,000,000, contrasted with
an expenditure of $1,224,000,000, or an operat¬
ing ratio of 98.8 per cent. The government
compensation to the owners of the lines in 1920
amounted to $213,000,000. This poor financial
showing was made in spite of the fact that on
January 15, 1920, freight rates were further in¬
creased by about 50 per cent.
"Since the inauguration of government own¬
ership and control in 1914 the balance sheet has
been showing a loss, and it is reported that for
the year 1920-21 that deficit will be $280,000,000.
The revenues are estimated at $600,000,000, and
the expenses at $880,000,000. The freight and
passenger rates were increased with a view of
reducing the 1920-21 deficit. Freight rates have
been increased by 400 per cent above the rates
of 1915, while the passenger fares have been
increased approximately 250 per cent.
Rates 200 Per Cent Above 1913.
"The freight costs in Italy have been in¬
creased to such an extent as to create an ac¬
centuated disproportionate relativity with com¬
modity prices, and to such an extent that mer¬
chants are fast diverting their business to the
motor-vehicle routes, whose rates of carriage
in many instances are 50 per cent lower than
those now applied on the railroads.
"The German railways are government
owned and operated. The latest figures avail¬
able are for 1919, and they show that the total
capital investment amounted to $5,333,000,000.
Freight rates were increased since our entry
into the war up to November 1, 1921, by 1,359
per cent over the prewar level.
"In Sweden the state operates 3,425 miles of
line, which equals about one-half of the stand¬
ard-gauge mileage and 38 per cent of the total
mileage of that country. Eighty per cent of all
the lines in Norway are operated by the state.
In Sweden the freight rates are now from lOÓ
64
per cent to 200 per cent higher than in 1913.
But it is expected that with the general de¬
crease in the cost of materials and labor this
level of freight charges will be adequate to meet
the expenses for the coming year. The passen-
gen rates in Sweden have been increased from
238 per cent to 330 per cent. Similar increases
in rates have taken place in Norway.
"The efficiency of either government or pri¬
vate operation is measured by the relative per¬
formance and cost of service. Measured by
these standards, private management has
shown itself to be superior to foreign govern¬
ment operation."
65
TYPICAL EXAMPLES OF
ANTI-RAILROAD
MISREPRESENTATIONS.
There is scarcely a single feature of the results
of railroad management, operation or rates that has
not been the subject of the baldest misrepresenta¬
tion, and even falsification, by labor leaders, radical
politicians and other propagandists seeking to dis¬
credit private management of railways in the eyes
of the public. In the following pages is given a
series of typical misrepresentations of a glaring
character, and the answers to them. These misrep¬
resentations may be used as examples of the kind
of propaganda to which the railways are constantly
subjected. Many other examples might be cited
if space permitted.
An Exaggeration of One Billion Dollars a Year.
The Misrepresentation
Senator Smith W. Brookhart made the statement
in an address before the Prairie Club at Des Moines,
Iowa, March 14, 1923, that the operating expenses
of the railways in 1921 and 1922 under private
operation were one billion two hundred million
dollars more per year than they were in 1919 under
government operation.
The Answer
The facts are as follows :
According to the statistics of the Interstate
Commerce Commission, the operating expenses
of the railways in 1919 were ^,399,715,515. In
1921 they were $4,603,806,907. In 1922 they
were $4,455,650,215. Therefore, according to
the statistics of the Commission, the operating
expenses in 1921 were only $204,000,000 more
than in 1919, and in 1922 they were less than
$56,000,000 more than in 1919.
In his speech at Des Moines Senator Brook-
hart referred to reductions in wages. The
66
average wage paid by the railways to each
employee in 1921 was $179 more than in 1919
under government control, and in 1922 it
was $136 more than in 1919. If the average
wage paid per employee had been the same in
1921 as in 1919, the total operating expenses of
the railways would have been $298,000,000 less
than they were, and if in 1922 the same aver¬
age wage had been paid as in 1919, the operat¬
ing expenses would have been $214,000,0(X) less
than they were. Therefore, except for this
increase in the average wage per employee, the
total operating expenses of the railways would
have been less in both 1921 and 1922 under
private operation than they were in 1919
under government operation.
A Twenty-Three Billion Dollar Exaggeration.
The Misrepresentation
Levi Stevens Lewis, in an article which appeared
in the Iowa Labor News, Burlington, Iowa, issue
of February 22, 1923, made the following statement :
"The income of the railroads of the United
States during the four calendar years 1916-1919,
the latest official reports accessible to the pub¬
lic, was according to these official reports, suffi¬
cient to cover the operating expenses and taxes,
in which operating expenses are included hun¬
dreds of millions for repairs, other hundreds of
millions for 'depreciation of property' and still
other hundreds of millions for 'retirements,'
whatever they may mean, and also billions of
dollars for 'interest on bonds' and yet leave a
margin of profit for the sole and exclusive bene¬
fit of those who own the stock exceeding by a
considerable sum $4,250,000,000. And here are
the official figures compiled from 'Statistics of
Railways in the United States,' published an¬
nually by the Interstate Commerce Commis¬
sion. The total net profits during these four
calendar years was $6,448,803,781, thus:
Profits realized in 1916 $1,232,484,589
Profits realized in 1917 1,542,195,111
Profits realized in 1918 1,839,443,459
Profits realized in 1919 1,834,680,622
Total profits four years $6,448,803,781
67
I have compiled from official sources, evidence
that stands unimpeached, which evidence indi¬
cates that the net profit of American railroads
(steam railroads only) is not less than $25,000,-
000,000 every period of twelve months, or more
than $23,000,000,000 a year greater than official
reports indicate such profits to be."
The Answer
The statements made by this writer are abso¬
lutely false, and based upon no facts whatever. The
statistics which he says are taken from the reports
of the Interstate Commerce Commission are com¬
plete fabrications. There is not to be found in all
the reports of the Interstate Commerce Commis¬
sion one single figure that he gives.
He gives what purports to be statistics for four
years. In two of these years, 1916 and 1917, the
railways were under private operation. The net
operating income actually earned by them in these
years is the largest possible measure of their "net
profit." In 1918 and 1919 the railways were under
government control. The "standard return" guar¬
anteed to them by the government is the largest
possible measure of the "net profit" received by
them in these years. Their net operating income
(or guaranteed standard return) in these four years
was as follows:
1916—$1»040,084,517 Net operating income for year ended December 31
1917— 934,068,770 Net operating income for year ended December 31
1918— 904,647,000 Guaranteed standard return
1919— 904,647,000 Guaranteed standard return
Total—$3,783,447,367
His statement that "the net profits of American
railroads is not less than $25,000,000,000 every
period of twelve months, or more than $23,000,000,-
000 a year greater than official reports indicate such
profits to be," is simply a silly prevarication. The
figure he gives is approximately 25 times as great
as the largest net return that the railways ever
earned and received in any year in their history.
The largest net operating income ever received by
68
them was in the year ended December 31, 1916,
when it was $1,040,084,517.
Railways Criticised for "Failure and Neglect to
Properly Provide and Maintain
Suitable Equipment."
The Misrepresentation
In his message to the legislature of South
Dakota, January 2, 1923, Governor McMaster said:
"The public had just grounds for complaint of
the incompetency and criminal carelessness on
the part of railroad officials through their fail¬
ure and neglect to properly maintain and pro¬
vide suitable equipment for transportation pur¬
poses. Eighteen months ago railway officials
were perfectly cognizant of their depleted rail¬
way equipment. They knew unless this equip¬
ment was speedily brought up to a standard
that tremendbus losses and hardships would be
inflicted upon the American people through the
railroads' inability to handle the traffic."
The Answer
H. E. Byram, president of the Chicago, Milwau¬
kee & St. Paul Railway Company, in an open letter
addressed to Governor McMaster under date of
February 12, 1923, replied to this charge as follows:
"Not only did the railroads make better use
in 1921 and 1922 of their equipment in hauling
the farmers' products to market than ever be¬
fore, but it is wholly unjust and misleading to
charge that managers of the railways did not
make proper efforts to provide the equipment
needed to handle the country's freight. During
the very period of eighteen months during
which you charge the railway managers with
being 'criminally careless' in not trying to pro¬
vide more equipment, the railways actually
placed orders for the purchase of over 2,700 new
locomotives, and for almost 200,000 new freight
cars.
"They ordered more new freight cars from
the builders in 1922 than in any year for 10
years, and 77,221 new freight cars were actually
69
delivered to the railways and put in service last
year. Thousands of locomotives and cars, how¬
ever, cannot be built in a day, and most of those
that have been ordered have not yet been built,
but are still in process of construction."
The Famous Carload of Potatoes from
North Dakota.
The Misrepresentation
Several papers and magazines have carried an
article recently, usually under the heading, "Car oi
Potatoes Sold in Minneapolis for $336 brings North
Dakota Farmer $1.30," the article carrying a fac¬
simile of a report by the Minnesota Potato Ex¬
change of Minneapolis to N. P. Nelson, Leal, N. D.
The article among other things makes this com¬
ment: "We do not know where the blame lies, al¬
though the freight charge of 43 cents per ICQ,
$180.60 on the car, or more than half of the gross
price at Minneapolis, seems out of all proportion to
the returns the farmer gets."
The Answer
This case was thoroughly investigated by W. W.
Baldwin, vice-president of the Chicago, Burlington
& Quincy, who, in writing to the publishers of one
magazine which published the article in question,
said :
"This potato statement, as you published it,
is full of mistakes and inaccuracies. In the first
place, this car of potatoes was not sold in Min¬
neapolis at all ; it was sold in Chicago, and yet
you give the Chicago freight rate as if it was
the Minneapolis freight rate. In the second
place, it was not a car of good potatoes but was
a car of damaged potatoes, which therefore
brought an inferior price. This was the reason
why the Minneapolis Exchange sent it on to
Chicago, where the chance of selling frost bit¬
ten and damaged potatoes is better because of
the multitude of cheap restaurants. This Min¬
neapolis Potato Exchange is sponsored by the
government and the state officials for 'cooperat¬
ive marketing.'
70
"These potatoes could not be sold in Min¬
neapolis and therefore were forwarded to Chi¬
cago, to avoid greater loss. The item 'Freight
Investigate $28.20' was a mistake, and that
money has already been refunded to Mr. Nel¬
son. The apparently high charge of $42.00
made by the Exchange covered not only their
services in Chicago, but their efforts to sell the
potatoes in Minneapolis. Unless you know
how much time their expert salesmen were re¬
quired to take in both cities in the effort to sell
a car of poor potatoes, how can you say that
$42.00 is excessive for the service rendered?
"The car was inspected by officials at Min¬
neapolis, who reported as follows:
" 'Potatoes had percentage of soft rot due to
freezing, and had other blemishes; impossible
to inspect lower layers; loaded in old sacks.'
"Chicago inspection said :
" 'Potatoes mouldy ; nearly every bag wet ac¬
count frost decay; only 40 dry sacks out of 3.50
sacks; lower layer had small potatoes which
were muddy.'
Loss was Grower's Fault.
"The manager of the Exchange at Minne¬
apolis says : 'The shipper probably offered the
car to buyers who rejected it on track at Leal,
and then shipped it to us. We get a look at the
car for the first time when it reaches Minne¬
apolis, and have to sell it the best we can. First
grade potatoes were bringing $1.00 on the Chi¬
cago market that day.'
"If this car of potatoes had passed inspection
at Minneapolis as number one, the proceeds to
Mr. Nelson, instead of being $1.30, would have
been about $200.00, and it was his own fault
that he failed to receive this amount. Had the
potatoes inspected No. 1, they would have been
sold promptly in Minneapolis for $1.00 per hun¬
dred, instead of selling for $0.80 per hundred in
Chicago, a difference of $67.50. Then the addi¬
tional freight expense to Chicago was $79.20,
and if to these items you add $28.20 which has
already been refunded, these sums total $174.90,
while the commission charges and other ex¬
penses probably would have been $25 less.
71
"The distance from Leal, North Dakota, to
Chicago is 770 miles, and the freight rate that
was paid on this car was 1.1 cents per ton mile.
The average freight rate in 1922 in the territory
west of Chicago was 1.3 cents per ton mile.
The rate that was actually charged on this car,
containing a perishable product, is less than the
average received on all freight over Class I
railroads in the western district."
The Claim That the Valuation of the Railways Is
Based on "Present Day Costs" of Labor
and Material.
The Misrepresentation
Governor W. H. McMaster of South Dakota, in
his message to the legislature of that state, January
2, 1923, said that the Interstate Commerce Com¬
mission based the tentative valuation of the rail¬
roads made in 1920 on "present day costs" and that
"the billions of watered stock are clothed with the
dignity of full value in that the so-called physical
valuation of railroad property about equals the
stock issue of the railroads."
The Answer
H. E. Byram, president of the Chicago, Milwau¬
kee & St. Paul Railway Company, in an open letter
addressed to Governor McMaster, February 13, re¬
plied to this charge as follows:
"E. E. Clark, who was Chairman of the Inter¬
state Commerce Commission in 1920, when the
valuation of $18,900,000,000 was placed on the
railways, stated to the Senate Committee on
Manufactures in January, 1921 ; 'Stocks and
bonds were not considered at all. We had a
mass of information gathered in our valuation
work. We availed ourselves of all the informa¬
tion we could. The principal figures that were
used in our valuation are as of 1913 and 1914.
We fixed the unit price on a given railroad
valuation as of June 30, 1914.'
"The average wages of railway labor and the
prices of materials used in railway construction
72
in 1913 and 1914, on which the valuation was
based, were only about one-half as high as
'present day costs.' Therefore, if 'present day
costs' had been used, the valuation would have
been about twice as large as it actually was."
The Charge That 10,000 Carloads of Apples Would
Be Dumped Into the Columbia River Because
of Excessive Freight Charges.
The Misrepresentation
Senator Smith W. Brookhart of Iowa, in a speech
in the Senate, December 18, 1922, alleged that
largely owing to inability to pay the freight rates,
the apple growers of the state of Washington will
be forced this year (1922) to dump 10,000 carloads
of apples into the Columbia River.
The Answer
S. M. Felton, chairman of the Western Railways'
Committee on Public Relations, in an open letter
addressed to Senator Brookhart, January 14, 1923,
replied to this charge as follows:
"A telegram from the Wenatchee Valley As¬
sociation, composed of the growers in the apple
district of Washington, says that your state¬
ment 'is not true' and adds: 'The district has
already shipped about 8,000 cars, and there re¬
main about 5,500 cars. No question but that
balance of them will be shipped, especially the
late hard varieties. Mid-winter varieties are
suffering on account of inability to move owing
to lack of equipment, and it may be possible
that a very small percentage will not move, but
this is hardly possible.'
"As the telegram shows, the shipment of ap¬
ples has been interfered with by shortage of
transportation, not by freight rates. It is
unfortunately true that there has been a short¬
age of transportation for some months, and that
the farmers and business interests of the coun¬
try have suffered heavy losses because of it.
This shortage of transportation is due mainly
to the policy of restrictive regulation which has
been followed for years, and nothing could be
73
better adapted to protract and increase it than
the adoption of the policy of confiscating a
large part of the value of the railroads which
you advocate."
Senator-Elect Shipstead and the Freight Charges
on Sheep.
The Misrepresentation
In an address before the City Club of Washing¬
ton, D. C., December 5, 1922, Senator-elect Ship-
stead of Minnesota, made the following statement:
"Farmers ship sheep to market and then get
bills for the balance of freight charges due.
What they get for the sheep will not even cover
the cost of shipping."
The Answer
S. M. Felton, Chairman, Western Railways' Com¬
mittee on Public Relations, replied to this misrep¬
resentation in an open letter addressed to Senator-
elect Shipstead, January 1, 1923, in the following
language :
"The facts never at any time were as you
stated them, and your statement never was
more incorrect than on the day you made it.
What is the truth as to freight rates and the
prices that the Minnesota farmer could get for
sheep on the very day that you made your
speech?
"On that very day sheep sold in the South
St. Paul market for cents a pound, a price
amounting to $780 for a single deck carload of
sheep weighing 12,000 pounds. The freight
rate from Northfield, Minn., a representative
point, to South St. Paul on a carload of sheep
was only $18.50, or less than 2J^ per cent of
the selling price in St. Paul.
"On the same day the price of sheep in the
Chicago market was cents a pound, or $660
for a carload. The freight rate from North-
field, Minn., to Chicago was $52.50, or only 8
per cent of the selling price.
"The freight from Crookston, Minn., to
South St. Paul was $41.45. Therefore, on a
74
12,000 pound carload of sheep selling for $780
the freight charge to South St. Paul was only
5.31 per cent of the selling price. A double
deck carload of sheep weighing 22,000 pounds
would bring in the Chicago market a total of
$1,210. The freight charge from Crookston to
Chicago was $128, and, therefore, the freight
rate was only about 10^2 per cent of the selling
price.
"In other words, the day you made your
speech the freight rate from representative
points in Minnesota to large markets was only
from per cent to 10^ per cent of the price
for which the sheep actually sold in the mar¬
kets. How, in view of such incontrovertible
facts, could any man of intelligence or honor,
say that the freight rate was more than the
farmer could get for the sheep?"
The Charge That Rates Have Been Made High
Enough to Pay Dividends on "Water."
The Misrepresentation
Governor W. H. McMaster, in his message to the
legislature of South Dakota, January 2, 1923, made
the following statement:
"In the original stock issues of the railroad
companies there are several billions of dollars
of watered stock, and when this stock was
issued they inaugurated rates which would pay
dividends upon this total capitalization."
The Answer
H. E. Byram, president, Chicago, Milwaukee &
St. Paul Railway, in an open letter addressed to
Governor McMaster, under date of February 13,
1923, replied to this charge as follows :
"Whether the railways originally were, or
are now, overcapitalized, the fact is that con¬
trary to your statement they never in a single
year in their history have paid dividends upon
their total capitalization. In the ten years end¬
ing with 1910, they paid no dividends on 39 per
cent of their stock. In the ten years ending
with 1920, they paid no dividends on 38 per cent
75
of their stock; and in 1921, they paid no divi¬
dends on 43 per cent of their stock. They have
used earnings they might have paid out in div¬
idends in making improvements ; and it is
wholly unfair to contend, as you do, that they
should not now be allowed to earn any return
upon money thus invested."
The Charge That Railway Officials Were Disloyal
and Endeavored to Discredit Govern¬
ment Operation.
The Misrepresentation
Senator Smith W. Brookhart of Iowa, in a speech
in the Senate, December 18, 1922, in an attempt to
explain why operating expenses were so great un¬
der government operation said:
"I do not question the integrity of the Direc¬
tor-General of Railroads. He was both able
and loyal to his country, but down below him,
perhaps below his possible touch, were manag¬
ing officers who were neither loyal to him nor
to the government of the United States. They
wanted to discredit government operation so
that the railroads would be turned back. They
were traitors as truly as was Benedict Arnold."
The Answer
S. M. Felton, chairman. Western Railways' Com¬
mittee on Public Relations, in an open letter dated
January 14, 1923, addressed to Senator Brookhart,
made the following reply to this charge:
"I was not in active railroad service during
the war, but was serving as Director-General of
Military Railroads. I do know something, how¬
ever, of how railway officers served their coun¬
try at that time, and I denounce the charges
you make against them as base and unsupport¬
ed calumnies.
"Statements made by both W. G. McAdoo,
who was Director-General of Railroads in 1918,
and Walker D. Hines, who was Director-Gen¬
eral in 1919, are the best answers to your
charge. Mr. McAdoo in his report to President
Wilson, said : 'The full and sympathetic co-
76
operation of the various regional directors, Fed¬
eral managers, operating officers and employees
has proved most effective in meeting the enor¬
mous problems facing the railroads, and their
work has assisted enormously in keeping the
transportation system of the country in a
healthy condition.' When Mr. McAdoo re¬
tired as Director-General, he issued a statement
to the public in which he said, with reference
to his successor: 'I can ask nothing better for
him than that they (railroad officers and em¬
ployees) shall give him and the country the
same loyal and efficient service they rendered
during my term as director-general.'
"Mr. Hines, on February 28, 1920, in render¬
ing his final report as Director-General, said ;
'A final word of appreciation is due to the loyal
and steady support of the officers and the great
bulk of the employees and their organizations.
The times have been exceedingly difficult for
officers and employees, and these difficulties
have been faced and dealt with in admirable
spirit and temper.'
"You were not, during government control
and have not been since, in any position to form
or express an opinion upon this matter which
directly contradicts the statements made by
both Mr. McAdoo and Mr. Hines."
Senator-Elect Shipstead on the Increase in Train
Load and the Labor Cost Per Ton Mile.
The Misrepresentation
Senator-elect Shipstead of Minnesota in an ad¬
dress before the City Club of Washington, D. C.,
on December 5, 1922, made the following assertion :
"A railroad train operated by five men can
now carry ten times as big a load as could be
carried twenty years ago, yet in spite of the
great labor cost reduction per ton mile, it costs
the farmer more to ship, and labor does not
get enough to keep it from striking."
The Answer
In replying to this misstatement, S. M. Felton,
Chairman, Western Railways' Committee on Pub-
77
lie Relations, in an open letter addressed to Sen¬
ator-elect Shipstead under date of January 1, 1923,
said :
"Because of the efficiency of railroad manage¬
ment the number of tons of freight hauled per
train has been greatly increased, but your state¬
ment regarding this is a gross exaggeration.
The average number of tons hauled per train
by the railways of the country in 1901 was 281
tons. In 1921 it was 578 tons. In other words,
the average train now hauls about twice as
much freight as it did twenty years ago, and not
ten times as much, as you stated.
"Furthermore, there has not been a 'great
labor cost reduction per ton mile' within the
last twenty years, as you asserted, but a very
great increase. The average total labor cost of
the railways per ton mile of freight in 1901 was
4.15 mills. In 1921 it was 9.02 mills, or more
than double what it was twenty years before,
despite the increase in the average load hauled
per train. This great increase in the labor cost
of operating the railroads is due, of course, to
advances in wages, and has been the principal
cause of the advances in freight rates of which
many farmers complain. While the total labor
cost of the railways increased twice as much
as the freight handled in this twenty years, the
average freight rate received by the railways
for the service increased only 47 per cent. The
main reason why the average rate charged by
the railways has not increased in proportion to
the increase in labor cost is that the owners of
the railways now receive much smaller net
earnings for moving each ton of freight one
mile than they did twenty years ago."
The Reason for Higher Railway Rates.
The Misrepresentation
Dante M. Pierce, publisher of the Iowa Home¬
stead, said in an article in this paper on November
2, "the shippers and consumers of the United
States are determined upon securing some relief
from the exorbitant rates which have resulted from
the operation of the Esch-Cummins law."
78
The Answer
C. H. Markham, President of the Illinois Central
System, in an open letter to Mr. Pierce on Janu¬
ary 10, 1923, made the following answer to this
statement :
"It is not true that the present scale of rates
is caused by the operation of the Transporta¬
tion Act. Present freight rates are made nec¬
essary by increased operating expenses which
grew out of the war and federal control.
"As a result of rate reductions put into effect
during the past year, the average railway
freight rate is now only 54 per cent higher than
it was in 1913, before the war came along to
upset the economic balance. Note how this
small increase in the average freight rate com¬
pares with increased operating expenses :
"The largest single item of railway operating
expenses is the wage bill. The average annual
compensation of all railway employes in 1922,
allowing for the wage reductions put into effect
during the year, was about $1,628, as compared
with $761 in 1913, an increase of 114 per cent.
The total amount of wages paid by the rail¬
roads in 1922 was about $2,635,000,000, as com¬
pared with $1,339,000,000 in 1913, an increase of
97 per cent.
"The second largest item of railway ex¬
penses is the coal bill. In September, 1922,
according to the United States Department of
Commerce, the average price for bituminous
coal at the mines was 310 per cent greater than
in 1913.
"Another important iteift in the cost of pro¬
viding transportation service is taxes. In 1913
the railroads paid taxes amounting to $118,386,-
859, while in 1922 their tax bill had mounted
to about $300,000,000, an increase of 153 per
cent.
"Any further reductions in rates cannot be
made without a ruinous effect upon all lines
of business as long as wages, the cost of coal,
taxes, and other expenses are at their present
levels."
79
Alleged Manipulation of Accounts.
The Misrepresentation
A recent editorial in a Kansas farm paper calls
attention to the so-called "recapture provision" of
the Transportation Act which requires such rail¬
roads as may earn a net return of over 6 per cent
in any one year to pay one-half of such excess to
the Interstate Commerce Commission, and states
that "Most of the prosperous roads have developed
systems of accounting that will enable them to
cover up their surplus profits and evade payment."
The Answer
A sufficient answer to the above is the fact that
the Interstate Commèrce Commission has not only
formulated the system of accounting which the
railroads follow, but its expert accountants regu¬
larly examine and check the railroad's accounts to
see that the accounting rules laid down by the Com¬
mission are followed and that no items are incor¬
rectly stated in the accounts.
Capitalization of Consolidations of Railways.
The Misrepresentation
The same editorial referred to above calls atten¬
tion to the plan of merger of the railroads, included
in the Transportation Act, into a few large systems,
and objects to such mergers because it claims that
"There would undoubtedly be a very large issue of
new bonds and the interest on such bonds could
be met in only one way—by charging still higher
rates for service."
The Answer
In answer to such a statement it is only neces¬
sary to say that the Transportation Act of 1920,
paragraph 188, reads as follows :
188 (b) "The bonds at par of the corpora¬
tion which is to become the owner of the con-
80
solidated properties, together with the out¬
standing capital stock at par of such corpora¬
tion, shall not exceed the value of the consoli¬
dated properties as determined by the Com¬
mission."
Federal Judges Claimed to be in Sympathy
With Corporations.
The Misrepresentation
The same editorial in the Kansas farm paper
referred to above in calling attention to the said
"recapture provision" of the Transportation Act
suggests that the railroads may contest the pay¬
ments called for (on account of excess earnings)
when the amount thereof shall have been deter¬
mined, and adds that "Nearly all the federal judges
are lawyers who were corporation attorneys before
they went on the bench. * * * All their sym¬
pathies are with the business interests which they
served as hired attorneys."
The Answer
While no one can presently say, with any degree
of certainty, what the decision of the United States
Supreme Court would be should the constitution¬
ality of the so-called "recapture provision" of the
Transportation Act be brought before it, attention
may be here called to the fact that three federal
judges in New Orleans on March 17 last held, in
the case of the Dayton-Goose Creek Railway Com¬
pany, that the so-called "recapture provision" of
the Transportation Act was constitutional.
Moreover, it is evident that any federal judge
whether on the United States Supreme bench or
on a Circuit bench must have been a lawyer of
wide experience in order to have been appointed to
the bench ; also that such experience would natur¬
ally have been, in part at least, as counsel for one
81
or more corporations. But does that justify the
suggestion that the judgment of a lawyer who had
attained eminence in his profession and had had
corporations among his clients would be warped
by such associations and that he would not, there¬
fore, be suitable for the federal bench? If such
reasoning were to be followed it would be prac¬
tically impossible to find any lawyer of prominence
suitable as judge of a federal court.
82