HE 2757 1919 .,j26 A SUGGESTION KEF ) 9/f OJarneU mmoerBtts ffiibrarg atljata. New ?otk ..CX...(L..l^^ Article VI Interstate Commerce Commission ... 74 Article VII Stock and Property 78 Article VIII State Railroad Commissions .... 89 Article IX Rate Making 91 Article X Appeals 98 Article XI Dividends 101 Article XII Building Branches 102 Article XIII Encouragement of Improvements . . . 106 Article XIV Improvements, Rights of Way . . . 108 Article XV Employes 108 Article XVI Issuing Stocks and Bonds . . . .114 Article XVII Co-ordination 116 Article XVIII Other Policies — Subordinate Systems — Com- petition 119 Article XIX Subordinate Systems — Local Initiative . . 121 Article XX Appropriations 128 Article XXI Oath of Office 128 Article XXII Provisions Against Fraud .... 128 INDEX TO ARGUMENT PAGE General Observations 21 Regional or Divided Ownership Is Wrong in Principle . 28 Administrative Regulative Bodies Cannot Function Separate and Apart from the Management 30 The Matter of New Railroad Construction . . . . 31 Competition 32 A Further Observation upon Incentive 35 Simplicity and Certainty — A Plea for Speedy Congressional Action 36 The Colorado Situation 37 In Relation to Certain False Principles in Some of the Plans 38 Undivided Executive Control Fundamental in all Business . 40 Electrification of Railways — Plea for the Speedy Solution of the Railway Problem 45 Responsibility in the Employment of Labor Should Rest with Executive Management 46 Ordinary Business Principles Applied to Rate Making . . 50 A Recent Illustration of Proposed Divided Ownership . 57 Balanced Subordinate Managements and Local Representa- tion on the Board of Directors a Stimulus to Local In- itiative 59 Conclusion 63 THE RAILROAD PROBLEM CERTAIN PRINCIPLES TO BE CARRIED OUT The turning over of the operation of the railroads to the Federal Government at the end of 1917 was hailed with approval by all classes of the American people. Those who believed in Government ownership as an academic question seemed to believe the roads would never be turned back to their former owners. The holders of railroad securities were satisfied with the change as a means of avoiding the financial ruin which faced the roads. The employes and labor organizations thought the Government more likely to look favorably upon demands for increases of wages than the private owners operating the properties without profit. And the American people as a whole felt that the move was necessary to carry on the war because they believed that it was the only method which would afford unity of control. With the signing of the armistice, however, the situation is found to be an impossible one under which to carry out any rational and advisable peace pro- gram. The losses to the Government during one year of war operation have been estimated at hundreds of millions of dollars. The poor service and inconvenience to the public, though tolerated patiently and patriotically during the war, are now found to be intolerable and inconsistent with the carrying on of business and industry. One has only to travel or to engage in business in a small way, or even to observe what is about him, to realize that the machinery does not now exist for making a satisfactory dispo- sition of the thousands of questions which call for executive effi- ciency and which daily arise in business with railroads. There is a total failure to consider, initiate and carry on the thousands of large and small administrative matters necessary to create a satis- 9 10 THE RAILROAD PROBLEM— A SUGGESTION factory service for an increased industry and production. The situation as set forth in the following words by a • prominent publication is not disputed : "That the railroads are running at a loss so great that the owners cannot afford to take them back as rates and wages are. "That if the owners took them back and the several states began to enforce the legal rates, the properties would be almost generally bankrupt. "That the Government, according to Mr. McAdoo, cannot afiford to continue the experiment of Federal operation unless it is given a period of five years in which to work out . . . suggestiqns offered . . . "That there is nowhere any responsibility." There are the other questions of reconstruction and readjust- ment, such as the shipping problem, threatened problems of de- mobilization and unemployment, grave questions of national finance, etc., but the railroad question is foremost in presenting a problem, the solution of which should be the key to most of the others. Many suggestions have been made for a solution, but few of them appear to do more than express a preference for one or the other of several general plans more or less vaguely referred to in the sug- gestions. From these expressions, however, there will be found a wonderful agreement as to general principles which should govern the disposition of the subject, and in this lies the hope of a speedy and proper adjustment of the entire railroad problem. For ex- ample, there are disciples of Government ownership, but they desire Government ownership only for the purpose of the proper regulation and control of the business; and the most extreme on the opposite side — in favor of returning to the old regime of private ownership — concede that a proper Government supervision is desirable and necessary. Among the principles which seem to be agreed upon, the chief ones may be enumerated as follows : Principle 1: The railroad problem should be handled in such a way (as Mr. McAdoo says) as "to keep the matter out of politics." This means that we should settle the matter on scientific principles based upon experience, without creating an issue between political parties. Hope that this principle can be carried out is found in the enactment of the Federal Reserve Act creating the present Federal Reserve banking sy!5tem, which is so excellent that al) parties claim credit for its enactment. THE RAILROAD PROBLEM— A SUGGESTION 11 Principle 2: There should be Federal Governmental regulation of policies relating to rates, service, profits, extensions and methods of financing. Everyone agrees with this. It is the one point which has now become well established. Bankers, railroad men, financiers and economists, including the most conservative and the most radi- cal, now join in this principle; and, as already stated, the disciples of Government ownership advocate Government ownership as a means to this end. Principle 3: There should be no interference with Principle 2 , on the part of the states. It is recognized that one of the greatest troubles in the past has been the conflict of authority between state and Federal jurisdictions. Principle 4: There should be no unnecessary duplication of service. Common terminals and repair shops ; consolidation of sta- tions and ticket offices at terminals and junction points, universal mileage books and common time tables ; the use of the most direct line between two points ; the use of the sailing day plan ; standard- ization of freight classification; and, indeed, uniform rules so far as practicable for the entire country should be possible of accomplish- ment in any system to be provided. Principle 5: The operation of railroads in co-ordination with water routes — one in support of the other — to the end of working out the greatest economy, the avoidance of congestion, and the maximum of elasticity for the accommodation of the public is an idea already partially worked out by the United States Railroad Administration and is universally approved. Principle 6: The virtue of operating the railroads in co-opera- tion with the service of ocean going ships and railroads in foreign countries as recommended by the Chairman of the United States Shipping Board is not disputed. Principle 7: The solution of the railroad problem must embrace an adequate financial plan for financing the railroads in equipment, betterments and extensions, in such a manner as to insure that those improvements will be installed and all railroads co-ordinated in one great plan. Principle 8: Railroad rates, fares, wages and salaries should be standardized as far as practicable and varied as local conditions and character of service demand. J 2 THE RAILROAD PROBLEM— A SUGGESTION The foregoing principles have all been formulated and tried, and their merit proved so far as circumstances have permitted, by the Railroad Administration and the railroad managers. Any proposed plan should permit of their application. There are also certain acknowledged defects in the practices and plans heretofore in use which should be remedied. These remedies call for the application of certain other principles, supplemental to the foregoing, which, with the defects that they intend to correct, are as follows : Principle 9: The regulation of railroad rates in the past, it is claimed, has assumed too much the aspect of penalizing the rail- roads. This should be obviated, and the railroads afforded sufficient revenue to operate in the most approved manner, and to reward the investments according to approved rules of finance. This should be accomplished in such a manner as to avoid class feeling as be- tween the public and the railroad owners. In no event should any plan be adopted that would permit a change in the political com- plexion of the legislative department of the Government to cause these rates to become unsettled ; for if such a thing is to be permitted, the question of railroad rates will become a matter of political ma- nipulation, which will endanger the successful operation and building up of any railroad system. To accomplish this end, any proposed plan should find a method of making it to the direct pecuniary interest of the Government to have the railroads earn a fair and proper revenue; and at the same time the plan should make it in the interest of the owners of railroad securities to have the costs of operation as well as the rates to the public kept to the minimum, consistent with actual necessities. Principle 10: The arrangements for financing railroads under any plan adopted should, under no circumstances, in times of peace, permit loans from the National Treasury, as was found necessary during the war. In normal times this would become a most danger- ous practice, tending to create discord, favoritism and general de- moralization. The guaranteeing of railroad securities by the Gov- ernment, which in effect is the same thing, would be equally vicious. The plan, therefore, must at all events provide that the railroad ownership, wherever, whoever, or whatever it may be, shall be able to finance the necessities of the railroads. Principle 11: The proposed railroad plan should contemplate THE RAILROAD PROBLEM— A SUGGESTION 13 the needs and necessities of tlie country in time of war, and should provide for the instantaneous use of the entire strength of the National system and the organization operating it for the needs of the Government, without demoralization and without requiring reorganization. Principle 12: Those abuses of the past, which are sometimes indefinitely referred to as the "abuses of the rights and interests of minority stockholders," must be inipossible under any future plan. To this end, speculation in and the manipulation of railroad securities by operators acting in self-interest or in the interest of other railroads or other business, must be made impossible. The abuses to which reference is made in this paragraph will be made clear in connection with the outline of the proposed Plan, which will follow. Principle 13: In connection with the organization of any proper railroad plan there is no reason why provision should not be made soon after the inauguration of the plan (1) to place the employes in such relationship to the enterprise as to make it to their pecuniary interest for the system to be operated successfully; and (2) to in- sure that such employes at all times shall receive proper compensa- tion without requiring them to demoralize the business of the country and the discipline of the railroads by making demands against those who should have the interests of the employes at heart and who should act without waiting for such demands to be made. Such a plan can readily be made automatic in its working, and should be based upon scientific and well-understood principles governing the relations of employer and employe. Principle 14: The fourteenth principle in solving the problem of railroad management in the United States is to be found in the principles underlying executive administration in all business. The principle applies where there is anything to be done efficiently and economically. To understand this principle it is necessary to con- sider the well-known divisions of all government, whether business or political, into the three branches commonly described as "the Ex- 'ecutive," "the Legislative," and "the Judicial." It is perfectly in order to stipulate in advance any proper limita- tions under which the business or the government may be conducted. If the business is to be conducted by a corporation, the charter of the corporation can very properly limit and define the legislative 14 THE RAILROAD PROBLEM— A SUGGESTION powers of the corporation in creating rules for its own conduct and the conduct of those with whom it deals. That is legislative. In interpreting the rights and duties, and judging the acts of such a corporation, or in visiting a punishment for violation of the rules laid down for it, it is proper also that there be an authority inde- pendent of the corporation to judge upon such matters. That is judicial. But in carrying on the purely executive and administrative mat- ters ; and to do so efficiently, the corporation must act within its own organization and with one head. That is to say, the executive powers must be centered in the very heart of the organization itself, in a single body with a single head, which can act definitely to the pur- pose so that it may carry out speedily, directly and efficiently the will of the corporation. This must be done if there is to be efficient and economical administration. It is from the violation of this principle that the chief evils arose in recent years under private management. If there is any one thing that pleases the public in dealing with a large corporation it is in being able to deal directly with some one in authority. It should be the first duty of the executive of a railroad system to understand the extent of his duties and the limitations of his authority; and with those things thoroughly understood, he should have power within those limits to speak for the railroad without question ; and this spirit of author- ity, tempered by proper limitations of the powers delegated, should filter down through the system among all employes; so that each in turn may act with vigor and certainty within the scope of his authority. It is this kind of service and satisfaction that the Amer- ican people demand. It is in this way only that thousands upon thousands of petty, insignificant questions, troubles and difficulties can be prevented from accumulating to the demoralization of em- ployes and to the ruin of the business of the Nation and of the railroads. Applying this Principle 14, therefore, it is the province of Con- gress in authorizing any corporation which is to conduct the rail- road business, to' provide certain general provisions for the limita- tion and guidance of the corporation. These limitations can properly extend to the manner and method of creating the Board of Directors and filling the offices of the corporation; but the officers and Directors thus created under such limitations should have a free hand to create an administrative organization and carry on the THE RAILROAD PROBLEM— A SUGGESTION 15 business of the corporation as efficiency and good business principles dictate. The authority thus created within the corporation, ahhough properly confined to its appointed course by outside authorities exercising a judicial function, should in administrative matters be accountable only to those who have created the Board of Directors. Thus there should be no conflict with state control where there is Federal control. If there is to be a Railroad Commission exer- cising judicial powers, care should be taken that the powers of any other authority, such as that of a Secretary of Transportation, do not come in conflict with the authority of that Railroad Commission. When we come to analyze the proposed plan which will follow, it will be observed that ample check, indeed, any desired check, upon the acts of the officers and the executive of the corporation can be provided hy its by-laws, which in turn can be limited and re- stricted to any required degree in the provisions of the charter itself. The whole point of the idea involved in "Principle 14" is that it is more direct and better to insure in the beginning a proper Board of Directors, representative of all stockholders as well as of the public and of the Government — all within the corporation itself — than to attempt to create new officers and new bodies outside of the corpora- tion for such representation and control. Principle 15: The plan adopted should dispose satisfactorily of the question of damages incurred in the war use of the railroads. It is the law that if the railroads are turned back to their owners and the owners are not returned the identical property, together with the same good will with which they parted, there shall be a due appraisement of the damage, if any, based on changes which have been made in the property, and such damage shall become due to the owners. It is apparent that there already have been sufficient changes in many cases to require an evaluation or appraisal of most of the several properties to determine such questions. Such rail- roads as have signed the standard contract have agreed to waive certain things in relation to damages- for reduction of value of property, disruption of organization or diversion of traffic. But that does not mean that the Government is under no moral obliga- tion to accord just and fair treatment to the railroad corporations in such matters. Any plan for the Solution of the railroad problem should, therefore, insure a just and fair treatment to the corpora- 16 THE RAILROAD PROBLEM— A SUGGESTION tions and their security holders in matters affecting the value of their properties, business and good will. Any plan which requires an appraisal or evaluation of railroad properties should carefully guard against arraying the non-security holding public against the owners of railroad securities. This can best be done by so arranging a plan that it will be to the interest of the great mass of railroad security holders to avoid over- valuation of the National system. The plan, furthermore, should provide for the proper financing of those loans which our Government voluntarily extended or guar- anteed to many of the railroads, and which are now liens upon those roads. This Principle 15 means that these subjects should be equitably handled in connection with the greater problems requiring solution. Principle 16: The principle of stimulating fair and healthy com- petition or rivalry between two or more railroad systems or parts of systems performing similar service should be recognized; and this competition should be made so to manifest itself in the morale of employes that each employe of a given road would know that it is to his direct interest that such road render a service superior to its rivals in efificiency, comfort and economy. There should be a direct incentive for towns, cities and communities to initiate movements and policies for building up a profitable railroad system ; and there should be an incentive for the railroad management — including the chief executive and subordinate officials — ^to assist and co-operate in the upbuilding of industry in regions, cities, com- munities and towns as far as possible consistent with the welfare of the Nation — all to the end of increasing local and National prosperity. [The conditions of this principle were more nearly met in the beginning of railroad building than after railroads came to be regu- lated by state and National authority. In the following Plan it is believed that a way has been found (see Articles XII, XVIII and XIX, and Section 3, Article IX) by which local initiative and a healthy rivalry may be restored without sacrificing proper National control.] With the foregoing principles as a guide in a solution of the railroad problem, the following tentative program is roughly out- lined. THE RAILROAD PROBLEM— A SUGGESTION 17 Before formulating the program, it should be pointed out that with the great problems and responsibilities, financial and otherwise, already burdening our Government and crying for attention, we are ill prepared co undertake any plan for Government ownership. Nor does such a plan appear either desirable or necessary if we can obtain the required regulation without Government ownership. We shall, therefore, eliminate the question of Government owner- ship from consideration. The discussion under the heading of "Principle 15" goes to show the gravity and impracticability of returning the railroads to their owners as they previously existed. But, happily, that is apparently not desired by anyone. The Rail- road Administration, in referring to the possible return of the rail- roads to their owners, appears to desire to carry out the eight principles first enumerated above; and if that be done such a re- turn to the owners is, of course, impossible. This was recognized by Mr. McAdoo, the then Director General of Railroads, in his testimony before Congress, wherein he spoke of reducing the number of the organizations which would under any circumstances be per- mitted. Others have advocated that this number be reduced to perhaps five or six separate corporations, each owning the properties lying within a given region. A consideration of the foregoing sixteen principles brings out two facts prominently: First, that there must be an evaluation of each railroad as it existed when the Director General of Rail- roads assumed its operation, either for a purchase or for the deter- mination of the question of damages ; and, second, that nothing short of a single National control of the entire system will be able to put these principles into effect. We must, therefore, eliminate any idea of return of the railroads to their owners as they were, and devote ourselves to perfecting, carrying on and extending the railroads of this country as a single National system. Our experience in the past generation in the creation, regulation and control of corporations goes to show that we can best do this by the creation of a National Corporation, organized, limited and controlled now and in the future by the legislative, executive and judicial branches of our Federaf Government. A National Corporation designed to operate all of the railroads would therefore be organized under an Act of Congress in which 18 THE RAILROAD PROBLEM— A SUGGESTION the proper regulation would be effected by law; and such "Act" would constitute the charter of the corporation. It is not the province of this paper to draft the "Act" which Congress would pass, but only to outline the essential features thereof. The "Act" would give the corporation broad powers (such as the right of condemnation) and all powers generally appro- priate for doing the things within the scope of its duties and business. The same Act of Congress would also define the duties of the Interstate Commerce Commission in relation to the Corporation and to the railroads ; and it would also define the duties of the existing Director General of Railroads, to be merged after the adoption of the proposed Plan into a new office, which has already been sug- gested by the Association of Railroad Executives and known as the "Secretary of Transportation." The following "Outhne," although but merely a suggestion of the essential points to be embodied in the proposed Act, is, it is hoped, presented with sufficient detail to indicate the feasibility and merit of the Plan. To this end, chief attention is paid to those features of the Plan in which there is greatest chance for a misunderstanding in interpreting the Outline; and those features of detail for which we have a well tried and long standing precedent are only barely referred to in formulating the Outline. THE RAILROAD PROBLEM— A SUGGESTION 19 SYNOPSIS OF PLAN The Plan provides for: 1. Ownership of all interstate railroads by a National corpora- tion with stock distributed among the security holders of the existing railroads. 2. Limitations and restrictions to insure economical and efficient service for the public, and an undivided management clothed with all administrative powers and representative of the large and small investors, the Government and the public. [Complete responsibility for administration and financial success is fixed in this management. A fair return on the investment is sought to be assured (a) by em- powering the managing board through its executive to exercise full administrative freedom to manage the business well; and (b) by requiring the management to provide betterments and equipment and make rates to enable it to operate as nearly as possible continu- ously at full capacity — this consideration being second only to a satisfactory service to the public; and (c) by accumulating a reserve fund in prosperous years to be drawn upon in lean years.] 3. Judicial review by the Interstate Commerce Commission, and in certain cases by the Federal courts, to construe the charter and require at all times diligence, ability, good faith and equity in the execution of the Plan. 4. Dividends up to 4 per cent cumulative to be paid annually. Profits over 4 per cent to be distributed among: (a) the stock- holders; (b) to a trust fund to initiate certain improvements; and (c) a possible share to the Government. (It is expected stock- holders would receive at least five per cent per annum, after which the Government would share liberally in further profits.) 5. The executive and administrative powers to be vested in a Board of Directors consisting of twenty-five persons. (a) The National Government to be represented by six Directors with a six-year term each — one term expiring each year. (b) Nineteen of said Directors to be divided into two groups ; one group to consist of nine Directors and one of ten directors. The group of nine Directors to be elected as now. The group of ten Directors to be elected by the stockholders at a meeting at which stockholders are permitted to be represented, in their discretion, by a Government official and Cabinet officer styled the "Secretary of Transportation." 20 THE RAILROAD PROBLEM— A SUGGESTION 6. The Secretary of Transportation to be the personal repre- sentative of the President and intended to represent small stock- holders, shippers and the public generally. His duties are repre- sentative and advisory, without executive or judicial functions in the operation of the railroads. 7. The Plan provides that stock in the National Railway Com- pany owning the railroads shall be issued, subject to be purchased in part pro rata and paid for at par, and sold at par among em- ployes, shippers and patrons of the roads who will have made application therefor, at not to exceed $2,000.00 par value to any one person. (The aim of this part of the Plan being to cause as much of the stock as possible to be finally owned by registered employes and resident patrons over all parts of the National system.) 8. The Board of Directors are required to divide the railroads of the country into separate subsidiary managements so as to pro- vide a number of balanced systems in competition with each other. Accurate account of the profits on each competitive system is to be kept, and bonuses distributed to employes and to the registered stockholders for the lines showing the greatest zeal and enterprise as reflected in the profits. 9. It is provided that within a fixed period after the inauguration of the Plan, the election of Directors, representative of each com- petitive system, may be made by stockholders actually registered as residents of the territory reasonably tributary to such competitive system, or conducting a business within the territory of such sub- ordinate competitive system; and the Directors thus elected shall have, unless waived, a limited right of approval of the appointment of subordinate managers by the chief executive of the National system. (It is the aim of the provisions referred to in paragraphs 7, 8 and 9 to stimulate local initiative and enterprise ana good service from employes by the actual owning eventually of the major portion of railroad stocks by employes, shippers and the patrons who are to be served by the National Company.) THE RAILROAD PROBLEM— A SUGGESTION 21 ARGUMENT For the "National Railway Company" proposed herein GENERAL OBSERVATIONS That the administrative control of the railroads can be safely en- trusted to the board of directors of a single corporation, if such a board is sufficiently representative of the general interests of the nation, will not be disputed. Stress is therefore laid on the widely representative character of the three groups of directors. The method for solving the control of the express business of the nation is based on control through a single corporation, which was adopted because it seemed to afford the only means for carrying out the same principles enunciated in the Introduction to this Plan. Experience proves that with a single central control of a large business enter- prise there will be a financial success where other^vise there would be financial failure. This is because of increased economies and efficiency resulting from such a central and unit control. The financial advantage is two-fold in that the net profit possible from a given gross income is increased; and the increased possibility for profit itself increases stability. And stability is the best insur- ance for the security of capital. There are two things which capital seeking an investment demands: First: Financial return in the nature of reasonable annual interest or dividends upon the invest- ment ; and second : Assurance that the business in which the invest- ment is made is stable, thrifty and profitable, and that the return thereon will be certain and permanent. The annual return, although essential, need not be large if proper stability is present. If the demand for stability be complied with satisfactorily, a four per cent dividend may be more attractive than a seven per cent dividend where the demand for stability is not satisfactorily met. Now this all important stability can be had in only one way ; viz. : By the profitable operation of the business itself. It cannot be had by any outside guarantee if the business itself loses money. The business itself, based alone upon its intrinsic virtue, must be made to pay. 22 THE RAILROAD PROBLEM— A SUGGESTION and must pay, in satisfactorily fulfilling the demand for itself independent of any payments guaranteed from the National treas- ury, and independent of laws attempting to insure to the business, at all events, a comfortable income other than that income which is made possible only by an able and efficient management. Good and efficient management able to cope with all possible conditions that may arise can alone create stability. Frequently the greater the odds of hardship (such as securing to be located along the line of the road of prosperous industries, the increase of the load factor, and the like) under which profits are earned, the more sound and stable is the corporation earning them ; and, conversely, the greater the ease (as, for example, under a government guarantee) with which profits are enabled to be earned, the greater the flabbiness and instability of the corporation. An attempt by statute to guarantee to the investor a given return on his investment independent of the financial success of the enter- prise cannot remain permanently satisfactory to the intelligent investor, because he knows that such a guarantee is unstable, and may, and indeed should be withdrawn if the business losing money continues to be neglected and badly managed by the officers con- ducting its affairs. The fact that in the operation of the railroads the government is losing at the rate of several hundred millions a year is unsatisfactory to the intelligent investor in railroad securi- ties, because it tends to prove a lack of stability which even pay- ments from the National treasury cannot restore unless at the same time a successful and efficient business management be provided for the future. No guarantee, therefore, to be given the railroads that is not based solely upon a successful profitable operation of the roads brought about by internal efficient management can, in the long run, be or remain satisfactory to the investor. That, too, is what all the American people, whether railroad investors or not, want — a thrifty business success. It is the duty of Congress, therefore, as public servants, to provide a plan for this business success. It cannot evade this responsibility. There are people in America who do not deem it the duty of public servants to adopt measures of National policy until after they shall have received instructions from the electorate. This is without doubt a mistake. We have no method in the machinery of our Government by which the mass of the people can select one way of doing a thing from many systems dififering in design and detail. THE RAILROAD PROBLEM— A SUGGESTION 23 The merit of no plan or policy can be judged fully except in con- nection with its details. To submit such details to the American people is not only impracticable but neither desired nor contem- plated by the people nor by our form of Government. There are too many matters of national and world-wide importance requiring speedy and correct solution to make it feasible to await a vote upon details — or even policies. To attempt to do so is to violate the very first introductory principle of the within Plan, which requires that the matter be kept out of politics. This does not mean that the people must not be properly considered and satisfied. It does not even mean that the people are not good judges of such matters. But it is the function of public servants to investigate, study and adopt the best plan or policy in relation to a given matter. A great American statesman once said that when the salvation of a community is depending it is incumbent upon those who are set up as its guardians to embrace such measures as have justice, vigor and probability of success, and to adopt them. If the Plan is not wise and not well conceived, then, and only then, will the people be heard from and the matter get into politics. If the matter is settled right, then we shall hear very little from it, and it will remain "out of politics," as it should. This is the principle upon which the greatest con.structive policies since the beginning of our country have proceeded. The matter of our National finances and the proper relation of the Government to the banking business was sought to be presented to the people for solution from the beginning of our country, but the subject was for more than a generation not properly solved for the reason that its com- plexity made it impossible to present a clear-cut issue to the people for determination. When Congress finally and wisely appointed a monetary commission, which made scientific studies of the mat- ter upon which a correct solution could be based, such a solution was, without creating any National issue, put into practice by our National Government, with the result that the great subject was finally settled, and settled right, and is permanently "out of poli- tics." If the subject had not been settled correctly it would have remained as it was prior to that time, "in politics." In the same way the great problem of the construction of the Panama Canal was studied and solved correctly by our public servants, so that it, in turn, was never permitted to enter politics. Had it not been solved right its entry into politics would have been assured. In 24 THE RAILROAD PROBLEM— A SUGGESTION like manner most of the great questions which have come up during the present war have been settled, and those which have been settled right are "out of politics" for all time, and those that have not been settled right are certain to get into politics. For ex- ample, prior to the war the matter of the express companies was a live subject. There were many disciples of Government owner- ship and operation of the express business, but through the stress of war, which forced upon public officials the necessity for quick and correct action, a policy was devised which has settled the sub- ject so wisely that the matter is not only not "in politics," but the very method by which it is settled is comparatively little known. [Reference is here made to the contract entered into under date of June 21st, 1918, between the Director Gen- eral of Railroads and all of the great express companies operating in the nation, whereby one large National cor- poration was organized whose stock was exchanged for the stock and securities of all of the separate express com- panies. The National corporation is known as the Amer- ican Railway Express Company, and this company oper- ates all of the express business under its charter, which provides for the payment of dividends and division of profits in a most scientific manner. This plan still re- quires an Act of Congress to perpetuate it, inasmuch as the Director General was authorized to enter into the plan for only a limited period. We have in this railway ex- press plan, therefore an excellent precedent as to some of its details for the railroad Plan proposed herein.] In like manner must we settle the great treaties, our National policy in relation to unemployment, to armament, to unfinished housing plans, to manufacture of equipment for war. Indeed, practically every important subject must be settled, and settled properly, by our public servants. The greater the subject the more imperative that the solution be made by our public servants without endeavoring to do the impracticable thing of submitting details of policies to the people. The American people are good judges, and they will not consider a subject settled until it is settled right; and if our public servants are dilatory or neglectful or procrastinating, the subject will be in politics until the proper solution is found. It seems, therefore, that Congress must at all events (and the sooner the better) consider and initiate the best solution possible for the railroad problem. It is believed that the principles enun- THE RAILROAD PROBLEM— A SUGGESTION 25 dated in the Introduction to the within Plan will be agreed to as abstract principles which should govern, and yet no plan hereto- fore proposed seems to embrace all of these principles. Refer- ence to the chief characteristics of those plans which were formu- lated with more or less definiteness, and submitted to the Inter- state Commerce Committee of the L^nited States Senate early in 1919, will by contrast help to emphasize some of the advantageous features which are claimed for the within Plan. No practicable detailed plan has yet been outlined for Govern- ment operation. (The four brotherhoods of railroad employes are reported to be sponsors of a plan for government ownership by purchase, but not for government operation — the operation under their plan to be by a board of fifteen directors, of whom five only represent the public and the government.) There are plans for the return of the railroads to their former owners ; but the wrong- fulness from every point of view of attempting permanently to place each such railroad company in the possession of its property for the purpose of operating the same as it stood before the war is so apparent, and such a plan would be so injurious and unpopular, that it is believed any lengthy discussion of those plans may be dispensed with. The plans to be discussed contemplate private ownership and private operation with Federal regulation. They differ only in the way in which private corporations would be per- mitted to hold the properties, and in the method for Federal regu- lation. One of the most meritorious of these plans provides for the return of the several properties to their owners, but also pro- vides for the unification in management and operation necessary to carry out particularly Principles 4 and 5 of the Introduction by means of a Federal corporation, which would, without profit, at- tempt to supply by allocation, the wants of the several roads in equipment, in use of terminals, and routing of shipment, and at the same time administer the operation of each road sufficiently to carry out the principle of unit control. Most of the other plans con- template the joining together into a single corporation of the rail- road properties in each of a given number of regions for the pur- pose of reducing the number of private corporations which would finally become the owners of all of the properties. In the opinion of the writer of the within plan, the authors of the proposed plans generally err in seeming to expect to accomplish by legislation what can and should be accomplished only by sound 26 THE RAILROAD PROBLEM— A SUGGESTION business management. This is shown more particularly in the provisions relating to rate making. If there is justice in this criticism it will be made clear as we proceed with this discussion. Legitimate profits are the growth of a sound business management and cannot be created by law. We cannot properly legislate profits into the treasury of a corporation. We cannot pay this in cash, and it is just as improper to pay it in the form of credit or guaran- tees or to pay it in property. Neither can it be done, however desirable it might be in theory, by attempting to require a higher rate, as such, to increase profits ; or by requiring that the purchase or non-purchase of railroad equipment will, as such, increase profits ; for an agency for any such purpose is powerless to create profit except in connection with good management, and bad management can counteract the merit of any such agency. Congress should, therefore, address itself, as we should all address ourselves, in studying the subject, to the matter of per- manently providing the best and most efficient internal management for the future operation of the railroads ; and avoid discussions of the constitutionality of this or that method of guaranteeing financial results from the National Treasury or of dividing profits expected to result from arbitrary requirements imposed upon regulating boards by acts of Congress. For similar reason, this inquiry will avoid any extensive discussion of the constitutionality of compul- sory Federal Incorporation. The writer believes that we can no more question the right to compel Federal Incorporation of an interstate railroad than we can question the right of Federal regu- lation of such a road. For without the former right, the latter right is incomplete. But railroad owners and railroad managements have with a single voice protested against the demoralizing unfairness and inconsistency of the regulation of Interstate Railroads at one and the same time by forty-eight State legislatures, commissions and courts, and it is believed, if an opportunity is offered them to in- crease their economies, simplify their operations, improve their managements and service, increase their income, and, at the same time, free themselves from multiple State control, they will not refuse to grasp that opportunity simply because it requires Federal incorporation. The question will turn, therefore, on whether we have made a case proving it to be better to so incorporate the rail- roads. If it is better for all concerned and for the nation, a legal THE RAILROAD PROBLEM— A SUGGESTION 27 way will be found. A tentative plan is outlined herein, under which it is believed Federal incorporation, (voluntary or otherwise) can be legally accomplished if the Plan has sufificient merit. We should direct ourselves therefore to an inquiry into the merit of all plans, to the end of learning the best plan; and to do that we must inquire first into the nature of sound business management, and then find how that sort of management can best be obtained. This is important because it is the duty of Congress to require, by the formulating of general principles, the best kind of management without attempting detailed specific instructions beyond formu- lating such general principles. The labor and responsibility of this is not small, but the more we look into the subject, the simpler we find the principles and methods by which the desired management can be assured. The inquiry teaches us that it is in the most economical use and in the most complete operation at all times of all of the railroad facili- ties and equipment, and in this alone, that the best financial results can come. (The result of this sort of operation will be referred to hereinafter in describing the full even load factor.) We will learn that every agency entering into the business must be made to contribute to this desired end; and all plans for rate-making and betterments, for purchases of equipment, for employment — indeed every activity in the business, must be brought into harmony to produce the "full even load" which is so indispensable to the best economy ; and it is one of the duties of Congress to formulate the principles of equity, fairness and efficiency under which this may and must be accomplished. Incidentally, in this inquiry we shall find a convincing reason why the government should not itself purchase or own the National railroad system. The art and science of Federal public utility regulation have proved that our government need never own the railroads if it is willing and competent to regulate themi under proper scientific principles. For all that the government could require under ownership, is sound and honest business management, and it is the duty of the Federal government to require that much, at all events, under private ownership. The government, in owning the railroads, would have no more right to make an excessive profit in their operation than do the private owners. In other essential minor respects, the duties and obligations of government and private owners are the same. For example : Neither can legally 28 THE RAILROAD PROBLEM— A SUGGESTION operate a substantial portion of the railroads at a loss in the interest of the portion of the public which happens to receive the service on such part; and neither should be permitted to earn an exces- sive profit in order to indirectly aid say a weaker railroad system, or any other element in our body politic. In short, all that the government should, properly, do if it owned the railroads, it can, both legally and justly, compel the owners to do under private ownership. REGIONAL OR DIVIDED OWNERSHIP IS WRONG IN PRINCIPLE BECAUSE IT MEANS DIVIDED MANAGEMENT The radical difference between the within Plan and the others to which it is proposed to give particular attention in this discus- sion is greater than would at first appear. This difference is based upon the division of ownership, which is common to the other plans, which means division in management, and requires drastic outside administrative control and regulation. The assumption of those plans that the country should be divided into regions for purposes of operation and local management is correct. But it is the contention in the within Plan that such regional districting is an administrative act, to be modified, as circumstances change, by the managing executives; that it is not an appropriate subject for Congressional action; and that districts should not be fixed by the accident of former control. It is contemplated in the within Plan that the country shall at all times be divided into subordinate systems for purposes of administration and operation, and it may be very convenient and advisable for the Board of Directors of the National Railway Company to require that each of the several roads as they formerly were operated be managed for a limited time separately, for purposes of accounting as well as for purposes of competition in service, as provided in Section 1 of Article XVIII herein. And the adoption of such a policy in the beginning would undoubtedly cause less demoralization among employes and the public generally than more radical changes, but it is plain that any divisions which may be resolved upon in the beginning may again need to be changed as circumstances and conditions change. When all of the stocks and bonds of any given railway become absorbed by the National Railway Company each separate railway would pass out of existence as a separately owned institution. For purposes of competition under Articles XVIII and XIX, the management of the National Railway Company would find it THE RAILROAD PROBLEM— A SUGGESTION 29 judicious to modify local managements so as to balance one com- petitive line against another, instead of requiring that two systems ■divided on accidental lines should rival and compete in service when one or the other might have a very decided natural or other advantage. It should be clearly understood, therefore, that the •creation of regional divisions is a matter for administration and not one for legislation. The greater evil, however, in attempting two or more separate regional ownerships as a permanent solution of the railroad problem is that divided ownership means divided imanagement and increased regulation from above, and the conse- quent destruction of responsibility. Inasmuch as divided owner- ship is an attribute of practically all of the plans which have been suggested to the Senate Committee we can point out concretely those evils by a direct reference to two of the leading plans which have been submitted — one by the Railroad Security Holders and the other by the Railway Executives. Both of these plans provide ior a number of separate ownerships, each with its separate man- agement, but in every case each of those managements is made impotent for good by divesting it of its principal executive and administrative powers, contrary to a primary principle followed by the within Plan. For example, the plan of the Railroad Se- curity Holders provides for a Federal body (a majority of whom are Government appointees), with power to determine upon and ■direct the purchases and disbursements for betterments, equipment and extensions; and with power to route traffic and direct the use of terminals, and to perform other administrative and executive acts vital to the operation of the roads. The same plan provides for a Federal governing board to determine railroad rates and ■wages to employes. The plan of the railroad executives is iden- tical in so far that it provides for a Federal appointee, a member of the President's Cabinet, to administer the railroads in a similar manner. Indeed, if there is to be more than one ownership there must be some such administrative control from above in order to co-ordinate into one management the two or more proprietary corporations. Divided ownership may, therefore, be said to be wrong because it means a divided administration of rates, wages, routing of traffic, purchase of equipment and use of terminals, -which in turn requires, for purposes of co-ordination, administra- tive control from above. It is candidly submitted, first, that the division of these powers is wrong in principle, and second that it 30 THE RAILROAD PROBLEM— A SUGGESTION is wrong to turn those great powers of executive control neces- sary for co-ordination over to political Government appointees. It would be preferable to make the Government itself responsible for the entire operation of the railroads than to place in Govern- ment appointees the principal administrative and executive powers without the responsibility for the management. In centering executive powers responsibility is fixed and incen- tive increased. The plan of single ownership permits the execu- tive to reveal his ability. Under a divided ownership there is no- similar opportunity permitted for an able executive management. ADMINISTRATIVE REGULATIVE BODIES CANNOT FUNCTION SEPARATE; AND APART FROM THE MANAGEMENT It is to be presumed that regulative bodies for the determination! of rates, regulation of wages, routing of freight and purchase and allocation of equipment will execute their orders a'fter the same careful deliberation, study and inspection that a prudent, efficient executive would make. No executive would think of determining- upon one such matter without the most careful survey, investiga- tion and inspection, not only of one of the said matters, but of all of them, and his judgment would be arrived at only after a careful study of all phases of each of the several subjects. It is unthink- able that an able executive would endeavor to determine, for ex- ample, the question of railroad rates without considering at the same time the effect upon the business, upon the equipment, and upon the question of employment, of any change of such rates. It is unthinkable that an able railroad executive would undertake to purchase equipment except in connection with expected busi- ness which would be largely controlled by the determination of rates. If the determination of any one of these matters for ad- ministrative action be placed in the hands of the regulative body which did not have full power over all other matters also, such a. regulative body could not function properly; that is to say, it would not be enabled to give wise instruction. Furthermore, regu- lative bodies are neither expected to make nor are they provided with the facilities and opportunity to make administrative inspec- tions; and without such inspections administrative bodies cannot deliver wise instructions, and they cannot, therefore, function. Common business prudence, therefore, requires us to limit any regulative body to its proper function of making judicial interpre- THE RAILROAD PROBLEM— A SUGGESTION 31 tations of the charter, with power to enforce requirements of the charter, and with power to adjudicate all questions of law and equity which can arise thereunder; and to place in the corporation itself as the owner of the railroad properties the executive func- tion of properly managing the corporation under its charter and in accordance with the ruling of the judicial regulative body. This can be done, as has already been shown, only where we are per- mitted to deal with a single corporation as the owner of the entire railway system. THE MATTER OF NEW RAILROAD CONSTRUCTION No plan for regional or separate ownerships, so far as has been observed, has attempted to detail any practicable method for build- ing railroad branches and railroad extensions. We are entitled to assume that the country has not yet reached the zenith of railroad building. It would be a melancholy outlook if we are to assume that during the next generation new railroad building on this continent will not compare favorably with the construction of the past. The continent is new. We are on the point of developing newly reclaimed regions. It would require a prophet to foretell what may be needed in the way of north and south lines, of which we have so few, to connect with neighboring countries of diverse and varied production. Is it, therefore, not reasonable to require that any new plan for the management of the railroads should provide easy and facile methods by which new railroad building may be promoted and encouraged ? The Director General of Rail- roads has testified that regional divisions should be created to co- incide substantially with the former transcontinental railroad sys- tems. This is to avoid inter-regional railroads for which there appears to be no provision in any plan of regional ownership. The former railroad systems nearly all extend from east to west; and new construction, if we are to be permitted a guess, may, for reasons based upon newly developed water routes, American ship- ping, and the Panama Canal, be demanded from north to south. The new construction would in such an event be entirely inter-regional, and for this no provision seems to be made. The dividing of the country, therefore, into regions with sep- arate corporate ownerships for each region would produce the same evils which the former multiplied ownership, management and regulation possessed ; and it should be clear that this evil can- 32 THE RAILROAD PROBLEM— A SUGGESTION not be remedied short of one single ownership for the entire rail- road system of the nation. COMPETITION Fair and healthy competition is said to be the justification for the continuance of separate diverse ownerships. This proposition is presented with such unanimity and force, both by railroad oper- ators and by political economists, as to' demand reply. Under any plan based upon separate diverse ownership, there can, from the nature of things, be no competition in the making of rates, for in all plans of diverse ownership a Federal supervisory body is pro- vided to regulate tariffs as well as co-ordinate other matters. As to competition in service, it is difficult to see how there can be competition for the great majority of stations that have but one railway. It is difficult to see how there can be real competition in service among different systems using such equipment as may be allocated to each by a supervising administrative body; or how there can be competition in service where the supervising, regu- lating body controls the routing of shipments. And yet, such super- visory and administrative control is universally deemed essential to co-ordinate the separate ownerships supposed to be in compe^ tition. On account of the importance of this subject care is taken in the Plan of the National Railway Company within to provide, as is supposed in Articles XVIII and XIX, for a healthy rivalry among employes, communities and local managements of the rail- roads, and also in Article IX for an incentive to reduce terminal costs, and, indeed, station charges generally. It is not believed that there can be any fair and healthy rivalry where unequal conditions exist. For that reason there should be authoritj% as there is in the Board of Directors of the National Railway Company, to balance and equalize the different systems or parts of systems which it is sought to place in competition with one another. It would seem that this can be accomplished by the executive or board of directors of a single owning corporation when it cannot be accomplished in any other way. Where the ownerships are diverse there can be no incentive by an increased profit, for profits are to be limited with each ownership by super- visory regulation. On the other hand, where good service will reflect itself (as it will in the National Railway Company as provided in Article XVIII) in increased facilities to communities, and THE RAILROAD PROBLEM— A SUGGESTION 33 bonuses to employes — for the co-operation of each in creating good service — that is not only the best incentive, but the only incentive possible where there is to be unified control of rates, equipment and betterments. To be perfectly just with the proponents of competition, they do not claim that where there is administrative central control and unification competition will exist in the sense in which the word is sometimes used. They do, however, make a two-fold conten- tion, setting forth wrongs which they would seek to correct by diverse ownership, to wit: First, that there are bound to be lapses in service in given local- ities which in the past have sometimes been corrected by a threat or prospect of competition in the nature of, say, a branch from a rival road entering the locality. There is much force in this claim, but it is negatived when a central regulating body is permitted (as is done in all cases of proposed diverse ownership) to veto or approve the right of any road to project and build any such com- petitive branch. The true remedy for a lapse of service in a given locality can best be made by the board of directors of a sin- gle corporation by improving the local management, and by en- couraging improved morale as provided in Articles XVIII and XIX hereof. If the corporation itself permits a poor service in a given community the Interstate Commerce Commission, as a judi- cial body, can enter a just order requiring improved service in any part of the system which is discriminated against and in which unequal treatment is charged. The second contention of the proponents of diverse ownership is that where there is a single ownership there may be a lapse in the morale of the entire system, which the executive body of a single owning corporation might not correct. The case of the New Haven Railway system, controlling practically all of the rail- roads of New England, is cited as an example of such a failure, and it is claimed with much force that there must be some alterna- tive possible against such a lapse of the management of a single owning corporation. This is a danger in all systems against which provision should be made. It would seem that the danger of such failure in morale is more likely to occur where the management is relieved by some supervising administrative body of its full re- sponsibility than where the authority and responsibility are single. And while each of the owners in a regional system might rest 34 THE RAILROAD PROBLEM— A SUGGESTION complacently secure in the feeling that the responsibility is with the administrative regulating body; in the case of a single owning corporation in which authority is with proper limitations centered in a single board of directors, there is no escape for such a board from the full responsibility. The communities on each subsidiary system of railroad pro- vided for under the within Plan could do more than they can under separate ownership to remedy any lapse of management, either local or National, by exercising their right to acquire and record stock and then elect proportionately therewith one or more direct- ors. It is believed that this right, provided for in Article XIX, would be exercised in connection with a waiver of the right of approval of subsidiary managers; but if the abuse were not promptly corrected even the approval of subsidiary managers them- selves need not be waived, and communities would exercise a direct influence in the appointment of subsidiary managers through- out the National system. Indeed, the responsibility under the within Plan of the election of nineteen directors, who would be responsible for the efficient management of the railroad system in each locality, rests with the local communities; and each com- munity has a method of (1) directly insisting that its management be as efficient as the community desires it to be, and (2) initiating any meritorious policy it may desire. There is still a further alternative which the American public can at all times exercise which should at all times be recognized by such a board of directors. That is the one for which there are always some supporters, but not enough to jeopardize the security of the single owning corporation, except where the single owning corporation fails either in winning financial success or in giving satisfactory service to the public. It is that of direct Government ownership and control. No charter from Congress to any com- pany can compel any better management or any better service than is inherent in the personnel of that company. All that Con- gress can do is to place adequate power for good in the manage- ment of such a company, and then hold it strictly responsible. That the management of the National Railway Company as or- ganized under the within Plan, with ample powers, will have full opportunity to make a financial as well as a satisfactory success of the operation of the railroads cannot be disputed. It is equally true that men expert in railroad management can be found who THE RAILROAD PROBLEM— A SUGGESTION 35 are able to grasp that opportunity. It is unthinkable that such men should not strive for and achieve financial success (which is a direct incentive for good management) and satisfactory public service. They v^^ould recognize that public satisfaction is not only the best way to financial success, but they would endeavor to avert thereby the calamity of a widespread feeling for Government ownership and operation. This is the alternative which in the last analysis must insure efficient management by any private cor- poration. The examples of the large corporations or "trusts" which already, each in a given field, hold more or less exclusive control of certain industries, go to show that whatever complaints there may be made against their managements, those of inefficiency and bad service are not the ones that can fairly be made. It would seem, therefore, that we have a right to conclude that the man- agement of the National Railway Company under the within Plan would at least be efficient and enterprising and would strive to render a satisfactory service to the public. A FURTHER OBSERVATION UPON INCENTIVE The foregoing review of the matter of competition was sub- mitted for an opinion to an American engineer who has for the past thirty years controlled operations in construction and industry amounting to millions of dollars per annum. His reply was that there would, in his opinion, be an incentive for the giving of good service by a single management in the operation of the railroads of the country; and that this incentive would be two- fold: First, that good service would be reflected in increasing the income and improving the properties included in the management. The sec- ond incentive he pointed out is omitted in the foregoing observa- tions on competition, and we therefore give this incentive in his own words : "The greatest moral and material advancement from barbarism has been due to the efforts of men who have a broad altruistic de- sire to benefit mankind. Men expert in railroad management are not devoid of these sentiments. It is the universal desire among educated men to want the approbation and good opinion of all men. This they can obtain by good service, and destroy by bad service. If the men entrusted with the railroad management be- long to a high-class type of educated men they will permit these high motives to control their actions, especially where, as is the case here, such a policy is in harmony with their business interests." 36 THE RAILROAD PROBLEM— A SUGGESTION SIMPLICITY AND CERTAINTY A PLEA FOR SPEEDY CONGRESSIONAL ACTION The greatest foe to the successful operation of the railroads, next to divided ownership and multiple regulation, is uncertainty. It is the uncertainty of present conditions that is ruinous. All improvements and all steps looking to new business under a wise railroad management necessarily follow a permanent policy. There is no constructive business, from the putting in of a railroad cross- ing or an industrial siding to the building of a new line of road, that is not now waiting on what is to be done with the railroad problem. There is no adjustment in business that is not likewise awaiting the creation of a permanent policy — to the extent that the congestion of unsettled business everywhere is paralyzing in- dustry. The failure in present operations is not due as much to lack of good administration as to uncertainty. The cost of this uncertainty is partly measured in terms of finance by the loss at which the railroads are now operated, which is said to be more than a million dollars per day. This is being well expended, of course, if additional time is necessary to determine the best plan; and the proponents of diverse ownership seem to think that con- siderable time is necessary. We should not mislead ourselves, however, by thinking that we may experiment successfully under an uncertain policy. There can be no fair test, for example, of Government ownership short of actual Government ownership it- self ; for if it is to be a mere trial the overhanging uncertainty will rob employes of morale and the management of its foundation of good administration. It is submitted that the within Plan of single ownership possesses — as do final solutions in all things — the merit of simplicity and certainty that makes it capable of be- ing easily understood and readily adopted. "The machines that are first invented to perform any particular movement are always the most complex, and succeeding artists generally discover that with fewer wheels, with fewer principles of motion than had originally been employed., the same effects may be more easily produced. The first philosophical systems, in the same manner, are always the most complex, and a particular con- necting chain, or principle, is generally thought necessary to unite every two seemingly disjointed appearances; but it often happens that one great connecting principle is afterward found to be suffi- cient to bind together all the discordant phenomena that occur in a whole species of things." — Adam Smith as quoted in Progress and Poverty. THE RAILROAD PROBLEM— A SUGGESTION 37 In unit ownership there is found a principle which enables us to provide a single administrative balanced control, which in turn permits us to eliminate many of the wheels otherwise necessary, and to accomplish even more effectively than formerly that well- regulated grind of operation which is so excellent and so much sought. Whatever may require reform in the old system, it is found, can better be corrected by less restriction rather than by greater. Simplification in ownership, to a marvellous degree, makes at once more simple what it does not eliminate in all ques- tions of evaluation, employment, traffic, building, economy, and indeed in all administration, as well as in regulation. It is the only method by which private ownership can be given an advantage in a central administration equal to that of Government owner- ship. The principle is either right or wrong. If it is right it is so simple as to permit adoption in a few months. Whereas the more complex plans admittedly require years as against months for working out; and in the meantime ruinous uncertainty will per- form its work. THE COLORADO SITTJATION The decline in railway enterprise, together with the chances for its revival under a proper National program, are interestingly illus- trated in the state of Colorado. The two largest cities of the Rocky Mountain region lie on an east and west line passing through this state, giving it a controlling position both from the commercial and tourist point of view. In 1919 the mileage of railroad operated in Colorado is about 300 miles less than it was ten years ago. This reduction has been in spite of increases in business and population; and in spite of a demand for increased railroad facilities for which both the state and separate communi- ties have given expression by direct vote from time to time in favor of bonds for new construction. The decline in mileage operated is directly traceable to the fact that under diverse man- agement the intrastate roads have been unable to co-ordinate with transcontinental lines. The transcontinental business passes over the Denver & Rio Grande Railway. The distance from a given station, "A," to a transcontinental terminal point, "B," on that line is 343 miles; and the distance from a certain station, "C," on a separate line to the same terminal point, "B," is only 149 miles. By constructing a railroad from the said station, "A," on one rail- way system to the said station, "C," on another railway system, 38 THE RAILROAD PROBLEM— A SUGGESTION which is a distance of only 30 miles, on a flat country, there can be saved on all transcontinental travel more than 164 miles. Construction of this sort is facilitated under a plan of single ownership. No plan for separate ownership can so well provide for the building of such an inter-regional line; and if it did there would be no method of equitably adjusting the damage resulting to the D. & R. G. through its loss of business. Those familiar with conditions in Colorado can testify that under the opportunity and incentive provided in the within Plan capital would be found there to make this connection and also build im- mediately a tunnel several miles in length projected through James Peak on the Denver & Northwestern Railway, which would at once connect the commercial world with an agricultural and min- eral empire, now at times completely isolated. This and other de- velopments, including the restoration to service of about 250 miles of road, could, if necessary, be initiated by local capital under Article XII of the within Plan. With every state doing as much the result would go a long way to restore normal conditions in the nation. It would be the key to the final solution of many of the after-war problems. IN RELATION TO CERTAIN FALSE PRINCIPLES IN SOME OF THE PLANS Some of the plans for the solution of the railroad problem pro- pose to require, with confidence in the success of the requirement, a regulative body, as, for example, the Interstate Commerce Com- mission, by a stroke of the pen, to order rates to be raised and expect net income thus to be increased accordingly. One of the plans, for example, requires this in the following language, in which the words which seem to embody the false principle are italicized (in copying) : "The Act shall provide that the rate of return on the combined property investment accounts of all the railroads in each of the classification territories shall be, as nearly as may be, 6 per cent; and it shall be the duty of the respective Commissions to maintain a level of rates that shall produce a rate of return at least equal to 6 per cent on the combined property investment of the railroads operating in each of such territories." Suppose the Commission finds this impossible. It is no more pos- sible in the operation of the railroads to increase the net income progressively by increasing rates than it is in the operation of a hotel, and in the operation of a hotel an increase in rates may THE RAILROAD PROBLEM— A SUGGESTION 39 drive away customers and reduce profits. In the recent instance of the Boston Elevated Railway it was found that an increase in fares reduced the net income by driving away business. We may have such a case even before us now in the problem of the rail- roads on some commodities. Rates have been increased twenty- five per cent, yet the railroads are said to be losing at the rate of several hundred millions per year, and the latest reports show that there is a large decline in business from month to month. Even if another horizontal increase would increase profits, it is equally possible that certain reductions in rates might stop the decline in business and add to the net returns. The zinc mining industry in America is at a standstill because ore, which was worth two years ago twenty-five or thirty dollars per ton, cannot now be profitably shipped to the smelters from the mines. A reduction in freight rates upon zinc ores would, therefore, tend to increase the business of zinc mining and the tonnage of zinc ore to be shipped. On the contrary, silver-bearing ore is worth about twice what it was at the beginning of the war, and increasing the freight rate on high-grade silver ore would undoubtedly increase the net income of the railroads. This shows how impossible it is to make a horizontal increase covering all commodities or any class of commodities and expect to achieve uniform results on all such commodities. Yet it is in such manner that an outside regulating body would be expected to act under a law requiring it to fix rates to earn a given net income on all railroads. We cannot escape the fact that the true and only guaranty for an increased net income is in unhampered, efficient and economical administra- tion and not in outside regulation. Another wrong principle upon which the argument in some of the plans rests is in the discussion of ways and means for reduc- ing labor expense without decreasing income. This false reason- ing proceeds on the theory that the labor needed is measured by the number of days' work received; and that if more per day is paid expenses are increased without increasing income, and if less per day is paid expenses are decreased without decreasing income. This reasoning seems to be used by some who desire to see wages fair, as well as by others who think they should be kept as low as possible. This reasoning, it is here maintained, is wrong, for with proper morale, which must, at all events, be the first consideration, increased service may frequently multiply more rapidly than wages 40 THE RAILROAD PROBLEM— A SUGGESTION when wages are raised ; so that the fixing of wages is a scientific question which should be made a part of the administration of management and in which it is the duty of Congress to permit the fullest possible freedom under fixed general principles of right and wrong. If the executive departs from the fundamental prin- ciples, one of which is the principle here pointed out that reduc- tion of wages does not always mean reduction in expense, and that increase of wages does not always mean increase in expense, then the action of such executive body must be corrected by judicial action; but that is all. We are bound to rest these ad- ministrative functions somewhere, and it is contended here that they can most appropriately rest (within the limitations prescribed) with the controlling board of directors of the proprietor of the railroads. If that board of directors is found unworthy of trust, and judicial control seems unable to cope with it, the remedy is in providing a different method for constituting that board, mak- ing it more representative oi public interests, and not in providing another commission for administering the business of the corpo- ration. The principle of seeking the remedy in improved service and morale rather than in decreased wages has been announced in the case of at least one important industry, in which there has been no requirement that managements be created representative of the public interest. The following recent semi-official announcement, in coming thus voluntarily, is very significant and hopeful : "There is a unanimity of opinion among iron and steel producers that no general reduction in wages should be attempted, either now or in the near future, despite the fact that daily earnings of the men are from two to two and a half times what they were before the war. There had been no general reduction in 1914, despite the depressed condition of the industry, and from 1899 to 1913, inclusive, theie had been many advances, with only two or three intermediate reductions. What employers do seek, how- ever, is a restoration of the labor performance of before the war. They expect men to render a standard day's service." UNDIVIDED EXECUTIVE CONTROL FUNDAMENTAL IN ALL BUSINESS We have seen that any plan for divided ownership of the rail- roads means "divided executive control" as opposed to "single ex- ecutive control." Of these two main principles of control which we have to consider we may be better able to judge if we apply THE RAILROAD PROBLEM— A SUGGESTION 41 them to a similar important but smaller business enterprise. We will take the example of a large metropolitan hotel — say, like the one with three thousand rooms recently completed in New York. Let us propose, for the purpose of illustration, two plans for the operation of this great enterprise. We will assume that the capi- talist owners set forth the two proposed plans in the form of letters of instructions from the owners to the executive manager of the hotel, who was selected because of fitness as a representa- tive of capital and as an expert hotel executive. Plan No. 1 — For Divided Executive Control To the Executive Manager of the Hotel: The capitalist owners of this hotel hereby place in your charge the management of the hotel. It will be your duty to conduct the hotel in such a way as to earn a profitable return upon the invest- ment and at the same time to give to the public fair, satisfactory and undiscriminating treatment. That is all. We are, however, aware that there have been cases where in the management of hotels the public has been unfairly discriminated against, and we desire to avoid all suspicion of such unfair treat- ment. To do this effectively we have consulted with the mayor of your city and have arranged with him to appoint a disinterested committee to assume all responsibility in making the rates in your hotel. This cannot work you or the owners any harm, because as a rate committee it will have definite instructions to make charges sufficiently high to effect a fair return upon the investment. This will relieve you of all responsibility and criticism in the matter and leave you free to manage the hotel. There is one more matter, too, for us to consider in avoiding suspicion of wrong, and that is in the matter of making purchases and betterments. We have, therefore, also consulted the mayor concerning this and asked him to appoint a second committee, whose duty it will be to make or supervise all of the purchases of equipment or furnishings for the hotel, as well as alterations in the rooms or building. This will relieve you of all responsibility in relation to such matters and leave you free to manage the hotel. There is still another matter — the matter of the relation of the hotel with employes. Since the rate committee must, at all events, make the rates sufficient for a return on the investment, we desire to avoid responsibility for either you or us on this other matter. We have, therefore also taken up that matter with the mayor and have arranged with him to appoint a third commission, or "labor committee," which will hear complaints and practically ar- range all of your relations with your employes, leaving you free to manage the hotel. 42 THE RAILROAD PROBLEM— A SUGGESTION These three committees will not interfere with each other nor with you, for each will be confined to its respective sphere in which it will assume all responsibility, that you may be left free to devote your great energy and expert ability to the one thing of making the hotel a financial and business success. Yours respectfully, (Signed) The Capitalist Owners of the Hotel. In order to carry out the illustration, we will assume that the hotel management is not successful in the respect that no return is made upon the capital ; that the morale among the employes is low ; that there is dissatisfaction among the public ; and that the equipment committee has a misunderstanding with the manage- ment of the hotel in the way of purchasing material not suitable for its purpose. The several committees were then appealed to. The labor committee deemed it its duty to avoid any possibility of labor trouble by the very wise precaution of making wages ample. The rate committee avoids responsibility for financial failure by making the rates of the hotel amply high; and the equipment com- mittee deems it best to avoid all purchases for betterments. But it is found that the patronage of the hotel continues to fall off and there is frequently a large percentage of the rooms vacant. The capitalist owners then appeal to the executive manager of the hotel and this is what the executive manager replies: To the Capitalist Owners of the Hotel: The morale among employes is low because, as I have been told by them, they are not accountable to your management in any way, but only to the labor committee. They see no reason why they should strive to satisfy two bodies. They claim they have frequently appeared before the labor committee and have striven to satisfy that committee, and having satisfied that committee, they see no reason why they should be called upon also to satisfy the executive manager of the hotel. That is the reason we have no discipline and have poor service, and excessive cost for service. In regard to the rates which have been established by the rate com- mittee, they have been amply high ; but the trouble lies in the fact that a great many rooms in our hotel are continually vacant and the public is dissatisfied. I could remedy these things if I had the power. For example, I believe I could increase the net income by reducing the rates. By striking in the nick of time, or by proper announcement in advance, I could fill the hotel at the time of an excursion or convention by the purchase of some special equip- ment or by granting a special inducement in some manner or other. It was a fad of mine in the management of other hotels that the THE RAILROAD PROBLEM— A SUGGESTION 43 hotel and its equipment should be used at all times, and to its full ■capacity, in order to make the maximum net revenue; and that rate-making should take into account the conditions of the hotel as well as the desires of the public. I have always found that that •can be done without unfair treatment to the public. In conclusion, I beg to say that the committees consist of estimable gentlemen, but on account of their number they are obliged to transact their business in a deliberate way, according to fixed hours and dates; and it is impracticable to take these matters up with them and ob- tain quick action. Furthermore, it is often the case that the cor- rect action can come only after a detailed personal investigation ■on my part of the conditions in each department, and although upon such investigation I frequently find that quick action, say, within an hour or two, may earn for the hotel many thousands of dollars, I find that in nearly all such cases that action is not needed by one committee, but by all of the three committees, and that €ach, like myself, should make a personal investigation of every department before it can act intelligently — all of which is, of course, impracticable. Yours respectfully, (Signed) The Executive Manager. After the receipt of this letter the capitalist owners of the hotel seek out the mayor of the city, and since there is danger of the hotel becoming a financial failure and injuring the city, they de- cide that before permitting the appointment of a receiver for the hotel they will heed the suggestions of the executive manager, and with the agreement of the mayor, the capitalist owners devise "Plan Number 2," which is set forth in the following letter ad- dressed to the executive manager: Plan No. 2 — For Undivided Executive Control To the Executive Manager of the Hotel: Your suggestions have been canvassed with the mayor of the city and he joins with the capitalist owners in writing you this letter, which embodies a new plan, in accord with your suggestions. We have interviewed the several committees which were appointed to regulate and administer the more important matters in connec- tion with the hotel, and each of these committees has agreed with us that it has always been in doubt as to exactly what action to take for the good of the hotel. The employment committee sees the force of your statement that the employes have been in the past accountable only to the labor committee, and not to the exec- 44 THE RAILROAD PROBLEM— A SUGGESTION utive manager, and this committee has itself suggested that the regulation of matters of employment be made by the executive manager, under certain general principles, which we can lay down. The betterment committee says that it has too little familiarity with all specific details of the hotel business to pass upon what should and what should not be purchased, and it also states that proper decisions in such matters cannot be made except by considering at the same time all departments such as deal with rates and revenues and the employment situation. The rate com- mittee also states substantially the same thing. And all those com- mittees point out the feasibility of the capitalist owners instructing you in one formal letter within what limits you may be permitted to act as to amount and character of equipment ; and the general under- lying principles for employment and for the making of rates ; and a controlling stipulation that you use every fair and honest means to keep the hotel occupied to capacity in your own way, provided that under like circumstances you treat the public alike. You will ob- serve that these instructions which we hand you herewith are ex- plicit in all these matters. We have agreed that the interpretation of these instructions on these three subjects be left when any ques- tion arises, to one committee which can require you not to exceed your authority ; to treat all people the same, under the same circum- stances; and follow, in employment, as in all other things, the prin- ciples laid down. This committee will be a judicial committee only, and we have laid down for it also certain principles such as the principle of keeping the hotel occupied to full capacity, which must govern it in making its rulings. This will leave you with full authority to hire and discharge employes and pay and reward them according to executive business practice and thus permit you to create your own morale in the hotel. It will also leave you free to institute rates in such a way as, at all times, to keep the hotel filled with guests, and you will have reasonable authority on the instant as the same may be needed, to make any changes or purchases which good executive management will require. In short, you will be placed in full executive administrative control of the hotel, subject to the instructions which we hand you herewith, and subject, of course, at all times, to the judicial review of the committee under certain directions which are given to it in regard to interpreting your instructions and judging your good faith and the fair and equitable treatment of the public. Yours respectfully, (Signed) The Capitalist Owners. Query: Is there any doubt as to which of the foregoing two plans is the better for a large hotel or for the railroads ? THE RAILROAD PROBLEM— A SUGGESTION 45 ELECTRIFICATION OF RAILWAYS PLEA FOR THE SPEEDY SOLUTION OF THE RAILWAY PROBLEM The electrification of railroads has proved successful in the vi- cinity of large cities, as well as in other places where conditions are favorable. It has proved itself especially superior for urban, and absolutely necessary for underground and likewise especially eco- nomical for mountain service, as well as generally economical of fuel and labor, wherever it has been thus far installed. The general policy of railroad betterment, therefore, should favor eventual elec- trification of those lines where it is going to prove economical and feasible. This can be accomplished better under one National system than under numerous systems or regional owner- ships. There is also a further argument in favor of a speedy settle- ment of the National railway policy which is urged upon us by two other matters pressing for attention with the National Government. Reference is had to the manufacture of power as an auxiliary (1) to National irrigation and reclamation works, and (2) to works necessary for flood protection. Bills aggregating many millions of dollars for projects of this character are before Congress with promise of early passage. In many cases such work can be planned only in connection with the manufacture of power as an auxiliary or by-product, which would have no other market than the trans- continental railway lines which pass through the regions where such projects are located. Testimony presented in February, 1919, before the Committee of the House of Representatives on Flood Control, by several authorities, one of whom was a former chief of engineers of the United States Army, tended to show, for example, that the protection against floods in the valley of the lower Colorado River requires the construction of reservoirs in the upper waters of that valley; and it appears that several hundred thousand horsepower can be developed which could be utilized by at least three trans- continental railway lines. Such manufacture of power as an auxil- iary to the irrigation and flood protection works would stimulate and render more economical the development of works which appear certain to be inaugurated by Congress as a part of its policy of reconstruction independent of the railway problem. Plainly, there- fore, a speedy and proper solution of the railroad problem in such a manner as to permit railways to co-operate with the Government in the use of such auxiliary hydro-electric power would be a stimulus to the work of reconstruction in the several fields of irrigation, 46 THE RAILROAD PROBLEM— A SUGGESTION reclamation and flood protection; and would, at once, offer a large field for the employment of labor and resumption of industry generally. RESPONSIBILITY IN THE EMPLOYMENT OF LABOR SHOULD REST WITH EXECUTIVE MANAGEMENT A high official in our Government has offered the suggestion that the proposed Plan should incorporate a provision for the payment of a share of the profits to employes. The within Plan is intended to encourage meritorious suggestions of this kind and to require the adoption of some scientific plan like the one proposed, or better, in connection with the employment of labor. Many of the larger corporations of the country and many of our larger capitalists have taken the position, to use the words of one of them, that capital, management, labor, and the community "are not enemies, but partners" ; and that "they have a common interest." It is high time that we recognize that the relations of employers and employes can be established according to approved scientific principles, in such a manner as thoroughly to co-ordinate and har- monize those relations. Some plans provide for the settlement and arbitration of disputes and strikes, as if strikes, as such, were ex- pected to come in the ordinary nature of things as initiatory steps for increases of wages, reduction of hours or other concessions. But strikes are no more necessary than are fires, wrecks and other calamities. The sooner business managements recognize that the "strike" is not the legitimate initiatve for changes in the relation of so-called labor and capital, the sooner those relations can be per- manently adjusted and settled. Indeed the evil of a strike is some- thing that cannot be remedied by a settlement outside of the cor- poration, for the reason that the chief harm in a labor strike is in the immediate failure of discipline — no matter what the direct result of the strike. The problem of the strike cannot be avoided by the mere "settling of disputes." The real remedy must go deeper. A board authorized to settle disputes or to arbitrate strikes may at times do good, but the complete remedy can come only through an instrumentality having administrative power to go deeper — with power to remedy the causes of disputes. The accompanying failure of discipline in a successful strike, or in the successful threat of a strike, is a reproach to the executive management of any business where the strike or threat of strike THE RAILROAD PROBLEM— A SUGGESTION 47 occurs. Such failure of discipline cannot be corrected by a mere concession in hours or wages; the harm cannot be measured in the dollars directly lost. • The true principles under which strikes can be avoided require discipline in the organization of the business. Dis- cipline requires respect for the employer by the employe. Respect cannot be earned by an employer who is bound by fast and fixed rules imposed upon him from the outside. The foundation principle upon which proper respect can be established is one of proper treat- ment by the employer. Such treatment must be given voluntarily or it cannot win respect, and without respect there can be no dis- cipline. It is, therefore, essential that all powers in the matter of employment and payment of labor (which indeed are all administra- tive) must be placed in the hands of the employer — in the manage- ment — the same as are all other administrative powers, with the re- quirement that those powers be administered under general prin- ciples governing the relations of employer and employe which have been evolved by science. For this reason no detailed plan of profit- sharing and no other detailed plan for the treatment of employes (beyond the formulation of governing principles) have been set forth in the proposed Plan. It is noteworthy how much more man- dates expressed in sound scientific principles will accomplish in the correction of abuses and in the construction of beneficial policies than mandates formulating in detail future administrative plans. The latter are impracticable because the conditions of the future cannot be foreseen; whereas true principles, like truth itself, are consistent under all conditions. A recent commentary on our government says: "It is one of the glories of the Constitution that it was created as a flexible instrument of general principles instead of specific com- mandments, so that under its protection the United States has been able to develop by the evolutionary process into a great nation." This may be illustrated by referring to the general principles to be laid down by Congress as a part of the within Plan (see Article XV, Section 1 ) wherein it is stipulated ( 1 ) that it shall be the policy to place each employe in the position, so far as practicable, in which he may be best suited; (2) that it shall be the policy to instruct and prepare employes for good service; (3) that all employes shall receive pay in proportion to their service; and (4) that all employes shall be regarded as in the line of promotion to receive increased pay 48 THE RAILROAD PROBLEM— A SUGGESTION as increased ability is shown and increased service given. Now to apply these principles, they cannot be carried out in good faith with- out an individual consideration or study of each employe, and if a way can be found to give individual consideration to each employe "labor trouble" in the ordinary sense disappears. Such individual attention has usually been regarded as impracticable in the past, and yet we have universities with 10,000 students in which individual attention is given to each student; and any attempt to work out a scientific plan to perfect the relations of employer and employe must recognize this possibility. It is pleasing to note that exactly such a policy has been formulated in what may be referred to as the Rockefeller Plan. In that plan the idea of personal contact by each employe with the management through the personal representatives of the president of the corporation appears to be at least partially worked out. It is not the purpose herein to give the details of the Rockefeller Plan. Even if it were the most perfect plan which can be devised it would not be appropriate to impose that plan upon the National Railway Company. Why should this be done when the very principles themselves which have been formulated for the National Railway Company require the adoption of such a plan if it prove workable and the best, and if not, then of a better plan — the remaining underlying principles never being changed, but the plans themselves subject to change? Likewise there is no doubt that some scientific system of profit- sharing can and should be carried out in connection with the opera- tion of such a corporation as the proposed National Railway Com- pany; and there are many such plans already in operation in large corporations, as the one, for example, in operation in Sears, Roebuck & Company. But it is the theory of the within Plan that it is the province of the board of directors of the National Railway Com- pany to devise the details of the plan. It should be the province of Congress to require good faith, diligence and ability in studying, analyzing and working out into actual operation a scientific plan for permitting worthy and meritorious employes to enjoy in times of prosperity and success part of the prosperity which is directly traceable to their efforts and loyalty. And it should be the province of the body exercising the judicial power over the corporation to enforce the requirements of Congress. But the making of the plan in detail is an administrative act, which, it is claimed herein, should be exercised only by the board of directors and its executive ofificers. THE RAILROAD PROBLEM— A SUGGESTION 49 It is obvious that the preservation of discipline among all employes and the preservation of the executive authority in the management of the corporation require that the management should be made responsible for the treatment of employes and should receive full credit for good treatment and all blame for bad treatment. If, for example, the corporation be required by law to pay a cer- tain bonus or share of the profits to the employes, such payment would become a vested right not in any way to be based upon merit or patriotism or loyalty, and the morale of employes would not be increased thereby. If, on the other hand, the corporation itself, through its board of directors, should work out a worthy scientific method of rewarding employes for meritorious service and loyalty to the company, all employes receiving such reward or portion of the profits would accord full credit therefor to the corporation and to its officers directly, which would be reflected in the morale of the employes. It would be a matter of regret if the directors and officers of the corporation under the general provisions stipulated by Congress, should fail to provide a desirable and scientific method for rewards, bonuses, or sharing of profits, as is suggested herein. Such failure on the part of the corporation would be in violation of the principle laid down that employes must be dealt with in an approved scientific manner ; or at least, in view of the advances already made in economics, would go to prove to a judicial court either bad faith, incompetence or negligence. It is believed that large corporations now see the wisdom of a liberal policy toward employes in such matters. A board of directors constituted as in the proposed National Railway Company with policies of this kind directly enjoined upon it, would not fail in providing a better and more workable administrative method than would possibly be pro- vided by Congress. The tendency of large corporations is in this direction, even in the absence, of the stipulation of principles, which, at all events, would control the actions of the National Railway Company. The distribution among employes of reasonable earn- ings after the payment of say 5 per cent dividends to the stock- holders, being a matter for general commendation, is sure to reflect itself in morale and service, and therefore in the further earnings of the company. This, therefore, becomes an incentive for the board of directors to provide voluntarily some plan for such dis- tribution. If in the face of all incentives and requirements, the 50 THE RAILROAD PROBLEM— A SUGGESTION board fails, then the remedy is in the reconstruction of the board, not in stipulating greater details for the control of its administrative acts. ORDINARY BUSINESS PRINCIPLES APPLIED TO RATE MAKING The within Plan undertakes to apply only the same common sense principles to rate making and to haulage of commodities that are applied in other business. It is a curious fact that business men collectively sometimes seem willing that wrong principles may be applied to a large; business, simply because it is large, when no one would permit the same principles to be applied to his own small business. It would be a very foolish farmer, for example, with say two teams of horses, who did not outline his work for the sea- son in such a manner as to keep those two teams busy at all times on the character of work which would yield the best results. He would endeavor to arrange the marketing of his produce at such a time as to procure the highest market price. He would endeavor to do his plowing in a season of the year which would interfere least with such marketing and yet would insure against any delay of the plow- ing until the last moment of the period within which it must be accomplished to plant his crop. The wise farmer would take an inventory of all the various classes of work to be performed, and if his teams appeared to be insufficient to accomplish the work he would endeavor to provide himself with new teams without delaying until the time when he might have to pay double the cost. The example illustrates the case of the railroads. It is possible to know a year in advance that not less than a given number of tons of coal are to be transported for the National use. Reasonably accurate statistics are obtainable upon which to base, usually several months in advance, the tonnage and distances that our farm products must be transported to market. The same rule is applicable in a degree to the products of our manufactories. With such statistics at hand, it is easily possible to figure out at least the minimum re- quirements for rolling stock and railroad facilities generally, and there is no reason why, as an economic problem, definite plans may not be made to transport certain commodities at certain times within reasonably elastic limits. Furthermore, the character of service which is to be required is. something that may be known in advance of undertaking the business, and perishable products and emergency shipments are all that should exact service on the instant. All other THE RAILROAD PROBLEM— A SUGGESTION 51 shipments, received within sufficient time, should be hauled within reasonable limits as to time, and in such manner as to be worked in with the business requiring more exacting service, and so as to keep the facilities of the railroad fully employed. It is here claimed that normal rates should be based upon normal business and normal expectations. TTiis would mean, for example, in the case of coal (and coal is a good illustration, as it constitutes about fifty per cent of the total tonnage hauled) that since a certain tonnage of coal is to be hauled to given points by given dates, the rate in each instance should be framed in the expectation that coal will be re- ceived, so far as reasonable storage will permit, in sufficient season to permit the railroad to use the coal as a leveling factor in the regulation of its tonnage ; and to be certain of such a rate the shipper must, at all events, supply, or the consignee must request, the ton- nage in due season to obtain that rate. If shippers should delay so as to create a congestion and not permit the railroad the delibera- tion which the handling of that commodity should permit, then the commodity would take a higher rate expressed in percentages of the standard. Even if the marshaling of shipments in this manner should be found inapplicable to coal or to any other given com- modity, then the other commodities to which the principle can be made to apply should be sought out ; and the consumers and shippers who can be induced to marshal tonnage in the interest of economical and full load railroad operation should be rewarded in the rate mak- ing program. For it is the right of the public to require that the National Railway System shall be operated at as near a full even- capacity as circumstances will permit; and it is expected that the estimated business of the railway system will be marshalled and handled in a manner to accomplish this end. In the normal opera- tion of a given railroad or railroad system, as in the past, during much of the time only a small proportion of the capacity of the railroad is used. It is admitted that if, at such times, business can be increased, rates can be decreased. To show some of the methods which may be adopted, let us illustrate by the use of terms used in the manufacture and distribution of power. Let us, therefore, style the hours or days when the railroad has all the freight it can handle, as the "peak," and let us style the longer period when the railroad is able to handle more business, as the "hollow" of the load. The problem is to arrange and stimulate business that may fill the "hollows." In other discussions herein, it has, it is believed, been 52 THE RAILROAD PROBLEM— A SUGGESTION sufficiently pointed out that the purchase of betterments, equipment and the building of extensions and feeders are so interwoven and closely related to the management of the railroad business as to show that the handling of those features by the executive management of the corporation is indispensable to the handling of business with- out congestion, and to the building up of a high "load factor" at all times, so as to fill up, as it were, the "hollows." In this discussion it will be attempted to show that the making and applying rates under some scientific plan of rate making such as is set forth in Article IX of the Plan, is perhaps the greatest agency for effectively procuring a desirable and acceptable business for the railroad at exactly the moment when it is most practicable to handle it. In the study of this matter it is learned how it can be that reducing rates will frequently increase net income. It is because such reduc- tion may create new business. Reducing rates does not always have this magic because too frequently in the crude methods of the recent past special low€r rates may have developed new business at the loss of more profitable business. But if in the lowering of rates, only business at the lower rate is permitted which may be handled in the hollow of the load without depriving the road of its normal business, then a moderate rate reduction on a given shipment or commodity is pretty near certain to increase the net income. Now this sort of ingenious and expert handling of the question of rates is, in its nature, an executive function, which must be preserved in the executive i>ranch of the railroad management and exercised by officials who have the responsibility of keeping up the load factor in all parts of the railway system. This was one of the virtues of the railroad system in the early days when the skeleton of the present great National system was building. How truly the exercise of this rate making power reflected itself in the development of in- centive for good on the part of subordinate officials, and in profit to the stockholders, as well as in betterments and extensions of the railroad systems, is very tersely set forth by Mr. Kenna, a former vice-president of the Santa Fe Railway, who in speaking of rail- roading in those early days, says : "Every -carrier has been made to realize that the sure way for it to increase its revenues is to increase production upon its own rails (in its own territory) and, for such purpose it has not only made rates and given service that would enable existing industries to flourish, but has offered encouragements to new ones. Where THE RAILROAD PROBLEM— A SUGGESTION 53 the development of a locality demanded reductions in rates on fuel, or on raw materials, these have been readily granted. * * * Every reduction in railway rates made voluntarily — and most re- ductions were voluntary — was made because an increase in the net income for the carrier was the result expected by the railway official who made it, and his motive was keener grasp of his position and the better standing with his principal that such profit might obtain for him." For obvious reasons, therefore, the rules imposed by Congress and the Interstate Commerce Commission must secure the proper equity and fairness antong the public without interfering with the freedom of the railroad management in fulfilling its duty of creating a high load factor. This is in part accomplished in what is described in the tentative plan as "deferred tonnage." By the use of that term it is sought to require no arbitrary classification whatsoever. On the contrary, it is sought only to give full power to the railroad management where the conditions exist, to receive a commodity, frequently almost worthless, if it sees that by accepting such com- modity its expenses will not be materially increased ; and provided also it will not be robbing itself of future business by accepting such commodity. In other words, the shipment would be so low in value that it could become a shipment only at the rate named. Under all of these conditions, the management of the railway company should be permitted to accept such freight. No harm can be done to any one. Only good can be done to the public. It is true that the rail- roads will be receiving a little less freight rate, but if they deem it wise to do this, they should be authorized to do so. This matter is so important that it may be worth while to give two illustrations, one of imperishable freight and one of perishable freight : Suppose a stone quarry is located at the top of a divide and that along the down grade for one or two hundred miles on either side of the divide are a score or more of stations and towns at each of vhich rich agricultural regions are served by the railroad. The greatest enemy in such communities against profitable agriculture and health is often the mud of rich alluvial districts; and for that reason it is extremely desirable that stone from the said quarry be distributed and used for pavements in towns, and for roads to the farms. Assume also that in the operation of the railroad the limit- ing feature is the load which may be hauled up the grade to the divide, and that there are many times when additional loads can 54 THE RAILROAD PROBLEM— A SUGGESTION be hauled down the said grades without increasing the cost of opera- tion. Under such circumstances it would be permissible under the plan of receiving "deferred tonnage" for the railroad, at its option, to haul cars of stone from the said quarry and distribute them along the stations on either side of the divide for use by the communities and cities referred to. The revenue received in this way it is be- lieved could be largely added to the net income of the road, and if so, it is to the interest of the public, and especially to the farming communities along the road to have such tonnage received and hauled at a reduced rate. The resulting improvements undoubtedly would be reflected in future production on the farms and in increased business to those stations and to the railroad, and the load factor of the railroad would be increased and leveled, which would tend to decrease rates throughout the nation. Another illustration may be given in the case of a perishable product : Suppose that one of our cities be visited with an epidemic like scurvy, and suppose the Health Department thereof gave it as its opinion that it would be a helpful and remedial thing if there were more fruit imported into that city ; and suppose that all of the fruit within a reasonable distance and that could be shipped at the regular rates was already being shipped to that city at that time. But suppose beyond this radius of reasonable limit there was a community with many peach orchards, and the peaches were so plentiful as to make it impossible for the people in that community or any people within reasonable distance to make use of that fruit and pay the current rates for transportation, and as a consequence, the peaches were rotting on the ground by the car load. It is the in- tention under the principle of receiving a deferred tonnage when such a condition presents itself, for the mayor of the city to say to the management of the railroad : "There are the peaches rotting. Here is our city needing them. You see yourself that they will not bear the regular traffic rate. We can, however, afford to pay a reduced rate. We, therefore, say to you: 'You are not compelled to make this shipment at your loss. You are not compelled to ship at all. But, if you find that you can do so at very little profit by watching for your own opportunity when it will not interfere with other business, we are ready to receive the peaches ,and you are per- mitted to ship them.' " Again as in the first illustration, the railroad could not be injured, because it would not exercise its option to receive the shipments THE RAILROAD PROBLEM— A SUGGESTION 55 unless it could be done without disadvantage or increased expense ; but if the business be handled, several communities and productive industry would be benefited, and the load factor of the railroad would be increased to the advantage of the general public. But it is not in the principle of "deferred tonnage" alone that the load factor is to be increased. The entire structure of normal rates, under which the railroad must at all events forward ship- ments, is to be built on the principle that normal rates are based on normal b%isiness, and may, therefore, to a considerable extent be planned for in advance so as to fit the equipment and facilities of the railroad. This will tend to help make a full load, and a level load. Under normal conditions even perishable commodities whose production can be well timed in advance, may be received at such a time and hauled in such a way as to avoid the "peaks" and fill up the "hollows" of the business. Most commodities for which the time of shipment and the amount to be shipped are certain, can and should be received and shipped in this way. That is why in the tentative standardization, variations are to be permitted in favor of certainty and quantity of tonnage. For certainty and quantity per- mit the commodity to be hauled on the "hollow" of the load instead of on the "peak" of the load. Indeed, it is not beyond reason to expect that there would be provided by a scientific body like the Interstate Commerce Commission, and under the methods which the National Railway Company should adopt, a pretty accurate in- dex of the load factor at all times ; and the public could be very properly informed that freight required to be hauled when the load factor is above, say, a dividing line between the hollow and the peak shall be at a higher rate than freight to be hauled when the load factor is below such a line. The tentative plan of rate making set forth herein, although very simple in the respect that it seems to permit the railroad company itself great latitude and the exercise of wise discretion in administration of freight rates, requires that it must so make its rates as to accomplish the very thing which can really reduce freight rates to the whole country, and that is the ■increase of the load factor. It is, therefore, submitted that any plan for rate making which does not provide for this, really fails by such omission to make use of the best means of insuring good and eco- nomical service to the public. It cannot be impressed too strongly upon those on whom the responsibility of solving the railroad problem rests, that the proper 56 THE RAILROAD PROBLEM— A SUGGESTION solution must turn upon management, and not upon some arbitrary and impossible requirement which may be imposed by Congress. To require that an outside regulating body shall make rates to yield a given net income is to require an impossibility. As is stated in the foregoing quotation from Mr. Kenna, railroad managements often find it possible and desirable to reduce rates in order to increase net revenue. To judge and determine this question requires intimate alert attention to the operations of the entire railroad system, which is possible only for the executive management of the railroad system to provide. The stipulation of Congress in the present law, which requires the Interstate Commerce Commission to make rates reasonable is an impossible instruction because the making of rates is an administrative act. It would be equally impossible for a commission outside of the railroad management to make rates so as to produce a given percentage of net return upon the investment, for that is a matter which demands that "keener grasp" of the operations of the railroad which only the executive management of the railroad, with its lieutenants, can have. This does not mean that an outside commission cannot judge as to whether fairness, equity, good faith, and even ability, are exercised by railroad officials. It is those matters, therefore, and only those matters and the con- struction of general principles, which should be controlled, and controlled judicially, by such a commission. The within proposed Plan has been subhiitted to large operating business officials for opinions as to whether under its operation the railroads would become a financial success ; and there seems to be no doubt that under it the railroads can be made successful financially. The remaining question, therefore, is whether or not the management provided in the within Plan can be trusted with such powers of administration. It is respectfully submitted that under the plan of rate making provided in Article IX of the Plan, the Interstate Commerce Com- mission will be more effective in requiring ability, diligence and good faith, and also equity as between interested parties, than it is under the present law. For rate making is a concomitant of man- agement itself — is inseparable from intimate familiarity, prompt action and the other functions of executive management which are necessary for satisfactory service and economical operation and the all important creation of a high and even load factor. THE RAILROAD PROBLEM— A SUGGESTION 57 A RECENT ILLUSTRATION OF PROPOSED DIVIDED OWNERSHIP A concrete example of the impossibility of providing a workable management under numerous separated ownerships is found in Senate Bill 5679 (65th Congress) made public after the foregoing argument was written. (The authors of this bill have given notice that it will be introduced at the present session of Congress in a revised form, without, however, departing from its fundamental requirements, which are intended to be set forth hereinafter.) This bill provides for the return of the railroads to their owners and former managements and gives the Interstate Commerce Com- mission power to regulate and administer their business with the aim of constituting a single National system. Financial success is sought to be assured by requiring the commission to establish rates which shall produce six per cent or more on the investments. Reg- ulative powers in other matters are delegated to the Interstate Com- merce Commission. These powers we shall attempt to analyze suf- ficiently to judge whether the Plan is workable and whether the railroads can be operated thereunder with success. The administra- tive acts of the commission require the authority of at least five of the commission's nine members, and nine votes may at times be required because there are added for certain purposes eight addi- tional members. The bill provides for more than ten distinct matters requiring administration by the commission, on each one of which, in one or more ways, the financial success of the system may turn. These include the power and duty: (1) To purchase equipment and motive power. (2) To authorize and build extensions and betterments. (3) To provide for increased service — or stations. (4) To reduce or add to the property account of any carrier as a basis for making rates. (5) To authorize sales of railroad stocks. (6) To purchase railroad properties and facilities. (7) To unify and direct the use of railroad terminals and sta- tion facilities. (8) To fix freight and passenger rates as follows : In and be- tween districts, areas and states, and on each of the several classes of commodities. (9) To route freight and passenger traffic and distribute income between carriers. (10) To regulate relations with employes. 58 THE RAILROAD PROBLEM— A SUGGESTION The country, by the proposed law, is to be divided into six dis- tricts which may be changed; and uniformity among the districts is not required ; and no method of evaluation is provided as the basis for the rates zvhich the Commission must make earn six per cent profit. Let us now see if such a plan is practicable. The Interstate Commerce Commission has not been generally criticized for partiality or prejudice in the dispensing of justice in cases which have been brought before it as a court of law ; but it has never been able as an administrative body to initiate and fix rates to produce reasonable or any other given results. We will assume that the patriotism, zeal and sincerity of its members succeed in overcoming the disadvantage in which they are placed by their not having as a mere regulating board detailed knowledge of the execu- tive and administrative features of a large number of railroad man- agements, and that five of their number do agree upon tentative rates in each of the six districts. Then suppose that in one of the districts the twenty-five or more railroad properties therein had not, on the average, earned the profit the law undertook to require. In the first place, who but the railroad managements through their familiarity with industrial and operating conditions is to know whether the case calls for an increase or a decrease in rates (and in either event how much) ? And then whether on freight or passenger rates or both? And if on freight whether on one, or more than one commodity, or on all commodities ? Or whether for the purchase of betterments and equipment? Or whether for an increased terminal or station service? Or whether for a readjustment of wages? Or whether possibly for the building of one or more extensions or feeders? Or whether perhaps for the reduction of the capital upon which the rates are to be based ? Is it not plain that the regulation of these matters is of the very essence of executive management itself? And that the real answer is to be found in a delicate combination of answers to all of the questions after considering the railroad system as a whole, and in all of its parts, and in all of its relations to the industries — past and prospective — which only a railroad executive with his army of lieutenants, appointed by himself and reporting to himself, can be presumed to know ? And how can an outside commission, with no financial interest in the properties — being organized for a judicial purpose, with THE RAILROAD PROBLEM— A SUGGESTION 59 none of the administrative staff either appointed by or reporting to it, sitting as a rate commission — be expected to remedy a failure in financial results by bringing a majority of their number to agree on the details of rate structure, when each of their number may, in his own heart, believe that the real trouble lies in one or another de- partment of the management or in one or more of the managements themselves ? Plainly the Interstate Commerce Commission could not function under such a law. And certainly the several hundred railway managements could be held to no responsibility, robbed as they would be of the executive functions enumerated in the ten classes of functions in the law. And yet the bill proposes to "return the properties" to their "former managements" and "their owners." When it is realized that the bill referred to represents one of the best backed and best thought-out railroad plans yet proposed and therefore perhaps most likely to be passed, the prospects for a financially successful operation of railway properties by the "owners" with administrative regulations are not auspicious. Would it not, therefore, be decidedly to the interest of security holders to exchange their securities for new stock, representing full value in a new rejuvenated railway system, with full power to manage itself efficiently? Stock, without any prior lien, in an ef- ficient, well-managed railroad, is better than any lien can be on an unprofitable railroad without power to manage itself. BALANCED SUBORDINATE MANAGEMENTS AND LOCAL REPRESENTATION ON THE BOARD OF DIRECTORS A STIMULUS TO LOCAL INITIATIVE The National railway system organized under the control of a single board of directors so constituted as to have the confidence of the American people, will possess the merit of efficiency and economy to a degree which can be possessed by no system which permits of a diversified ownership of the railroad properties. This principle is set forth in other parts of the argument, it is believed, with sufficient emphasis to make any further reference to it un- necessary. While this is true of the proposed National Railway Company, if it can be at the same time shown that nothing is lost in the matter of initiative by the individual or by the small community, the su- preme merit of the proposed plan for the "National Railway System" should be established. For the purposes of the following 60 THE RAILROAD PROBLEM— A SUGGESTION argument, therefore, let us omit all questions of national efficiency and economy and direct ourselves to an inquiry into the very best possible method for encouraging initiative and promoting interest on the part of each member of the community, and for promoting the maximum rivalry between lines or branches of railroad, and for stimulating the maximum of co-operation on the part of communities and industries in railroad development. It has already been pointed out in this argument that such in- dividual and local initiative reached its highest development in this country when each small line of railroad was built and separately managed ; and it is true that each branch or line of railroad should be operated with a view to its own business success, and for the profit of the Owners who are financially interested in its welfare. This business success and profit are not only consistent with the public welfare, but where free from fraud it should insure the best public service. It is, therefore, necessary, in any system, to preserve this local zeal and initiative as it stood in the days long prior to the war when the same was not thwarted by regulation which interfered with the executive managements of these local enterprises. The several local systems in competition with one another in those days were not, however, balanced in the most perfect manner, and as a result, unfair competition grew up, and it was the unfair competition prob- ably as much as anything else which in turn led to the "over-regula- tion" from which the railroads suffered immediately prior to the war. It should be the duty, therefore, of Congress in its solution of the railroad problem, to provide a system capable of developing the fairest, best, and most evenly balanced competition among all its parts. In other words, provide for the restoration of local man- agement and local initiative as they stood before there was Federal regulation; but at the same time (1) to permit the various local parts to be so differentiated and situated in relation to cities, towns and communities as to stimulate the greatest local initiative and morale, and (2) to balance one part against another rival part in a manner to permit the fairest possible competition between the respective managements. Plainly this cannot be done by restoring the local managements as the managements stood under Federal and State regulation before the war, for the reason that the systems under each of those managements were purely accidental in that they coincided with the control of the railroads that happened to be represented by the particular blocks of stockholdings which may THE RAILROAD PROBLEM— A SUGGESTION 61 have been gotten together — for purposes other than efficient operation, and often for even purposes of unfair competition. The individual systems operating under such managements were in no sense scientifically arranged for purposes of operation; and there was accordingly a failure in affording either fair competition or stimulating local morale and enterprise. The matter of the division of the National system into local or subordinate systems for the best local management, is therefore a matter for scientific study, and should be based upon experience and careful observation by expert railroad operators. The very •division into systems or regions is accordingly an executive function and should not be exercised by Congress, although Congress shouW provide the machinery and set forth the principles under which subordinate- divisions and local management may be brought about. This being a function requiring scientific study and observation, it is essential that the same be entrusted to a body sufficiently worthy of trust and confidence ; and since it is an executive function, that tody should be the same body which is responsible for the success of the administration of the railroads of the nation. It is not expected that perfection will be reached at first, and there should be a method for amending or changing with facility the boundaries or limits of systems for local management. It must also be permissible for the areas of regions to overlap wherever territory covered by the said regions or systems has a railroad point in common with more than one region. There must also be a method for carrying on inter-regional construction and inter- regional operations. None of these things can be possible where the subordinate systems have diverse ownership, but all are pos- sible if they all have a single ownership, provided that that single ownership provides the right kind of representative local manage- ments. Such local managements are provided for in Articles XVIII and XIX of the within Plan ; and the method of achieving to a rea- sonable degree the desired balanced local managements, each stimu- lated by a healthy rivalry and competition, it is submitted, is provided in those articles; whereas they could not exist under diversified separate ownerships. For, under separate ownerships, no facile method for inter-regional construction or operation, or for amend- ment of the limits of subordinate systems, or for balancing sub- ordinate systems — one against another — can be devised, because the separate proprietary interests of the different systems become 62 THE RAILROAD PROBLEM— A SUGGESTION barriers to inter-railroad administration and rigidly fix the bound- aries of each system. Indeed, there can be, as pointed out else- where in this argument, no unified executive management for the entire country under separate ownerships of regional railroads. Attempts to create out of a number of separate ownerships a unified management or regulation for the entire nation, can mean only an emasculation for good of the management of each separately owned system. It is appropriate to emphasize in this connection, the necessity for so constituting the personnel of the Board of Directors of the National Railway Company that they may be truly representative of industry, of labor, of shippers, and of the government, and thus be the better fitted to be entrusted with the great executive powers which cover the operation of the railroads, including the organiza- tion of the several local managements. Under Section 5, Article XV of the within Plan, and under other provisions of the Act, it is believed that employes, shippers and local patrons would, to a very large extent, become owners of the railroads of the nation. A stronger pecuniary incentive for this sort of thing is, however, provided, it is believed, in Article XIX, which inevitably would cause, without confiscation, and in the fairest and most equitable manner, the stock of the National Railway Company to be finally owned and distributed throughout the nation co-extensively with the railroad property itself ; and necessarily the patrons and employes would through this incentive, become the owners, and would accord- ingly not only elect nineteen out of twenty-five of the board of directors of the National Railway Company, but would elect a board of directors which would be representative of each of the several interests and localities which it is so desirable shall all be repre- sented on such a board. Such a board would, of course, not reach perfection. Exploiting and over-reaching might, since directors are human, be undertaken, but there would be no possibility of dividing the nation — in the manner in which some Socialists claim our nation, and indeed, all capitalistic nations are dvided — into two classes, namely: the "exploiters" and the "exploited," for the two classes would become one. Shippers and employes would become owners, and if there were to be any exploiting, it would be a case of men exploiting themselves. One of the merits claimed for the Plan set forth herein, is that in addition to being simple and workable, it is, at the same time, easily amendable; whereas any rigid division THE RAILROAD PROBLEM— A SUGGESTION 63 of ownerships comprising a number of railroad companies, en- grafted upon the nation as a permanent policy would, on account of the property rights vested in each of the parts, be difficult to change, either as to any part, or as to the plan of control for the whole. CONCLUSION The "best railroad system in the world," which we have built in America, could not have been built except under business prin- ciples which fully permitted the exercise of high-class executive judgment. The outline of the proposed Plan for the solution of the railroad problem implies a return to foundation business principles under which all good businesses, including the railroads themselves, should be managed. These principles were departed from, however, because of the abuses on the part of some railroad managements, and because of the diversity and extent of the systems operating in large numbers of separate jurisdictions. The departure was to a large extent unwittingly made by diverse state governments and regulating bodies not acting in harmony with each other, which in depriving railroad managements of the power for evil, also unfortunately deprived them of power for good. It is now proposed, herein, to enable and require railroad man- agement to correct the abuses of the past by pointing out the prin- ciples of right that were violated, and at the same time restoring to that management the executive power and responsibility which go with good administration. It is essential that this be done. It has been attempted in drafting the within Plan to point this out in each of the several features of the problem, and much space has been devoted to emphasizing proper principles in relation to manage- ment; but it has been deemed wise to do this because of a misunderstanding among some of those upon whom a solution of the problem depends that the American people want the railroad managements deprived of power for good as well as of power for evil. It is hoped that in the discussion differentiating between the elements of true executive management and legislative require- ments on the one side, and judicial control on the other, that sight will not be lost of the simplicity of the Plan. For it is based upon the one principle that has now progressed to the point where it is possible to require that the managing body in a large corporation shall be (1) so constituted as to be reasonably representative of all interests — public and private; and (2) regulated (not by an 64 THE RAILROAD PROBLEM— A SUGGESTION arbitrary withholding from it of its executive powers) by general scientific principles, which, with the help of the judicial branch of the Government, will insure, at all events, that kind of conduct which is the right of the American people to demand. In presenting the Plan two appeals are made: If the Plan has intrinsic merit, then objection ought not to be made simply because of a fancy that a sentimental opposition exists on the part of the American people against large corporations. For such an opposition is not worthy of the American people, nor does any such opposition really exist. Many years of intimate contact with the business pub- lic in States of the Union extending from coast to coast show the writer that the American people want the best solution for this and all problems ; and if the "best" can be had through the medium of a large corporation properly directed and judicially supervised they will not be opposed to such solution. It is results that the American people will scrutinize. There is a feeling against unnecessary and enormous accumulations of capital which threaten to be used for improper purposes. There is a feeling against large business enter- prises serving the public which threaten to be diverted to private ends. There is opposition to large business enterprises getting under the control of political bosses and becoming instruments of political reward. But there is not the slightest prejudice against the large efficient corporation, if it will best serve a good purpose; provided that the accumulation of its surplus is properly regulated ; and provided there is a reasonable safeguard against improper individual and political control. It is difficult to find any student of the question who is opposed to a large corporation with a con- centrated executive management (simply because it is large), if its governing board is properly constituted, and if it will promote the most efficient administration. Then why should such a student oppose a proper plan simply because of an imaginary fear that others may be opposed to it? The first appeal, therefore, is that each individual in considering this Plan judge it and endorse it or reject it purely upon its merits. An appeal is also made to those who do not approve of the Plan : It is asked that they do not fail to require that in any Plan for which they are sponsor some body or board shall, at all events, be clothed with the responsibility of successfully operating and ex- tending the railroads to keep abreast of National progress ; and at the same time supply the public with that first-class service at low THE RAILROAD PROBLEM— A SUGGESTION 65 cost which it now demands and to which it is entitled. The country has a right to demand that complete responsibility be placed in some one body, so that in case of failure such responsibility may be fixed. If it is believed that the board of directors provided for in the within Plan will not be truly representative of the public, the Gov- ernment and the private interests involved, then it is submitted that the proper remedy is in changing the method of constituting that board, and not in divesting it of power and responsibility. It is a legitimate criticism upon the proposed Plan, the writer of the Plan believes, to suggest that this or that representation upon the pro- posed board of directors be increased or decreased according to the ideas of the critic, but the writer also believes that it is not proper to rob that board of the functions necessary for operating the rail- roads — functions which any board must have if we are to hold it responsible for success. In short, if it is to be asserted that the board of directors provided for by the within Plan is not a proper board to be entrusted with the rate making power, or with the em- ployment and payment of labor, or the purchase of equipment, or the routing of freight — then by all means let the remedy come by reconstructing the board in the organic Act of Congress, by giving this or that element a greater or less representation on the board; but not in attempting to create an additional regulating body which cannot be held responsible for the successful management we so much need. By way of review, in final conclusion, recognition is given by the writer to the justice of a requirement that employes in any business should be safeguarded and protected by a proper board, representa- tive of all sides. Recognition is also accorded to the believers in a plan for the initiation, fixing and changing of railroad rates by a board properly representative of the Government, of the shippers, of the public, and of the large and small stock and bond holders. Let us also concede to be true in principle the doctrine of those who favor the purchasing and allocation of railroad equipment by a board expert on the subject provided for the purpose and who believe that the extension of railroad facilities generally should be under the control of a similar representative board. And if there are any other matters which, for the protection of the public, require action by an additional expert board or boards, let us admit the wisdom thereof, together with all that may be claimed in justice concerning the proper constitution of the said boards. And let us 66 THE RAILROAD PROBLEM— A SUGGESTION then constitute an ideal board so that there can be no question about its wisdom, representative character and high executive abihty for carrying out all of the purposes named; and finally let us place all of those administrative powers in such a board, with a further power to appoint executive officers with proper lieutenants to carry out its instructions ; and then impose on that board the full responsi- bility of the executive management of the railroads — and expect from it both financial success and superior public service. Final responsibility must rest somewhere, so let us rest it in such an executive board with full power to do right; and which can do no wrong except on peril of the searching judgment of a supervising court exercising jurisdiction under scientific principles laid down for the purpose. Such is the fundamental basis of the suggested Plan. THE RAILROAD PROBLEM— A SUGGESTION 67 PREAMBLE TO THE PLAN WHEREAS, Prior to the taking over of control of the railroads by the Government of the United States for the purpose of carrying on the war, the railroads of the L^nited States were operated by several hundred railroad corporations, which were also adminis- tered in miscellaneous ways by the conflicting regulations of forty- eight states variously coming from their legislative, executive and judicial branches of government; and frequently by Railroad or Public Service Commissions appointed for the purpose; as well as by the Federal Interstate Commerce Commission ; and WHEREAS, Such multiplicity of control means demoralization instead of regulation; and W^HEREAS, As a result of the said demoralization (before the railroads were turned over to the Government) in the fall of 1916, there was, as stated by the present Director General, "almost a paralysis of operation due to lack of unified control of operation,"' and "side tracks were filled with loaded freight cars destined for the Atlantic sea-board which could not move because of congestion of freight at all points" ; and WHEREAS, As a further result of the said demoralization the railroads of the Nation were at that time financially embarrassed and operating at a financial loss ; and WHEREAS, The conditions now existing due to the demoraliza- tion of readjustment and reconstruction are even worse from the point of view of thrift and profit; and notwithstanding the fact that freight charges have been increased more than 25 per cent the railroads are acknowledged to be operating at a rate of loss variously estimated from one hundred million to two hundred and fifty million dollars per annum; and WHEREAS, A worse condition is threatened in that the railroad business since the armistice was signed has shown a large decline in tonnage; THEREFORE, In order to remedy these conditions, relieve the National Government of further financial responsibility in the mat- ter, and provide a unified control for American railroads, centered in those who have a direct interest in appointing officials of the experience and ability to operate a National Transportation System : and In order to insure in such a system the best service to the public at the lowest cost with promise of financial success, and at the same time amply protect the small stockholders, shippers and the entire public, the "Outline of Plan" hereinafter set forth is made; THE RAILROAD PROBLEM— A SUGGESTION AGREEMENTS PRELIMINARY TO THE PLAN Section 1. If the Director General of Railroads, shall obtain within, say days after the passage of the Act of Con- gress creating the National Railway Company, sufficient agreements to the following Plan with existing railway companies in the man- ner hereinafter set forth, to enable the said National Railway Com- pany to operate, at all events, railway lines (either directly or other- wise) extending from some point on the Pacific Coast to some- point on the Atlantic Coast (or such lesser mileage of lines as shall be approved by the President of the United States), then the Director General shall submit the said contracts to the Attorney General of the United States, and if the Attorney General shall find them, in his opinion, regular and valid for the purposes for which they are intended, he shall certify that fact; or he may cause any necessary suit or suits to be brought before any court of competent jurisdiction for the purpose of adjudicating any questions in rela- tion to said matter about which there may be doubt ; and thereafter if it shall appear that said contracts are valid, they shall become binding upon all properties owned by the said companies thus con- tracting, except the cash and the equivalent of cash held in the respective treasuries thereof, and thereupon the following "Plan" for the operation of the railroads of the United States shall become effective. Otherwise the said Act creating the said Corporation shall become void and of no further force and effect. Section 2. The Director General is authorized in his discretion, in procuring said agreements, to agree upon the amount of stock which may be issued to any Corporation as the minimum which shall, at all events, be received by' such railroad under the Plan hereinafter set forth (and which will be referred to as the "Plan") ; provided that the par value of such stock agreed to be delivered shall not, in the opinion of the Interstate Commerce Commission, exceed the value of such railroad to the new Corporation; and in such an event the National Railway Company shall be bound, in carrying out the said following "Plan" to issue the said stock to any such railroad thus agreeing with the Director-General; and if said amount of said stock shall exceed the amount which shall be allotted to the said railroad under Article VII of the followin • "Plan," then said excess shall be paid to said railroad from the capital stock of the said Corporation, separate and apart from the stock which shall have been set aside and described in said Article as the "Total Valuation Stock." If the said stock thus agreed to be allotted to any such railroad under any agreement provided for in this section shall be less than the award or allotment as there- after determined under said Article VII of the following Plan, then the amount allotted under said Article VII shall be "the amount which shall be paid to said railroad. If, for any reason, there is THE RAILROAD PROBLEM— A SUGGESTION 69 no determination or allotment under Article VII for any such rail- road which shall have contracted with the Director-General, then the amount of stock thus contracted to be paid as provided in the Preliminary Agreement shall be paid to said railroad, in full settle- ment of all its rights and claims. The said Director-General shall have authority to make contracts in the manner provided in this section with any and all railroads in the United States with whom he may find it possible to nego- tiate, prior to the adoption of the said Plan. Section 3. The Director-General shall become "Director of Transportation" after the Plan is efifective, and shall thereafter perform all the duties of said office, until a "Secretary of Trans- portation" is appointed. Section 4. The adoption of said Plan shall repeal all laws and acts inconsistent therewith; but the Director-General of Railroads shall continue as heretofore in the management of all railroads under his management at the time of the passage of the Act until the management thereof is turned over to the National Railway Company. 70 THE RAILROAD PROBLEM— A SUGGESTION OUTLINE OF THE PROPOSED PLAN ARTICLE I NAME, CAPITAL STOCK, ETC., OF THE CORPORATION Section L The Corporation shall be styled the National Railway Company (or some other suitable name). Section 2. It shall provide for an issue of capital stock, ex- ceeding by, say, ten per cent the sum of the estimated values of the railways, which are now being operated by the Director-General, say, two hundred million shares of the par value of $100.00 each. Section 3. The said Corporation shall have, unless otherwise provided by law, the exclusive right to carry on the business of Interstate Railroad Transportation in the United States with the customary powers granted to common carriers, and it shall also be the purpose of this Corporation to supply the local needs of the public. Its object (to use the language of the railway executives) "is to furnish the public with safe, efficient and adequate transporta- tion at the lowest cost consistent with such service, and with due regard to the just interests of the owners and employes, and also adequate to the Nation's needs." ARTICLE II THE SECRETARY OF TRANSPORTATION Section 1. The Act of Incorporation creates an additional de- partment of the United States Government to be known as the "Department of Transportation," and provides for a Secretary to be appointed by the President of the United States as a member of his Cabinet and known as the "Secretary of Transportation," with duties in relation to the said Corporation and in relation to the railroads as prescribed by the "Act" ; but he shall be clothed with no executive powers and shall perform no administrative acts in connection with the physical operation and management of the Railroad Corporation. His primary duty shall be to represent and advise the President of the United States ; and to advise, act for and represent by proxy or otherwise such stockholders of the said Corporation as may desire him to act for them. He shall have the power to initiate inquiries into the affairs and business of the Cor- poration and to present questions relating thereto to the Interstate Commerce Commission and to the courts for judicial determination ; and he shall perform the duties required of him in Article XVII and in other Articles in this Act. The Secretary of Transportation shall be learned in the law and expert in railroad matters ; shall devote his entire time to the duties of his office ; and shall receive the same salary as the Director General of Railroads. THE RAILROAD PROBLEM— A SUGGESTION 71 ARTICLE III THE BOARD OF DIRECTORS Section I. There shall be a Board of Directors consisting of twenty-five members, of whom six shall be appointed by the Presi- dent of the United States by and with the advice and consent of the Senate ; and nineteen of whom shall be elected by the stockholders in the following manner : Section 2. Nine in number of said Directors shall be elected by the stockholders in manner of holding such elections in the past. (Here will appear the details of the manner of election, terms of office, etc., according to the most approved plans, and the same shall be incorporated in the by-laws. See Article V hereinafter.) Section 3. Ten in number of said Directors shall be elected at a stockholders' meeting called for the purpose, and at which no other Directors shall be chosen. The notices for the calling of such meeting shall be made by the President or Secretary of the Corpo- ration and by the Secretary of Transportation, jointly, and such notices shall permit the representation of stock at said meeting by the Secretary of Transportation under a form of proxy prescribed in said notice. But, at the option of each stockholder, stock may be represented in person, or by proxy to any other person. And thereafter it shall be the duty of the Secretary of Transportation to attend said meeting and vote all stock thus represented by him; and all stock represented at said meeting shall be voted cumula- tively. At the first of the said elections called for the purpose of electing the said ten Directors, five of said Directors shall be elected for a term of two years and five shall be elected for a term of one year ; and in each year thereafter five Directors shall be elected, and any vacancies filled in similar manner. Vacancies in said group of ten Directors shall be filled, prior to election, by the remaining Directors in said group- -Directors so appointed holding office until the next election provided for the purpose. It is provided that after the said National Railway System shall have been divided into Subordinate Regional Railway Systems for purposes of operation as directed in Article XIX of this Act, the method of holding and calling election for Regional Directors may be changed by the Board of Directors with the approval of the Secretary of Transportation, if necessary for the purpose of carry- ing out the provisions of said Article XIX. Section 4. The six Directors appointed by the President of the United States, as hereinbefore provided, shall, in addition to the other qualifications required in all Directors, be specially qualified to represent the interests of the shippers and the general public, and it is' not necessary that they be stockholders in the Corporation. The terms of office for said six Directors shall end in one, two, three. 72 THE RAILROAD PROBLEM— A SUGGESTION four, five and six years, respectively, from the date of organization of the Corporation. At the expiration of each of said terms, all succeeding terms shall be for a period of six years each, making a rotation system, in which one term of the said six terms of office shall end in each year thereafter. Section 5. All Directors, except the six Directors appointed by the President of the United States, shall be required to be stock- holders of the said Corporation in which each shall own in his own right not less than twenty shares of stock. Each of the said Directors in said Corporation shall receive a salary of $ per annum, and each shall be required to devote his entire time to the business of the Corporation; (except that two of said Directors may be also members of the Federal Reserve Board and also perform the duties of that office), and each shall be qual- ified in such manner as the President of the United States shall, from time to time, prescribe; and each shall be required to reside during .his term of office, in such region of the United States as the By-laws shall prescribe, to the end of having the entire body as nearly as practicable representative of all parts of the country, and in such manner that tie e shall be at least one Director residing during his term of office in each of the Regional Districts into which the country may be divided by the Interstate Commerce Commission, as provided in Article VI hereinafter. (It is not the purpose of the Act to stipulate in advance the Districts into which the country will be divided by either the Interstate Commerce Commission or the National Railway Com- pany, since such districting is a matter which should be determined as conditions from time to time dictate. The details of this matter are therefore appropriately left to the By-laws, to be determined from time to time in accordance with the requirement that the body shall be as nearly as practicable representative of all parts of the country.) ARTICLE IV OFFICERS Section 1. The officers shall consist of a President, one or more Vice-Presidents and such other officers as the By-laws shall from time to time prescribe, or which the Chief Executive may, with the assent of the Board, create. The President shall be the Chief Exec- utive and shall be elected by the Board of Directors by a four-fifths vote of the entire Board ; and his salary shall be fixed at $ per annum. The President shall be a member of the Board, but he shall have the right to appoint a General Manager and other Executive and Administrative Officers and Agents, not members of the Board, to whom he may delegate authority to exercise his powers. THE RAILROAD PROBLEM— A SUGGESTION 73 Section 2. In order that the management and execution of the business of the Railway Company may proceed unhampered and in order to guard against harm resulting from any possible deadlock in securing a four-fifths vote in the Board of Directors of the National Railway Company, the election of a President of the Na- tional Railway Company shall, ipso facto, delegate to such officer all of the executive and administrative powers possessed by said Board of Directors, except such powers as may be expressly with- held by a four-fifths vote of said Board of Directors. The powers thus automatically delegated to the President of the Railway shall include the appointment of officers, including local and regional managers as well as the making of all other appointments, and the creation and carrying out of all policies necessary or advisable for the proper operation and growth of the railroads.; and in order to provide against a possible deadlock in the Interstate Commerce Commission, which might prevent or delay that Commission in creating and promulgating a scientific standardization for rate mak- ing, said powers thus automatically delegated, shall include the power of authorizing and promulgating and amending, from time to time, a standardization of freight rates to be effective until such a standardization shall be provided and certified to the said Presi- dent by the Interstate Commerce Commission as a basis for the making of railroad rates as provided in Article IX of this Act. Section 3. The Board of Directors shall have power, by a four- fifths vote of a full Board, to recall the appointments of President or any other appointee which it may make ; and at any time that the office of President shall become vacant, it shall be the duty of the Board to elect in the manner above stated, a new President forthwith. [A majority instead of a four-fifths vote may be sufficient here.] [It is intended that this Article be drawn sufficiently broad so that the Board of Directors may delegate all executive authority, including the appointing and removal of employes, the fixing of sal- aries of subordinate officers (under those of a fixed amount as de- termined in Article V) as well as the performance of all other ad- ministrative and executive acts necessary for the efficient and satis- factory carrying on of the business. The Chief Executive will then be made responsible for the administration of all of the departments of the Corporation. There can be no danger in delegating authority in this manner as long as the Executive is, in turn, held accountable and responsible to the appointing body.] ARTICLE V BY-LAWS Section 1. The usual matters covered by the By-laws of a Corporation, including the manner of fixing salaries over $ per annum; the standardizing and general policy of rate making; the time, place and manner of holding meetings ; the general duties 74 THE RAILROAD PROBLEM— A SUGGESTION of officers; and such other matters as the stockholders shall from time to time determine, shall be prescribed by the By-laws. These By-laws may be amended by a vote of four-fifths of all of the said twenty-five Directors of said Corporation, or by three-fourths of said Directors if thereafter ratified by a vote of three-fourths of the outstanding stock of said Corporation, voted at a stockholders' meeting called for the purpose. It is a part of the Plan that the general policy in relation to certain matters covered by the By-laws shall be prescribed by law to be incorporated in the first By-laws enacted, and since the amend- ment of the By-laws, if made by the Board of Directors, requires the approval of at least four-fifths of the said Board, it will be noted that at least one Presidential Director is required to make changes in these important matters, thus giving these Directors who are peculiarly representative of the public, at all events, some voice therein. It is intended, however, that broad policies only shall be dealt with in the By-laws, and care should be taken to see that the Chief Executive of the Corporation and his subordinates are clothed with plenary and dicretionary power in all details to ex- pedite by quick action the business of the Company. ARTICLE VI INTERSTATE COMMERCE COMMISSION Section 1. The large contributions to the knowledge of the rail- roads, resulting from the extensive investigations and reports of the Interstate Commerce Commission, shall be utilized under the Plan. Section 2. Judicial and Advisory Powers. The Interstate Commerce Commission shall have no administrative or executive powers in connection with the operation of the railroads ; but its judicial powers, so far as consistent with this Act, shall remain, and said Commission shall continue to hear complaints, as formerly, at the instance of individuals, .railroads, stockholders, • shippers, communities, etc. Appeals to this Commission for such purpose shall be carefully regulated so as to avoid any interference whatso- ever with the carrying on of business by the National Railway Company. And the records and advice of the said Commission within the scope of its purposes shall always be available upon appli- cation, for the assistance, information and help of the executives of the National Railway Company. There shall continue to be the distinction between the methods of procedure with this Commission and the ordinary procedure in courts of general jurisdiction, in that the Commission may, on its own motion, and shall, at the instance THE RAILROAD PROBLEM— A SUGGESTION 75 of others, institute inquiries and make investigations upon which it may base its own findings. To this end and also for other pur- poses which will be referred to in other Articles following herein- after, the Commission's powers shall be preserved in matters of inspections of appliances and equipment, and broadened and ex- tended in the matter of its investigation into earnings, expenses and operating statistics ; and the work of the physical evaluation of railroads, so far as the same is performed, may be utilized and ■continued in future as a basis for charges for depreciation, and for other purposes. The function of ordering inspections, fixing rules for the use of safety appliances and equipment for the safety and convenience of employes and the public is an administrative function, and such rules and orders should be initiated by the executive management of the railroad system. But if the sufficiency or fairness of these rules or orders be brought in question by a State or any other interested party, they will require judicial review on the instant, and it is therefore intended that such review shall remain with the Interstate Commerce Commission ; but this is one of the func- tions in which proper co-ordination between the railway manage- ment and the Interstate Commerce Commission, and the co-opera- tion of both, so far as practicable, with state authorities, will pro- mote an efficient and satisfactory railroad service ; and a way for such co-ordination and co-operation is provided for under Article XVII hereinafter. Section 3. Bureau of Accounting. For the purpose of carry- ing out the intention of this Article, the Interstate Commerce Com- mission shall organize a "Bureau of Accounting" with a Director thereof, expert in accounting and efficiency management, whose duties it shall be to carry on the work of accounting and perfect the evaluations as provided in this Article. It shall be the function of the said Bureau of Accounting to standardize, in connection with the advice and help of the operating management of the National Railway Company, all operating statistics and costs relative to the operation of the Railway System in sufficient detail to show at all times in so far as possible the relation of the costs, the service performed, and the profit earned in all services and in all branches and parts of the Railway System, as well as in the Railway System as a whole. This Bureau shall thus be able definitely to find and report as to the profit or loss in the operation or carrying on of the entire Railway System, as well as the profit or loss in so far as possible in the operation of every service and of every branch and part of the Railway System ; and this Bureau shall, upon application of the National Railway Company, the Interstate Commerce Com- mission, or the Secretary of Transportation, provide a Standard 76 THE RAILROAD PROBLEM— A SUGGESTION Schedule for Tariff Charges, with recommendations for variations from such standard as local conditions and the more expensive operating costs of particular branches of the railroad shall from time to time seem to require. This Bureau shall, therefore, like- wise, upon application, report the profit or loss in the operation of any particular part of the Railway System in such a manner as to show the value to the whole of any such part. The work of this Bureau shall not, however (except incidentally), deal with the accounting of the Railway System as between the railway and indi- vidual patrons, nor in any respect shall it interfere with the account- ing of the operating department of the railways ; except that for the purpose of carrying on its work, this Bureau shall receive such de- tailed memoranda and information, from time to time, from the operating and other departments of the National Railway Company as it shall require or desire for carrying on the work of the Bureau. Section 4. For the purpose of enabhng the Interstate Com- merce Commission to carry on its duties, as provided in this Article, it shall have the authority to divide the territory of the United States into five (more or less) regions, so as to include in each region, so far as practicable, those matters pertaining particularly to physical and local conditions as may naturally and properly group themselves together. [Questions, for example, affecting the operation of railroads in the Rocky Mountain region naturally should be grouped together on account of the widely differing conditions in those regions from those in the agricultural regions.] The said Interstate Commerce Commission shall have the right to establish in each of said districts a Subsidiary Commission at some appropriate headquarters located therein, to act under its direction and control and perform such duties as it may require for the pur- pose of aiding it in carrying out its duties. Each Subsidiary Com- mission shall consist of from one to three persons, to be appointed in such manner as the Interstate Commerce Commission, approved by the Secretary of Transportation, shall provide. And such officers shall not be removed except for cause. Each Subsidiary Commission shall have power to pass upon such questions as may be presented to it with the sanction of the Interstate Commerce Comniission, or referred to it by said Commission, but there shall lie a right of appeal under appropriate rules to be provided therefor, from each Subsidiary Commission to the Interstate Commerce Commission. Section 5. Rate Making. The Interstate Commerce Commis- sion shall adjudicate questions and differences in relation to rates and tariffs as provided under Article IX, but shall aid the National Railway Company at all times in making rates by supplying it with advice in advance on request ; and if applied to by the National Railway Company for approval in advance for the making of a special rate or rates on "Deferred Tonnage" as defined under THE RAILROAD PROBLEM— A SUGGESTION 17 Section 3, Article IX, it may approve the same if in its opinion it is justified under the terms of said Article IX. Unless otherwise provided, the Interstate Commerce Commission shall have no power to initiate rates, but this prohibition shall not abridge its full power to compel the performance of full and complete equity among shippers of the same class as provided in said Article IX. Section 6. Depreciation — To Insure Stability. In order to promote stability and to aid in securing a permanent reasonable income in periods of depression upon capital invested in the National Railway Com'pany it shall be the duty of the Interstate Commerce Commission, in preparing its records of evaluations, operating sta- tistics, costs and profits as provided in Section 3 of this Article, (a) to determine or apportion the total value of the properties of the National Railway Company as represented by its total out- standing capital stock among the various divisions and parts of the property of the National Railway Company; and also (b) to deter- mine the ratio of profit on each of such parts of the National Rail- way System to the investment or evaluation in every such part. And where it shall appear that the net earnings on any such part of said system do not equal a fair return on the reasonable evalua- tion apportioned to such part, the said Interstate Commerce Com- mission may fix an amount for a reasonable depreciation upon the capital thus apportioned to any such part, which will tend to make the future probable net earnings on any such part based on reason- able tariff charges equal a fair return on the evaluation apportioned to such part as thus depreciated. And a statement of the amounts of such proposed depreciations shall be certified to the Board of Directors of the National Railway Company and to the Secretary of Transportation, together with the recommendations of the Com- mission for the creation of a "Depreciation Fund," as hereinafter provided. And thereafter it shall be the duty of the National Rail- way Company after the payment of 4 per cent cumulative and an additional 2 per cent dividend in any given year to set aside any further profits into a fund to be known as the "Depreciation Fund," which shall not exceed at any time the sum of the said depreciations prepared as herein provided by the Interstate Commerce Commis- sion. And provided further that said Fund shall not be created where in the opinion of the Interstate Commerce Commission it would be preferable in the interest of the public welfare to reduce the general standard level of railroad rates. After said Fund shall have been established the Interstate Commerce Commission may, from time to time, recommend the purchase with said Fund or any part thereof, at not more than par, of outstanding stock of the National Railway Company ; and thereafter the Secretary of Trans- portation may, after the manner provided in Section 5 of Article XV of this Act, cause said stock or any part thereof to be pur- chased pro rata from the outstanding holdings of said Company, provided that only holdings of more than twenty shares each and 78 THE RAILROAD PROBLEM— A SUGGESTION not more than ten per cent of any one holding shall, without the consent of the owner, be required to be sold hereunder in any given year. After any stock shall have been thus acquired it shall be retained in the treasury of the National Railway Company and not again issued except in accordance with the provisions relating to the issue of the original stock of the said Corporation, and there- after the Interstate Commerce Commission shall cause appropriate depreciation entries to be made in its said list of depreciations. All stock of the National Railway Company shall be issued subject to the rights of call thereupon as provided in this Section. It is proposed in this Section to place it in the power of the Interstate Commerce Commission to eliminate gradually, without disturbing business, all chance for criticism, based on charges of "watered" capital of the National Railway Company. It is deemed well worth while in periods of good business and National prosperity for the National Railway Company to provide a fund from its profits which will permit it to reduce, in the manner stated, its outstanding capital stock, and make equivalent depreciation entries on those parts of its system where it may be shown or claimed that the tariffs are based upon "watered" capital. In periods of depres- sion thereafter it will be necessary to maintain tariff rates only suf- ficiently high to equal a fair return upon the reduced capital. It is believed that co-operation of the public will be stimulated if the National Railway Company can establish in connection with its right to earn and distribute a fair return upon its investment also a conviction that it is not earning or endeavoring to earn a return upon any more than a low evaluation of the property. Such a reduction should add greatly to the stability, security and guarantee of investments in the National Railway Company. ARTICLE VII ISSUE OF STOCK AND ACQUIREMENT OF PROPERTY Section 1. Stock for Railways. So much of the capital stock of the National Railway Company as may be required for that purpose shall be set aside for the acquirement of the railways of the country which have been under the control and management of the Director General of Railways; and also for the acquirement of such additional railway properties as may be desired by the said Corporation for carrying out its purposes. Section 2. Evaluation Commission. To the end of determining the amount of said stock necessary to acquire the railroads which THE RAILROAD PROBLEM— A SUGGESTION 79 are at the time of the passage of the Act under the management of the Director General of Railways, a Commission shall be formed by the Director General, the Interstate Commerce Commission and the Association of Railway Executives, to be known as the "Evalua- tion Commission." If the Director General, the Interstate Com- merce Commission and the Association of Railway Executives shall be unable to agree upon the personnel of such a Commission, then the said Association of Railway Executives shall be allowed to name two members, the Director General of Railroads shall name one member, and the Interstate Commerce Commission shall name one member, and the Chief Justice of the Supreme Court of the United States shall name a fifth member (and the said Chief Justice shall also make any appointments on said Commission which either of the appointing powers named shall have failed or refused to make), and the said resulting Commission of five shall constitute said Evaluation Commission. Said Commission shall have access to all necessary records of the railroads, of the Interstate Commerce Com- mission and of other departments of government for the carrying on of its work. It will be the function of this Commission to report a total valuation for said railway properties as a whole, based upon four things (each given such weight as the Commission shall deem just under all the circumstances) : First: Upon the earning power as shown from the amount paid to said railroads under the opera- tion of the Director General (except where the conditions have been abnormal). Second: Upon the value of the outstanding stocks and bonds issued by said road during a period of years next preceding the date of the "Act" and now outstanding. Third: Upon the amount of betterments, improvements and exten- sions which said Commission may find shall have been paid for by said railroads during said period of years, which in its opinion may not have been reflected in the profits earned, and for said reason not reflected in the quotations of securities ; but which do give any such road a permanent, future value and earn- ing power. Fourth : The Evaluation Commission shall have the right to take into account any facts and circumstances which a prudent business man might consider in the purchase of a property, including the physical character (although for want of sufficient data it is understood that no theory of physical valuation can become the basis of determination at this time). If said Commission is unable to agree upon such a report, it shall be the duty of the members thereof to certify any questions which may have arisen and which shall have prevented an agreement, to the Supreme Court of the United States for adjudication or direction until the said Commission shall be able to determine upon a report — it being understood that the said Supreme Court shall have power to call upon said Commission for any information and reports which it shall require to enable it to arrive at any decision, and if it shall appear that the Commission is unable to come to an agreement, then 80 THE RAILROAD PROBLEM— A SUGGESTION the said finding of the said total value of said railroad properties as a whole shall be determined by the Supreme Court of the United States, after taking into account all of the findings and reports of the said Commission, as well as all other facts and circumstances which shall have come to its notice, to the end of arriving at (as nearly as may be) the aggregate total value of the said railroads of the United States; but no finding is required hereunder for any indi- vidual property. Section 3. Allotments of Stock. The total value of all of the railroads of the country operated by the Director General at the time of the passage of the Act having thus been determined, an equal amount of stock at par shall then be set aside for the purpose of the issue thereof in exchange for said properties in the following manner: If it shall have appeared that the said Evaluation Com- mission had been unable under the instructions of the Supreme Court or otherwise, to determine the total evaluation as aforesaid, then said Commission shall be dissolved and the further duties of said Commission as hereinafter imposed, if any, shall be performed by the Interstate Commerce Commission. The Association of Rail- road Executives representing all of the several properties shall then be invited to submit to the Director General or the Secretary of Transportation, as the case may be, a method for the division of said gross sum among the railroads interested. This method may be by agreement, by arbitration, or otherwise; and if the Director General or the Secretary, with the advice and approval of the Attorney General of the United States, shall approve of such method of apportionment, such a method shall thereupon be adopted and the stock set aside for such properties shall be issued as fast as the apportionment thereof shall have been determined. If, however, the Railroad Executives are unable to agree upon a plan or method for the apportionment of said total valuation, it shall be the duty of the Attorney General to make a finding to that effect, and report that finding to the said Evaluation Commission, or in case it shall have been dissolved as aforesaid, then to the Interstate Commerce Commission. It shall, thereupon, become the duty of the Commis- sion to whom said report shall have been made to apportion a value or valuation to each of the individual railroad properties, showing its share or part of the entire valuation determined as aforesaid, and for which the said stock is set aside. Such individual apportionment shall be duly reported to the officers or authorized agents of each of the individual properties and also to any accredited representative of the railway executives. Thereafter each of the said railroads shall be given due opportunity to except to the find- ings in relation to itself by filing such exceptions with the Interstate Commerce Commission, or with the Evaluation Commission, as the case may be, which shall have due opportunity to correct its findings in the event of mistake or misunderstanding or change in its opinion, based upon good ground, and any increase in the THE RAILROAD PROBLEM— A SUGGESTION 81 apportionment to any one property shall be deducted from one or all of the other properties in such manner as the said Commission shall determine ; until the said Commission shall be able to make and certify its finding as to the valuation of each of the railroad proper- ties concerned, which shall equal, in the aggregate, the entire valua- tion as already hereinbefore determined. And thereupon each of the railroad companies interested shall be entitled to receive upon application its share of stock set aside from the treasury of the National Railway Company, as the same shall have been determined. The acceptance of said stock by a majority of the stockholders of any railroad corporation at a meeting called for such purpose shall bind all of the stockholders and security holders of said corporation thereto, unless otherwise provided by law. Section 4. Grievances. , If any railroad corporation shall fail or refuse to receive its share of the said stock in exchange for the entire business, stock and securities of the said corporation, then such stock shall be held in trust for such properties until said cor- poration can have opportunity to have its rights or grievances adjudicated before the United States Circuit Court of Appeals, provided that in any adjudication relating to said matter it shall be conclusive upon the Court that the rights of the said corpora- tion are limited to its share of the total valuation stock, based upon the proportion of the value of its road to the total valuation of the railroads; and the burden of proof shall be upon the railroad com- pany to show that great injustice is about to be done by oiTering it the proportion which shall have been tendered. If, thereupon, the said Court shall determine that injustice is about to be done, it shall render a decision, fixing the amount of additional stock which shall be issued by the said National Railway Corporation from its treasury stock, over and above, and in excess of the said "Total Valuation Stock" to the said complainant corporation, and such decision or finding of the Circuit Court of Appeals shall be binding upon the said corporation. There shall be a right of certiorari in such matters similar to that now existing, which may be exercised with the approval and in the discretion of the Supreme Court of the United States, and if in any such case where certiorari is al- lowed, the Supreme Court of the United States may correct the judgment ; or if it shall find that there is probability that grave injustice may be done for the reason that the circumstances sur- rounding the case are too vague and indefinite upon which to base a final decision, it shall have the righty in its discretion, to permit the finding of the Commission making the appraisement to be approved, subject to correction after the said National Railway Company shall have operated said road under the Plan for a period of time to be fixed by the Interstate Commerce Commission, which shall not exceed three years, and the Supreme Court shall thereupon in- struct the said Interstate Commerce Commission to render again its finding as to the said valuation, based upon the facts as they may 82 THE RAILROAD PROBLEM— A SUGGESTION develop and be determined by it under said operation and under the reports and findings of the Bureau of Accounting as provided in Article VI of this Plan. In the meantime the Supreme Court shall hold jurisdiction of said matter with power to make findings as it shall, from time to time, deem proper, and finally order judg- ment in accordance with all of the facts and circumstances of the case. Section 5. If, by reason of any such determination made under Section 4, the quota allotted to any one or more railroads shall be so reduced that there will be, after delivering to them the final allotted quota, a remainder left in the total allotment of stock after making delivery to all of said railroads, then any such remainder of said stock shall be the property of the said Corporation and remain in its treasury as other treasury stock. If by reason of any such determination the first quota of any one or more railroads shall be increased with the approval of such Court, so tliat the total amount thus to be delivered to all of the railroads shall exceed the total valuation stock, then such excess shall be delivered and paid out of the treasury stock of the said National Railway Company, separate and apait fioni sa-'d "Total Valuation Stock " Section 6. Powers of the President of the United States in Exchange of Stock. The President of the United States, under the advice of the Secretary of the Treasury and the Interstate Com- merce Commission, may authorize the Secretary of the Treasury or the Secretary of Transportation (or the Director General of Railroads) to contract for the exchange of stock of the National Railway Company for the stock or any of the securities of any rail- way company in the United States, provided that any such exchange shall be upon the basis of par for the stock of the National Railway Company, and for the actual cash value of any securities for which it is proposed to make exchange, which shall not exceed the average market value of such stock or securities for a period of years next preceding January 1st, 1919. Provided that in purchases of stock or bonds under this Section, it shall be the policy of the President to acquire as nearly as practicable a control of the stock, and as large a holding as practicable of the securities in any railroad in which purchases are made ; and the President shall have for such purpose discretionary power to increase the amount of stock to be paid in the purchase of any block of stock or bonds, where, in his judgment with the approval of his advisers, the exigencies of the case and the interests of the National Railway Company shall seem to require the purchase of such block; and the Secretary of the Treasury and other advisers and agents of the President are ex- pected to use the same diligence in the acquirement of said stock or securities that a prudent business man would use in the acquire- ment of the said stock or securities for the said purpose; and it shall be the duty of said officers to make due allowance in the THE RAILROAD PROBLEM— A SUGGESTION 83 purchase of bonds which are a first hen on any railroad for the fact that the said bonds are a first hen, and to make it attractive to holders of first lien securities to exchange such first lien for capital stock of the National Railway Company at par; and in any case where it may advance or promote the objects of this Section the President may authorize at any time a sale of the stock of the National Railway Company to be made at par, and the cash from such proceeds to be used in the purchase of any such secur- ities. In such purchase of stock or of securities of such railroads the President of the United States may (a) authorize the nego- tiations to be carried on and transactions to be completed with any minority stock or security holder or holders; or the President may (b) authorize, in his discretion, the purchase of any railroad property, including the stock and all of the securities thereof, by the issue of stock of the National Railway Company, to an amount which shall be determined as provided in this Section, provided that said purchase of said railroad property shall be approved by the corporation owning the same at a stockholders' meeting of said company, and with any further approval by the holders of stock or securities that the President of the United States may require. In cases where abnormal circumstances such as insolvency, a receivership or war conditions shall, in his opinion, require an independent basis for evaluation, the President may authorize the Secretary of Transportation to contract for the ex- change of stock of the National Railway Company at par for a part or all of the property of any railway company, provided that such property shall be appraised or evaluated by a commis- sion appointed by the President for the purpose, and approved in the opinion of the Interstate Commerce Commission to be worth in cash to the National Railway Company the amount thus pro- vided to be allowed for it in stock. And the President of the United States may, in his discretion, order suspended all proceed- ings under Sections 2 to 5, inclusive, of this Article, when there shall have been acquired, as provided herein, a sufficient number in his opinion of railroad properties to justify the calling of the stockholders' meeting of the said National Railway Company for the purpose of organizing said National Railway Company and for taking over the management of the properties which it shall have acquired (or whose control it shall have acquired), and for carrying on the active management of the railway business as provided in this Act; and in such an event the President shall by Proclamation cause said meetings to be called in accordance with Section 11 of this Article. And thereafter the status of all rail- roads in the United States not owned or controlled by the National Railway Company shall be as set forth in Section 7 of this Article It is the purpose to acquire all railroad stocks and bonds, but that is not essential to the success of the Plan. It is difficult to 84 THE RAILROAD PROBLEM— A SUGGESTION conceive of stockholders in the existing demoraHzed railroads re- fusing to exchange their stock at a fair valuation for the stock of the proposed National Railway Company, whose very purpose in every detail is calculated to rehabilitate, protect and insure those investments by proper stability. It is reasonably certain, there- fore, that under Section 6 there would be little trouble in securing on the part of the National Railway Company a working stock interest (which in some cases need be only a minority) which would insure the co-operation under contract or otherwise of every corporation in the country. The purchase of such stock need in no way aiifect the bondholding interests, but it is also contemplated that they likewise would exchange their holdings for the stock of the National Railway Company. It is true they would be placed upon a parity with the common stockholders, whereas now they have a preferred right, but it is believed to be helpful to the Plan to induce such bondholders (by a proper appraisal of bonds as compared with stock) to exchange their holdings. This is deemed to be a matter of detail which could be worked out equitably in fixing the prices to be paid for securities under the authority con- ferred in this Section. It has been authoritatively stated that there are nearly fifty million of the American people now either directly or indirectly the owners of existing railroad securities. It is par- ticularly desirable that all who are owners of either stocks or bonds in the existing railways become stockholders in the National Rail- way Company, thus having a voice in the management of that Company. It is plain that this vast number of stockholders must necessarily represent all sections and all interests in the country, including shippers, manufacturers, farmers and employes, which thus becomes in itself an assurance of fair treatment to those in- terests by the Board of Directors of the National Railway Com- pany. For similar reason care has been taken to insure a further distribution of stock by sales to employes and patrons; and for this reason care has been taken in outlining the Plan to provide for a special and thorough method of insuring that all of such stockholders, including the smallest holdings, be represented in the stockholders' meeting which is to elect the group of ten members of the Board, as provided in Article III hereof. It is reasonably certain, as already pointed out, that the Plan for the exchange of stock is not dependent upon securing the con- sent of the bondholders. Neither is it dependent upon securing THE RAILROAD PROBLEM— A SUGGESTION 85 even stockholders' consent if a majority of the bondholders agree. (If neither agree, then some such procedure as outlined in the foregoing Sections 2 to 5 may be invoked, which in the end might require a just and fair coercion, by regulation or taxation under Section 7 upon those corporations, if any, that finally fail to co- operate.) But there should not be the slightest doubt of the prob- ability of effecting an exchange of stoclc voluntarily between the Federal Corporation and the State Corporations. This has been demonstrated many times in the far more difficult matters of form- ing large corporations, known as "Trusts," the formation of which has always been voluntary, because it has been made to the inter- est of the parties in such cases to co-operate and because it has been made impossible in any case for an outstanding interest to defeat the Plan. -Vd On account of the importance of this feature of the subject, the following quotation discussing this very subject is made from Mr. Victor Morawetz's plan, which is so in harmony with business common sense and law as to be final as to the practicability of making the exchange without even proceeding to coercive measures : "It is believed that the great bulk of the stockholders and bond- holders of the companies would soon agree to any fair terms offered them. Unanimous agreement of the bondholders and stock- holders would not be necessary. A majority of the stockholders of some of the companies have now the power to sell the property of their company subject to its indebtedness, and in other cases legislation probably could be obtained giving such power to the majority. But if in any case the stockholders are unwilling to agree to reasonable terms their equity could be acquired through a condemnation proceeding. "In most cases it would be safe to proceed upon obtaining the assent of the holders of a majority of the outstanding bonds of a company. The outstanding bonds would not be assumed by the Federal Corporation, and the bonds received from assenting bond- holders would be kept alive in the treasury of the Federal Corpora- tion, so that the security of the non-assenting bondholders ivould not he improved. Separate accounts should be kept of a railway thus acquired subject to outstanding bonded indebtedness, and if the property should not earn the interest on all outstanding bonds, including those in the treasury of the Federal Corporation, the latter could foreclose the mortgage securing the bonds held in its treasury, in which event the property could be bought in by the Federal Corporation by paying to the non-assenting bondholders only their proportional share of the net proceeds of the foreclosure sale." 86 THE RAILROAD PROBLEM— A SUGGESTION The simplicity of the within Plan of a single ownership, which is so essential in all administrative matters, is also exceedingly useful in the matter of evaluations. In the evaluation of inter-regional railroads, under plans for divided ownerships into several regions, as well as in the placing of all such regions on a parity, difficulties are presented which do not exist under the within Plan. Section 7 Rights of Railroads Not Accepting Terms of Act. If any railroad which shall have refused to receive the stock allotted to it, as determined in the foregoing Sections, and shall thereafter fail to submit the question of its relative rights to stock under the Plan to the United States Circuit Court of Appeals, as provided in Section 4 hereof, then said railroad shall have no further right to bring any such suit, unless on proper showing of reasonable cause the said United States Circuit Court of A.p- peals shall extend the said time; and if, during the time thus pro- vided, it shall continue to refuse the allotment which shall have been provided for it, the said railroad company may carry on interstate business under any contract which may be entered into by it for such purpose with the National Railway Company ap- proved by the Interstate Commerce Commission; or in the event that no such contract be entered into, then the said railroad may transact interstate business upon the terms which the said Inter- state Commerce Commission shall impose, which shall be no less favorable than the terms provided for the operations of the National Railway Company. And if upon the advice of the Secretary of Transportation it shall appear that the railroad property of any such railway company or any part thereof is not being used and that the same is necessary for the public welfare to be operated by the National Railway Company, the said National Railway Company shall proceed to condemn and pay in cash for such property for the use of the National Railway Company in carry- ing on its business. And in any such condemnation proceeding the actual value of the property actually condemned shall become the basis of the damage to be paid for, and the National Railway Company is hereby authorized to borrow money on such terms as it may deem wise in the interest of the Company, at not to exceed .... per cent per annum, for the payment of any such damage for property actually taken and received by it; provided that any such loan shall first be approved by the Secretary of the Treasury. [The railroad plan of Mr. Morawetz for several Federal Cor- porations to take over the railroads upholds the right of condemn- ation of any railroad by a Federal Corporation. Mr. Elihu Root, in a letter filed with the Senate Committee on Interstate Com- merce, has questioned this right on the ground that the property to be condemned is already devoted to the public use. If, there- THE RAILROAD PROBLEM— A SUGGESTION 87 fore, it be not so used or not used to the extent for the public which the National Railway Company would make use of it in interstate commerce, the right of condemnation would lie. Mr. Root calls attention also to the legal right of Congress to tax any railroad refusing to come into a Federal Corporation, out of ex- istence. The Act of Congress would, therefore, provide accord- ingly.] Section 8. Stock to United States for Advances. The Sec- retary of Transportation is hereby authorized and directed to assist in every practicable and businesslike manner in the promo- tion of the organization of the said National Railway Company, and the acquirement of the railroad properties as herein provided, and to that end the Secretary of Transportation is hereby author- ized, with the approval of the Secretary of the Treasury, to bind the United States to receive stock of the National Railway Com- pany at pai for any advances in cash which may have been made during the period of operation by the Director General of Rail- roads, including payments made either by the United States or by the railroads at the Director General's direction for all material, equipment and betterments which may not have been included in the evaluation of the railroads as herein provided for, and which shall not have been deducted from the rentals which the United States became obligated for under the operation of the railroads during the management of the Director General. The said ad- vances for which stock shall be received, as provided in this para- graph, shall include all amounts for which the United States Government may have become obligated for said railroads, or any of them, under contract, although payments thereunder may not have actually been made. Section 9. All valuations provided for in the foregoing Sec- tions of this Article shall be made as of the date of the turning over of the railroads to the Government of the LTnited States for management and operation by the Director General of Railroads. Section 10. Upon the acceptance of stock by any railroad cor- poration, as provided herein, the respective and relative rights of all stockholders, bondholders and other claimants shall be settled hy agreement, or by interpleader if the parties interested are en- titled to such settlement and are unable to come to an agreement. If in any of the proceedings under this Article the rights of bond- holders in any property shall be set up as against the rights of stockholders, the former claiming a preference in partaking of the proceeds of any sale ; or by way of disputing the right of the railroad company to exchange its property for stock in the man- ner provided in this Article, then it shall be the duty of the At- torney General, on his own motion, or upon the suggestion of the Secretary of Transportation, to pray for the appointment of a receiver for such corporation to protect the interests of all parties 88 THE RAILROAD PROBLEM— A SUGGESTION interested; and the court shall have the right upon proper show- ing at the instance of the Attorney General or any other party in interest, to appoint a receiver in any such case and to cause justice to be done among the interested parties, following the practice similar to that heretofore adopted in railroad reorganizations. In cases of insolvency or otherwise, when it may deem best, the court shall have the right, in its discretion, to do any and all things necessary and proper to protect the relative rights of security holders and stockholders, and may continue the receiver after any such railroad company for which the receiver is appointed shall have received its quota or allotment of stock, and such receiver may be required, in the discretion of the court, to hold such stock on deposit in trust for the parties interested, collect the revenue thereon and distribute it to the bondholders and stockholders in such order of preference as the court may direct. In the event that more than one receiver is asked for under this Section, the court may have the right, in its discretion, to appoint one receiver for more than one corporation. If the court finds that for the protection of all parties in interest a sale of the property is neces- sary it shall have the right to order the sale of any such property, or to order a sale of the stock which shall have been allotted to such corporation. Section 11. Whenever stock shall be issued in the National Railway Company the names and addresses of the persons to whom said stock shall be distributed, together with the holding of each, shall be filed with the Secretary of Transportation (or the Director General of Railroads) by the individual stockholders or by the officers of any railway company to whom any allotment shall have been made, and thereafter, when there shall have been received the names and addresses of stockholders representing a majority of the stock of the National Railway Company, or when there shall have been thereby acquired for the National Railway Company sufficient control of railway properties to justify, in the opinion of the President of the United States, the operation and management of the same by the National Railway Company, the President shall make proclamation to that effect, and the Secretary of Transportation (or the Director General of Railroads; as the case may be) shall thereupon advise with the railway executives representing the railroads, who shall have accepted allotments of stock, and proceed to call stockholders' meetings for the National Railway Company, in such a manner as may be agreed upon as to notices and forms, for an election of the First Board of Directors as the Attorney General of the United States shall certify will protect in their rights at such meetings all of said stockholders for whom the addresses are filed with the Secretary of Trans- portation (or Director General) ; and proper stockholders' meet- ings shall be called for the purpose of electing a Board of Di- rectors, providing by-laws and electing officers, as provided in this THE RAILROAD PROBLEM— A SUGGESTION 89 Act, and for the transaction of any other business which may properly come before the meeting, for the purpose of taking over and prosecuting the management of the railroads, for which the control shall have been acquired by the National Railway Com- pany. The Stock of the National Railway Company Will Be Worth Par to Existing Security Holders. Attention is called to the re- quirement that the stock of the National Railway Company shall be valued at par in making exchanges for railroad stocks, bonds or property. It is permissible, therefore, for the United States Government to treat such stock as worth par in the operations of Federal Reserve Banks. Although a provision relating to this matter is not fundamental to the Plan, Congress can properly authorize (say, with the approval of the Secretary of the Treasury) the use of stock in such manner. This will serve to eliminate all doubt as to the market value of such stock as well as its exchange value for railroad securities, and will promote that speedy ex- change of securities which will be desirable in completing the Plan. Senate Bill No. 5077 (65th Congress), understood to be drafted by Mr. William W. Cook, author of the leading treatise on Corpo- rate Stocks and Stockholders, formulates a provision for the use in this way of shares of stock of proposed Federal railroad com- panies, and that bill enumerates six different uses for railroad stocks as collateral security in the operations of Federal Reserve Banks. ARTICLE VIII RELATION OF THE STATE COMMISSIONS Section \. Nothing in this Act shall prohibit the right of any of the states of the Union to inaugurate Railroad or Public Service Commissions, and such Commissions shall exercise the duties and be clothed with all of the authority which the state laws creating them confer upon them, provided that in the matter of rate-mak- ing, payments of wages, and matters pertaining to the conduct and operation of any railroad operated by the National Railway Company, the findings of the said State Commission shall not be permitted to conflict with the regulations imposed under Federal authority on the National Railway Company, and in the event of threatened conflict, the findings of the Interstate Commerce Commission shall be final as between the state authorities and said 90 THE RAILROAD PROBLEM— A SUGGESTION Federal Commission. The said State Commission shall, however, be invited to make their own findings in any matters in which they may desire, which findings before they become efi'ective shall be certified to the Interstate Commerce Commission as an aid and by way of advice to that Commission. This certification may be made to and through the Subsidiary or Regional Commissions appointed by the Interstate Commerce Commission, if the Inter- state Commerce Commission shall so direct. In the event that said State Commissions or any state authority shall order any sta- tions, grade crossing eliminations, or other improvements of ad- vantage to the public and useful or necessary in the operation of any railroad owned and used in interstate commerce by the Na- tional Railway Company, the cost of such improvements shall be carefully considered by the National Railway Company through its Board of Directors or any officer or agent authorized by said Board, and if the National Railway Company shall find such im- provements to the advantage of the railroad and the public, and equitable, fair and proper to be installed, it shall be the duty of the said National Railway Company to carry out such instructions ; and to the end of encouraging the state in aiding and assisting in such improvements, the President of the National Railway Com- pany shall have the right to agree, in such manner as may be possible and advisable, with the state authorities for the division as between the railway company and any state government or locality of the expense of any such proposed improvement or betterment, and such contract shall bind all parties. If the Na- tional Railway Company shall decide against any such improve- ment or regulation the matter may be brought for adjudication and determination before the Interstate Commerce Commission at the suggestion of the Secretary of Transportation or of any inter- ested party. It is provided, as a method of determining, equaliz- ing and justifying the payment for any such proposed improve- ment, that it shall be the duty of the Interstate Commeixe Com- mission to be guided by the records of the cost of operation and the profit to any local or main branch of railroad upon which said improvement is to be made, and if, in the opinion of the Interstate Commerce Commission, it is deemed wise and equitable to do so, the said Commission shall have the right to approve the payment for said improvement. But the Interstate Commerce Commission may, if the doing of equity as between the state or locality and other regions of the country requires, cause the amount of the cost of said improvement to be earned by such increase in the local freight and passenger rates as it may deem just, but the increased net income resulting from said increased charges shall not exceed said cost of improvements. And it shall be the duty of the Inter- state Commerce Commission, as an aid to carrying out the plan proposed by this Act and as a part of the system of accounting which is placed under its control and referred to herein as the THE RAILROAD PROBLEM— A SUGGESTION 91 "Bureau of Accounting," carefully to keep record and account of charges or burdens which may be levied against the properties of the National Railway Company and paid by it, and those charges may be taken into account (as well as the expenses and profits of operation as provided in Article IX) in regulating the charges on any railroad within any state ; to the end that all branches of rail- road shall, as nearly as practicable, be operated at a profit, and to the further end that all state authorities shall be treated equitably and fairly in said matters, and the interests of the Nation not jeopardized or injured. Provided, however, that in regulating the local rates or charges as provided in this Article, the Interstate Commerce Commission shall not initiate rates — that being an ad- ministrative function — but the Interstate Commerce Commission may order the Board of Directors to so construct the local rates and so regulate local service as to cause the net income on local lines to be regulated in the manner provided in this Article. (It being realized that the executive management of the company is the only instrumentality which can from the nature of things, have sufficient familiarity with the operations and sufficient administrative authority over local managers either properly or adequately to alter rates to effectively increase or decrease profit without re- ducing the load factor and without otherwise injuring the public service.) Findings made on questions arising under this Article may be appealed under appropriate rules to be provided therefor to the United States Circuit Court of Appeals under Article X of this Plan. [The matter of state taxes is to be disposed of by the Act of Congress. Mr. Victor Morawetz's railroad plan provides that the Act of Congress require that the interstate railways shall pay to the states, each respectively, taxes under an apportionment based upon the railroad property located within each state; and under the judicial supervision of the Supreme Court.] ARTICLE IX RATE-MAKING Section 1. Freight Rates. The rates and charges which were in effect on the organization of the National Railway Company, together with the then existing rate committees representing car- riers and shippers, shall remain until the same are amended or changed or abolished. Section 2. Changes. Any changes or amendments in rates may be initiated or made by the National Railway Company, pro- vided that the authority for the same is approved by its Board of 92 THE RAILROAD PROBLEM— A SUGGESTION Directors in the same manner that amendments to its By-laws are made. Sf.ctign 3. Any questions relating to said rates, upon the sug- gestion of any state or community or shipper, or upon the suggestion of the Secretary of Transportation, may be called to the attention of the Interstate Commerce Commission, together with any com- plaints that may arise, and it shall be the duty of the Commission to determine as to the relative fairness thereof as between any two or more of the interested parties, which may include indi- viduals, corporations, localities, communities, towns, cities, coun- ties, states or regions. In making its findings in such matters the Commission shall endeavor to classify such interested parties in relation to the business, facts, and circumstances surrounding each, which tend to define their relative rights as patrons of railroad service ; and where the Commission determines that two or more of the said parties before it are in the same class, it shall require that such parties be accorded the same treatment under the same circumstances. In the adjudication of such matters it shall be the duty of the Commission to take into account all of the physical circumstances of the railroad property, and of the business or businesses involved, and so make its rulings as near as may be to allow a profit to be made in the local operations in every part of its system, as well as upon all service rendered after considering all of the actual and relative costs thereof. And in considering these matters the said Commission shall take into account in addition to the costs to the road (due to physical conditions, such as climate, grade, character of road and equipment), also matters in connection with the public welfare, such as a meritorious policy in good faith to encourage and build up enterprises and activities which could not otherwise exist, in the interest of the general community. And said Commission shall also take into account the amount of ton- nage involved in making a given rate for a particular purpose, and whether or not there is available railroad capacity for handling a given proposed tonnage at a particular time without interfering with a more profitable service, to the end of enabling the railroad, at all times, to build up in all parts of its system and for all of its equipment as nearly a full and level load factor as may be possi- ble. To aid it in determining such matters the Commission shall, through its -Bureau of Accounting, endeavor to establish from time to time on scientific principles, a system of standardization and classification such as will permit, as nearly as practicable, the application of such standards to prevent and avoid unjust and unfair discrimination. The test before the said Commission in passing upon the acts of the said National Railway Company and its officers shall be that of "diligence," "ability" and "good faith" ; and if such are found to exist, and if no direct injury shall, have resulted from the acts and rulings of the railroad company, it shall THE RAILROAD PROBLEM— A SUGGESTION 93 "be the duty of the Commission to endeavor to uphold them. In its •classifications and standardization, the following seven business principles shall be kept in view by the said Commission, as well as all other principles which it may from time to time adopt in the interest of the public welfare, to the end (a) that the railroad may be enabled to operate at all times as nearly as possible to its full level capacity, with a fair profit; (b) that the public welfare or right of the Nation to have as much as possible of its natural resources developed and used without waste shall be subserved to the greatest extent; and (c) that all persons and communities in the United States may be treated equitably and fairly, and, so far 3.5 circumstances will permit, in the same manner. The said seven principles are as follows : L Net income is, as a rule, dependent upon rates, but it is not proportional to rates, and there are cases where the higher the rate the less the net income; and the rate may be so high as to prohibit income. 2. Net income on a given rate increases rapidly with the in- crease of tonnage, and the greater the tonnage up to the capacity to handle, the lower the rate usually may be. There may be cases where a greatly increased tonnage can be hauled without materially increasing other expenses. 3. The greatest net income can be earned where the railroad property is operated to its utmost capacity. A railroad operating at full capacity may earn more profit frequently than the same railroad operating at half its capacity, but charging a several-fold advanced rate. 4. In addition to the service performed by a railroad expressed in ton miles there is always an extra service incident to the receipt and delivery of goods ; and frequently in terminals where labor, rentals and other expenses are high, this may cost the railroad more upon a given shipment than the actual movement over the road; and the smaller the tonnage in a given shipment, the greater is the relative expense of terminal service for said shipment. 5. The railroad should at all times be encouraged to operate its road as nearly as possible to full capacity, consistent with those conditions of fairness, justice and good faith as set forth in this Act, which must at all times control. 6. Where there is too limited ability to serve, the welfare of the public should be the first consideration; and freight should take priority according to the general public need. Where there is an ability to carry beyond the requirements of the freight of- fered at the standard rates, the acceptance of tonnage at a lower rate in special cases to build up a load factor is permissible, but for such purpose tonnage should be classified as "Deferred Ton- nage" and "Preferred Tonnage," and "Deferred Tonnage" shall 94 THE RAILROAD PROBLEM— A SUGGESTION be received at a lower rate only when but for that lower rate such tonnage could not, in the opinion of a responsible expert official named by the President of the National Railway Company for the purpose of passing on such questions, be moved at all; and such "Deferred Tonnage" shall be moved only when required, in the opinion of the Railway General Manager and Interstate Com- merce Commission, to make a high load factor for a limited period. [This is on the principle of the telegraph companies in receiv- ing deferred night messages which may or may not be sent, ac- cording to the facilities.] [The same principle is applied in the power business in what is known as the "dump" load, which may be sold at a low rate to create an even full load factor for the power plant; and is illustrated by the following example : One of the large hydro- electric power companies operating in the Rocky Mountain region,, finding itself with several thousand surplus horsepower unsold in ordinary business, entered into a contract with a large tramway company in Denver (operating by steam-driven generators) under which the power company had the right, if it chose, to deliver to the tramway company any or all of its said surplus power at a very low figure. This enabled the power company to dispose, from day to day, of its surplus power, and thus enabled it to maintain a full even load. The arrangement was in the interest of the tramway com- pany because the rate was a very low one and less than the cost of coal, and it had to use its own generators only when there was no sur- plus power available from the power company. The ordinary power users throughout the state were benefited, because by an arrange- ment insuring it a full even load the power company was enabled to reduce its standard regular rate to the other customers. This contract was not only never questioned, but was formally ap- proved by the Public Utilities Commission.] 7. Rates and classifications may be so made as to be reducible to a standard, from which all variations for any purpose may in the main be expressed in percentages of the standard. The following examples of certain tentative principles of stand- ardization which may be imposed by Congress to guide the Inter- state Commerce Commission are herewith submitted : A Tentative Standardization The standardization of carload or less than carload rates shall separate charges based upon cost into the following groups : a. Charge for service at terminals, known as "Terminal Charge." b. Charge based upon extraordinary costs incident to any given shipment. c. Charge for haulage based upon standard ton miles. This THE RAILROAD PROBLEM— A SUGGESTION 95 standard rate per ton mile shall be varied in accordance with Prin- ciples 1 to 6, inclusive, hereinbefore set forth, and to fit local con- ditions in such a manner as to permit the railroads to operate as nearly as practicable at an even full load factor, and to make a profit upon the several branches of the entire system, and so as to effect the sort of service which the varying local conditions may seem to require and justify. But such variation shall, so far as practicable, be expressed in percentages of the standard rate per ton mile. The said variations shall include the following : (a) Variations due to local conditions as set forth in this Article and in Article VI. (b) Variations due to differing classes of commodities. (c) Variations due to quantity or certainty of tonnage. (d) Variations due to acceptance of shipments as "Deferred Tonnage." (e) Variations due to certain approved service and facilities supplied by industries or communities, as, for example, cars for special industries. (f) Variations for any other reason or reasons which may commend themselves as equitable, just and fair; as, for example, where a shipment for a long haul — say, one thousand or more miles — necessitates no corresponding haulage of empties and may be made up into one or more unbroken full trains which may be moved at the convenience of the railroad. (g) Variations in the nature of additions based upon the haul- ing of empties to the point of initiation of shipment where the business is spasmodic and therefore not foreseen nor provided for in advance by the carrier. [The said standard rate, as well as the application of the varia- tions therefrom, would be, at all times, so constructed and ad- ministered as to require the shipper, or at least make it to his inter- est, to fill cars to full capacity.] [The standardization of rates for shipments in less than carload lots as worked out by the Interstate Commerce Commission might, in addition, be affected by certain differing principles which would readily commend themselves to the Commission, and would natur- ally be based to a greater extent proportionately upon service than are the rates on carload shipments.] Mr. Robert W. WooUey, member of the Interstate Commerce Commission, has demonstrated the practicability of expressing rates in terms of a given standard; and although he does not offer to require a high load factor, nor suggest the variations which seem to be necessary to accomplish that desideratum, he shows the unscientific folly of the present cumbersome, expensive and unfair methods in use in relation to rate-making; and further 96 THE RAILROAD PROBLEM— A SUGGESTION indicates that scientific standardization is designed for a single transportation system; so that if we are to make progress in the matter of rate-making we must bring the railroads into a single system. (It is shown elsewhere in this analysis that this means single ownership and a single management.) The standardization of Mr. Woolley places the average car shipment costs at approx- imately 12 cents per car mile for mileage service, and $16 per car for terminal service, which, he says, would be reduced by an in- creased proportionate revenue which would be received from less than carload shipments. One of the most excellent features of the foregoing proposed standardization is believed to consist in the differentiating from the other charges of the "Terminal Charges," and it is fundamental that such terminal charges be uniform at a given terminal, but that they vary among different terminals as the actual costs at the several terminals vary. It is contemplated that each terminal point (and, indeed, each station) would strive to cause the terminal charges at such point to be reduced by reducing the cost of real estate, rentals and other matters which are peculiarly in its con- trol. A wholesome competition would be stimulated among all terminal points seeking transcontinental business. Cities under peril of losing business would be obliged to perfect and unify in the interest of economy, their terminal problems, and with the terminal problems thus solved, the terminal charges at those points would be correspondingly reduced, to the advantage of those terminal cities, as well as to the advantage of the entire country. The reduction of terminal charges under this sort of competition would reduce proportionately freight rates paid by the public, and at the same time would tend to insure a fair profit on the railroad operations of the entire National system. Section 4. Appeals. Questions relating to rate-making may be carried to the IJnited States Circuit Court of Appeals in cases where proper questions arise, as hereinafter provided in Article X. Section 5. All provisions relating to notices of rates, pub- lishing of rates, etc., in force at the time of the organization of the Corporation will continue to be in force, and it shall be the duty of the Corporation or its agents administering these matters to see that this provision is carried out. Section 6. Express Rates and Passenger Fares. (Here will appear appropriate provisions to prohibit unjust discrimination as THE RAILROAD PROBLEM— A SUGGESTION 97 between individuals, towns, communities, cities and states, but at the same time encourage the increase of the load factor and all things which will best subserve the public welfare. The subject is much more simple than that of freight rates, which is the sub- ject of Section 3.) The general plan of rate-making, it will be observed, is, under this Article, placed with the owning corporation — the National Railway Company — as one of the executive powers of the corpo- ration, which cannot be properly or efficiently exercised by an out- side body. By introducing scientific methods and requiring the rate-making power to follow certain principles of business, equity and efficiency, which principles are to be enforced by the Interstate Commerce Commission, it is plain that there can be no danger in entrusting this administrative power to a board of directors con- stituted like that in the National Railway Company. Indeed, no outside body can, from the nature of things, be expected to have the quick comprehension and realization of the peculiar facts and circumstances upon which the fixing of charges, in order to create a high load factor and earn a maximum net revenue, must be based. It is claimed herein that the rate-making power should lay proper emphasis upon the sound business principle that in order to create a high load factor the rate-making power must take into consideration the ability of the railroad to serve at the time the service is performed, as well as the other factors. There can be no injustice in this. If two cities have no connecting railway, certainly no railroad can be required to provide transportation be- tween those two points. Likewise, if there are two points con- nected by superior facilities, the railroad between such points might find it equitable to permit a lower local rate than a rail- road between two points where the facilities are inferior. The within Plan contemplates that facilities for service shall keep abreast of the business developed in all parts of the National sys- tem. It is in the power of each community to remedy this situa- tion by increasing its industries and its business. Furthermore, it is to the interest of the Nation to have the railroad system in all of its parts operated at a full load factor, and the right to so make rates and increase patronage as to utilize the facilities of the rail- roads in every part is fundamental. If an apparent injustice to some individual or community appears to result from the circum- stances, then in the absence of incompetence, wrong intention and 98 THE RAILROAD PROBLEM— A SUGGESTION bad faith on the part of the rate-making power, what appears at first to be the selfish interest of an individual must give way to the interests of the entire country, which is that the railroads must operate at full capacity in order that the standard level of rates in the entire country may be reduced. And after all the interest of each individual will be best subserved by such a policy. Under the rigid, unscientific requirements which an outside administra- tive body rnust, from the nature of things, impose, if such a body is to fix railroad rates, not only is efficiency destroyed and waste engendered, but frequently there is not even a pretense at the supposed justice which is the only excuse for the past system. Many illustrations of this can be given. For example, the rate on a certain grade of black molasses is less from New Orleans to St. Louis than it is from New Orleans to Little Rock, which is a lesser distance on the same rails. Yet the rate to Little Rock is admittedly not too high, and to readjust it would disturb the equilibrium of rates in Little Rock; so that the Interstate Com- merce Commission finds itself practically helpless under the pres- ent system of rate making to make a fair adjustment as between Little Rock and St. Louis. Such an inconsistency could not occur under the foregoing tentative Plan of Standardization. ARTICLE X . APPEALS FROM THE INTERSTATE COMMERCE COMMISSION Section 1. Appeals to the United States Circuit Court of Ap- peals, with right of certiorari when permitted under rule to the United States Supreme Court, shall lie from the findings of the Interstate Commerce Commission and inferior jurisdictions in questions involving railroads in the following cases : In all matters of rate-making which involve the question of the National Railway Company's ability to earn a profit, and pay divi- dends of at least four per cent per annum, cumulative, on its out- standing capital stock. Also in cases where it is charged that the general level of rates is unreasonably high and complaint is made that the National Railway Company is earning an excessive profit over and above six per cent dividends on its outstanding capital stock beyond a reasonable reserve for the purposes of carrying on its business, and beyond a reasonable reserve for new equip- ment and betterments and extensions. (In the determinatioto of THE RAILROAD PROBLEM— A SUGGESTION 99 any question of excessive profit, together with excessive rates, the Appellate Court may take into consideration in its own way all of the circumstances surrounding the case relative to the actual level of freight rates compared with rates formerly existing, and relative to the prices of commodities, and also relative to the pre- vailing rates of interest, and weigh the same in conjunction with the questions of general diligence and good faith exercised by the Board of Directors and officers of the National Railway Company, and render a decision fixing a limit for any such reserve and fixing the limit for a higher rate of dividends (over and above those fixed in line seven of this paragraph) if in its opinion such findings are necessary to encourage the greatest possible thrift and enter- prise in the further management of the National Railway Com- pany to the end of having the public interest subserved to the maximum extent. And if the Court finds that there be a surplus not authorized by law accumulating and not necessary for carry- ing out the purposes of the Corporation, and not reasonably useful for the future needs of the Company in its operations, or for bet- terments, extensions or to tide it over possible periods of stress or adversity, then the Court may order any portion thereof dis- tributed as provided in Section 2 of Article XI of this Act. And in such event if it appear to the Court that the general level of freight rates is relatively high as compared with rates formerly existing, or that the level of rates as fixed is a harsh and unneces- sary burden on the public, it may make such order in the premises as it may deem wise, consistent with the principles set forth in Article IX of this Act. Appeals will also lie in all cases involving railroads resulting from a conflict in the jurisdictions of State and Federal authorities. In all cases involving railroads which also involve questions of relatively equitable treatment between cities, or between, states (provided that a principle is involved which in the opinion of the Court can reasonably be said to create a pecuniary issue of $ or more) ; also in all cases involving the equity or fairness of the charges on a branch line or part of the system upon which rates differing from the rates on other parts of the system are charged. In such cases the Appellate Court shall enter such orders as will assist and direct the Interstate Commerce Commission in standardizing its practice and formulating, so far as practicable, a body of rules of a general nature according to Article IX for insuring fair and equitable treatment to all communities, indi- viduals and industries ; and the Court shall grant individual relief when the circumstances show plainly that a palpable injustice is about to be done. Appeals under this Article shall be made ac- cording to the rules of the Appellate Court to be provided there- for, and shall be allowable only in cases where the jurisdiction of 100 THE RAILROAD PROBLEM— A SUGGESTION the Court is plain, and where without such appeal there is grave danger that an improper or unfair system of rules and practices would be enforced and adopted as the practice of the lower tri- bunal, contrary to the principles of law and equity. In all cases where provision is made herein for appeals from findings of the Interstate Commerce Commission, such appeals shall be made as provided ' in this Article. Section 2. The uninterrupted service to the public is the prime duty of the National Railway Company, and shall not be interfered with except by acts of nature, and the Executive and Judicial Departments of the Government of the United States shall at all times be available to enforce this duty ; and all ques- tions extending to the performance of this duty are within the jurisdiction of the Appellate Courts as set forth in Section 1, of this Article, upon appeal from the Interstate Commerce Commis- sion, or from any other inferior court ; and in cases of National emergency, in the discretion of the Circuit Court of Appeals, such matters may be brought originally and directly before it ; and when such matters are brought to the attention of the Court, the said Court shall give by injunction, mandamus, the appointment of re- ceivers, or otherwise, such temporary relief as, at all events, will prevent the interruptions and secure a continuance of service to the public; and thereafter it shall continue to hold jurisdiction of said matter until the underlying matters which caused the interruption may be fully investigated and presented to the Court and a perma- nent remed}' provided. Section 3. (Here will appear a section permitting special re- lief in cases where the National Railway Company neglected to obey the findings of the Interstate Commerce Commission by failing to treat different communities or industries equitably and fairly .in the same manner. This relief in aggravated cases and where the same offense shall have been repeated may, in the wis- dom of the Court, extend to the granting of a receiver.) Section 4 In the event of a deadlock in the Board of Direct- ors of the National Railway Company which seriously interferes with or prevents the said Board of Directors from accomplishing the duties such as the appointment of a President of the Company, or any other important duty which may require a four-fifths vote of said Board, which said failure seriously interferes with the morale, successful management or with the operations of the Na- tional Raihvay Company, any interested party may cause the mat- ter to be brought before the said Court of Appeals, and upon hearing, if it appear that said deadlock is caused by a failure of any of the Board of Directors to attend meetings or otherwise ful- fill the duties of his office, the said Court may grant relief as provided in Section 2, Article XXI, providing against fraud, in- competence and negligence; and if said deadlock is not chargeable THE RAILROAD PROBLEM— A SUGGESTION 101 to the fraud, incompetence, negligence or failure of any member of said Board, and the said Court becomes satisfied that said dead- lock has become or threatens to become a serious handicap to the successful operation and proper growth, extension and develop- ment of the said railroad system, the said Court shall have power to grant such relief according to law and equity as it may deem best, and may, if it deems wise, remove the entire Board of Direct- ors from ofHce and cause said Board of Directors to be superseded in the management of the Company either by a receiver to be appointed by said Court or by a new Board of Directors, six of whose members shall be appointed by said Court and nineteen of whose members shall be elected as provided in Article III of this Act at proper stockholders' meetings to be initiated by the Secre- tary of Transportation, or in such manner as the said Court may direct. Relief under this Section shall be granted, however, only in cases which seem to require the most extraordinary remedies. ARTICLE XI PAYMENT OF DIVIDENDS Section 1. The National Railway Company shall permit net earnings to accumulate in its treasury until there is a sufficient accumulation therein for a reasonable working fund, after which dividends may be declared at the rate of four per cent per annum, cumulative, on the outstanding capital stock. After the payment of said four per cent cumulative dividends in any given year, no further dividends shall be paid in said year until there shall have accumulated in the treasury of the Company an amount equal to ten per cent of the par value of the outstanding stock of the Com- pany; which said accumulation will be referred to hereinafter as the "Ten Per Cent Reserve Fund." Thereafter when sufficient funds shall have accumulated in the treasury to justify, in the opinion of the Board of Directors, a payment of an additional two per cent dividend, said dividend shall be paid in the following manner: One-half thereof, amounting to one per cent, shall be distributed among the stockholders in the usual manner, and the remaining one-half thereof, amounting to one per cent, shall be paid to the Secretary of the Treasury as the property of the Gov- ernment of the United States; but the same shall be set aside as a special fund, styled for purposes of reference the "Government Fund." The said "Ten Per Cent Reserve Fund" and also the "Govern- ment Fund" shall each be invested from time to time (similar to the manner in which investments are now authorized by state treasurers and other similar trustees) in such manner as to render the said funds available for the purposes for which they are in- 102 THE RAILROAD PROBLEM— A SUGGESTION tended, and the respective accretions to the said funds shall be added to each of the said funds, respectively. The said "Ten Per Cent Reserve Fund" shall be used as a guarantee fund that the four per cent dividend may be regularly paid, and it may be drawn upon for the said purpose if necessary (as well as for other pur- poses in times of war or National stress or emergency). When payments are to be made into said "Government Fund" under, this Article, if any part or all of said payment shall create a balance in said fund in excess of one billion dollars, such excess shall be covered into the Treasury of the United States. Section 2. After the payment of four per cent cumulative and two per cent additional dividends in any year as herein provided, further dividends if justified may be declared in the same manner, and paid fifty per cent thereof to the Secretary of the Treasury for the United States Government and fifty per cent to the stock- holders of the National Railway Company. Dividends as provided in this Article shall be paid upon a vote of four-fifths of all of the Directors of said Corporation. ARTICLE XII TO ENCOURAGE THE BUILDING OF BRANCHES AND NEW EXTENSIONS Section 1. Nothing in this Act shall prevent the National Rail- way Company from initiating and building such branches and extensions as it may deem wise, in accordance with its charter and by-laws, and provided that if more than $25,000 cost is in- volved in any such extension or branch the approval of three- fourths of the full Board of Directors shall be required therefor. Section 2. For the purpose of encouraging the building of such branches and extensions, where there is a demand for the same locally, the following method of co-operation with any locality, municipality or state is hereby authorized. (By the use of the word "branch" or "branch line" hereinafter, it is intended to refer to any construction or extension of railroad as provided in this Article.) The President of the National Railway Company may negotiate with and shall have the power to enter into a contract with one or more individuals or with any private corporation or with one or more municipalities or states (which said contracting party or parties will be referred to hereinafter as the "Builder") for the purpose of constructing and operating at the said Builder's ex- pense any such Branch Line or extension of railway to be oper- ated in conjunction with and as a part of the railway system of the National Railway Company. In such an event the terms of the contract for said construction shall set forth a survey in com- plete detail, showing all improvements contemplated, and an esti- THE RAILROAD PROBLEM— A SUGGESTION 103 mate of the cost thereof, which said survey and estimate shall be approved by the Chief Engineer in charge of the Engineering Department of the National Railway Company, and certified as appropriate and satisfactory for construction as a part of the said National Railway System ; and the plans and prospectus of said extension or Branch railway, and any securities to be issued by the "Builder" and secured by a lien on said extension or Branch railway, shall be approved by the Interstate Commerce Commis- sion ; and provided that the said Builder shall enter into contract with the National Railway Company providing for the rates and charges to be made on said extension or Branch, and providing for all operating conditions which shall control the , operation of said Branch Line or extension of railroad for a term of years, to be therein stated, with such provisions governing all such matters during such term of years as may be agreed upon in said contract. Said charges shall include in general terms the basis of through tariff rates over said Branch Line of railroad to main railroad points, and also the charges which are to be paid for carrying express and the United States mails. The said contract shall also provide for the use on such line under the supervision of the Na- tional Railway Company and the employes of that company of cars, engines and other movable equipment of the said National Railway Company, together with a scale of rentals and charges to be paid therefor out of the first earnings of said Branch Line. Such contract shall further provide that in the construction of said Branch Line, an accurate account shall be kept thereof, ap- proved by the Chief Engineer of the National Railway Company and regularly reported to and approved by the Bureau of Ac- counting of the Interstate Commerce Commission, to the end that the cost of the said construction, when completed, may be at all times ascertained, and the same shall remain a part of the permanent records of the said Bureau. The said contract shall further pro- vide that out of the first profits of operation of said Branch, after payment for all charges required by the contract with the National Railway Company and all other costs and expenses of the said Builder in relation to said matter, all of which shall be approved, from time to time, by the Bureau of Accounting of the Interstate Commerce Commission, there shall be paid to the said Builder, as a dividend, a rate of interest upon his investment, which said rate of interest shall be fixed by the terms of the contract and shall be cumulative from the time the expenditures in the construction of said road were made. The said contract shall further provide that after the payment of said interest each year the remainder of the profits shall be placed in a reserve fund until said fund shall equal ten per cent of the cost of said Branch Line; and thereafter the said profits in the operation of said Branch shall be divided between the National Railway Company and the said Builder in 104 THE RAILROAD PROBLEM— A SUGGESTION the proportion which shall be agreed upon and provided in said contract. The said contract shall further contain a perpetual op- tion under which the National Railway Company may be permitted to purchase said railway from the Builder at the actual cost of said railway, plus per cent thereof, to be paid in cash or in the stock of the National Railway Company at par in such man- ner as may be provided for in the said contract. And the said contract shall become effective when executed by both parties to the said agreement and when the same shall have been approved by the Interstate ^"ommerce Commission and by the Director of Transportation as being in full compliance with the terms of this Article and in the interest of the National Railway Company and of the public generally. And such approval shall' certify to the financial and other responsibilities of said Builder, showing that the said Builder is able to carry out the contract ; and in the event that the Builder is a private corporation, the charter for such corporation shall be taken out in such jurisdiction as the Secretary of Transportation shall require, and the articles of incorporation therefor shall contain such provisions as will protect the United States and the National Railway Company at all events, and which will require the faithful performance of the said contract. And in the event of the purchase of any such Branch or ex- tension of railway by the National Railway Company, the same shall be operated as a part of the National Railway System in the same manner and under the same rules and regulations that would have been appropriate therefor had the said Branch been built in the first instance by the National Railway Company. For the purpose of encouraging the building of such railway Branches and extensions it shall be the duty of the Secretary of Transportation to make investigations and inquiries, collect infor- mation, and initiate negotiations in all regions and communities within the United States where in his opinion, or at the suggestion of communities interested, extensions or Branch Lines appear to be in the interest of the local and general welfare; and where such Branches continue upon such investigation to seem to be justi- fied and advisable, the said Secretary of Transportation shall give his co-operation and the assistance of his department to negotiate a contract that will seem to be equitable and fair to all parties con- cerned. It is further provided that for the purpose of promoting the building of all necessary Branches and extensions of railroads within the United States the President of the United States may, where the circumstances promise to justify the building of any extension or Branch railroad under the terms of this paragraph (whether the same shall have already been suggested by any pro- posed Builder or not) require the Bureau of Mines, the Geological Survey, the Reclamation Service, or any other bureau under the direction of the Secretary of Interior, the Secretary of Agricul- THE RAILROAD PROBLEM— A SUGGESTION 105 ture, the Secretary of War or the Secretary of the Navy, to supply information gathered by said bureau to be placed at the disposal of the said Secretary of Transportation to aid in his said investi- gations, and it shall be the duty of the Secretary of Transportation thereafter to endeavor to negotiate for the building of any exten- sion or Branch Line of railway as provided in this paragraph. A careful account shall be kept of the actual cost of such investiga- tions, including any survey which may be recommended and made by any department or bureau of the Government at public ex- pense, under the authority of the President of the United States. And in the event that any contract shall be thereafter entered into with any Builder covering any extension or Branch Line of rail- way resulting from such investigation, then the cost of investiga- tion by any department or bureau of the Government shall be reported and certified to the Interstate Commerce Commission, and provision shall be made under the said contract for the pay- ment thereof as a part of the expense of the construction of said railway. But no cost of said construction, except the said cost of investigation and survey, shall in any event be paid by the United States for any construction under the provisions of this paragraph. Under Article XII, it will be observed that although the National Railway Company is not interfered with in the building of any Branches which its stockholders deem wise and will lawfully authorize, yet the way is open for individuals, partnerships, private corporations, municipalities and states to build and authorize to be built railways and extensions in any manner which they are willing to finance, with due assurance that the investment in each case will be fairly rewarded from the operating profits of the enterprise, and that the builder in each case will continue to own such Branch as in the early days of railway building, but subject to an option to the National Railway Company providing a fair reward to the Builder, and subject to a mutually beneficial contract for the opera- tion of said Branch by the National Railway Company. Under this plan it would be practicable and require no further legislation from Congress for States to authorize the building and financing of State railways by the taxing or assessment of benefits in the same manner that municipalities frequently extend sewers and other municipal improvements. Indeed, more than one State could join for this purpose in the construction of an interstate railway. 106 THE RAILROAD PROBLEM— A SUGGESTION ARTICLE XIII DUTIES OF INTERSTATE COMMERCE COMMISSION AND SECRETARY OF TRANSPORTATION TO PROMOTE IMPROVEMENTS Section 1. It shall be the duty of the Interstate Commerce Commission to cause to be classified all proposed expenditures of the National Railway Company into the following two classes : 1. "Necessary Expense." 2. "Expenditures for Improvements Not Classified as Necessary." 1. "Necessary Expense." The expenditures classified as "Nec- essary" shall include all expenditures not prohibited which the National Railway Company shall authorize and deem wise to make, together with all other expenditures which are necessary at all times for operating the said railway system as a public carrier according to law ; and also all expenses required to be made to insure the stability and reasonable growth of the railway system. And said expenses shall at all times be incurred by the National Railway Company and paid from its treasury before the funds in the treasury can be used for any other purpose. 2. "Expenditures for Improvements Not Classified as Neces- sary." All other proposed expenses not included in Class 1 shall be included in Class 2. This class shall include many expenses for desirable improvements as to the wisdom of which there may be doubt; and the Interstate Commerce Commission may prohibit the payment of any item included therein upon proper showing that the funds and earnings of the Corporation do not justify the making of such expenditure or that the same is against the public interest and public welfare. Except that the Interstate Commerce Commission shall in no event in the absence of fraud, prohibit ex- penditures to be made for education, for instruction, or for tech- nical or scientific investigation ; to which the fullest freedom is accorded. Section 2. It shall be the further duty of the Interstate Com- merce Commission from time to time to cause to be compiled, classified and listed and kept in its files detailed estimates for im- provements not yet installed, but which may have been recom- mended by the Engineering Department of the National Railway Company, by a Public Service Commission of any of the several states, or by the Secretary of Transportation, about the merit of which there appears to be no question, but the payment for which does not, in the opinion of the Directors of the National Railway Company, seem justified, and the payment for which, in the opin- ion of the Interstate Commerce Commission, should not be en- forced against the will of the Board of Directors of the National Railway Company. Such improvements may be styled "Desirable Improvements," and it shall be the duty of the Secretary of Trans- THE RAILROAD PROBLEM— A SUGGESTION 107 portation to at all times zealously endeavor to finance and provide for the payment of the cost of said "Desirable Improvements" as shall, in his opinion, be most proper and practicable in the manner provided in Section 3 hereinafter. Section 3. It shall be the duty of the said Secretary of Trans- portation to attend meetings of the Board of Directors and stock- holders of the National Railway Company when practicable; and he shall also familiarize himself, so far as practicable, with the plans, desires and policies of the principal executives and heads of the departments of the National Railway Company, with all of whom he shall, from time to time, as the representative of the President of the United States, tender his advice. He shall also, in similar manner, place himself in close relation, so far as prac- ticable, with the authorities of the several states, having to do with the railroad matters in those states, and especially with the railroad, industrial and other similar commissions in those states ; and where it shall appear that reasonable encouragement and finan- cial aid will secure the improvements which shall have been so recommended and classified under this Article, it shall be his duty to endeavor to arrange for the payment of any such "Desirable Improvement" by joint agreement between the National Railway Company and any locality where the same is found practicable ; or between the National Railway Company and any private cor- poration, private industry or any other person or organization, as he may deem wise. And when the agreement to supply any such funds, accompanied by appropriate guarantees, shall have been received, the same, if approved by the Interstate Commerce Com- mission, shall be installed as an improvement of the National Rail- way Company, and thereafter all such improvements shall become a part of the system and property of said Company. In carrying out the spirit of this policy the Secretary of Transportation shall have the further right to agree to pay, with the approval of the said Interstate Commerce Commission, from the said "Govern- ment Fund," a portion of the cost in the making of any such "De- sirable Improvement," provided that in no event shall more than fiftv per cent of anv such cost be paid from said "Government Fund." [Note. — Under Article XV reference is made to the housing and educational systems for the employes of the railway. Such expense would be regarded as impossible under the existing finaii- cial conditions by the National Railway Company; but the esti- mated cost thereof would undoubtedly be classified among "Ex- penditures for Desirable Improvements" by the Interstate Com- merce Commission, under whom there would be co-ordinated and worked out, in the form of an estimate, all ideas, suggestions and proposals made on the subject. It would then be appropriate for the Secretary of Transportation to take up the matter of financing 108 THE RAILROAD PROBLEM— A SUGGESTION the same as authorized in this Article. In like manner the arts and most approved practices known to building and landscape architecture would be drawn upon with the aid and assistance of the Engineering Department of the National Railway Company to create a plan for properly utilizing and beautifying with fair- ness and justice to all localities, railway grounds near stations, and railway right-of-way throughout the country. This plan would utilize hundreds of thousands of acres for agriculture as provided in Article XIV, from which, by means of lease or otherwise, a large revenue would be received, which would create a fund, which itself would be material aid in financing the "Desirable Improve- ments" along said railroad right-of-way, as proposed herein.] ARTICLE XIV IMPROVEMENTS OF RIGHT-OF-WAY Section 1. It shall be the duty of the National Railway Com- pany to utilize in agriculture, gardening and other similar indus- tries, and otherwise improve its right-of-way; and to improve its- station grounds and stations, according to the approved practice of building and landscape architecture, and consistent with its purposes and its financial ability. For the purpose of carrying out the intention of this Article the National Railway Company shall have the power to lease or sublet in such manner as it may deem practicable and wise, its grounds for agriculture, gardening and other similar purposes, provided that any such leases shall require the adoption by all lessees of the most approved practices in such industries. The Railroad Company shall have the right to exer- cise all powers appropriate therefor, including the employment of experts and superintendents, and the establishment of proper laboratories, the fertilization of the soil for the purpose of causing the said ground to continue to yield the best results, and at the same time improve the appearance and increase the attractiveness of such grounds. For the purpose of creating a fund for carrying on such work the National Railway Company shall keep the net proceeds derived from all such leases in a fund, to be known as the "Right-of-Way Improvement Fund." From this fund, as well as from any other funds in its treasury, the Railway Company shall have the right to make expenditures and appropriations for the beautifying of said right-of-way and its grounds and stations, in accordance with appropriate rules of building and landscape architecture, applicable to railroads. ARTICLE XV EMPLOYES Section 1. Wages. The wages of employes of the National Railway Company shall be based upon merit and service ; and the THE RAILROAD PROBLEM— A SUGGESTION 109 value of the service to the railroad of each employe shall be known as the "Earning" of that employe. The earnings or value of the services of employes shall be determined, so far as practicable,, from the standards found by the Bureau of Accounting as de- scribed in Article VI hereof. So far as practicable, no employe shall be employed by the National Railway Company who is un- able to earn a wage equal to the fair cost of living for himself and those dependent upon him. The wages to be paid by the rail- road shall not be controlled by the laws of supply and demand for labor, except that the said Railway Company shall endeavor to pay wages which under all the circumstances average as high as the wages paid generally by other and similar industries requiring similar • service. It shall be the policy of the Corporation to pay wages that will not be less than shall be necessary to pay reason- able living expenses as the same may be estimated or worked out by a Bureau of Employment of the National Railway Company, approved by the Interstate Commerce Commission. If the pay- ment of such wages shall constitute more than any such employe can reasonably be said to be earning for the Company the exec- utives of the said Railway Company may continue, nevertheless, to make such payment, if in the opinion of the Chief Executive of the National Railway Company it is wise, under all the circum- stances, to do so; but in such an event any such employe shall be classified as a "Preparatory Employe," and it shall be the duty of the Railway Company to provide general systematic instruction and educational facilities for employes in such class, to the end of rendering them capable of performing the proper service com- mensurate with their pay. And all employes in the service of said Company shall at all times be considered as in the line of promo- tion, to receive as the value of their service increases an in- creased wage; and it shall be the duty at all times of the National Railway Company to reward with impartiality such increased serv- ice whenever the circumstances will permit. As a part of the re- quirement guaranteeing to each employe the payment of a living wage, as hereinbefore defined, the right to a comfortable home and educational facilities for dependent children and others shall be unquestioned ; and for the purpose of aiding and insuring these things, the Railway Company may standardize and provide in such manner as it may deem best, a system of homes for its employes, reasonably tributary and convenient to the public schools, or to schools of instruction which may be provided by the Railway Com- pany ; and such provision shall be taken into account and credited (together with any insurance or profit sharing benefits given, if any) as a part of the wage which is required at all times to be paid to employes. The National Railway Company shall use its utmost endeavor to place each employe, so far as the circumstances of its business will permit, in those positions in which such em- no THE RAILROAD PROBLEM— A SUGGESTION ploye may be best fitted. The National Railway Company in deal- ing with such matters shall co-operate, so far as may be, with the National Employment Bureau, with the National Labor Board provided by law, and with other Governmental authorities dealing with such matters, including those of the several states, to the end of avoiding the evils of unemployment, labor turnover and other similar matters throughout the country. For the purpose of carrying out this policy, when the services of numbers of laborers become no longer necessary in a given locality, and their discharge might result in serious unemployment, those laborers would be transferred to other localities where they could be profitably employed. On the other hand, there would be cases where unemployment would not be threatened, and where suitable employes could be engaged in the new locality. In such cases the transportation of employes to new localities would be particularly avoided in order to promote to the maximum degree, the establishment of permanent homes. Such a "clearing house" for railroad employes could be perfected best only where the rail- roads are operated under a single management as in this Plan. Section 2. To Encourage Education and Thrift. The Na- tional Railway Company shall have authority in its discretion to provide instruction for persons devoting only a portion of their time to its service as a means of preparation for efficient service to be rendered under its rules and regulations. Any employe em- ployed in such manner may be employed under such arrangements as to compensation or otherwise as may be agreed to between any such employe and the Railway Company ; and this may include a minor person if not contrary to the law of any state or of the United States, and if duly approved by the guardian thereof as for the benefit of said minor. Any such employe thus receiving instruction shall be classed (for convenient reference) among "Preparatory Employes." The rules and regulations for employment may and should properly extend to all matters of health, and may, in the discre- tion of the Company, require that the living conditions in the homes shall be thrifty, healthful and sanitary and in harmony with any policy for education adopted by the Company. Section 3. The said Railway Company shall have full power to make rules and regulations covering employment and payment for services not inconsistent with the general rules laid down in this Article, and not contrary to law. Section 4. Insurance. In order to avoid pauperism and the creation of dependents upon the Company and upon the public, THE RAILROAD PROBLEM— A SUGGESTION 111 the National Railway Company shall encourage and institute, if it deems wise, such systems of accident, life, health and old age in- surance for all employes as may be deemed best in accordance with good practice, and it shall be the duty of the Interstate Com- merce Commission to standardize, so far as practicable, such mat- ters as are provided for in Article VI. The National Railway Company shall have unrestricted freedom in investigating, formu- lating and adopting those plans for insurance, profit sharing, ar- bitration and education which will best promote universal thrift among its employes. Section 5. Stock for Employes — Policy. It shall be the duty of the National Railway Company to set aside portions of its capital stock for sale at par to its employes, in some systematic and appropriate manner, to be approved by the Secretary of Trans- portation or the Interstate Commerce Commission, to the end of permitting and causing as wide a distribution of the stock of said Company among its employes as possible, and in all such cases the stock shall be registered and transferred in such a manner as to insure that the interests of employes unaccustomed to attending to business of this kind may be safeguarded by the Corporation, for whom the Corporation will act in such matters as a trustee. It shall be the policy of the National Railway Company and of the Secretary of Transportation in performing his duties in con- nection with said matter to promote as wide a distribution of the stock of the said Corporation (and also of the bonds in the event that any bonds are sold) among all citizens of the Nation and especially among employes of the railroad to the maximum degree, following the policies during the war for the flotation of the Lib- erty Loans. To this end the Secretary of Transportation shall give his assistance as directed in other Articles of this Act, and shall from time to time report to the Board of Directors of the National Railway Company his views and advice in relation to said matter; and if at any time it shall appear that a demand exists or may be created for further stock among employes who are not already stockholders, every reasonable effort shall be made to meet the demand of such employes to any extent which may seem advisable and practicable, from the stock of the Company in the treasury thereof. Or, if there be no stock available for that purpose, then the Secretary of Transportation is authorized to pro- vide stock to meet such demand either by purchase pro rata from larger stockholders at a price not to exceed par; or, if necessary, such stock shall be provided by the Corporation itself by requiring proportions of stock from blocks of more than twenty shares al- ready held by stockholders (not to exceed per cent thereof) to be surrendered at par pro rata, and said stock shall be sold to employes to an extent not exceeding ten shares each. All stockholders of the National Railway Company shall receive 112 THE RAILROAD PROBLEM— A SUGGESTION their stock subject to the right of the Company to make this re- quirement. Section 6. Appeals to the Interstate Commerce Commission. If it shall appear to any interested party that the National Railway Company is not striving in good faith to carry out the terms of this Article in relation to wages, appeals may be made to the Inter- state Commerce Commission by the Secretary of Transportation or by any other interested party, in all cases in which it is claimed that the standard of wages is lower than that paid for equal service in other industries, and is also less than the actual cost of living as defined under Article XV of this Plan; but at the hearing on any such appeal the Interstate Commerce Commission shall not entertain jurisdiction of said matter except upon a showing of fraud, bad faith or negligence on the part of the National Railway Company or its employes in said matters. And in determining said question of fraud, bad faith or negligence it shall be the duty of the Interstate Commerce Commission to take into account any industrial and social surveys which the National Railway Com- pany may have provided for or carried on in connection with the said subjects, and if it shall appear that the National Railway Company shall have installed a thorough and comprehensive sys- tem of investigation and records tending to show the conditions of employes and cost of living of the employes of the railroad and other employes not in the employ of the railroad but similarly situated, for the purpose of carrying out the provisions of the preceding sections of this Article, and shall show reasonable dili- gence and good faith in carrying on said work and providing whatever remedy may in good faith seem proper and appropriate on the part of the said National Railway Company, and no bad faith, fraud or negligence is shown to exist, then the Interstate Commerce Commission shall dismiss said matter from its juris- diction. If fraud, bad faith or negligence be shown on the part of certain employes who may have charge of said subject for the National Railway Company, or if said fraud, bad faith or negligence appear to exist in certain localities and the Interstate Commerce Commis- sion finds the Board of Directors of the National Railway Com- pany are disposed and willing to remedy the said matters, the Interstate Commerce Commission shall have power to retain juris- diction pending a reasonable opportunity for the said National Railway Company itself to institute such improvements or remedy as it may deem wise in accordance with the advice of the Inter- state Commerce Commission. But if the Interstate Commerce Commission shall determine that the Board of Directors of the National Railway Company are as a Board guilty of fraud, bad faith or negligence and are not found to be as a Board duly dili- gent in the selection of its officers for carrying out the provisions THE RAILROAD PROBLEM— A SUGGESTION 113 of this Article, or otherwise, then the said Interstate Commerce Commission may entertain jurisdiction of said matters and make such findings and orders or give such advice as will in its opinion serve to carry out the intention of the foregoing Sections of this Article. Orders made by the Interstate Commerce Commission in relation to wages are under this Section appealable to the United States Circuit Court of Appeals, which shall pass upon the said questions of fraud, bad faith or negligence, and upon any other questions involved; and the Appellate Court may make such find- ings as it may deem proper, or may order, in any such case, the return thereof either to the Interstate Commerce Commission or to the Board of Directors of the National Railway Company with such instructions as it may deem wise. Note. — It will be observed that beyond the requirement to offer from time to time small holdings of stock to the railroad employes, and beyond the formulating of certain governing principles, the Board of Directors of the National Railway Company is given control of the policies in matters of employment. It is only re- quired that the Board of Directors shall, at all times, endeavor to work out on a scientific basis, all problems in relation to the matter. This is in recognition of the fact that correct principles controlling this subject will be required in all industries as part of the readjustment after the war; and it is a theory of the Plan that much better results can be obtained by giving the Board of Directors authority in relation to the matter, and then hold them to accountabihty for good results. It is not the province of this outline, even were it possible, to enumerate the various phases of the subject, but for purposes of illustration a single reference will be made to one feature. It will be observed that the powers of the Board of Directors of the National Railway Company may extend to the matter of housing for employes. It is not expected by this that the Board of Directors of the National Railway Com- pany will provide, after the fashion of some precedents in the past, mere living and eating space in the nature of "shacks" along its rights-of-way, which it may or may not rent to employes. On the contrary, it is expected that the Board would recognize that employes are more valuable, and will advance in efficiency and service more rapidly, if permitted to exercise their own initiative so far as practicable in establishing and owning homes. At the same time there are certain principles now adopted by the most modern and approved residential developments in the suburbs of 114 THE RAILROAD PROBLEM— A SUGGESTION our cities, which promote health and economy, which can also be adopted by a corporation like the National Railway Company. Forest Hills Gardens, near New York; Roland Park and Guilford Place, near Baltimore; the Country Club District, near Kansas City, and six or eight others are examples of such developments promoted by private corporations for the purpose of providing homes ranging in value from the humblest residence upward. These residential developments make use of principles which may in many respects be adopted by the National Railway Company for its employes. For example, the regulations require that no structure of any kind be constructed except with the approval of a commission appointed for that purpose by the original owners of the developments. Such commissions see that the rules of health, privacy, beauty, good taste and common sense are not violated in the construction. Ibis sort of regulation is found to be in the interest of economy, and promotes the ownership of homes. It is well known that some of the larger corporations have already made substantial progress in the management and handling of housing for employes, but detailed investigations of the subject show that the railroads (on account of their diverse ownerships and managements) have made less progress in this as well as in the instruction and preparation of employes for service with the Company. Certainly as good results should be expected from the Board of Directors of the National Railway Company in the matter of housing of employes as have been attained by the private corporations owning, initiating and managing, as private enter- prises, the various developments named in this paragraph. With- out such valuable precedents the National Railway Company might properly fear that the imposing of restrictions on residences might be regarded as an unjust interference with the private affairs of employes; but with such excellent precedents for the imposing of restrictions on high-priced as well as low-priced dwellings there can no longer be the slightest danger in their adoption. ARTICLE XVI SALE OF STOCK OR BONDS Section 1. Upon the organization of the National Railway Company there shall be set aside from its capital stock an appro- priate amount of said stock, for sale at par, for the purpose of THE RAILROAD PROBLEM— A SUGGESTION 115 creating a temporary fund to provide for the installation of bet- terments, equipment and other necessary requirements for carry- ing out the immediate necessities of the Corporation. Said stock shall amount to not less than $ par value and shall be sold only at par. It will be the duty of the Director General of Railroads under the advice of the Secretary of the Treasury im- mediately upon the passage of this Act to provide for the sale of this stock, so far as lies within his power, and in making provision for sales thereof, provision shall be made for sales to small holders and particularly to shippers and patrons of railways, and it shall continue to remain the policy of the said Railway Company, after the organization thereof, to extend at all times the sales of its own stock to its employes, as provided in Article XV hereof, and also to shippers, merchants and others — all representing by their num- bers as wide a scope of territory as possible ; and sales to persons for holdings up to twenty shares each are favored in such dis- tribution. Section 2. The said Director General of Railways shall have power, in carrying out this Article, to arrange for sales of said stock to the employes of railroads as they existed before the or- ganization of the National Railway Company, and it shall be his duty in inviting subscriptions to communicate to such employes, as far as practicable, in brief form, the general plan provided herein for the National Railway Company; and in making sales of stock to employes of railroads the Director General of Railroads shall have authority to make sales upon the instalment plan, under which payments, after a first ten per cent payment, may be de- ducted from the wages and salaries of such employes during their period of actual service with any of such Railway Companies; and such agreements shall become binding upon the National Rail- way Company as a part of the conditions of its charter. Provided, however, that nothing in this Article shall call for the continuing in service of any employe, and if such service be terminated, then whatever stock may have been paid for by any such employe at such time shall be issued to him in fulfillment of said contract. Section 3. Upon sales of stock, as herein provided for, it shall be among the first duties of the National Railway Company, after its organization, to make such extensions and improvements as may seem necessary to improve its service and increase its profits at the earliest practicable date, payments therefor to be made if necessary from the proceeds of the sales of stock, as provided in this Article. Section 4. Bonds. The National Railway Company may is- sue and sell bonds, with the approval of four-fifths of its entire Board of Directors, and with the approval of the majority of the stockholders of said Corporation expressed at an election called 116 THE RAILROAD PROBLEM— A SUGGESTION for said purpose in such manner as the Secretary of Transporta- tion and the Chief Executive of the said National Railway Com- pany may agree upon; provided that the terms, rate of interest and amount thereof, as well as the selling price of said bonds, are all approved by the Secretary of the Treasury of the United States ; and provided that the proceeds from the sale of such bonds may be used only for extensions, betterments, new equipment and (for a period limited to five years from the date of the passage of the Act) to the creation of a working fund, in the event that the same is approved by the President of the United States. Such bonds shall contain provision malting them convertible into stock of the company after five years from date, on terms which the Secretary of the Treasury shall approve. ARTICLE XVII CO-ORDl NATION Section 1. It shall be the policy of the Interstate Commerce Commission to co-operate wherever practicable and where no un- fair and unjust pecuniary loss will result therefrom, with the or- ders and suggestions of state authorities, and especially with the rulings of the State Public Service Commissions, for the purpose of encouraging such state authorities to offer their aid, advice and help at all times for the betterment and improvement of the Na- tional Railway System. It shall be the policy of the Interstate Commerce Commission to require, so far as practicable, the stand- ardization and adoption of rules and practices for the public health, for the adoption of Hfe-saving devices and other similar improve- ments. When requirements are offered in such matters by any state authorities, if the Interstate Commerce Commission deems such improvements worthy of trial, the same shall be adopted so far as consistent with the policy of standardization of those parts of the said Railway System which will be affected outside of the state requiring the improvement. For the purpose of co-ordinat- ing such requirements made by state or local authorities it shall be the duty of the Secretary of Transportation to place himself in communication with such local authorities and offer and receive advice in relation to all such matters, and where standardizations and improvements are about to be ordered by the Interstate Com- merce Commission which may tend to interfere or conflict with those which are about to be proposed by the local authorities, said matters shall be taken up with the local authorities and with the National Railway Company and 'with the Interstate Commerce Commission by the Secretary of Transportation, to the end of causing the installation of the best and most approved improve- ment and standardization without conflict. In the event of any THE RAILROAD PROBLEM— A SUGGESTION 117 threatened conflict in any such matters, the rulings of the Inter- state Commerce Commission shall be final with such rights of appeal therefrom as may be provided by law. Section 2. Duties of the Secretary of Transportation in Co- ordination. It shall be the duty of the Secretary of Transporta- tion, as the representative of the shippers and of the general public, to endeavor to bring about wherever practicable co-operation and co-ordination among state. National and railroad authorities on the matters set forth in Section 1 of this Article, as well as in all matters relating to the conduct of the National Railway Company ; and it shall be his duty to point out to the said authorities threat- ened inconsistencies and conflicts among the said authorities if possible before they arise, to the end of advising the avoidance, if possible, of conflict. His duties in this matter shall be educa- tional, advisory and conciliatory; and if after due effort on his part to prevent, there is then conflict of authority, the rulings of the judges, officers and agents appointed under the authority of this and other National laws shall govern. It may be pointed out that one of the matters in which good may be done by the Secretary of Transportation is in the division into regions of the United States by the Interstate Commerce Com- mission, and by the officers and Board of Directors of the National Railway Company. It will be observed that this Act does not propose arbitrarily to require in detail such divisions on the part of either the National Railway Company or the Interstate Commerce Commission ; and yet it is equally apparent that both will in the ex- ercise and prosecution of their respective duties have to make such regional divisions of the country. It will, therefore, be the duty under this section for the Secretary of Transportation to become ad- vised with respect to what each of the separate authorities may be about to inaugurate in relation to this matter, fo the end of bringing them together in co-ordination, if possible, and procuring the adop- tion by them of the same principles and methods of division if such should appear to all concerned to be wise. It is not intended that the Secretary of Transportation shall exercise any mandatory powers, but that he would have great influence as the personal rep- resentative of the chief executive of the nation there can be no doubt; and he would suggest from time to time recommendations in relation to the laws governing the matter to the President of the United States. The Secretary of Transportation should be able to accomplish much in the way of co-ordination as between the Interstate Commerce Commission and the National Railway Com- 118 THE RAILROAD PROBLEM— A SUGGESTION pany in the matter of rates, tariffs and classifications of expense. He should be able to work out with the officers and Board of Di- rectors of the National Railway Company such matters as the sale of its stocks or bonds to the employes of the company in which the said Secretary of Transportation has definite authority and duties to perform in connection with Article XV and Article XVI. The Secretary of Transportation should be at all times advised in regard to National employment bureaus, and labor boards, and at the same time, in being fully informed from the officers of the National Rail- way Company in regard to the needs and desires of that company, he should be able to assist in co-ordinating the said National bureaus (whose advice or findings may not be mandatory) with the desires of the National Railway Company, all in the interest of working out the public good. Section 3. (Here will appear a section covering the matter of the co-ordination of the railway system with our great merchant marine and inland waterways. Mr. McAdoo, ex-Director-General, in a public statement on January 27, 1919, called attention to this subject and showed that a plan of co-ordination is now being worked out. It would be part of the function of the Secretary of Trans- portation to assist in co-ordinating these matters, and this is one matter in which it may be found advisable to extend the powers of the Secretary of Transportation — making them possibly more than merely directory. This will depend upon the duties which are im- posed upon him as Director of Transportation in relation to shipping matters. The act will at all events provide for co-ordination be- tween the water routes and rail routes, and the co-ordination would come through or be aided by the Secretary of Transportation sub- ject to the right of the Interstate Commerce Commission to enforce equitable rules and regulations in the manner provided herein under Article IX.) Not the least of the duties of the Secretary of Transportation under this article would lie in the matter of solution of terminal problems; in which his function would be to initiate negotiations with boards of trade, municipal governments, and other public bodies or associations in terminal cities, for the unification, improvement and construction of terminals in a manner acceptable to the Railway Company as well as to such terminal city or community, whereby the expense therefor may be shared by the Railway Company, by the community at the terminal point, and possibly partly paid from the "government futid" as provided in Article XIII. Where any funds are contributed from the "government fund," however, the THE RAILROAD PROBLEM— A SUGGESTION 119 contribution from the community should be so liberal that the gov- ernment and the railroad would be glad to duplicate a similar ar- rangement with any competing terminal. The incentive for aid from communities at terminal points is more fully set forth under Article IX relating to "Rate Making," and the discussions relating thereto. ARTICLE XVIII OTHER POLICIES IMPOSED UPON THE NATIONAL RAILWAY COMPANY Section 1. Organisation for Operation — Competition. It shall be the duty of the National Railway Company to organize the rail- ways of the nation for purposes of management and operation, into such groups, regions, systems or branches as in its opinion will pro- mote the public good and the efficiency of such operations. That such efficiency can be promoted by offering methods for competition in efficiency where circumstances will permit is a recog- nized principle; and if, in the opinion of the officers and Board of Directors of the National Railway Company, a beneficial competi- tion can be promoted by organizing, for purposes of operation, under a distinct and separate local management, a given region or a given railway system, the National Railway Company may provide therefor as a legitimate and proper means to such end. It is recognized that a large part, if not nearly all railroad busi- ness is a monopoly. For this reason government control or regula- tion in some form is now universally advocated. Yet there are those who contend that competition is the best incentive to enterprise and good service, and that the same should be preserved by a return of the railroads to their former managements, but under the genera! supervision of a Federal board of control. This Section 1 shows that this principle may be adopted by the Board of Directors of the National Railway Company which takes the place of the pro- posed "Federal Board." If, in the case of two railway systems operating between two terminal points in the same general region, the Board of Directors of the National Railway Company believe efficiency may be promoted by organizing the said systems separ- ately, that may be done. As a means of rewarding the desired zeal and enterprise in the practice of efficiency and economy, the officers of the National Railway Company may offer inducements in the way of increased wages on the particular system where such zeal seems to have caused an increase in profits thereon ; or the officers of the National Railway Company, in order to stimulate the co- 120 THE RAILROAD PROBLEM— A SUGGESTION operation and zeal of the public along a given line may reward the resulting increase in profits by increased facilities and improved equipment. By reference to the tentative plan for rate mailing set forth under Article IX, it will be seen that an acute rivalry between com- munities and cities competing for business will be stimulated under the Plan of charging exact cost for station and terminal service, which will mean that communities will aid in building and in some cases possibly themselves build station and terminal facilities. In connection with this section, attention is also called to Mr. Kenna's statement quoted elsewhere, to the effect that under the operation of the railroads in the past the railway ofificial has been led to increase net income, through the motive of earning "a better standing with his principal." The greatest discouragement to this sort of incentive is unequal and unfair opportunity among local ofiQcials ; and under the foregoing section these opportunities may be so equalized as to greatly increase this sort of morale.) (See the discussions on this subject under "Rate Making.") It is the intention of this section to permit the National Railway Company to invite in the most systematic and scientific manner any enterprise, economy and efficiency which may come as the result of fair competition Section 2. Public Service. Public service is the primary object of the railroad transportation system, and it shall be the duty of the National Railway Company at all times to instal and provide that service for the public which an enterprising, wise and prudent railroad company would provide when operating under legitimate and fair competition with another railroad — it being the duty of the National Railway Company to provide such service, whether there be any line competing therefor or not. The recognized privi- lege of shippers to route shipments over a given line shall be ob- served, if the same can be done consistently and with due regard to the load factor, to economy, and to profit on operation, as re- quired in Article IX of this act ; and in cases where it is impossible to accommodate shippers in the matter of routing, a record shall be made of such applications, so far as practicable, and the same may become a factor to be considered in the installation of better- ments and other facilities for the giving of service. The National Railway Company shall endeavor to have its agents meet and confer with shippers and prospective shippers, in order to inform and aid them in the customary way of the past in the making of shipments and also in the tracing of the same and supplying information as to receipts and deliveries of shipments. The duty and right of the THE RAILROAD PROBLEM— A SUGGESTION 121 National Railway Company to perform these matters of accommoda- tion and service wherever practicable and reasonable is unquestioned, provided that all patrons are equitably and fairly (and so far as practicable, equally) treated in such matters. And the right of the National Railway Company to perform an extra service for which an extra charge to cover the cost thereof is made, is permissible, provided that there be no favoritism or unfair discrimination used in such performance. Section 3. Schedules to be Co-ordinated. It shall be the duty of the National Railway Company at all times to endeavor to co- ordinate its rates and schedules for freight, express and passenger traffic, with the schedules of public carriers operating on waterways (both inland and oceanic or in the air), and also with connecting railways in other nations. And if the National Railway Company shall, in the opinion of its officers be unable to bring about the proper co-ordination in such matters, it may call the attention of the Sec- retary of Transportation to any such matter and the subject may be brought up before the Interstate Commerce Commission, and said matters co-ordinated in accordance with Article XVII hereof, and in accordance with the laws regulating transportation on waterways. The encouragement of passenger travel in the interest of educa- tion, recreation and health is to be prompted, and although the National Railway Company is not required to incur an unreasonable expense in providing sleeper, eating and hotel accommodations in such matters on railroads where the profit of the operation of the road does not reasonably justify the same, nevertheless, the National Railway Company is, at all times, to be encouraged to make such reasonable installations, and it shall be its duty in doing so to favor as between two or more lines, the line or lines on which the profit on its entire business seems best to justify the same. The National Railway Company shall in making its passenger and mail train schedules, routing passenger and sleeper coaches, and in providing for changes of cars, always aim to accommodate and serve the busi- ness requirements, convenience, health and comfort of the greatest number of people, consistent with the other duties imposed on the National Railway Company herein. Section 4. (The same class of questions which are appealable to the Interstate Commerce Commission under Article IX of this act are likewise appealable hereunder.) ARTICLE XIX ORGANIZATION OF SUBORDINATE RAILWAY SYSTEMS TO INCREASE LOCAL INITIATIVE AND PRESERVE COMPETITION Section 1. Further Duties of Board of Directors. — It shall be the duty of the Board of Directors of the National Railway Com- pany in organizing the railroads owned by the National Railway 122 THE RAILROAD PROBLEM— A SUGGESTION Company into groups, regions, systems or branches for purposes of operation as provided in Section 1, Article XVIII of this act, to organize the railways into not less than nineteen in number of such groups, regions, systems or branches, and thereupon cause to be prepared a map showing the same, and to cause, within a period of two years after this act shall take effect, said map to be certified and filed with the Interstate Commerce Commission, and a duplicate thereof with the Secretary of Transportation. Each single group, region, system or branch which shall be intended to be operated under a separate local management, as provided in said section, shall be referred to for purposes to be hereinafter set forth, as a "Sub- ordinate Regional System." Each such subordinate regional system shall remain a part of the National railway system, and shall be subject to the control of the National Railway Company, and any subordinate regional system shall be subject to change from time to time by the Board of Directors of the National Railway Company, by filing with the Interstate Commerce Commission and with the Secretary of Transportation a new certified map showing such change in any such subordinate system. In apportioning the territory of the United States into the several subordinate systems thus to be estabHshed, and in providing sub- ordinate systems for serving the several regions and localities of the United States, it shall be the duty of the Board of Directors of the National Railway Company to provide for the very best service for each locality in the United States and for the United States as a whole; and to the end that a healthy rivalry and competition in the building up of the several regions and localities of the United States as well as local initiative may be stimulated, the said Board of Directors may provide that any given region or locality may be served at the same time by different subordinate railway systems such as it may deem wise for said purposes ; and the said certified map shall, for purposes of convenience, apportion the region of territory which is reasonably tributary to each of the said sub- ordinate systems to such system, and such regions shall be con- secutively numbered and referred to for purposes of convenience as the "Regional Areas" ; and regional areas shall be permitted to over- lap at any point which shall be found to appropriately and reason- ably lie tributary to more than one subordinate system. And it shall be the duty of the chief executive of the National Railway Company under the instructions of the Board of Directors of the said com- pany, to provide a separate local management including a manager, for each of the said subordinate systems. Such manager shall devote his entire time to the general management of said regional railway system, and his duties shall consist in carrying out the purposes of this act and the instructions of the chief executive and Board of Directors of the National Railway Company. It shall be the special duty of each subordinate manager to perfect in the operation of the subordinate railway system under his management, the highest load THE RAILROAD PROBLEM— A SUGGESTION 123 factor, and the best and most economical railroad service within his power; and to earn for the said subordinate system the best profit consistent with economy and high-class service for the public; and to operate the said system in such a manner as to promote industry and up-build without unfair discrimination, cities, towns and com- munities in the region in which the subordinate system of which he is the manager is located. Section 2. Further Duties of the Interstate Commerce Com- mission and the Secretary of Transportation. Within days after said certified map showing all subordinate systems and regional areas shall have been filed with the Interstate Commerce Commission, it shall be the duty of the Interstate Commerce Com- mission to apportion, under the authority granted said commission in Article VI of this Act, an evaluation for each of the said sub- ordinate systems as provided in Section 6 of said Article, in such a manner that the total of the several evaluations thus apportioned for the several subordinate systems shown by the certified map shall equal the par value of the outstanding stock of the National Railway Company; and it shall also be the duty of the Interstate Commerce Commission to further distribute or apportion the value allotted for each regional system to the various parts of such system in such manner as it may deem wise, to the end that there may be a sub- ordinate apportionment recorded for each city, town or distinctive community or locality which may be served by such subordinate system or included within the regional area of such system as here- inbefore provided. And the said appraisals or evaluations thus allotted or apportioned shall be certified to the manager of each subordinate regional system, to the Board of Directors and to the chief executive of the National Railway Company, and to the Sec- retary of Transportation; and thereupon within ; days after the delivery to the Secretary of Transportation of the said certified evaluations, the Secretary of Transportation shall supply a copy of said map showing said evaluations as apportioned by the Interstate Commerce Commission, to each of the stockholders of the National Railway Company together with the apportionment allotted to each regional or subordinate railway system, and each stockholder shall be notified by the Secretary of Transportation to file his correct residence or business address, together with the number of his shares of stock and the number of one of the regional systems in which said residence or business is located ; and each of said addresses shall be filed with the Secretary of Transportation, with the secretary of the National Railway Company, and in such other places as the Secre- tary of Transportation or the Board of Directors of the National Railway Company shall direct; and stockholders filing such ad- dresses shall be known as "Regional Stockholders" and their stock as "Regional Stock" — each stockholder being identified by the region for which he shall be enrolled ; it being further provided that each 124 THE RAILROAD PROBLEM— A SUGGESTION stockholder, if challenged, must be able to show that he is a resident of the region for which he is enrolled or that he conducts or owns a business which is served by the subordinate railway system in the region for which he is enrolled; and there shall thereafter be kept in the records of the National Railway Company, and in the records of the Secretary of Transportation a list of such stockholders with the amount of the stock holdings of each stock- holder of each of the subordinate regional systems provided for in this section. It is provided, however, that where the residence or business of any stockholder shall be tributary to more than one subordinate system, and therefore lie in more than one region of the several regional systems, said stockholder shall have the right to record any part or all of his stockholdings for any one regional system; and the remainder, if any, he may apportion to any one or among all of the remaining regional systems in which his residence or business may be located. Thereafter and beginning with the next election thereafter of directors of the National Railway Company, votes for directors of the National Railway Company shall be cast as follows : Each of the subordinate regional railways, as herein defined, shall be entitled to elect one director of the Board of Directors of the National Railway Company for each part of its regional stock which shall equal five per cent of the outstanding stock of the Na- tional Railway Company. Provided, that the aggregate amount, at par, of its regional stock thus voted shall not exceed the total valua- tion allotted to any region by the Interstate Commerce Commission ; and in the event that more stock shall be recorded from a given region than shall be permitted under the allotment for such region, preference shall be given in voting to stock allotted for those parts of said regions where the par value of the registered stock shall not exceed the evaluation allotted to such part; and if thereafter there still remain an excess of recorded regional stock for said region, then preference among such stock shall be given to stock which was first registered upon the books of the Secretary of Transportation. In the event that the number of Directors thus to be elected by the regional stockholders of subordinate railways shall not equal nine- teen directors, the Secretary of Transportation shall have power to direct that the allotment of any two regions or subordinate railways may be combined for the purpose of electing a director, and in such an event, one director shall be elected from such combined regions in the same manner that is herein provided for the election from any region for which the recorded stock shall exceed five per cent of the total outstanding capital stock. After it shall have been determined how many regional directors may be elected as provided herein, the remainder of the nineteen directors may be elected as provided herein, as directors at large, and in the election of such directors at large, only stock shall be permitted to be voted which shall not have been voted at the election of a regional director. THE RAILROAD PROBLEM— A SUGGESTION 125 The terms of office of directors shall be fixed by the By-laws of the National Railway Company in accordance with the provisions of this act, and the times of election, manner of holding elections, and provisions in relation to calls for elections for regional directors, shall be approved by the Secretary of Transportation, whose duty it shall be to see that the provisions of this section are carried out in relation to the election of regional directors. Section 3. Sales of Stock to Regional Stockholders Encouraged. In order to encourage and promote the registering of regional stock- holders in regions where the subordinate railway systems of the National Railway Company are located, it shall be the duty of the Board of Directors and the Secretary of Transportation to receive from time to time from residents of any such region applications for the purchase of stock of the National Railway Company — such applications not to exceed, for any one person, twenty shares of the par value of $100 each; and after receiving such applications, it shall be the duty of the Secretary of Transportation to arrange for the supplying of stock to such applicants in the same manner that is hereiflbefore provided for supplying employes with stock at par. (See Section 5, Article XV of this Act). Provided that the stock from which purchases shall be made for such sales shall be limited to voluntary offerings and to stock whose owner shall not have en- rolled a regional address as provided in Section 2 of this article. Section 4. Payment of Bonuses. In order to stimulate competi- tion, healthy rivalry and zeal among employes, and among cities, towns and communities as well as among subordinate regional rail- way systems, it shall be the duty of the Interstate Commerce Com- mission after finding the profit for any given year in the operation of any subordinate regional railway as provided in other parts of this Act, to certify to the Board of Directors of the National Railway Company the profits which said Interstate Commerce Commission shall find to have been earned in each such regional system, together with the excess, if any, of such profit over and above its proper apportionment for dividends and reserves which the National Rail- way Company may have declared or set aside ; and the Interstate Commerce Commission shall have the right, in making such cer- tificate, to recommend that a portion, not to exceed fifty per cent of such excess of profits, shall be used in whole or in part in the pay- ment of a special distribution or bonus among the stockholders of record whose stock shall be registered on the books of the National Railway Company and on the books of the Secretary of Transporta- tion as regional stock for such region ; or that such amount shall be paid in such manner as the Board of Directors of the National Rail- way Company shall approve, as a bonus to employes employed on such regional or subordinate railway. In anticipation of such pay- ments and to encourage good service, zeal and enterprise, the Board of Directors of the National Railway Company may from time to 126 THE RAILROAD PROBLEM— A SUGGESTION time with the approval of the Interstate Commerce Commission definitely promise such distribution of bonuses from profits as herein authorized, and in such an event, such promises shall be faith- fully kept; provided that, in carrying out the provisions of this section, unfair discrimination shall not be permitted ; and appeals may be made from decisions of the Interstate Commerce Commis- sion for violations of this provision as provided in other parts of this Act. Section 5. Regional Managers. After the election of any regional railway director as provided in this article, it shall be the duty of the president of the National Railway Company in selecting- a manager for the subordinate railway for such region, to name a manager for said subordinate railway who shall be approved by the said director from said region. If the said director shall fail to give his approval to any such appointment, the chief executive of the National Railway Company may make a new appointment for such approval or shall submit an appointment for the position to the Board of Directors of the National Railway Company for approval,, and in the event that two-thirds of the directors shall give their approval to the appointment of the said manager, then the approval of the regional director shall not be required ; provided, that a ma- jority of the stockholders who voted for and elected said regional director may at such election formally waive the right to have such manager thus approved as provided in this section. For the purpose of recording such waivers, it is provided that when any election shall be held at which any regional director shall be voted upon as- provided in Section 2 of this article, each stockholder voting at such an election shall be required, in casting his vote, to record either a waiver or refusal to waive the confirmation or approval required by this section, and in the event that a majority of the votes thus cast shall contain such waiver, then the regional manager for such region shall be appointed by the president of the National Railway Com- pany in the same manner that other subordinates in the said National Railway Company are appointed by him. Any regional manager appointed under this section shall hold office until his successor shall have been appointed in the manner provided herein. Section 6. Stock Isstied Subject to Terms of This Article. All stock of the National Railway Company shall be issued subject to the terms of this article ; and when an owner's address of regional stock shall have been recorded as provded in this article with the Secre- tary of Transportation, the certificate or certificates for said stock shall be duly stamped showing such registration. THE RAILROAD PROBLEM— A SUGGESTION 127 Under this article and Article XV, employes of the railroads and citizens of other vocations would share in the management of the railroads. This is not opposed to the American idea that only two parties — the owners and the public — are entitled to share in such management. For it will be observed, this sharing in the management is founded on the purchase and ownership of stock, and is not a gratuity. The difference between management by right of ownership, and management based on class privilege is of great importance. The former encourages thrift, and promotes community spirit, able management and good service. The latter engenders class hatred, and encourages the selection of Directors and Ofificers for purposes other than the best management of the rail- roads. The only persons that we are customarily taught will attempt to exercise management over property without a corresponding ownership interest, are of the robber type; and in recent times, of the Bolshevist type. It ought not to be necessary to emphasize this principle of the owners' right of management which is so fundamental to all our institutions; but some of the proposals for post war adjustment show that we must be diligent. There are a number of bills before Congress seriously proposing to create a Board of Directors by apportioning one or more Directors to each of several segregated social groups, such as "farmers," "engineers," "merchants," "labor," and the like ; as if each of these groups should hold itself aloof from all other elements of society to receive a protection different from that of the general good of all. Aside from the impossibility of legally differentiating any unincorporated group in a nation that has or should have no caste or class ; aside from the impossibility of providing any scientific or workable method for such representa- tion; the idea is wrong in principle. The criticism is not based on the-unfitness of the members of any class whatsoever. It is based on the character of the trust which the appointment hy class im- plies. Take the case of the farmer. Even if it were practicable to appoint Directors on such a Board who would be representative of the farm industry of the nation as distinct from all other classes and groups, what would be the implied attitude of those Directors on the Board ? From the very nature of their appointment they would be expected to secure from the railroads the lowest rates and the greatest advantages and privileges for the "farmer class." Other- wise they would not be regarded as true to their constituents. In 128 THE RAILROAD PROBLEM— A SUGGESTION the same way, Directors representing each of the other classes, as such, would be expected to strive for all of the advantages which it might be possible to secure — each for his particular class. The resulting Board would be a Board not adapted for the efficient and expert operation of the railroads, but would be a Board in which each member would be striving for the selfish gain of his class or group as opposed to the rest of society. Whereas in a Board repre- senting stockholders — although the Board, as a whole, is improved, strengthened and broadened in being drawn from various industries — each member would be expected to conserve the interests of the owners by securing the very best possible management and success for the railroads. It is proper that the farmer, and the laborer, and the employe, and the merchant, and all the rest be represented, but the representation should be not by virtue of membership in a privi- leged group, but as members of the whole community — exercising a well-earned right to help manage a property they own, and striving, only as such owners would strive, to secure a perfect management. As a corollary to the principle that good management must rest upon and faithfully represent ownership, (and — aside from the public — represent no other interest whatsoever), it may be stated that an undivided ownership is entirely useless unless it, in turn, is made the basis of an undivided management. Up to the date of this publication, however, no plan for reorganization of the railroads has been publicly advocated which fully recognizes this principle. Many plans provide for a National undivided ownership, but all fall short in the requirement for an "undivided management." This should warn us, when applying the provisions of this and other articles, to be diligent to preserve the undivided executive adminis- tration of the railroads in the single Board of Directors provided for that purpose, which alone represents both the owners and the public, and upon whom rests the full responsibility for a successful, adequate and satisfactory National transportation system. ARTICLES XX, XXI AND XXII (Article XX of the Act relates to the necessary appropriations to carry out the iVCt. Article XXI prescribes the form of an oath of office for each member of the Board of Directors and such employes as may be required by the By-laws Article XXII contains provisions against fraud, incompetence, negligence ero« mismanagement and misappropriation of property.) ' ^ ** -r I •:i I" 1 i^ I