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HE 1051 .K34 "aifwajr misrule, olin Cornell University Library 1924 030 119 915 Cornell University Library The original of tinis bool< is in tfie Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924030119915 Railway Misrule Railway Misrule EDWARD DUDLEY KENNA New York DUFFIELD & COMPANY 19 14 COPYRIGHT 1914 bf DUFFIELD 4 COMPANY CONTENTS Preface vii CHAPTEn I. — Railways Viewed from a National Standpoint 3 Chapteb II. — ^The Popular Movement in the United States for the Regulation of Rail- ways 17 Chapteb III. — Methods of Railway Regulation in the United States 31 Chapter IV. — ^Problems of Railway Officials: The Need for New Capital 45 Chapter V. — Problems: The Demands of Em- ployees for Higher Wages and the Demands of the Public for Lower Rates 61 Chapter VI. — ^Problems; Expectations of Share- holders and their Probable Disap- pointment 67 Chapteb VII. — The Fundamental Fault of the Present Policy of Railway Regulation — Its Wastes and Extravagances 77 Chapter VIII. — What Might be Accomplished with the Railways in Private Ownership Under a Different Policy 103 Chapter IX. — Government Ownership 135 Chapter X. — Conclusion 159 PREFACE THIS book has been written in the hope of interesting the younger men of the author's country in certain railway prob- lems which they must one day solve. The United States is the one nation of the world whose people have never seriously studied the transportation question from the national standpoint. Individual action and public inquiry alike have been almost wholly concerned with the consequences to shippers or to shareholders, of every suggested method of railway regulation. During forty years of public agitation every question presented has been regar- ded from the standpoint of' personal in- terest. On the one side have been the shippers and passengers, and on the other the share- holders and bondholders arrayed against them. With one, the sole objective has been "reasonable rates," meaning low rates; with the other "reasonable compensation," mean- ing high dividends. This antagonism of in- VII RAILWAY MISRULE terests has influenced individuals so gen- erally that little attention has been given to the larger economical and ethical ques- tions that aif ect the public welfare, questions which in other countries have received, and continue to receive, the intelligent considera- tion of students and public officials. The railway is far too important an agency in the development of civilization and the solution of social problems to be controlled in the interest of commerce alone ; and much too important to be regulated on the theory that all services must be charged for on the basis of exact cost. Today the prevalent idea in the United States is that for every transportation service performed a charge should be made that will at least equal its actual cost. That is a superficial view, which has been rejected by every other country, and never adopted by railway offi- cials in ours. Practical experience has demonstrated that it pays to do some busi- ness at a loss in order to develop other busi- , ness from which profits more than offset such loss ; and it is ethically right that those who can afford high public charges should be re- quired to pay them, in order that tho§e. ..vm RAILWAY MISRULE who cannot may be charged according to their abihty to pay. These principles have in practice been apphed to induce greater profits; it remains for them to be ap- phed generally because of other considera- tions too. Passengers are often carried at a loss to further freight traflBc ; some freight is carried at a loss to induce development of desirable business ; unprofitable branches are built to create traffic for delivery to main lines, all because they promise an increase of the ag- gregate profits . To do these things for higher motives is to pass from the plane of business to the sphere of government, and it may be added, to incur risks exceedingly hazardous. Schools and highways are used by those who contribute nothing towards their mainte- nance ; rivers and harbours are free to every sort of craft, while a letter is carried one mile or a thousand for the same rate of postage. The author would not be under- stood as advocating the "postage stamp" or "zone" system of rate-making. He merely contends that whatever services are required of a railway in the public interest must be rendered for a cost the user can ajfford to pay. Economically considered such a view .IX RAILWAY MISRULE is justified if the aggregate railway revenues equal operating costs and a reasonable re- turn on capital; and so far as the ethical side of the question goes, by a distribution of the advantages of such methods according to the social advance which they induce. Such a theory of rate-making applies merely to transportation, a theory that obtains in respect to all other governmental affairs, it is a distribution of public charges according to the ability of the individual to bear them, having regard for the interest of the people as a whole. It originates in the predominance of the nationahstic over the individualistic spirit. The chief diffi- culty in carrying out such a policy is that, until all the railways are under one direction and operated with regard to the best interests of aU, the policy must be greatly restricted in its operations ; and even when a general soli- darity is established the danger wUl remain that under private ownership the manage- ment's sole interest will be to increase profits^ while under Government ownership repre- sentatives of the people would ignore the economical questions that are involved. One thing in respect to which all authori- X RAILWAY MISRULE ties are agreed, is that competition between railways results in great national waste. In the hands of private corporations the rail- ways are now expending enormous sums in a competition that produces no benefit to anyone, though it is true that there is a check on expenditures and rate reductions which, if reckless and uncontrolled would result in even greater national loss. How to save competitive waste on the one hand and avoid the danger of extravagance on the other is therefore the real problem of the railway and the public. The author's experience at home and his observation abroad have led him to believe that a middle course between private owner- ship and Government ownership is prefer- able to either one as a whole. It should be quite feasible to devise a method whereby the advantages of the Government's superior credit could be secured as a basis for low rate- making, and at the same time retain those advantages that arise from the expectation of individual profits. Such a method has been referred to as "Compulsory Unification with a controlling Government interest." Its fair consideration deserves much more space XI RAILWAY MISRULE than can be devoted to it in this book, whose purpose is rather to call attention to the problems of the railway than to put forth an absolute solution of them. XII Railway Misrule CHAPTER I RAILWAYS VIEWED FROM A NATIONAL STANDPOINT TO discuss without prejudice or favour railway affairs in the United States is difficult. The subject is of vital interest to Capital, to Trade, to Labour, and, to write or to talk of it unbiased requires a judicial point of view. Capital sees in the railways a money investment as great as the added national debts of England, France, Germany, Russia and the United States. Trade cherishes the railways as its best cus- tomer, one buying each year the output of a thousand coal mines, — the steel, the iron, the copper of a hundred mills, the products of far-reaching forests. Labour knows the railways as the master of sixteen hundred thousand men — a vast army whose annual 4 RAILWAY MISRULE wage exceeds the military expenditures of all countries. And, finally, the public be- gins to recognize that the individual, either as passenger or shipper, provides every dol- lar the Railways spend. But it is in the national aspect that the railways should be regarded, primarily, for they constitute the nation's most important highways. Without such railways as already exist the country would not be what it is; without their proper maintenance the coun- try would cease to be what it is ; and without their extension and betterment the country can never be more than it now is. Therefore, the first object of railway regulation should be to provide all necessary railway facili- ties. The problem is a very practical one requiring only that the money needed shall first be raised and thereafter wisely expended. And, as the people must ulti- mately pay for such construction, either out of the public treasury, or in charges which will compensate capital, it is they, not railway shareholders, who are chiefly interested in seeing that no unnecessary highways are built, and that of those al- ready built, such as are best fitted for new RAILWAY MISRULE 5 traffic shall be selected for betterment. To see that these highways are built, maintained and extended as required, is a governmental duty of the first importance, more essential than the keeping free of ocean highways and the care of the country's rivers, harbours and ports. So to regulate the use of such rail- ways that rates thereon may be, and will be, moderate, though a secondary duty, is scarcely of less importance. The first relates to that which affects the whole nation's life, and the second to that which deeply concerns the welfare of its people. Together they constitute the true railway question; and, while no policy for its solution should ever be considered that will not protect private rights and provide redress for public and private grievances, the patriotic citizen will forget personal interests and party opinions and favor those policies that will promote the public welfare ; and he may aid his coun- try even more by overcoming his own pre- judices than by resisting the selfish influ- ences of others. Extensive as is the system of railways in the United States, it is yet only in the first stage of its development. It is now barely 6 RAILWAY MISRULE adequate for the present requirements of commerce, and must be continuously ex- panded and improved to meet the needs of a country whose traffic grows steadily and relatively much faster than its ever increas- ing population. Experts estimate that the new capital required by the country's nor- mal growth will be not less than thirty thousand millions during the next quar- ter of a century. The financial world is dumbfounded by estimates calling for money equal to sixty times the proposed cost of the I*anama Canal. The country's growth is dependent absolutely upon timely provision of adequate transportation facilities, and he must be an exceptionally optimistic or utterly stupid person who can view com- placently the present plight of the railway companies, and the worse plight of his coun- try with respect to them today. For, it is most apparent that this new capital required is not forthcoming.* * Some readers may say that it will be impossible to obtain such astonishing sums for American railway im- provements, under any conditions. If that were true the predicament of the country would be much worse than here indicated, for in such case the country would be con- fronted with inevitable disaster. RAILWAY MISRULE 7 This extraordinary call for new capital comes at a time when demands are being constantly pressed, by employees for in- creased wages, and by the public for reduced rates ; and when public and employees alike are demanding the removal of grade cross- ings, the installation of better systems for signalling and the adoption of every device that safeguards life and limb. Because of such conditions, shareholders find their in- vestments jeopardized, shippers observe that rates are gradually increasing, and every in- dustry is haunted by fear lest the growth of the country is about to be arrested. It is therefore not untimely to inquire whether the public policy in respect to the railways is well contrived for the solution of the diffi- cult problems which at this time confront railway officials and menace every industry. When an institution affects every citizen in some way, its regulation by the state is sooner or later inevitable, and as the railway system of the United States is such an in- stitution its regulation by the governments of that nation was in fact long ago taken in hand. In every country the railway ques- tion is one of far-reaching importance, and 8 RAILWAY MISRULE ha8 presented difficult political problems; but, in the United States, the location of vast natural resources and a large population far inland and away from water routes render the railways indispensable to the nation, while the difficulties incident to their regula- tion are greater than elsewhere because of two conditions, one of them imique in the world and the other peculiar to the institu- tions of our country. Under the form of government in use in the United States the regulation of railways is divided among one federal and forty-eight state governments, each completely sovereign in its sphere of action; and at the same time these forty-nine sovereignties have by the nature of their grants to private corporations deprived themselves of that absolute power to regulate the railways which all other countries have retained. In no other country has the Gov- ernment divested itself of the power to regu- late the railways as its people may desire. •Generally, the state owns the important rail- ways outright, as in Germany, Russia, Aus- tria-Hungary, Italy, Belgium, Switzerland, Japan, India, South Africa and Australia; and in the few important countries where RAILWAY MISRULE 9 private ownership of railways exists, always excepting the United States, there are no constitutional limitations of the legislative power to prescribe regulations or fix rates. Americans have become so accustomed to complications arising from the multiple form of Government, and its system of indepen- dent sovereignties, that its anomalies are too often taken as matters of course. Neverthe- less, the incongruous methods adopted by these various Governments for the regula- tion of railways present a scheme that is as lacking in efficiency as it is wanting in har- mony. Every railway of importance traver- ses two or more states; and there are few trains that do not cross state boundaries. Consequently, passengers travelling side by side, and parcels being carried in the same car, may be subject to widely varying rates, and, not infrequently, to contradictory regu- lations, if, as is almost constantly the case, one passenger is an "intra-state passenger" and the other an "inter-state passenger," and one parcel is "intra-state freight" and the other "inter-state freight." And the in- congruities that are caused by the unrelated orders issued by state and federal govern- 10 RAILWAY MISRULE merits for the control of the same railway — and the same trains passing over it — are trifling compared with the inapposite regu- lations to which the managers of such rail- ways and the operators of such trains are subject when such trains are in the act of passing from one state to another. A few instances may be cited to show how remarkable and even absurd is this system of control by so many independent sover- eignties over the same subject. By federal law, trains carrying live stock must be stopped at prescribed intervals to water the animals in the cars, but according to many state laws trains need not be stopped for such purpose at all. Humane provisions such as these are not viewed alike by all shippers, and consequently in order to com- ply with their wishes a car of live stock going from a point in Kansas to Kansas City, Kansas, may be subject to a wholly different rule from that which governs a consignment from the same point of origin, carried in the same train, a few feet farther, to Kansas City, Missouri. Recently, one state enacted a law which required every locomotive to be equipped with an electric headlight, because RAILWAY MISRULE 11 the legislators of that state were convinced collisions might thereby be avoided; and an adjoining state prohibited the use of such headlights because its legislators believed their bUnding light endangered the lives of employees on railway tracks and in railway yards. Each state provided severe penalties for the enforcement of its law. One state, for a long period, compelled every train en- tering its domain to stop just inside the state boundary for thirty minutes, with no other purpose than to impress upon passengers a geographical fact they might otherwise have overlooked. And the same state still com- pels all the officials but one of every company operating a railway in that state to reside within its borders. The adjoining states have not yet seen fit to enact similar laws. But the most extraordinary feature of the situation is, that even if the Federal Govern- ment and all the states could put aside their divergent views, and unite in the creation of a correlated system of regulation, the united powers of all would fall short of absolute authority and control, because the people by their original grants of power authorized the building and operating of railways, 12 RAILWAY MISRULE by private capital, and the ; courts have held inviolable under these grants the right of the railways to charge rates produc- ing an income which represents in the aggre- gate a reasonable return on the capital in- vested. Thus, until such income is realised, under a management with which the Govern- ment may not interfere, the Governments' hands are tied. If the management is effi- cient and the company prosperous, then rail- way commissions may reduce rates, but, if the company is unsuccessful, the conmiis- sions are powerless to act. And so the gov- ernments, state and federal, find themselves subject to the powers possessed by their own creations in respect to one of the most vital functions of government in modern times — the regulation of commerce. Turning to the corporations themselves we find no power of importance left them, except one which cannot be taken from them under the constitution — the right to charge and collect a sufficient amount in tolls to obtain a reasonable retvu-n on the capital they have invested. The cor- porations are required by the people to pro- RAILWAY MISRULE 13 vide facilities iind perform services whether they are promable or not, and they are denied the privilege of entering into agree- ments with each other whereby enormous sums might be saved that are now being wasted. Altogether, neither the state gov- ernments nor the national government, and not the owners of the railways themselves, have sufficient power to deal fully with any phase of railway management or regulation, and meanwhile the separate exercise by each of restricted powers is producing a state of disorder and confusion which prevents econ- omies, obstructs rate reductions, and threat- ens to deprive the people of the advantages they might easily enjoy if state or private interests had the full direction of affairs. There shovdd always be one supreme direc- tion in control of the operations of railways ; and the more that direction — ^whether it be state or private — ^is hampered and interfered with by unsympathetic or uncorrelated au- thority, the more impossible will it be to ob- tain efficiency in service and that care in management that are at the root of a prob- lern: which after all is chiefly economical. Adequate facilities and low rates are 14 RAILWAY, MISRULE what the people demand and are entitled to ; they represent the sum and substance of the the railway question.* But such facili- ties cannot be provided without new capital, and new capital can be obtained only in accordance with the credit of the railway corporations; while rates must be charged generally with regard to operating costs, and operating costs cannot be reduced without new economies. Therefore, every proposed law, every administrative order contemplated or other expression of public policy that injures the credit or trammels the management of railways, should be con- sidered with careful scrutiny, not simply be- cause it may do capital an injustice, but be- cause it is of vital concern to the whole na- tion. It is the people who will suffer most if their railway policies are unwise, as it is they who not only maintain the railways and defray all costs of transportation, but pay for every blunder in construction and for all waste in operations too. One can better ap- preciate this by considering that the gross • "Anything which adds to the necessary cost of transpor- tation aggravates the tax, and anything which diminishes it removes one more burden from human toil." — Charles Francis Adams, Jr. RAILWAY MISRULE 15 revenues of the railways, which for 1912 were $2,826,917,967, constitute the nation's yearly freight and passenger bill. In the statement of account the item of compensa- tion to the shareholders for the use of their capital that year was $346,805,582, an item relatively so small that, were the railways freed of all obligations to shareholders, eighty-eight cents out of every dollar would still have to be provided by the public. With all rights and claims of shareholders elim- inated, operating expenses, taxes and in- terest would yet call for a very large por- tion of such dollar; and were these charg<;:s to increase twenty per cent, a much larger annual bill for the same railway ser- vices would have to be paid by the public than now. When one reflects on these facts, and is reminded that labor receives the lion's share of operating expenditures, it should not be difficult to realise that, the question whether shareholders receive five or eight per cent, in dividends is a trifling affair viewed from the national standpoint and regard- ing only the public interest in railways, compared with the provision of adequate facilities and the cost of transportation, for 16 RAILWAY MISRULE the countiy must have the facilities and must pay all operating costs. The people may acquire or confiscate the railways, but they cannot escape the economical questions in- volved in their operation. And it is time their representatives should as searchingly examine those causes which consume the eighty-eight cents of the public's dollar as they have jealously guarded the public in- terest in all that has affected the other twelve cents. CHAPTER II THE POPULAK MOVEMENT IN THE ItNlTED STATES FOR THE REGULATION OF RAILWAYS IN December, 1872, the United States Senate appointed a Select Committee on Transportation Routes to the Sea-board. With this the national movement for public regulation of railroads may be said to have begun. There had been already some agita- tion of the subject, reflected in some of the states by legislation, but the resolution under which the Select Committee was appointed in response to President Grant's message to Congress, was the first step taken in the direction of Federal control. It is note- worthy that the subject reconmiended by the President to Congress for its consideration, and the only one which the Senate authorized its committee to investigate, was "the subject of transportation between the interior and the sea-board," He who does not grasp the 17 18 RAILWAY MISRULE significance of this will never understand the reason for the movement to regulate rail- roads, nor the causes which have retarded it. In its inception the movement was agra- rian, having its birth in regions where the people depended upon agricultural products and for which at that time the principal markets were at the Atlantic sea-board and in foreign countries. These regions, now the most prosperous states, were then sparsely settled by pioneers lacking necessities they could not buy and groaning under debts they could not pay. Although fertile fields yielded bountiful crops, they were scarcely worth harvesting because transportation facilities were inadequate and freight rates exorbitant. To ship a bushel of wheat by rail from Chicago to New York cost thirty- six cents* ; to ship it from Mississippi River points to Chicago seventeen centst addi- tional; and the charge was even more from stations farther west to these points. The charges for shipping corn, the West's greatest product, from the Mississippi River to New York, was forty-six cents a bushel. * Transportation Routes to the Seaboard, Vol. 1, p. 25. + Transportation Routes to tlie Seaboard, VoL 1, p. 31. RAILWAY MISRULE 19 As anything affecting the price of grain touched every pocket and concerned every household, the people of these regions fore- saw they could not prosper, realising that for them there could be neither growth nor de- velopment without better and cheaper trans- portation facilities. Failing to secure these by their own efforts, a contest between the people of these states and the corporations became inevitable. The potentialities of the inland states were being throttled under the policy of unrestricted control of the rail- roads by individuals and so, rightly or wrongly, such policies had to be changed. Happily, they were altered according to law, and just as the policy of exclusively pri- vate control gave way to that of partial pub- lic regulation, despite the protests of the private interests affected, so did the pros- perity of both shipper and carrier increase. It became at once apparent that extensions, branch lines and additional cars, elevators, terminals and other facilities, and the lower rates conceded to shippers, induced an in- crease in the general volume of traffic. The farmers prospered because rates were re- duced, and the shareholders in the "Gran- 20 RAILWAY MISRULE ger" railway companies, who had not pros- pered hitherto themselves, realised that it was business and not high rates that they re- quired in order to make money on their in- vestments. But the direct reason for the movement was one that appealed only to people liv- ing inland. Those who lived near the sea- board had transportation to the markets of the world sufficiently cheap already; the east- ern farmer was even directly interested in keeping western farm products out of eastern markets, wisely foreseeing that the tiUers of land in the older states could not compete with the farmers of virgin soil should freight rates be reduced. Furthermore, the money with which the western railroads had been built was obtained largely in eastern states, where the interests of shareholders were beheved to be unjustly attacked by the radical and popuhstic theories which left shareholders no hope of profit except through the then doubtful expedient of reduc- ing rates to produce increased income. There are many who yet believe that The West fought for lower rates and state regulation because its people were radical in thought RAILWAY MISRULE 21 and action and imfriendly to wealth; and others too who still believe The East op- posed public regulation of the carriers because it was dominated by capital. The truth, as often, lay between the two extremes. The West demanded reduc- tion because its very existence was in jeopardy. The East opposed it because some of its people were investors fear- ing reduced incomes, and others were traders who profited by the maintenance of higher rates on farm products and restricted sup- plies from The West in consequence. Many were indifferent. Therefore, while the pop- lilar movement spread like a prairie fire over the grain-growing states of the Missis- sippi Valley sweeping aside all local opposi- tion, there was no fuel for its flames east of the AUeghanys, where the political power of the country yet remained. A solid West stood opposed by a solid East, and The East was yet the more populous and still politi- cally the stronger. Once the people of the "Granger States" had enacted laws intended to deprive rail- road corporations of the exclusively private character they had assumed, it became neces- 22 RAILWAY MISRULE sary that the constitutionality of such laws should be decided in State and Federal courts, and during the long period required for this slow process it was generally recog- nized that even should the Supreme Court of the United States sustain the states in their assertion of rights, the powers of a state would only extend to shipments ori- ginating at and destined to points wholly within its boundaries, because all power over inter-state commerce is reserved under the federal constitution to Congress. Therefore, without waiting for a decision of the highest court (which, as anticipated, was favorable to the contention of the states, so far as af- fecting intra-state traffic), the people of the interior turned to Congress and sought to obtain there the complete relief required. At first their efforts were but little heeded. They obtained the appointment of the Select Committee of 1872, but its report was silenced by an oppressive majority mustered against it by the foes of railroad regulation. For sixteen years Congress ignored all the recommendations of that committee, and granted no relief to the determined people, who never ceased the fight to better their RAILWAY MISRULE 23 existence, and whose hopes rose with the gradual but certain transfer of pohtical power from The East to The West. Slowly, too, but surely, the inland forces found allies elsewhere. Merchants at cer- tain ports learned that they were discrimin- ated against in favor of merchants at other ports on shipments to and from the interior. A few men were monopolizing the grain trade and the oil, dressed beef, iron and coal in- dustries, dominating them not because of superior abilities but chiefly because of sinis- ter means which the connivance of railroad officials made possible. The farmer in Ne- braska who had burned his corn because no possible rates would be made to move it, and the oil producer in Ohio who was crushed by his favoured competitor; the ranchman in the San Joaquin Valley who paid on his reaper unloaded at Bakersfield freight char- ges equal to the sum of the through rate to San Francisco and the local rate back, and the merchant at Hutchinson, Kansas, who paid almost twice as much on sugar shipped from Hawaii as was paid on a like shipment through his own town to Kansas City two hundred miles further; the investor in Mas- 24 RAILWAY MISRULE sachusetts whose shares were rendered value- less by imprudent and reckless management, and the western office seeker, defeated by a discreet use of free passes, all found that, while aU did not seek the same redress, yet by uniting they could achieve what all de- sired. The united action of a powerful many became invincible, and the defeat of the feeble few who opposed them was over- whelming. In 1873 railway corporations claimed the right to determine the character of every service offered the public, and the right to fix the rates to be charged therefor. They asserted also their right to immunity from any form of public supervision, and bitterly resented the suggestion that representatives of the people should have any voice in their affairs. Now, after forty years of continued controversy between the people and the cor- porations, one hears no longer such claims and assertions. The railroad corporations are now controlled by the public in respect to every phase of their business. They can neither fix what their charges shall be for a service they must render, nor determine what they will do with their receipts. They must RAILWAY MISRULE 25 elevate their tracks, build their depots, con- struct additional lines, enlarge terminals and acquire equipment as demanded by the public, and may not say for what price they shall dispose of securities issued to obtain the capital they require for such enforced expenditures. Every detail of their affairs is open to public inspection, and they are not even left free to say how their accounts shall be kept. In effect what their em- ployees shall be paid and how long they shall work must be submitted to arbitration. Ad- judications to the effect that property ac- quired for railroad purposes is dedicated to public use, and becomes subject to a public interest, has found its logical sequence in a course of legislation and judicial interpreta- tion that have transferred to the public an option to exercise at its pleasure all the rights of ownership, reserving only for the shareholders such net income as may remain after the directions of the public have been carried out. Why was it necessary for the people so to fetter railway officials and resume almost every right and privilege of private owner- ship granted originally to the corporations 26 RAILWAY MISRULE that built the railways? Not in order to pre- vent the payment of rebates and unjust discriminations, nor to stop the giving of passes and the making of campaign contributions; not to prevent the circu- lation of false statements, or the con- cealment of true accounts. All these things can be and are regulated by effective meas- ures which need not interfere with private control of the railroads. The real reason is that adequacy of railroad facilities and the charges to be paid for them are matters of such momentous importance to the people as to become Government affairs, affairs to which only the national defence and the preservation of public order are paramount. A country like England, small in area, whose chief cities are on tide-water, and whose greater commerce is foreign, whose farmers find at home a market for all they can produce, whose factories stand by the sea or canal-side, whose various dis- tricts are developed and whose railroad facilities are adequate for all traffic that is reasonably to be expected of them, may view with tranquility a policy which leaves to private direction a large measure of the RAILWAY MISRULE 27 control of railroads.* But what the ocean is to England, the vast interior regions are to the United States. Without their rail- roads, such regions could no more exist as they are, than England could if it were denied the use of the seas. The continued growth of such regions is absolutely depend- ent upon the extension and improvement of existing transportation facilities, and the maintenance of low rates. As well might one expect England to contract with a pri- vate corporation for its maritime conmiercial needs and national defence as to expect the people of the United States to allow private interests the uncontrolled right to determine what railway services are necessary to them; what facilities shall be considered adequate, and what charges shall be deemed just.f *Mr. W. M. Ackworth ITas said: "The railroad problem in England is nothing compared with the United States." t"The social function of transport is finely summed up in a United States Government Report on Pacific Railways issued in 1869: 'The highways of a nation are the measure of its civilization. Without roads there can be no society, government, commerce or intelligence. In exact proportion to the abundance and excellence of highways (and in exact proportion to the cost of transportation on those highways) are the exchanges of services between men, the communica- tion of thought, the augmentation of wealth, the growth of comfort, the development and consolidation of the civilized States.' "—The Railway and the Nation, W. BoUand, p. 144. 28 RAILWAY MISRULE The railroad problem in the United States today is the still unsolved difficulty of ade- quate and cheap transportation. If one turns to the report of the Select Committee of the Senate made in 1872, he wiU find this as clearly foreseen then as it is conspicuous now. The committee did not ignore alleged evil practices complained of by the public, such as "stock watering," "construction rings," "fast freight lines," "general extra- vagance and corruption of railway manage- ment whereby the officials are enriched and the public impoverished," "imjust discrimi- nations against localities," etc. It condemned such practices, but it never once exag- gerated their importance, or lost sight of the real problem, which was "by what means shall cheap and ample facilities be provided for the interchange of commodities between the different sections of our widely-extended country." That the facilities required should be ample, as well as cheap is reiterated more than once, with emphasis on the words here italicised. The necessity for securing such facilities was regarded as so imperative that scant space was given to the mere abuses of the existing manners and modes of transpor- RAILWAY MISRULE 29 tation. The members of the committee saw what an excited pubHc would not see — ^that immoral practices, such as rebates and un- just discriminations, injured particular in- dividuals only, and that, reprehensible as they were, the harm done the country at large was slight compared with the evil in- flicted by exorbitant rates, or the losses sus- tained in the lack of adequate transporta- tion facilities. The first were wrongs against individuals, but the second struck at the very being of the public welfare. These are the concluding words of the report: "The cry of despair which comes from the over-bur- dened West; the demand for cheaper food heard from the laboring classes of the East and from the plantations of the South, and the rapid falling off of our principal articles of export, all indicate the imperative neces- sity for cheaper means of national transpor- tation." And who can tell what disasters might not have overtaken the country if that cry had been unanswered — ^if rates had re- mained as they were in 1872? The average rate per ton per mile at that time was more than twice the average rate for 1911.* To jcarry the present freight traffic of the poun- 30 RAILWAY MISRULE try today on the basis of the rates that pre- vailed then would impose on the people an additional annual burden of more than $3,000,000,000 — a burden the traffic could not bear. * The all-rail rate on a bushel of wheat from Chicago to New York was nearly four times as great in 1872 as in 1919 and the lake and rail rate over five times as great. — Statit- tical Record of the Progress of the Uvited States 1800-1912: Washington, D. C, p. 746. CHAPTER III METHODS OF RAILWAY REGULATION IN THE UNITED STATES 'T^HERE can be no two opinions in re- •^ spect to certain phases of the railway- question. That unjust discriminations and undue preferences should have been forbid- den, all will agree. That it was wise to put an end to all such practices as the giving of passes, the abuse of private cars and special trains, and the paying of rebates, no think- ing mind can deny. That localities as well as shippers should be treated with equal fair- ness, that all rates should be moderate, and that stockholders should be entitled to a rea- sonable return, are principles that ought never to have been questioned; and their es- tablishment and acceptance by all have been weU worth the contest of years. But all these things are mere incidents to the real problem. They had to be determined, but their determination leaves the fundamental 31 32 RAILWAY MISRULE question as it was and as it will remain until the United States has reached the territorial bounds of its development, and its increase of population subsides from abnormal hordes to natural limitations. In the beginning the imperative necessity was to find men who could be induced to supply the capital re- quired to build the railways for the country's development. Today, and so long as the nation continues to grow in population and to expand in territory, the primary railway question continues to be the same — ^how can the money be found to carry on these great public works? While the management and regulation of the railways in such manner as to produce low passenger and freight charges is a mat- ter of great concern to the nation, a much more important affair is to secure all the transportation facilities required. An emi- nent writer and public official* has recently said: "While the state commissions and the Inter-state Commerce Commission can make reasonable rates and regulate sched- ules for the running of trains, the point is whether this can be done so as to bring in *Hon. C. A. Prouty. RAILWAY MISRULE 33 the new men and the new capital necessary for the building of new systems and the fur- ther development of the present ones." Until recently the money required has been readily secured from investors, but this has been ac- complished under a policy that has been superseded by one entirely at variance with that displaced. It is doubtful if the public policy in re- spect to railways is generally understood de- spite its clearness. While there was a time when there was one policy favored in The West and another in The East, one in some of the states and another followed by the Federal Government, now the Union and all its parts are in agreement.* It has been de- termined that the legislatures of the various states may make all intra-state passenger and freight rates, and that Congress may make all inter-state rates ; and that the United States and the states may delegate the exer- cise of such powers as are legislative powers to administrative officials. In the exercise * There is substantial agreement in respect to the general principles which constitute such policy, the confusion men- tioned in the previous chapter is caused by the diverse ap- plication of such principles by many independent sov- ereignties. 34 RAILWAY MISRULE of its legislative power Congress has created the Inter-state Commerce Commission and authorized it to fix all inter-state rates, either upon complaint of shippers or on the Com- mission's own motion, and no increase or de- crease of rates is legal that does not receive the Commission's approval. While the labour of preparing inter-state tariffs is still performed by railroad officials, the rates themselves may be changed by the Commis- sion at will. Nearly all of the states have created railroad commissions whose powers in respect to intra-state rates are similar to those possessed by the Inter-state Commerce Commission. Congress may elect, but has not yet elected to make all rates, state and inter-state, over railroads that do an inter- state business. And not only has the rate-making power been taken from the railroads and conferred upon certain public officials, but such offi- cials are either elected by the people or ap- pointed by executives chosen by the people. Such officials are, of course, even when ap- pointed by executives, representatives of the legislative branch of government, and there- fore their supreme political duty is to obey RAILWAY MISRULE 85 the will of the people. They are not judicial officials in any sense. The Inter-state Com- merce Commission reports to the Senate and House of Representatives, not to the Presi- dent. It is the people, therefore, who make the rates, acting through their commissions, to whom the representatives of the people have, for the sake of convenience, granted some of their powers. Congress could by act nullify any order of the Inter-state Com- merce Commission and make at pleasure rates and rules of its own prescription. Therefore a commission must of necessity be almost as responsive to popular demands as the legislature itself. Commissioners who failed to satisfy the people would not remain long in office, and the method of Congress, to regulate through a bureau of its creation instead of in open session, would, convenient as such a method is, not long endure if it did not satisfy the people. Under any democratic government it follows that the representatives of the people voice the wishes of a majority, and as the majority in this case are patrons of railways and not share- holders, the rates, if not actually made by such majority, must be so made as to satisfy 36 RAILWAY MISRULE them. And the representatives of the people may determine, not only what rates shall be paid, but also how cars and railways shall be built, what trains shall be run, and what con- veniences shall be offered to the public. Here the reader may pertinently enquire : How can one explain that a policy which compels A to sell to B, and permits B to say how much he wUl pay, has not already re- sulted in the bankruptcy of A? For surely, it will be said, the millenium has arrived, if a majority of the people of a great nation are satisfied with the services offered by rail- way corporations and accede to the reason- ableness of tolls charged therefor. Unfor- tunately the answer cannot be found in an inference so pleasing. Man remains in the United States the same as he has always been in all countries, demanding constantly more of those who serve him than the ser- vitors are willing to give, and not to be trusted with a duty so incompatible with his nature as that of fixing the price of a commodity he must use himself. If the railway corporations are not bankrupt it is because the policy outlined above is limited by provisions of the Constitution of the RAILWAY MISRULE 37 United States, provisions which prevent popular demand from nullifying or confis- cating private rights. When the courts finally adjudged that state legislatures possess the power to make intra-state railway rates, the people demon- strated what regulation unrestrained by con- stitutional limitations might come to mean. In Iowa, Kansas, California, Texas, Ne- braska, and Mississippi, rates were prescribed by law that the highest tribunals subse- quently declared to be confiscatory. In plain terms, a majority of the people of all such states, acting through their legislatures, or their commissions, attempted acts which were annulled by the Supreme Court of the United States because such acts amounted to confiscation. It will be said, indeed, this happened a long time ago, but it must be answered too that it happened as soon as the people had a chance to manifest their dis- position in respect to such affairs. And it is no reproach to the people of the states mentioned that all the states did not follow their lead. Most of them would have done so if courts had not closed that way to speedy satisfying of public demands for radical rate 38 RAILWAY MISRULE reductions, by holding that certain provi- sions of the Constitution of the United States deprive states of the power to take property without due process of law, and that the enforcing of rates which will not permit of a reasonable return on capital invested in rail- ways amounts to such a taking. While it has not yet been determined that Congress is restrained to the same extent that state legislatures are in the respect mentioned, it is reasonable to expect that it will be. Never- theless, as the limitations that have so far served to protect capital invested in rail- ways are found in provisions of the Federal Constitution limiting the powers of the var- ious states, and which do not affect Con- gress, capital has not yet received the assur- ance it needs most. As indicating that the spirit — ^the very nat- ural spirit — of the people, above referred to, does not die, one may recall that only recently there have been made in many states attempts to reduce rates which the courts have since determined to be confiscatory. It is only fair to say that in all these attempts the people and their representatives have be- lieved that the rates which they sought to RAILWAY MISRULE 89 enforce were in fact reasonable and just. Their acts should not be considered as in- tentional wrongs, but as wrongs arising through ignorance and indicative of the con- sequences that are certain to follow when any man is given the unrestricted right to say what he shall pay for something belong- ing to another. To give a man the right to fix the price he must pay for the necessities of life and expect him to refrain from con- stantly asking that such prices be lower is to expect the supernatural. As the federal constitution affords the only barrier against rate reductions that might greatly diminish, if not entirely de- stroy, the value of railway bonds and shares, one naturally is led to enquire into the prac- tical value of such protection. While the constitutional provisions forbid confiscation, they afford no ultimate guarantees against it. For although the state limits the return an investor may receive, it does not assure his returns at all. If the corporation is un- successful the investor may never receive any income, and may lose principal as well as interest. If it is successful the investor may only receive what the state and courts de- 40 RAILWAY MISRULE termine to be a "reasonable return" on his investment. It is of no benefit to the share- holder to have his company increase its net income beyond what will yield such "reason- able return," because such increase is likely to invite a revision of its schedules and an increase of its burdens. The incentive for economies is being killed in consequence as a factor in reducing operating costs. As courts are powerless to prevent reductions whenever railroads earn a margin over a "reasonable return" on capital invested in them, commissioners are for ever watching the rise and fall of net incomes. Just as ships in some ports must await high tide to cross the bar, so must commissions wait till net incomes rise to fix their rates. Obviously, therefore, even under the pro- tection afforded by the federal constitution, the investor can never again expect anything better than keeping his principal safe and getting a "reasonable rate of interest," prac- tically fixed by the public, and he may lose both. Someone may say this has always been the public policy, and yet investors have al- ways been found when needed to supply new capital. But the policy has in important re- RAILWAY MISRULE 41 spects been completely changed. Until re- cently railway companies have been free to offer inducements such as every other indus- try offers to subscribers for bonds and shares. Not only might either be sold at a discount from par, but bonus shares have not been forbidden. The man who risked his money in doubtful bonds could be given shares as a bonus, and the man who subscribed for shares that might never earn anything understood he might receive even ten or twenty per cent, if through the country's development and the company's good man- agement that were made possible. Now all such inducements are withdrawn. Commis- sioners fix the prices at which securities may be sold; "watered stock" issued as a bonus to induce subscriptions is prohibited, and large dividends are no longer to be expected. These, therefore, are the conditions im- posed by public policy upon railway officials, and under which they are unsuccessfully striving to solve the problems confronting them. The power to make rates has been taken from the companies, and that power and the further power to prescribe the ser- vices the companies shall render have been 42 RAILWAY MISRULE conferred upon public officials who are re- sponsive to popular demands. The rate of dividends to be paid is dependent upon pub- lic opinion, as voiced by public officials, whose power to decrease them by rate re- ductions is unlimited, so long as "reasonable returns" on capital invested are permitted. New bonds and new shares may be issued, only in such amount, for such discount, if any, and under such conditions and restric- tions as may be fixed by public utUity com- missions. Concisely, the railways are owned by individuals and operated for public bene- fit under a dual direction of corporation and state, with neither supreme. The only in- violable right left the owners is the right to some compensation secured by the Consti- tution, and it is very largely dependent upon such measures of fair play as the public per- mits railway commissioners to concede; for while the Constitution assures to investors the chance to obtain, if they can, a fair re- turn on their investments, the interpretation of what is a fair return rests practically with the representatives of the people. And finally, the people have, by the application to the railways of anti-monopoly laws de- RAILWAY MISRULE 48 prived railway oflBcials of the most effective means left them for achieving economies in operations, and by denying to the sharehold- ers the right to profit from what their compa- nies might save they have taken away the greater incentive to the introduction of econ- omies, forgetting, apparently, that he who may not reap will not sow. The latter phase of the subject is of such economical import- ance that its full discussion is reserved for a later chapter. Under such a policy, what is there to attract the "new men and the new capital necessary for the building of new sys- tems and the further development of the present ones?" An invitation to enter a bank with no assurance except that the depositor shall not be knocked down and robbed, would attract few depositors; and is it any more likely that a policy which affords no guaranty of interest on money invested in railway bonds and shares, and permits no profit to their holders, will attract investors? If railway investments cannot be made at- tractive to capital, is not the nation threat- ened with an inevitable breakdown of its transportation system? One probably should not dismiss the sub- 44 RAILWAY MISRULE ject without again referring to the incon- gruities of a system of regulation that has been created by forty-nine governments each independent in its sphere, for the per- fect working of which the forty-eight states and the federal government must work har- moniously and unselfishly. Even if the in- terests of the different states were the same, efficient control under such a plan would probably be impossible. It is as if one were to divide the responsibility for a patient's condition among many doctors, none with authority over any other. In point of fact the states' interests are often conflicting. The natural flow of traffic does not ordina- rily even pause, much less stop, at state boun- daries; and when one reflects that, under- lying all other questions is the demand for cheap rates that shall not discriminate be- tween individuals, or localities, one sees how absurd is the expectation that such methods can ever produce efficient regulation. "No man can serve two masters," much less many; but that the railway official is ex- pected to do so under the present railway policy of the United States is one of the chief defects of that policy, CHAPTER IV PROBLEMS OF RAILWAY OFFICIALS : THE NEED FOB NEW CAPITAL RAILWAYS in the United States pre- sent two aspects. As viewed by the shareholder they are private property, and as seen by the pubhc they are highways open to the use of all upon equal terms. In certain cases under the constitution they must still be regarded as private property, but as a private property dedicated to a public use and invested with a public in- terest, while in others they are considered solely as public works impressed with a few private rights. They cannot be confiscated by the state nor used without payment of reasonable tolls. But on the other hand, railroad property, unlike private property, is dedicated forever to public use, and capital once invested in it can never be withdrawn. In consequence of this dual state, the officers of railway corporations occupy positions 46 RAILWAY MISRULE where they are compelled to take orders from many masters. They are subject to directions from the shareholders, who regard themselves as the owners of the railways, and to laws and rules imposed by the Federal and State governments, which exercise most of the rights and priv- ileges ordinarily regarded as of the es- sence of ownership. In one sense, there- fore, railway officials are agents for inves- tors who act collectively in making their in- vestments, and in another they are public servants. When the instructions given them as private agents conflict with the or- ders given them as public servants, or when- ever a conception of private duty conflicts with laws imposed by their ultimate masters, they have but one recourse — ^the courts. Fortunately the duties of corporations and their rights have now been at least sketched judicially, so that a railway official, in respect to the essential affairs of his trust, knows fairly well what his duties to the pub- lic are, and what are the few remaining rights of his employer. Broadly speaking, the important duties of a railway company are to build the railway it has agreed to RAILWAY MISRULE 47 build, to keep it going, and to carry all per- sons and property offered for transportation by it; and its chief privilege is to collect reasonable fares and tolls for such services. The performance of such duties and the col- lection of such toUs constitute the work of railway officials. The problems, the yery difficult problems, confronting the railway official today, prob- lems which, it is asserted, cannot be success- fully solved under the existing public policy, are these : He must find the money required to provide additional tracks, terminals, cars and locomotives necessary to care for the enormously increasing traffic that results from the country's continued growth and development, to increase the safety of life and limb, and to add to the comforts and conveniences required by the public ; he must avoid strikes, so that his lines may be con- tinuously operated; he must constantly re- duce rates in response to administrative orders and the demands of trade ; and finally he must see that operating expenses, taxes, and interest are paid, and that shareholders receive reasonable returns for their invest- ments. 48 RAILWAY MISRULE It is well to consider first the most press- ing of all the demands upon this unfortu- nate, blamed as he is by the public if rates are thought too high, and by the shareholder if dividends are too low. Everyone appre- ciates the fact that the interior growth of the United States has been due to the con- struction of the railways. By means of the railways, flour manufactured in Minnesota can be sold in New York in competition with the products of the Genesee Valley, and cat- tle bred in Iowa can be sold in London in competition with those of Sussex and Kent. It is but trite to remark that without its railway systems the interior of the country, lying far from water courses, wotJd have remained a wilderness. But what is not per- haps sufficiently appreciated is, that the fu- ture growth of the country, said to be well capable of sustaining four times its present population, is as much dependent upon addi- tional railway facilities as the development which has taken place in the past was de- pendent upon the creation of the facilities which now exist. Of what use to a country would be a river without boats, and of what use a railway without cars? RAILWAY MISRULE 49 What advantage would there be in growing more grain along a river, or near a railroad than could be carried in the boats and cars provided? And why buy more cars for a railway than its locomotive can haul, than there are tracks to haul them over, or terminals to house them in? It should be perfectly evident to anyone that production and trade are absolutely meas- ured by transportation facilities, and that whenever the capacity of such facilities barely equals the demands of existing trade and production, then such trade and pro- duction cannot be increased without such facilities being increased; for to induce growth the supply of facilities must always be, as until recently it has been, somewhat in excess of the demand. As the population of no city can exceed the number of people its water system will supply, so the trade of every region is limited by the transportation facilities it possesses. People would not move to a city known to have a scant supply of water, and just so no one will produce or manufacture what he may not surely ship to market. Until recently there has been a sur- plus of such facilities in the United States. 50 RAILWAY MISRULE In the cars there has been space for more passengers, and when the cars were filled there was power in the trains for more. When the trains could haul no more cars, there was room on the tracks for more trains. But the limit of the car and train capacity of the existing railways has been nearly, if not quite, reached. Population and trade have not only filled all the empty cars and added the full complement of cars to trains, but trains have grown too numerous for a single track, and the country has reached the point where it must be pro- vided with a double track railway system such as, it may be remarked, all other great nations long ago possessed. Furthermore, sidings are no longer sufficient for the cars that must be placed on them. Depots and stations are too small. Where there has been a single track there must be two, and where there are two there must be four, and where there are four, ultimately there must be even eight. Sidings must be doubled in number, and increased in length, and later on may have to be quadrupled. All ware- housing facilities must be greatly enlarged. Loading and unloading tracks must be du- RAILWAY MISRULE 51 plicated. And all this must be begun at once and completed quickly. In 1907 the busi- ness of the country actually overtook the progress of railway development, and with a return of normal growth and prosperity, may do so any day again, for without the expenditure of hundreds of millions of dol- lars the railways can do no considerable busi- ness in excess of what is being done now. In short the country has outgrown its rail- way system and must rebuild it.* The growth of population has been steady and great, but the growth of traffic has been equally steady and even greater in ratio. In twenty years popu- lation has increased forty-six per cent, but passenger traffic during the same period has increased one hundred and fifty per cent, and freight traffic over two hundred per cent. At the same rate of increase the traffic on the railways in the United States twenty years hence will be three times what it is today. The value of locomotives and * Mr. W. M. Ackworth, a distinguished English author- ity on railway economies, recently said: "You American railway ofBcials ought to stop talking about double track- ing your railways as if that were the end of the improve- ment. The time will come when you wiU have four, six, eight, ten, twelve tracks." 52 RAILWAY MISRULE cars in use today for railway traffic is ap- proximately $3,500,000,000. As there is no appreciable surplusage of power and cars now, it is safe to assume that the require- ments of cars and locomotives will increase proportionately to tonnage and passengers. On this basis, the railways must add $7,- 000,000,000 of equipment during the next twenty years, assuming that its cost remains stationary; and the sum to be so expended will be small compared with the cost of building the needed tracks and terminals which such additional traffic wiU render necessary. It is of the greatest significance, moreover, that these terminals must be bought in localities where land values have greatly increased, so that twice the terminal space in ground area cannot be obtained for twice the present capital so invested. Land in many cities that was donated or bought at a trifling cost would today be almost priceless. In some cities, $100,000,000 would not buy real estate that cost their owners less than $1,000,000 when originally acquired. Even in towns and villages values of land required for terminal extensions have increased enormously, and a million dollars of new RAILWAY MISRULE 53 capital invested in terminals will often have no greater usable value today than adjoin- ing lands representing insignificant amounts in the present capitalization of the railways, so that new business must be done at a pro- portionately greater average cost. It is the irony of fate that railway corporations are not only denied the right to base their charges on the present value of land even though they bought it at much lower prices, but also must pay extravagant prices for new sites which they themselves have made valuable, and this, notwithstanding the fact that they need the sites to render services for which they are being compelled to make constantly lower charges. The president of an important railway* has recently stated that the corporations of the United States need to spend for im- provements and equipment during the next five years annually not less than $1,700,- 000,000, and certainly they must expend during the next twenty years not less than $25,000,000,000 in the aggregate. As many existing mortgages will mature and must be *Mr. Howard Elliott: Addresses at Superior, Wisconsin, January 1, 1913. 54 RAILWAY MISRULE paid or refunded during such periods, it is evident that during the next two decades at least $30,000,000,000 must be found for in- vestment in the securities and shares that American railway corporations will be re- quired to offer for sale. The amount is startling in its immensity; to obtain it even with the aid and active assistance of the Government would be a herculean task; to do so under existing conditions seems weE- nigh impossible. All the world is bidding for capital as it has never before bidden in its history. Abroad, as at home, capital is needed by states and municipalities, by in- dustries, by pubhc utilities and by railways. Asia has awakened from its long sleep, and Africa and South America are to be de- veloped in the twentieth century as America was developed in the nineteenth. The arma- ments of nations and their wars are causing large issues of Government securities. The amounts expended in municipal improve- ments and public road building are increas- ing out of all proportion to the ability of municipalities and states to pay for them from current revenues ; and this flood of se- curities coming on the market with ever in- RAILWAY MISRULE 55 creasing flow, gives the cautious investor, seeking security first, a variety of state and mmiicipal bonds at prices unprecedentedly low, as well as bonds secin^ed by first liens on Asiatic, African and South American railways and other pubhc utilities with large bonuses of stock. Other countries, in order to bring out the money available for invest- ment, are offering today what the United States formerly permitted its railway cor- porations to offer for money invested in their lines. Investors willing to take some risk in order to secure possible large returns are offered elsewhere the chance which in the future is to be denied to them in Ameri- can railway securities ; namely, the chance to share in the prosperity which they help to create. If a man invests his money in a German shipping corporation there is no limit to the interest it may earn. If he in- vests it in a South American railway there are similar possibilities for him, he generally receives a first mortgage bond at a consider- able discount and often also a bonus in shares that are not limited as to possible earnings. And even in America he may invest his money in every business but one and enjoy 56 RAILWAY MISRULE whatever increment may result to it from the country's growth and good management. Why should investors buy shares and bonds of United States railway corpora- tions at all? Certainly they will not do so unless they are as desirable as other invest- ments offered them, and investments are of course desirable accordingly as they offer security, income, and opportunity for gain. Savings banks, insurance companies, guar- dians and trustees seek security, first of all, in making their investments. They cannot afford the chances of fortune. The cautious man of affairs, able to supervise his own in- vestments, wants the largest returns com- patible with reasonable safety. He may sometimes take slight risks, but he must be well paid for the hazard. The man of a speculative turn wants big gains, and will take big risks in return for a fair chance to realise them. But the day is coming when few securities of American railway corporations will offer any of these things. In the first place their properties are now already covered with liens securing "first mortgages," "gen- eral mortgages," "consolidated mortgages," "adjustment mortgages," ad libitum. In RAILWAY MISRULE 57 exceptional cases, first mortgage bonds will be offered as maturities occur, but these cases of necessity will be rare. Few bonds that are being offered or can be issued are "gilt-edged" in the strict sense of that quaint phrase. They are not legitimate invest- ments for savings banks, nor can they be ac- ceptable under any plan that has been pro- posed for the issue of emergency, or asset currency. Therefore, as the railway com- panies must do their future financing mainly with issues of bonds having really no better security than notes, or with new issues of shares, they cannot expect to attract much of the sort of new capital, such as that at the disposal of trustees, guardians, savings banks and insurance companies, which seeks safety first and foremost. What these classes of investors will not buy cannot be sold to other conservative investors who follow their lead, nor can the speculative investors be relied upon either, for they wiU buy only where there is a chance for a "big rise." Shares that must be issued near par, and are debarred from earning more than a "reason- able rate of interest," and may not long earn that, will not appeal to the speculator. With 58 RAILWAY MISRULE these extreme types of investors, trustees and speculators, the ultra-conservative and the venturesome, all out of the market, will there be enough of the third class — those who are willing to take some risk — ^to absorb all issues of such securities and shares? And, suppose there are enough, wiU they buy? Large returns are the main object with this class of investors, the largest income consis- tent with a reasonable safety of their prin- cipal. It follows, that American railway corporations must offer something not only quite as attractive in respect to income promised and security granted as wUl be of- fered by other nations and their municipali- ties, and by the railway companies of other countries, but something also as attractive as the untrammelled industries in America wiU allow. But this is just what railway companies may no longer do, because, as has been seen, the securities they will be allowed to offer will consist chiefly of those having no better than second, third and fourth liens, while the shares that may be issued by such companies will be limited in their earn- ing capacity. In the past, American rail- way shares have been preferred to those of RAILWAY MISRULE 59 all other countries because it was believed that the investor might reap profits in keep- ing with the company's and the country's prosperity. Men who bought shares at ten saw them rise to two hundred, and all pur- chasers acquired their holdings in the reason- able expectancy, or at least with the fair chance, that they might profit from increased dividends, even from stock dividends. In the past, under a policy which extended inducements and encouragements to inves- tors, there was every reason why an investor willing to take a fair chance should invest in American railway shares, but why should he do so now? There are to be no more "melons," no more "watered stock," no more "inordinate dividends," just "a reason- able rate," determined by those who provide it. That is all the interest an investor in shares can receive, and he may get none of that and lose his principal as well. And as a prospective buyer of railway securities will consider not alone the interest promised and the security offered, but everything likely to affect the company's income and credit in the future, so every difficulty of the railway official likely to impair the future credit of 60 RAILWAY MISRULE the company or reduce its net income has a direct bearing on the saleability of any bond or share it may offer. For, whatever the rate of interest and whatever the character of the lien, no prudent investor cares to buy, at any price, bonds or shares of a company whose financial future seems doubtful. Conse- quently every phase of governmental regula- tion asserted, or reasonably probable, has direct bearing on the value, and therefore on the attractiveness, of the large issues of railway securities which railway managers must market during the next two decades. In short the task set before railway offi- cials is an impossible one. They are in the position of peddlers who are sent out to sell unattractive goods in a market already over- stocked, yet are denied authority to meet current prices and terms, or give guaran- tees that others offer.* *"Must we not in the public interest make railroad construction so attractive and profitable that the necessary capital will be forthcoming? Otherwise must we not come measurably to a standstill and face a future of comparative stagnation?" Address at the Annual Meeting, 1909, of Railway Commissioners, by Hon. Martin A. Knapp, then Chairman of the Interstate Commerce Commission, now Presiding Justice of the Commerce Court. CHAPTER V, PROBLEMS : THE DEMANDS OF EMPLOYEES FOE HIGHER WAGES AND THE DEMANDS OF THE PUBLIC FOR LOWER RATES NEVERTHELESS the railways, such as they are, or may become, must be kept going. No suspension of them for any cause would be, or could be, tolerated. The cities have never enough food accumulated to suffice for more than a few days. Not only must water-works, street railways and aU industries be kept supphed with fuel, brought them daily by railways, but factories and stores must be left free to offer their usual employment and perform their usual social services to the communities which they serve. A protracted general strike on the railways would mean starvation for masses in the cities, and bankruptcy for thousands there and elsewhere. Such a strike would be ahnost unthinkable, and no methods would be too revolutionary to end ii. If one should 61 62 RAILWAY MISRULE ever occur and proceed to such a point as to prostrate business and threaten famine and epidemics the rights of shareholders and the demands of employees alike would receive scant courtesy from the public. The Gov- ernment would have to seize the railways and operate them, and public sentiment would make short work of all contentions between employers and employees, for the public wel- fare is the supreme law. In view of this, the danger of a general strike is not great, for the corporations do not court the risk of seizure of their properties by the state, nor are the employees likely to put themselves in a position where they may be forced to work against their will. The property of one is at stake and the dignity of the other. T«Jevertheless, within a year and scarcely without warning, England has faced for days the not improbable prospect of being required to seize and operate her railways in such an emergency. The demands of employees for higher wages are perpetual. Sometimes these de- mands are reasonable but often not. The attitude of the employees is one of constant demand and that of the railway officials uni- RAILWAY MISRULE 63 form resistance. Neither side can well re- fuse arbitration, for neither is willing to incur the public's ill-will and wrath. Arbi- tration, which has been defined as "a process by which one contestant gets half his claims and the other loses half his rights," nearly always results in an increase of wages. Railway officials seem altogether to be con- fronted with a situation that promises end- less increases in wages, increases which they are powerless to arrest, for as long as arbi- tration must be accepted and as long as every arbitration is reasonably certain to re- sult in an award carrying some advantage to the employees, they may be expected to per- sist in their demands!. It must be remem- bered too that there is great justice at the back of many of these demands, for the cos^ of living is constantly increasing and the wages of employees in all industries are being constantly raised. The distress of the railway official arises from the fact that, un- like the producer of coal, the manufacturer of goods or the builder of houses, he may not add the cost of wage increase to the price of what he has for Sale. 'Increases in wages must come out of the net earnings of the 64 RAILWAY MISRULE company, and the problem for its manager is how to make this good, how to hit upon some device that will increase the efficiency of the employees' services. If this cannot be done, then continued increase in wages must be met by increases in rates, if railway securi- ties and shares are to retain their present value. And yet the last privilege the railway companies seem likely to be granted is au- thority to increase rates — at least, to the degree necessary to meet employees' de- mands. All such requests have been denied, so far, and he must have a glorified concep- tion of human nature who can believe the people will consent to that process of con- stantly ascending rates which would follow the adoption of a policy intended to meet periodical increases of wages by correspond- ing increases of rates. At the same time the demands of the public for reductions in rates will not cease, for such reductions, however unjust they may seem at the time, are essen- tial to the due expansion of trade and the development of commerce. Dominated by inexorable economic laws, the charges for carrying freights and passengers may re- RAILWAY MISRULE 65 quire to be increased in time, but increases at present are an inconsistency certain to result in arresting national growth, to be ac- cepted only when all remedies suggested for avoiding them have failed. The demand and the need of the country is for "adequate and cheap transportation"; and is it true that railways by increasing rates wiU in- crease net incomes? WHl not the proceeds from such increases be claimed by the em- ployees? In point of fact such prosperity as the corporations have enjoyed has been largely due to an enormous increase in busi- ness induced by low rates, sometimes volun- tarily made and sometimes enforced by pub- lic regulations or general agitation. May it not be, indeed is it not reasonably certain, that considerable increases in rates would in- evitably work inversely, and diminish busi- ness and consequently reduce incomes? In- creases in rates, if permitted, might perhaps afford temporary relief, but they are, to say the least, a remedy as dangerous for the cor- porations as for the public, and at best such increases cannot endure, while demands for increased wages will never cease. If the rail- way official is quite candid, must he not ad- 66 RAILWAY MISRULE mit that to meet increases of wages by in- creases in rates is an unsound solution of the problem? However they are met, the aver- age investor wiU see, if he does not see al- ready, that as a railway shareholder he would be ground between the upper and the nether millstones, and that, with wages, and the costs of materials going up and rates going down or at best standing still, it is only a question of time unless the efficiency of rail- ways can be increased in some way, when all his income must disappear. There are evidences that he has already appreciated these facts, for recently new issues of securi- ties and shares have failed conspicuously to attract him. And at the same time other companies are adding to their floating debts by issuing short-time notes at ruinous rates of discount and commission, because their bonds and shares do not tempt any- body to buy. CHAPTER VI problems: expectations of shaeeholdeks and their probable disappointments RAILWAY officials are required not ■- only to give ear to shippers clamour- ing for lower rates, to satisfy employees de- manding higher wages, to find money to pay taxes that are always mounting and interest that grows in rate and in the aggregate, but they must respond to the demand of share- holders as well. Some corporations pay no dividends.* Their officials are the more happily situated, for what a shareholder has never had, or has grown accustomed to do without, he will not greatly miss. But there are still dividend-paying corporations, and their shareholders will continue to expect dividends from them. A startling and unpleasant fact confront- *No dividends were paid on 34% of the total capital stock outstanding June 30, 1912, according to the press bulletin of the Interstate Commerce Commission issued July 1, 1913. 67 68 RAILWAY MISRULE ing the official and the shareholder, is that a source of profits considerable in the past is disappearing. The prosperity of American railroads has been due largely to improved efficiency of operation, well-known phases of - which have been grade reductions, cars of ex- panded capacity and locomotives of extended power. Such constantly increasing effi- ciency permitted the companies to make rate reductions and pay higher wages without suffering a depreciation of incomes. But the limit of what is possible in this respect on well-managed railways is now near, if it has not indeed been already reached. The ratio of increase in car-loads and train-loads is lessening from year to year. Grade re- ductions may cost more than they are worth, and there is a maximum weight of engines and cars beyond which, economically speak- ing, one may not build. Some few further improvements in these respects are possible, but even these are dependent on new capital. An eminent expert has recently said: "The railway owner can go no fur- ther in using larger tools in his plant."* * Mr. Howard Elliott: Address at Helena, Mont., Sep- tember 36, 1913. RAILWAY MISRULE 69 Heretofore greater efficiency has been ac- complished by increasing the product of each employee without correspondingly increas- ing his wage. Now, he is demanding, and getting additional pay, in practical equiva- lent to his increased output. If he is en- abled to run an engine one hundred and fifty miles instead of one hundred miles a day, or asked to drive a big locomotive instead of a small one, he desires his wages increased accordingly. There is no economy in hav- ing larger locomotives if all they save must be paid to engineers. Again, persons obsessed by the supersti- tution of efficiency leave out of their calcu- lations the long-overlooked but always po- tential fact that managers who have shown the best results have achieved them by mak- ing fuller use of things which already existed but had not yet been completely utilized. A car was made to carry a greater load. A train was made to carry more cars, and tracks and terminals were used to greater capacity than ever before. Money to reduce grades and buy heavier cars and locomotives was advantageously expended, but the greatest savings were due to the in- 70 RAILWAY MISRULE creased density resulting from growth of traffic and from the using to its complete capacity of the same railroad as it existed when the improved methods were adopted and the additional traffic obtained. It is quite obvious that a passenger train with some empty seats in it can be filled with ad- ditional passengers without appreciable in- crease in the cost of operating the train. The cost of maintaining tracks and terminals ad- mitting of forty trains a day and used by twenty only, could, without any correspond- ing increase in cost of maintenance, accom- modate several new trains; for, if the rail- way exists and is not used to its full capacity, the principal additional cost of additional trains would consist of the actual expense of fuel and train crews only. Looking further in the same direction, one sees with equal clearness that when a train cannot be made to carry another passenger, the cost of putting on an additional train may exceed the net profits from both unless the surplus traffic is very great. It will exceed it, to a certainty, if there are not enough new pas- sengers to pay for the new train; and in- creased passenger traffic seldom comes in RAILWAY MISRULE 71 f till train loads. It is also clear that, even when a single track is filled to its capacity and a double track required, the increased cost of maintenance and operation may for a long time serve to reduce the profits previously accruing from the single track. This last is precisely the stage that American railways have now reached. Until recently they have had a surplus of capacity on a single track system ; they have, so to speak, been dispos- ing of their by-products; but now the time is rapidly approaching when they must in- crease their track and terminal capacity, and they will do this necessarily faster than traffic will increase, so that there must be an inter- val during which each company will be like a hotel proprietor who has increased the number of rooms in his hotel and is waiting for guests to fill them. In other words a railway must double its tracks long before its traffic will double itself. This line of thought should suggest many reasons why operating ratios must of necessity rise, for a period at least, and why much new money must be spent, before full returns thereon may be anticipated. The operating account of no railway com- 72 RAILWAY MISRULE pany fairly reflects actual operations from the financial point of view, because none takes into account the new capital that is being constantly invested. To save a mil- lion dollars annually in operations, by in- creasing interest charges a million and a quarter, is poor business. It may produce a satisfactory showing for the manager, but not for the shareholder. The true test of a manager's efficiency is the surplus left after paying all expenses and charges. One should not be misled by such technical terms as "in- creases in train-loads," "increases in car- loads," etc. The true inquiry is : are net in- comes increasing or decreasing after the payment of all charges? Unfortunately they are decreasing, generally speaking. In very few, and those only unimportant in- stances, have there been increases in net in- come equal to the ratio of increases in capital. The Atchison earned at the rate of 12.11% on its common shares in 1909, 8.89%' in 1910, 9.30% in 1911 and 8.20% in 1912; the Chi- cago and Northwestern earned at the rate of 11.42"%' in 1909, 8.06% in 1910, 8.28%' in 1911, and 7.52% in 1912. The New York Central earned at the rate of 7.67% in 1909, RAILWAY MISRULE 73 6.00% in 1910, 5.74% in 1911 and 6.23% in 1912; and the Northern Pacific earned 10.74% in 1909, 8.99%' in 1910, 8.24% in 1911 and 7.93% in 1912. The net "operat- ing income" of the Pennsylvania Railroad Company in 1911 was nearly three million dollars greater than in 1909, and yet the Company earned 11% on its stocks in 1909 and less than 9% in 1911, the reason for this seeming anomaly being that meantime the Company had increased its capital without succeeding in increasing its profits propor- tionately. One can learn the real tendency of the combined conditions affecting rail- ways only by studying the ratio of earnings on shares, for, as has been stated above, "train-loads," "train hauls," "car-loads," and "operating ratios," while of great interest to the technical expert, possess little significance for one studying the values of railways proper. What he wants to know is : does the return on money invested increase, or de- crease? In other words, he applies the sim- ple test that the owner of a store, a bank or a factory applies to ascertain whether his business grows better or worse, of merely ascertaining whether a doUar of capital in- 74 RAILWAY MISRULE vested earns one year more or less than in the previous year. Applying this test, one can easily see that capital now invested in railways is facing a gradual but neverthe- less a serious shrinkage in earning power. Another cause for such shrinkage not pre- viously mentioned may be stated here. Not alone for betterment and equipment must new capital be raised, but dangerous grade crossings must be removed, tracks must be elevated in cities, life-saving devices gener- ally must be adopted, and lines must be built to do business that is for a long time posi- tively unprofitable. The aggregate cost of all these things is calling, and will continue to call, for enormous amounts of new cap- ital, the expenditure of which will add noth- ing to gross incomes of companies and little to their net incomes. In the foregoing pages, only the usual practices and methods of rate regulation and their consequences have been dealt with. There is one power possessed by all com- missions which they have not often exercised, but which may be exercised in such a way — constitutionally, too — as to render valueless many securities and shares, A commission RAILWAY MISRULE 75 may fix rates on one railway without pre- scribing them for its competitors. There are many companies earning far in excess of what might be regarded as reasonable re- turns on capital invested, and if a commis- sion so elects, it may quite obviously to a considerable extent reduce rates on such lines. The consequence of this to other lines is something which may better be considered by investors before they buy shares and bonds of American railway companies, than regretted afterwards. There is one com- pany operating between the seaboard and Buffalo earning annually from thirty to fifty per cent, on its shares; and another operating from Buffalo to Chicago that earns from eighteen to thirty per cent. Rates could be constitutionally imposed on these lines that would ruin others engaged in the same traffic. What assurances have inves- tors that this will not be done? A public that guards its money should not hesitate to give a fair and frank answer to what is pro- posed in the respect suggested. In the cases that have been mentioned, if the rates were reduced, as they might be, every other cor- poration engaged in the traffic affected 76 RAILWAY MISRULE would be compelled to reduce its rates volun- tarily or else relinquish its share of com- peting business. The danger stated is no new conception or unwarranted fear. The State of Texas has been using it success- fully as a threat for more than fifteen years. In that State the Commission always care- fully ascertains what reductions the lines most favored in respect of grades and net income can afford before promulgating an order, and as all the other companies realise that, in case of contest, the courts can afford no protection to such favored lines, all ac- quiesce — ^the strong lines because they can be compelled to do so by law, and the weak lines because they must meet all rates. The strength of a chain is in its weakest link, and it will come to pass in America, if the present policy is not changed, that all railways must reduce their tolls to the level of those which may be constitutionally imposed on routes especially favoured by direct lines, light grades and capital charges. CHAPTER VII THE FUNDAMENTAL, FAULT OF THE PRESENT POLICY OF EAILWAY REGULATION — ITS WASTES AND EXTRAVAGANCES AND the suggestion in the last chapter points to the fundamental fault, from an economical point of view, underlying the present railway policy of the United States, a fault which prevents large savings in the cost of transportation and renders impos- sible reductions in rates far greater than any yet demanded. We have seen that under certain circum- stances particular companies might be com- pelled to make rates not legally to be im- posed on others engaged in the same traffic, because there is always one line that, on ac- count of its lesser gradients!, distance, curva- ture and capitalisation, can profitably carry at rates which would affect seriously, if not entirely ruin, some, and possibly all, of its competitors. Is not the shipper 77 78 RAILWAY MISRULE perfectly tjustified in asking: why should I be required to pay more than what is a fair rate for the one company that can do my business cheapest? And it may be added that the carrier which can do the transport most cheaply can nearly always do it most expeditiously, and that the line with the least curvature and the best gradients can generally carry the passenger not only the most comfortably, but at the least cost. And why should not all the traffic be offered to the company that can do it best and cheapest ? Can anything be more preposterous than a system, that, for any reason, imposes a greater burden on the producers and con- simiers of America than they need bear? Was there ever a more absurd proposition than that every articled ship should bear an unnecessary burden because some railways cannot afford the low price that is profit- able for others? Can anything be more de- serving of condemnation than a policy that secures for the public, not the lowest rates but the highest ; that requires them to fatten the fit that the unfit may survive? Because the A Company cannot transport as cheaply as the B Company, we must pay both of RAILWAY MISRULE 79 them such rates as A "can stand"! And when we seek for the causes engendering such an extraordinary condition, we find that it is the people and not the railway corpora- tions who are responsible. To inquire intelligently into the reasons for a situation so remarkable it is necessary to review the history of railway develop- ment and regulation. The conditions men- tioned did not arise in a day, nor within a decade ; they were of slow growth, and there- fore their consequences are felt before they are understood. In the beginning, the railways of the United States were built primarily to serve communities existing or soon to exist adja- cent to their rights of way. It was not fore- seen in the early days that there would ever be two or more railways between any two places. Competing railways were then un- thought of — as unthought of as parallel country roads, or canals, and seemingly as unnecessary. The railways were to per- form for the nation what the Roman roads had done for Rome. They were to offer means of protection in times of war and open the way for the spread of commerce 80 RAILWAY MISRULE and enlightenment in times of peace; they were designed to radiate from capitals, each performing its separate and distinct service. In those days there were no great interior cities with traffic collected and await- ing transportation to the seaboard. No one foresaw — it could not have been foreseen — when Chicago was a country town and Kan- sas City a village, that through business would ultimately become the important con- cern to shareholders and shippers alike. The early railways, with few exceptions, were planned to serve localities only — to do a local business and to have a monopoly of it:. Such was the first period in the development of the present railway system of transporta- tion. The second period marks the beginning of problems that remain unsolved. In order to allure capital to these fields of specula- tion and investment, aid and assistance had been given by the state and national govern- ments, and rights of way, terminals and cash were donated by individuals, while every assurance of future liberal and fair treat- ment was promised. Investments in rail- ways became popular. Favored by this RAILWAY MISRULE 81 popularity, and believing that competition was the remedy for grievances, localities joined in offering almost every conceivable inducement to those who would construct lines that might parallel and compete with those already built. The first step in this second stage of prog- ress, from monopolistic to competitive con- ditions, was the enactment by the various states of laws which authorised any "five or raore persons" to build a railway from any place, to any place ; and, until quite recently, it was possible under such laws for men of mo means, and at no cost beyond a few dol- lars paid for copies of their "articles of asso- ciation," to acquire the right to parallel ex- isting lines. In a majority of states it is still possible for any one who will pay the small fees imposed to obtain a "charter." So far as such laws are concerned, a hundred parallel railways may be built. In many states counties having one railroad voted subsidies to induce a second, a third, and even a fourth railway to enter into competition with the first. One may see today in hun- dreds of places in America two, three, and even four short, unfilled trains slowly mov- 82 RAILWAY MISRULE ing on almost parallel lines between incon- sequential county seats upon rails over- grown with grass, while every farmer who sees them passing is working, not only to pay taxes on the subsidy bonds issued by counties and municipalities to aid the con- struction of these roads, but also to pay taxes and interest and make good all opera- ting deficiencies resulting from the unneces- sary creation of these absurd lines. Of course the railways, built under such con- ditions, were badly located, cheaply con- structed and often of no advantage to any- one.* Another cause of the unsuitability of many lines for the through business they now en- gage in, and of their bad locations for any business, is that, strange as it may seem, the railways, generally speaking, were origi- nated neither by practical business men nor by trained engineers. The rule, the almost invariable rule of procedure, was for some optimistic promoter to conceive the project *"It is difficult to deny that the miscellaneous and unequal activities of private enterprise fail in the absence of some central gmdance to produce the best results so far as harmony and completeness of design are concerned." — Sir George S. Gibb, in a paper read before the Royal Eco- nomic Society, November 10, 1908. RAILWAY MISRULE 83 of a particular line, organise a company to build it, ask an engineer how cheaply it could be constructed and then induce bank- ers to find the money for it. The bankers and investors seldom saw with their own eyes the country it was proposed to tra- verse and the engineers were given no dis- cretion but to build as quickly and as cheaply as possible. Ten parts of optimism and one of experience and business .sagacity was about the ratio in such projects. When these qualities were combined in their proper proportions the lines were found in the hands of practical men, or in the posses- sion of other companies who unfortunately could not relocate or abandon them. When it became apparent that the im- portant tonnage of the country was des- tined to be collected in the great manufac- turing, trade and distributing centres, and that what was to be henceforth known as "through" business in contradistinction to "local" business woxold become the greater source of freight and passenger traffic each of the companies, through consolidations, pur- chases and extensions, sought connections with as many of such centres as the wisdom 84 RAILWAY MISRULE of their directors — or the lack of it — ap- proved, and its credit permitted. From this point in their development it is as through lines connecting important centres that one must consider the railway systems. Every- thing that relates to the operation or regula- tion of railways has primarily to do with them as through lines, and proceeds on the theory that they are operated by their own- ers and regulated by the public because the development of the country as a whole and not of localities is the chief object. The con- sequence has been that whereas the grower of grain on the plains may compete with the producer near the seaboard, and vegetables may be grown in Florida for consimiption in New York, and through rates have been reduced to low levels, nevertheless local rates are still maintained at high levels. The line projected along the Hudson River, which grew through gradual exten- sions until it found itself terminating at Chi- cago, met there in competition a line that had started from Philadelphia to Pittsburg, and stranger still met also a line that had been in- tended in its first stages to connect Portland in Maine with Montreal. A line projected RAILWAY MISRULE 85 southward from Chicago to New Orleans found itself in competition with a line ex- tending from St. Paul to Portland, Oregon, in carrying trans-continental business. The "Burlington," which had Quincy for its pro- spective terminal, and the "Rock Island," hoping some day to reach Davenport, found themselves competing at Omaha, Denver and Kansas City. The Atchison, Topeka and Santa Fe was operating trans-conti- nental trains that did not pass through any one of the places from which its name was derived. Systems so created could be but patchwork. Some were better than others, but none was what it would have been if it had been built entirely by one company to do a large through traffic, economically. For twenty years the important companies have been engaged in rebuilding systems that with few exceptions consist largely of lines which were they to be planned today would be differ- ently located, with different gradients and curvature, or would not be built at all. But despite the millions that have been spent, and the billions that must yet be spent, be- fore the American railway system will have 86 RAILWAY MISRULE even the semblance of fitness for its pur- poses, the system must remain forever an unduly expensive one to operate and main- tain, like a row of old houses transformed into an hotel with few parts intended for current uses and the whole a makeshift. If it were possible to take up every track, abandon every termiinal, and rebuild the system entire it could be immensely im- proved upon. This is impossible, but ade- quate facilities must be created during the next quarter of a century for twice the exist- ing traffic and there is no reason why the mistakes of the past may not be avoided in the future, and new construction be so planned that traffic may be carried more economically than as at present or in the past. These mushroom systems soon found themselves engaged in competition which threatened all with ruin. One company was carrying passengers from Chicago to California for a dollar and another offered the passenger free meals en route for the same price. The condition desired by the people had been attained — ^monopoly had been succeeded by open competition, but the RAILWAY MISRULE 87 most astonishing result of the substitution was that it satisfied nobody. Every business man preferred stability of rates to low rates if he could not have both. Rates that changed from day to day pleased no one. No man could foresee what rates might be, and in- ability to foresee might mean financial loss or even ruin. In the midst of it all shrewd and grasping men were keen to see that the greatest advantage a shipper might have was not low rates, but rates lower than any of his competitors. That open competition meant ruin for the companies was soon demonstrated by the bankruptcy of many. Three means of es- cape were offered them; they could amalga- mate and thereby end competition, both open and secret; they could agree to maintain rates and divide, or "pool" earnings ; or they could, openly, profess to charge the same published rates to all, and secretly grant rebates to favoured shippers as an induce- ment to collect and ship freight over their lines. It is easy to understand why the adop- tion of the first and sepond methods was pre- vented. The masses hated monopolies, and had a faith almost superstitious in the ad- 88 RAILWAY MISRULE vantages of competition; and the powerful and resourceful men who were then laying the .foundation of fortunes that have since astonished the world, saw the way closed to them if amalgamations or pools were per- mitted. The man of "big business" and the "captain of industry" could see no advan- tage in an open reduction granted his com- petitors, and neither could the railway offi- cial see any benefit from open reductions which his competitors could meet ; and so be- gan the long period of what may be called secret competition. Its destiny was to make the favoured shipper richer and more power- ful, and the company which was his con- confederate stronger, for the more business he did, not only the more did he profit, but the greater were the gross revenues of the railway company which was his partner in wrong-doing. Thus competition designed to destroy monopolies of transportation, led to the creation of monopolies in nearly all the trades and industries, for there were many industries monopolised through the rebate system besides iron, oil, dressed beef, coal and grain. Such a system of discrimination and favouritism, with all its injustices, could not RAILWAY MISRULE 89 of course be endured, and when it and var- ious other evil practices were at length re- vealed the public indignation was so intense that a perfect deluge of legislation followed, legislation that was more an expression of anger and exasperation than a reasoned plan for the correcting of evils. When occasion for calm consideration came it was found that the present policy, half monopolistic and half competitive in its theories, had been adopted. To protect shippers against each other, as well as against officials who might otherwise favour particular shippers, laws had been enacted requiring all rates to be the same for aU shippers, and to be published for thirty days before taking effect, and pro- hibiting any reduction in rates without like notice given a stated number of days in ad- vance of the proposed change. All prefer- ences and favouritism were forbidden, and carriers were required to extend like facili- ties and equal advantages to all. The ship- per of a thousand cars was to pay the same price as the shipper of one. Early students of the railway question 90 RAILWAY MISRULE saw that if prices were to be the same to everyone and long notice given in advance of changes the companies would have to agree with each other what the rates and changes should be, in order to bring about stability and equality of treatment.* On the other hand this might, and if the purpose of the agreements was unrestrained it certainly would, result in prices unreasonably high. Accordingly laws were passed which pro- vided that rates, when complained of, should be fixed by representatives of the people, and not the railways. Here was a perfectly rational plan, well conceived and carried out, whereby equality and stability of rates could be assured and extortion made impossible. Rates were to be made by the state and fed- eral governments by slow processes, and un- restrained competition which had been found hurtful, whether open or secret, was to be ended. The wisdom of this theory of rail- way regulation, which finds its clearest ex- position in the Commerce Acts adopted by Congress, may be questioned by reasonable *Bcdlroad Traniportation. Arthur T. Hadley, 188S» "Permanent competition is out of the question." RAILWAY MISRULE 91 men, but all must concede that it was well considered and complete. Nothing, however, seems so difficult for legislative bodies as to let well enough alone — to try out one policy thoroughly before adopting another. The first federal "anti- trust" statute was the "Sherman Act," which became a law in 1888. While it was being debated, certain senators said it would not affect railways which were already sub- ject to a law specially adapted to their regu- lation — ^the Act to Regulate Commerce, which had been enacted in the previous year. Being men of intelligence, they considered it difficult to discern how an act intended to force competition could consistently apply to companies which by another law were for- bidden to do the things which constitute competition. For real competition means necessarily one price to one man and a dif- ferent price to another man. It means dis- crimination in every form; it means, too, one price today and another tomorrow; it means above all that the man of strong credit buys cheaper than the man of poor credit, that the big buyer pays less than the small buyer. 92 RAILWAY MISRULE It is a most discriminating, unregulated and ruthless force. Before its natural operations the weak go down and the strong succeed. Its law is, that the fittest only are fit to survive. It is the antithesis of that equality under the laws which is the spirit of the Commerce Acts. To the credit of the United States Senate it must be said that it was never so stupid as intentionally to say to the railroad companies "you must com- pete" by one law, and by another "you must not compete." Unfortunately the Senate was incapable, as it would seem, of choosing clear language with which to express its in- tentions, for the Supreme Court decided that the act as worded did apply to railways and must be so interpreted, despite all the Senators had said when adopting the meas- ure; and so, because the Senators did not know how to phrase their enactments accord- ing to their intentions we have the absurd policy which compels railways to compete in whatever way they can without affecting rates! If one can imagine the Commerce Acts so amended as to apply to the "trusts" he may appreciate the absurdities caused by RAILWAY MISRULE 93 applying to the railways an act intended to regulate the "trusts" only. To require all the "trusts" to make the same prices for every purchaser, grant the same terms to all, and post such prices and terms for sixty days; to have all such prices fixed by, or at least subject to, revision by the Interstate Commerce Commission, and allow neither more nor less to be charged than approved by it and at the same time to compel "com- petition" in every manner left possible — ^would not such a law seem prepos- terous? Its only effect would be to compel the maintenance of unnecessary agencies, to enforce production at plants economically unfit, and to overstock markets. And this alone is all that has resulted from apply- ing the "anti-trust" laws to the railways. The only effective results of such laws have been, so far as railways are concerned, to prevent the concentration of all traffic on the lines best adapted for its expeditious and economical transport, and to make impos- sible enormous savings that might be pos- sible were the companies free to arrange for better and less costly services than is possible 94, RAILWAY MISRULE at present.* The prevailing policy is one depriving competition of the only power it might possess to benefit commerce, and di- vesting monopoly of the only privilege it might use to reduce rates. This long narration has been necessary, first, to explain why many railways are so unfavourably located to do economically the business they undertake, why their lines are often so needlessly long and burdened with such excessive curvature and gradients, and why they are so badly adapted to their uses ; secondly, to explain why the trafiic of the country may not be carried over the lines able to carry it most economically and ex- peditiously today. It is observable that no matter how many *"What do the wastes of the present system, with its manifold ownership and divided management, amount to? Only an approximate figure can of course be given in the present defective state of railway statistics. The Secre- tary of the London and Northwestern Railway Company — and he would not be likely to err on the side of exagger- ation — estimated the loss at 20 per cent, of working ex- penses. A similar estimate has been made by Sir Edwin Chadwick, C.B., the eminent engineer. Another railway authority. Captain Laws, manager of the Lancashire and Yorkshire has placed the estimate at 24 per cent. But to be on the safe side, let us take the lower of these two and apply it to the working expenses of 1905 . . . that gives us the enormous sum of £14,000,000 a year as the mere preventable wastes of the present system." — Railway Nationalization. Clement Edwards, p. 28, RAILWAY MISRULE 95 railways there may be between common points, and no matter how many trains may be operated between these points, the rates remain the same, and the trains make the same running time by whichever route — long or short. Obviously then, such competition as is enforced by anti-monopoly laws has no influence on rates, and little if any on the speed of trains. The only practical effect of the different ownership of lines engaged in the same traffic is that a spirit of rivalry be- tween official staffs is maintained, something which unquestionably has some advantages for the public. It is a rivalry, however, that never results in reduction of rates. But it will be said : "But for the law the companies would agree that only some of them would run most of the trains, and pay the others for the privilege of doing so." It may be answered that this could only occur with the approval of the people, whose representa- tives may prescribe the character of services offered the public as well as fix the charges therefor. The public now uses many lines, the best and the worst. If all lines were under one management the ultimate result indeed might be all passengers travelling 96 RAILWAY MISRULE over the best routes, and all freight being shipped over the most expeditious ones, which is what the public would demand if the government owned aU the railways. It is characteristic of aU phases of anti-monop- oly questions that the people fight hard and long for the privilege of using the worst ser- vice offered them. AU that the "anti-trust" acts, as applied to railroads, secure for the citizen, is a choice of scenery when he travels, and an option of company names in shipping receipts; and for this he pays enormously.* Apparently many have yet to learn that the public pays for the mistakes made and for the waste incurred in the operation of railways ; that taxes, interest and the upkeep of unnecessary railways burden only the man who pays freights and fares ; and that all the money expended to buy materials and to pay wages and dividends comes out of shippers' and passengers' pockets. If wages, costs of material, or charges are increased, there is just proportionately more for the producer *"If those responsible for the handling and carriage of railway traffic could work with a single eye to economical results, and in all cases forward traffic by the routes which yielded the best working results great economies pould undoubtedly be effected."— Sir George S. Gibb. RAILWAY MISRULE 97 and the consumer to pay. The railways have no mines of hidden wealth, and their stock- holders cannot be assessed. Every doUar a company pays out is one it has received from that stolid public which views with such seeming indifference every augmentation of wages, of taxes and of interest charges. If producers and consumers cannot see that they pay for every such increase it is because they overlook the truth that they pay for everything. Possibly their blind indifference comes from the fatuous belief that as freight rates cannot be raised without the consent of commissioners who represent the people, in- creases of wages, taxes and interest must "come out of" somebody else. But little dis- cernment is necessary to perceive that all expenditures must come from the same gen- eral supply of money ; and even less is neces- sary to understand that such increases pre- vent rate reductions which otherwise might be made voluntarily by the companies, and which, if not made voluntarily, can be en- forced by the commissioners. So long as there is no margin between operating in- come and a fair return on capital, railv/ay managers will not, and in justice to their 98 RAILWAY MISRULE employers should not, reduce rates, nor can commissioners compel them to do so. Such persons as doubt that railway offi- cials voluntarily reduce rates when they can do so in justice to shareholders, should care- fully study the following table: SUMMARY OF FREIGHT TRAFFIC SINCE 1888.* Tons Carried Receipts per Year One Mile Average Tons Ton-Mile (Millions) in Train (Cents) 1912 261,416 430 7.41 1911 253,783 383 7.57 1910 255,016 380 .753 1909 218,802 363 .763 1908 218,381 352 .754 1907 236,601 357 .759 1906 215,877 344 .749 1905 186,463 322 .766 1904 174,522 307 .780 1903 173,221 310 .763 1902 157,289 296 ,757 1901 147.077 281 .750 1900 141,596 .270 .729 1899 123,667 243 .724 1898 114,077 226 .753 1897 95,139 204 .798 1996 95,328 198 .806 1895 85,227 189 .839 1894 80,335 179 .860 1893 93,588 183 .878 1892 88,241 181 .889 1991 81,073 181 .895 1890 76,207 175 .941 1889 68,727 179 .922 1888 61,329 176 I.OOl Increase 1888 to 1913 326% 144%, D2S.9% 'Railway Statiatict of the United States of America- Slason Tliompson, 1913. RAILWAY MISRULE 99 It is deeply significant that, during the period when railway officials were free to make all inter-state rates (1888 until 1899), and to enter into agreements "in restraint of trade" (or, if they were not permitted to do so, actually did so under a misapprehen- sion), the average freight rate per ton per mile fell from 1.001 cents to .724 cents, and that since effective regulation began there has been no reduction but rather some in- crease. During this period the power of the state to make rates had been established, and the laws against agreements in restraint of trade, by becoming effective had pre- vented consolidations. The epoch, there- fore, which marks the metamorphosis of the railway manager from a belligerent defen- der of capital to the servant of many mas- ters also marks the termination of the down- ward trend of rates, until then unceasing. It may be said that this coincidence of the advent of effective governmental regulation with the ultimate of decreasing rates is accidental, but this is hardly true. One may almost assert that obedience to natural laws resulted in greater economy than compliance with contrary regulations. The railway offi- 100 RAILWAY MISRULE cial is no longer the free agent of capital, and he is without authority to represent the people. As the dividend his employer may receive is limited, and as he is under no obli- gations to the public, slight inducement exists to spur him on to the achievement of practical economies. Whatever the cause and eifect of regula- tions may be, one fact is certain. A stage has been reached when rates cannot be re- duced. Managers will not reduce them, be- cause further economies are seemingly im- possible and the Commissioners cannot re- duce them, until some means are found for increasing net incomes. Clearly, then, some means must be de- vised for doing the transportation business of the country more cheaply, since nothing remains long stationary, and the average prices that under existing conditions cannot fall must inevitably rise. So it is not alone necessary to give managers the power to in- troduce new economies, in order to permit further reductions in rates — ^it must be done to prevent their increase. And to do this will be to the advantage of everyone — pro- ducer, consumer, employee, and shareholder. RAILWAY MISRULE 101 All jthese problems which confront the rail- way manager must be solved somehow. Is the solution possible with the railways under private ownership, or must the Government acquire them?, CHAPTER VIII "WHAT MIGHT BE ACCOMPLISHED WITH THE BAIL WAYS IN PRIVATE OWNERSHIP UNDER A DIFFERENT PUBLIC POLICY TO raise $30,000,000,000 in twenty years is as gigantic a financial task as was ever contemplated. And to get such a sum for a business marked by frequent failures and disasters while favoured by the Govern- ment and the people, at a time when it has become subject to restraints and prejudice from both, seems an impossibility. Certainly, it is not feasible unless the policy of the gov- ernment is changed. The few companies having exceptional credit will exhaust it long before they have achieved any considerable part of their task, and others with only the usual resources wUl earlier meet financial failure. The country will suffer no sudden shock, but reach slowly that period of com- plete stagnation and continued depression which is inevitable. What is happening 103 104 RAILWAY MISRULE daily is portentous of what will continue to happen indefinitely. A few — a very few — issues are being offered to the public, by com- panies whose credit is of the first rating. But it is known that such companies are getting but a part of the money they require; and that the other and more numerous class of companies can sell neither shares, nor bonds. As the money needed to provide railroad facilities must be procured in some way, with the aid of Government credit if corporate credits fail; and as Government assistance would in all probability lead to Govern- mept ownership, it is high time for the people to consider carefully the causes which render it impossible for the railway companies to obtain the money they require, money needed not for extensions and betterments desired by shareholders, with expectations of private gain, but to provide facilities demanded by the people for public benefit. The popular impression that to enable cor- porations to sell shares and bonds, it is only necessary for the Government to permit in- crease of rates is a view both fatuous and fallacious. As we have already seen, rates are now sufficiently high to permit many of RAILWAY MISRULE 105 the corporations to earn reasonable divi- dends. The Atchison, Southern Pacific, Northern Pacific and Northwestern are all earning at the rate of over eight per cent, on their common shares ; the Burlington and the Pennsylvania in excess of nine per cent. ; the Great Northern more than ten per cent. ; the Atlantic Coast Line twelve per cent.; the Lehigh Valley and Delaware and Hud- son thirteen per cent.; the Louisville and Nashville and Union Pacific, fifteen per cent. ; the Central of New Jersey twenty-two per cent.; and the Lake Shore and Lacka- wanna thirty-three per cent. The most serious aspect of the situation is, perhaps, that many regions are served by companies which earn little or nothing on their common shares. The Missouri Pacific, Texas Pacific, Denver and Rio Grande, Western Pacific, Rock Island, Seaboard Air Line, Missouri, Kansas and Texas, Chicago and Alton, and St. Louis and San Fran- cisco Companies earned in 1912 not one dol- lar available for dividends on common shares, while the Erie and Southern earned only one and three per cent, respectively. Mid- way between the companies earning little or 106 RAILWAY MISRULE nothing on their shares, and those which earn from eight to thirty-three per cent, are a number of important companies like the New York Central, Baltimore and Ohio, Chesa- peake and Ohio, and St. Paul, which earn from six and one-half to seven and one-half per cent, on common shares. The rates between common points are the same on all these lines ; the prosperous Lack- awanna, the Lake Shore, the Northwestern and the Union Pacific enjoy no benefits from rate-making that are not shared by the Erie, Rock Island, Denver and Rio Grande and Western Pacific. All rates are made on pre- cisely the same basis for the Pennsylvania and the New York Central; the Atlantic Coast Line and the Seaboard ; the Louisville and Nashville and the Southern; the Bur- lington and the Rock Island; the Atchison and the 'Frisco. It is evident, therefore, that rates are not the controlling factor in the prosperity of railway corporations. And if we search for what such factors really are we shall find that the success of the pros- perous companies has been proportionate to the wisdom exercised in the location of their lines, the prudence displayed in capitalizing RAILWAY MISRULE 107 them and the economies practised in operat- ing them. But if it may not be charged justly that railway regulation is the true cause of the inability of many companies to pay divi- dends, neither can it be denied that the pres- ent public policy has impaired the credit of aU American railway corporations — ^the rich no less than the poor — abroad as well as at home. The condition referred to is rather a re- sidt of the public attitude generally towards railway corporations than the consequence of specific governmental acts. Continually attacked and rarely defended by representa- tives of the people; the object of hundreds of laws intended to restrain their powers and restrict their incomes, and of hardly one measure intended to assist them, these cor- porations have been treated like malevolent foes of society instead of useful servants of civilization. And those who have invested money in such corporations have been re- garded, if not actually considered, as the abettors of evil-doers finding their only pro- tection under the Federal Constitution, a constitution no longer reverently regarded 108 RAILWAY MISRULE in all quarters. Until a recent day railway corporations have been permitted the attempt to overcome unpopularity by attracting cap- ital with tempting offers of gain and prom- ised rewards, allurements they may no longer proffer. Investors are now warned that in future they may not profit from a company's prosperity, nor share in the savings its man- agement may make. If through growth of business or the introduction of economies the net income of a company is increased, that is to be regarded henceforth as a cause for reducing the rates of such company. Thus investors have learned that not only are they to be denied any gains from railway invest- ments, but their security is to be undermined by the taking away of all inducements to make the railway official adopt methods whereby the surplus may be increased. It is hardly necessary to add that a company's credit is gauged by its surplus income.* The investor is directly concerned by the amount he may receive in interest or divi- dends, the opportunities afforded him to *"If rates are going to be reduced whenever dividends exceed current rates of interest investors will seek other fields, where the hazard is less and the opportunity greater." — Railway Securities Ckinunission. RAILWAY MISRULE 109 profit on his investment as an offset to its hazard, and the security offered. We have seen that under the present public policy, he is allowed no chance whatever to profit — he may get his principal back with interest (or he may not), but stock dividends and bonus shares are advantages of the past. And even the interest he may receive is to be limited by the public which pays it, stohdly unconcerned by the fact that there is no limit to the losses the shareholder may sustain short of all he invests. This then, and this alone is the principal cause of the investor's lukewarmness ; and explains why corporations earning from seven to thirty- three per cent, on their shares can obtain but a fraction of the new money they require. At a time when every attraction is needed to induce capital to purchase American railway securities the people have adopted a short- sighted policy which repulses investors. The truth is that if American railway cor- porations are to carry out their undertak- ings, the public policy must be so far changed as to give buyers of shares and bonds a chance of something more than cur- rent rates of interest. Such investors do not 110 RAILWAY MISRULE expect assurances, or guarantees; but they justly demand that opportunity for gain in return for the risk of loss that is offered them by every other industry in the United States, and by every industry in other coun- tries. Why should not those who advance the money required for the country's growth be allowed some share in the prosperity they help to create? Why should not the share- holder receive a part of the savings which accrue from betterments their subscriptions make possible, and from increased efficiency their agents achieve? But by a change in the public policy the people can do something even more impor- tant than relieving the government's neces- sity of providing the immense sum required to rebuild the railways ; they can, by repeal- ing the anti-monopoly laws so far as they relate to railways, enable the cost of trans- portation to be so cheapened both that rates may be reduced and dividends increased. This should be done for the public good as the only means at the government's com- mand to assist in the reducing of the cost of transportation. Having the right to say what kind of trains shall be run, how many, RAILWAY MISRULE 111 how often and how fast; the right to say where stations shall be located and how they shall be lighted, heated and partitioned; the right to fix all rates, wages, interest and divi- dends. Governments might wisely leave to railway managers some offices through which their ingenuity and intelligence might help in the work of reducing the cost of transportation — always the great objective after adequate facilities have been provided therefor.* It has been seen that some railways enjoy excellent credit and that others have none. The difference is something that affects lo- calities and reflects on their development. It is important that regions served by a poor railway corporation should be aided to grow as well as those served by prosperous cor- porations. The town in the Southwest where many companies are poor should have an even chance with the town in the North- *English experts estimate that the wastes from competi- tion are equal to 30 per cent, of operating expenses. They are scarcely less in the United States. As the operating expenses of the railways for 1913 were $1,958,963,000, the reasonable inference is, that $400,000,000 of this was waste, aU of which the people were called upon to supply. This sum exceeds the total of all dividends disbursed during the year given by railway companies and is also greater than the annual disbursements for military, naval and post oifice expenditures by the Government. lia RAILWAY MISRULE west where the companies are all prosperous. With a few companies owning aU the rail- ways, their credit would be excellent. There- fore, the government should pave the way for the employment of such credits in the solution of the greatest problem confronting the public today by permitting the poverty- stricken and bankrupt railways, strugghng against their difficulties, to pass into the pos- session of their richer rivals, whose credit would give them what they lack, and enable them to achieve for the public the services which it demands. Under this policy, eventually, hundreds of imnecessary agencies, occupying expen- sive sites in all our cities, would be closed, and the thousands of officers and clerks they require could soon be more profitably em- ployed. Those agencies could be replaced by central joint agencies with necessary branches in the larger cities. Ultimately all freight depots and loading tracks could be concentrated in places the most suitable. One freight and one passenger department and one accounting department would suf- fice for as many companies as were brought under one direction, and soliciting agents RAILWAY MISRULE 113 would become obsolete. If these advantages were all that could ensue, it might yet be too early for the country to feel justified in stifling that rivalry between railway offi- cials which benefits the public to some small, yet appreciable extent. But the savings mentioned are insignificant when compared with what might be achieved were combina- tions and mergers and other means now pro- hibited again to be permitted. To get the full meaning of this suggestion let the reader assume that one direction — ^not necessarily one company — ^had control of all lines be- tween Chicago, St. Louis and the Missouri River, as what is true of trafiic in that region is largely true in general. Every morning and every night passenger trains leave Chi- cago, St. Louis, Kansas City and Omaha by way of numerous routes, but all destined to the same places. They leave at the same hour over different routes and make the same time. Only a few of these trains are loaded to their full capacity in cars, and few cars are filled — ^those routed over the lines preferred by the public — ^while the others are more or less empty except under unusual conditions. If this business were concen- 114 RAILWAY MISRULE trated as it might be, half the number of trains operated would serve the public better than it is served now. Through travel could be routed over the shortest, smoothest, and safest lines, and ample provisions could be made to enable the public to travel always by the superior routes. Those lines which, by reason of greater length and lack of ac- commodations, are not the best fitted for through travel would be the better enabled to serve their local business. The most ex- travagant and wasteful practice in railroad- ing is the running of expensive equipment at an excessive speed by companies whose lines are long, rough and crooked, in a hope- less effort to take business from lines that must always do most of such traffic, because they are best fitted to do it. It is no un- common sight — ^indeed a very usual one — to see Pullman after Pullman leave the depots in many cities with four or five pas- sengers occupying space intended for five times as many. This is why the average passenger revenue per train mile is so low. Statisticians report that for the year 1912 it was $1.13. The average earnings per train mile are small, not because passengers are RAILWAY MISRULE 115 few but because innumerable trains are run that the public will not patronize, having a better service offered by lines whose trains are readily filled. Let anyone observe and he may soon learn why the average earnings are but $1.13 per mile (the equivalent of fifty-seven passengers at the average rate paid .0199 cents ) . When he counts less than sixty passengers on any train he will find that it is either an exception to the rule or one of the many mentioned that should never be run; and he wiU also find, on nearly every train run over a line that is fitted for the service it undertakes, that the nimiber of passengers is rarely less than one hundred to the train, and frequently three hundred. Any modern locomotive is capable of haul- ing a train with comfortable sleeping capa- city for one himdred and fifty passengers and seating capacity for three hundred over a road of average gradients, and any train that can be so filled will earn from three to six dollars per mile. Limited trains and trains on branches into sparsely settled re- gions prove nothing, for they are either the extravagances or the unfortunate exigencies of the railway business. 116 RAILWAY MISRULE But these useless trains, and empty cars added to the burdens of necessary trains, are not only a waste, they are a nuisance. If the lines were relieved of them, there would not be such a pressing need for double tracks, more sidings and larger terminals ; the extra room at stations and at terminals, on sidings and on main tracks that might be so pro- vided, would greatly add to the freight faci- lities required; and many lines with only slight additional expenditure could do the business required of them for several years to come. It has doubtless occurred to the reader that the policy of concentration of all through passenger business on the lines best adapted to care for it, and of all freight traffic on the lines best adapted to handle it, would render immediately necessary addi- tions to the terminals and tracks of such lines, and that this would call for far greater expenditure of new capital than may be now contemplated by their owners. But what possibly does not occur to him is that the superior lines have already the greatest sur- plus capacity, or could supply it at the least relative cost; and that the lines unfit for RAILWAY MISKtlLE lll^ much of the business they seek are those that require proportionately the largest amount of betterments. A plan whereby aU traffic could be shifted to the superior lines would not only require less money in the aggre- gate than the present one, but it would largely relieve companies with poor credits of the necessity of securing much they now demand, and impose the burden instead on the companies having strong credit. Another fact of much greater importance, which may not have occurred to the reader, is that in doing the business yet to be de- veloped, the largest savings are to be made by routing all business over the best instead of over both best and worst. In twenty years the freight traffic of the country may be expected to grow to three times its pres- ent volume and the passenger traffic to two and a half its present proportions. Prepara- tions must be made to do a business in com- parison with which the present traffic is small, and preparations for such enormous increase should be made precisely as a manu- facturer would make them for an enormous increase of output. He would not only re- pair his factories, he would tear down many 118 RAILWAY MISRULE of them and rebuild elsewhere. In similar fashion much less than the $30,000,000,000 of new capital required by railways under the existing policy would suflSce them if the general policy of sending traffic over the most suitable lines could be adopted by the country's railway system as a whole. But such a consummation could be achieved only by arranging that the expenditure of the amount in question should be made under a single direction, a direction that should recognise two services to be rendered, both important and equally to be favoured, each according to its needs — ^local business and through business, the development of every locahty and the expansion of the whole coun- try. The first service would require the maintenance andT operation of every existing line in a way to care for all existing local traffic, and to develop every locality between the great centres, as well as the building of branches. For the other there would be selected for development between all cen- tres those railways that are located on the natural routes, and if better routes can be selected than exist, then new railways wovJd be constructed on such new routes. For pas- RAILWAY MISRULE 119 sengers, the shortest and straightest lines are such natural routes. For freight, the water level is the ideal, and its nearest approach practicable the desirable location. To spend money on lines that must lift all freight over avoidable mountain ranges or over roads unnecessarily long is to burden the commerce of the United States with a perpetual and unnecessary charge and one growing with each year in amounts to be counted only by thousands of millions, enough ultimately to crush the Nation's trade in the days when the test of its strength to survive will be determined by its ability to compete in production with the other nations of the world. The Nation today is in exactly the same situation as that of a manufacturer with many plants, who is assured of new business soon to be offered at a constantly increasing ratio which he knows will in a few years in- crease his present business to three times the present proportion. If it were optional with him either to add, pro rata, to the capacity of each existing plant, or to select the best of them and add some entirely new and better ones, would any manufacturer hesitate as to 120 RAILWAY MISRULE the course to be pursued by him? Certainly not. He would select the site where condi- tions were most favourable for economical production, and, if necessary, he would wreck any or all of his other plants. That is what "efficiency" means as applied to pro- duction, and the conservation of energy is its potency.* Greater efficiency in management of rail- roads is now on the tongue of every theorist and has always been uppermost in the mind of every practical operator. And yet the door is closed by law against the general use of the fittest railroad for all service to be performed. We continue to force many pas- sengers over the worst routes when they might travel over the best, and send freight over the longest, crookedest and most moun- tainous lines when it might all be shipped by the most direct and the most nearly level. What would the public think of a farmer who, having two roads open to him between his home and his station, one shorter than *It is said that Mr. Carnegie once ordered ten machines at a cost of over twenty thousand dollars each, and after paying for them, had them "scrapped" at the place they were made because he could not afford to use them. He had seen something better in the meantime, which he sub- stituted for them, and which cost twice as much. RAILWAY MISRULE 121 the other, more level and better paved, should choose the longer, steeper and rougher road? And yet that is just what the American people do constantly in respect to their rail traffic, deluding themselves with the fact that they pay the same whichever rail route is chosen.* That the traffic will be ultimately concen- trated on the lines that can do it cheapest is certain. But it will be first necessary to over- come the prejudices of those who hold to the archaic idea that competition between car- riers is advisable, and to overcome also the influence of interests that cannot afford to admit now that the railroads in which their money is invested are not suitable for all sorts of traffic. The interesting and the doubtful question is whether these great economies are to be introduced by the railways held in private ownership under public supervision, or under Government ownership and control. It would seem the better policy to permit the *"The more completely the whole railway system of the country can be created as a unit, as if it were all under one management, the greater wiU be the benefit of its serv- ice to the public, and the less the liability to unfair exac- tions." — ^Thomas M. Cooley, the first chairman of Interstate Commerce Commission in Omaha Board of Trade Case. 122 RAILWAY MISRULE present corporations to do it. But this would require assurances from the Govern- ment that the new money needed would be permitted to earn an attractive return, that the railroads should be authorised to com- bine so as to do the present and future busi- ness in the most economical way, and that the railways should be compelled to do it in that way. For let it not be supposed that every railway shareholder and every official would favour the unification of lines. The owner would favour it, only at his own price for his shares, and the official would be largely concerned for his own future. If by a change of public policy the opportunity were given the companies to route all busi- ness as it ought to be routed, the principal opposition to complete reforms would come from shareholders and railway officials, not from the public. Men fight hard to make a good bargain, and long to retain power. Should the people grant railway corpora- tions the privilege of doing the business in the most economical manner, the companies would still have to be coerced into doing it in that way. But what if the people will not tolerate RAILWAY MISRULE 128 a change that removes the remaining faint shadow of competition between railroads? Or what if the companies, having been au- thorised to do business in an economical way, decline to change present methods, or can- not be coerced into doing so? Then, if the facilities needed for the country's growth and the best and the cheapest service are to be secured, there is no alternative but Gov- ernment ownership. CHAPTER IX GOVERNMENT OWNERSHIP Government ownership is not to be welcomed with eager expectation, but neither is it to be dreaded. Its feasibility is being tested by other nations, and with success. Certainly no foreign people have been as dissatisfied with Government owner- ship, or as clamourous for change and as passionate in their denunciation of practices under it, as our people have been with their systems in private ownership. If "differ- ence is the first sign of progress," content may perhaps be regarded as an indication of decadence, and it were illogical to cite national dissatisfaction as other than a rest- less desire for improvement. To admit that Government ownership has faults does not prove private ownership to be without them. What is best for one race may not be so for another. What is best for one country may work injury elsewhere. On the verge of 125 126 RAILWAY MISRULE what is surely to be an eventful epoch, and may be a crisis, in the history of the United States, it is the part of wisdom for its citizens to study without bias every policy offered for solution, to put aside prejudice, and in an open-minded manner weigh the advantages against the disadvantages of Government ownership. It is unfortunate that those who might as- sist most in the solution of the problems out- lined here are generally restrained by self- interest, or influenced by quest for public favour, from cahn consideration and frank discussion of the subject. Unfortunately too many persons are lying in ambush for the railway official or the public official whose orthodoxy can be questioned, holding no forgiveness for him who is false to the tenets of his class. If he represents capital, they think he shoxild, to remain loyal, assert that Government ownership would result in inefficient service and national bankruptcy; and if he represents the people he must never cease denouncing all combinations and agree- ments in restraint of trade. Therefore only those may speak and write candidly on the subject who bear neither the yoke of capital RAILWAY MISRULE 127 nor that heavier one imposed by the people. This is unfortunate because the questions are better understood by the first, and the influence of the other class is much greater than that of the unimportant and urdn- fluential persons free to speak and act. Serious consideration of Government owner- ship is inevitable, and its acceptance may be the wisest solution of many problems. Under all circumstances and conditions the unification of railways is unavoidable if the most economical transportation is to be at- tained. The only debatable question is whether such monopoly should be managed by persons responsible to private corpora- tions seeking to make some profit for private investors, or by persons responsible to the Government, required only to see that the rates charged impose the least possible bur- den on the people regarded as a whole. The question may be properly asked at the outset : Is the ownership and operation of railroads a proper undertaking for a Gov- ernment? The answer may be given by il- lustrations. England now accepts the own- ership and operation of tramways as a legit- imate function of its municipalities, and the 128 RAILWAY MISRULE towns and cities in America where water- works, electric light works and gas works are in private ownership grow yearly less in number. There are few cities where it is not now recognised that all public service corporations are essentially monopolistic. One ownership of street railways, of tele- phones and of light plants in each quarter of a city, if not throughout, is an accepted the- ory in all those cities that are best served. But people in many countries yet apply a principle to their municipal governments which they reject in affairs affecting the Nation. It is nowhere any longer demanded that street-cars on parallel streets shall be operated by rival companies, but it is in- sisted upon in the United States that paral- lel railroads between cities shall be. The first has come about because the cities found that, if they were to grow and expand, poli- cies must be adopted that would secure the transportation and other public services de- manded, and that to get the best services and the money to supply the facilities to provide them, things economically sound must be recognised as politically wise. The Federal Government has not hesitated to build the RAILWAY MISRULE 129 Panama Canal, and now proposes to make it free — to American shippers. England owns its telephones, as well as its telegraph lines, and the United States has entered into the business of a carrier in no smaU way. by the institution of a parcel post. Altogether one finds England, Canada and the United States the only important countries that still hold to the policy of private raUroad owner- ship; and notes with surprise that pubUc opinion in England is divided respecting its desirability.* In Germany, Austria Hun- gary, Russia, Italy, Switzerland, Belgium, Holland, Denmark, Norway, Roimiania, Bulgaria, Japan, India, Egypt, the South African Union and Australia, all the more important lines are state-owned. In every land where England governs, except at home and in Canada, the railways are state railways. In France the Govern- ment operates only one system, but by oper- ation of law all are to come into the posses- sion of the Government in course of time. According to provisions of the concessions *I end by saying that State Ownership is in my judgment coming and coming soon." The State in Relation to Rail- ways in England. — W. M. Ackworth, paper read at Congress of the Royal Economic Society, January 11, 1912. 130 RAILWAY MISRULE granted railroad companies of Mexico and the States of Central and South America the systems are to become the property of their respective governments upon the ter- mination of such concessions, generally ex- tending over a period of fifty years. Thus it is seen that the principle of private own- ership of railways is exceptional in the af- fairs of nations, and peculiar to the United States, for even under the English flag more miles of state-owned railroads are operated than are privately owned: to be exact, 53,450 miles against 33,292. One should not forget that railways are by law declared to be highways, and that the courts have declared that they are impressed with a public interest. The transmission of intelligence, the maintenance of means of national defence and adequate provisions against internal disorders are the very first "business" of a Government. Clearly, then, the creation and operation of railroads is a governmental function. That is why private property can be taken for their use, and why, although privately owned, they are subject to public control, and why money once invested in them can RAILWAY MISRULE 131 never be withdrawn. The question of who shall operate them is therefore merely one of political expediency. There is one objection sometimes urged against Government ownership that has slight justification. It is said that the serv- ice would be inefficient and unnecessarily ex- pensive. Those who have given voice to this opinion have only their opinions to offer in support of their assertions. Neither the United States nor its people have so failed in any public undertaking, or displayed such feebleness or incompetency, as to warrant this sneering insinuation. The Government is conducting a postal service admirable and cheap and building a canal under conditions which reflect high credit on the officials that have had it in charge. If it is true that one swallow does not make a summer, neither does he make a winter. There has never been, in American construction experience, better engineering than that displayed by army engineers nor greater integrity shown in the expenditure of public funds. If their work has been costly, it has also been eco- nomical, because it will endure. The men who are constructing the national irriga- 132 RAILWAY MISRULE tion plants are spending more money than the promotors of a stock speculation scheme would spend, because they are build- ing dams that will hold water forever, and canals that wiU distribute it for all time, and not unstable things, fulfilling their purpose only till the last sh;}re of stock is marketed. The value of any public work depends upon its durability as well as its suitability. That private construction is notoriously unsub- stantial is attested by the enormous fire losses in the United States. It is cheap and it is expensive. The value of any public service depends on what is given, and not on what is paid for it. The state may give the user of its postal service more than he pays for. It can give him something of great value for nothing. An extreme case of this sort is presented by the proposal to give shippers the free use of the Panama Canal. The economic question in every gov- ernmental undertaking is : does the value of the service to be rendered the people as a whole justify the cost to the whole people? The people of the United States have long since passed beyond the stage when one may insist that no man shall be taxed for an- RAILWAY MISRULE 133 other's benefit. Their ideas of Government are diametrically opposite. He who can be made to pay is taxed for the common good of all. The people do this as justly as they can, but they do it. They protect industry to the detriment of a goodly few. They build roads that many >^an never use. They maintain schools that some will not enter. That the Postal Department earns no sur- plus means nothing to the average citizen. He only asks : is it worth what it costs ? And who shall say that it is not? It is true the people have yet to show their ability as a state to operate their railroads successfully, but it is likewise true that they have done nothing yet to indicate their inability so to do. When one turns to other states, one need not be any less encouraged. In Italy and in France complaints are many, but they are no more than one hears in America of serv- ice, and little or none of rates. Further- more such complaints are generally party tactics made by newspapers and publicists opposed to the Administrations in power. This sort of critics, so frequently quoted else- v/here, are in their own countries recognised 134 RAILWAY MISRULE as partisans engaged to criticise everything the Government does. The truth one rarely hears is, that, bad as the management of these state railways is now said to be, it was worse when they were under private owner- ship. L'Ouest was the worst railway in France, and it is still far from the best. But it is now better than it was under private ownership. Of course large expenditures have been required and more will be required before it can be brought to a state of com- plete efficiency. The recent history of na- tional railroad operations in France proves nothing. That it has been cited by others as an argument against state ownership in- dicates either a lack of good faith or little acquaintance with the facts. In Italy railroads are still abominable, but so are many other utilitarian innovations in that otherwise most richly dowered of coun- tries. But they are infinitely better than they were before the state took them over. Some years ago an Italian Minister quieted the foes of state ownership by saying: "We found private ownership of railways insuf- ferable. If the state fails in their operation, RAILWAY MISRULE 135 that will not mean state ownership is a fail- ure. It will only mean that the people need another ministry." It seems to be generally conceded that English railways in India are well managed, as are also those in her colon- ies. Tables of average rates of charges and average costs are not helpful to the student of the question, for these depend upon many things that are never the same in any two countries. How great the variance may be without reflecting on any management will be understood by one who will consider that the average freight rate on the Pennsylvania Railroad is about six-tenths of one cent per ton per mile, while on the Southern Pacific Railway it is one cent and a quarter, or more than twice as much. Nothing can be more unreasonable than to attempt to prove what rates would be in the United States under Government ownership by citing what they are in countries that do operate their rail- ways. If however one should wish to pursue that line of argument, he would have to con- clude that Government ownership in Europe results in much cheaper rates than private ownership, for here are the statistics : 136 RAILWAY MISRULE Average rate Ownership. Country. per ton per mile. United Kingdom 2.33 cents Private Austria Hungary 1.45 cents State Germany 1.41 cents State Russia 95 cents State Belgium 74 cents State — which of course proves nothing except that anything can be "proved" by statistics. It has been asserted that because the aver- age cost per ton per mile for hauhng freight in Germany is 1.41 cents, whUe it is but .741 cent in the United States, there is convin- cing proof that state ownership is responsible for the higher charge. Only a brief enquiry into the cause of such discrepancy would be necessary to convince a railway expert that the German charge is in reality perhaps the lesser of the two, allowance being made for the character of the service rendered, be- cause the average haul of a ton of freight in Germany is sixty miles, while in the United States it is one hundred and forty-eight miles.* The expert knows that the length *"I am inclined to think the American railways are on the whole the best in the world. But this is not nearly so certain as it was twenty years ago. , In 1885 the Ameri- can Railroad clearly led the world in the race for suprem- acy. In 1906 they are in the position of being rapidly overtaken by those of Germany and perhaps of some other countries." — Arthur T. Hadley, LL. D., in Boston Tratir script, April, 1905. RAILWAY MISRULE 137 of haul is a controlling factor in the cost of transportation, for the same terminal serv- ice must be performed at the beginning of the shipment and at its termination whatever the length of haul.* A thorough investigation of all condi- tions in all countries by an impartial and competent commission would show rational explanations of the discrepancies which sta- tistics present, t And it must be kept in mind that not all the mismanaged railways are state-owned and not all the well man- aged ones are privately-owned. If there are countries that wish their railways were as well managed as the Atchison or Pennsyl- vania in America, and the Northwestern in England, there are many shareholders in American companies who would profit greatly if their lines were as efficiently di- rected as the Post Office in America, or the Parcel Post in England. In the United States the Government in taking over the railways would find itself *The Railways and the Nation.— W. Bolland, p. 106. +The reader interested in the arguments pro and eon relative to the efficiency of government-owned railways will And them presented in an interesting way by E. Davies in "The Case For Railroad Nationalization," and by E. A. Pratt in "The Case Against Railway Nationalization" in The Nations Library Series, London, 1913. 138 RAILWAY MISRULE extremely fortunate in two respects. It would take over a system admirably organ- ized and be able to avail itself of the splendid talents and great energies of the men who have brought the system to its present state of efficiency. The railway service would necessarily become subject to civil service regulations, but that is a system which most important companies are themselves en- deavoring to create in their managements. Salaries, wages and prestige would not necessarily be disturbed, and as employment in the public service is certainly as honour- able as under individual, or corporate direc- tion, young men of the highest attainments and best abilities should easily be induced to qualify for this branch of the Civil Service.* The public too often forgets that the men who manage the railways are not specula- tors, or "captains of industry," or capitalists, but men of education and hard experience, who have studiously, earnestly and indus- triously applied themselves to their chosen life-work. Given the chance, they would *Mr. W. M. Ackworth, himself opposed to state owner- ship, has written: "Operation from the technical side will, I doubt not, be improved." — The State in Relation to Bail- ways, p. 10, RAILWAY MISRULE 139 work as well, as honestly, as honourably, and as profitably for their country as for share- holders whom they neither see nor know.* It must not be overlooked that the charges for railroad transporation are likely to in- crease under private ownership. They were .724** in 1899, and in 1912 .741 per ton per mile, and in the interim had been .780. The difference between .724 and .780 means $150,000,000 annually to the public. There is therefore no guarantee that rates will re- main at their present low level under private ownership. Passenger rates were 1.93 in 1908 and they are now (1912) 1.99. But what of the cost ? The sum that would be required now to buy all railway shares would be enormous, but not more than one- seventh of the amount that it is said must be raised to finance the railroads during the next quarter of a century. The first cost is trifling compared with what it would lead to eventually. That should be frankly stated and seriously considered. *"No arguments have been put forward explaining why the same managers and workers who are efScient when em- ployed by companies suddenly become incapable or malevo- lent when their paymaster is the state." — The Cage for Railway NationaUzation, E. Davies, p. 212. **Cents. 140 RAILWAY MISRULE Two facts that will surprise the casual student of the question, and may surprise many others, are that the first cost woxild be much less than is generally supposed; and that the properties are worth on the basis of their present earning power much more than their probable cost. The pubhc has been astonished so often by the state- ment that the capitalization of the railways is "over nineteen billions" and startled so frequently by the statement that they are verging on the brink of bankruptcy, that it is as agreeable, as it is unexpected, to learn that nothing like the amount stated would have to be expended by the government to acquire the railways, which, taken as a whole, are in good condition, earning large divi- dends, putting incomes into betterments, carrying over large surpluses and having large cash balances on hand.* Although there are nearly two hundred and fifty thousand miles of railway operated in the United States, and these are owned *The Atchison, Topeka and Santa F6 Railway Co. had on hand, June 30, 1913, $30,096,000 in cash and bant deposits and $17,536,000 in supplies : Eighteenth Annual report. The cash balances of the Pennsylvania Companies in 1913 were over $60,000,000. — Sixty-sixth Annual Report. And the Union Pacific held in its treasury in cash, bills receivable and unpledged securities over $236,000,000: Sixteenth Annual Report, RAILWAY MISRULE 141 by over four hundred companies, neverthe- less all the important lines engaged in inter- state traflSc are controlled by less than forty corporations. No plan for Government own- ership would be feasible that did not con- template ownership by the Federal Govern- ment of the important systems ; and, on the other hand, such Government in the first in- stance would certainly not consider the pur- chase of any of the terminal, belt, and indus- try lines, nor of those smaller systems whose lines are all in one state, except in cases where such lines constitute important links in inter-state systems. In the appendix to this volume will be found a statement showing the mileage con- trolled by thirty-five companies, their share capital, their net income for the year end- ing June 30, 1912, the highest market quota- tion for such shares since 1911, and the value of such shares based on such quotations. The systems mentioned in this statement in- clude every railway of importance except those now in the hands of receivers and those belonging to Canadian companies. While the aggregate mileage mentioned is 188,002, the mileage actually controlled is much greater, because such companies together control 142 RAILWAY MISRULE many terminal and belt lines, and also many- small lines not appearing in the list of lines controlled by any one of them. It can be safely said that if the Government owned these systems its control of the national sys- tem would be complete for aU practical pur- poses. If all the shares were bought on the basis of the highest price that has been quoted for such shares since 1911 the aggregate cost would be $4,066,311,000; and the aggregate net income which such shares earned during the year ending June 30, 1912, was $264,- 414,753. But the relation of cost to net in- come would be much more favourable than appears from these figures, because the quotations which are the basis for the as- sumed value are far above the normal prices for the shares, generally speaking. And while the government would want to deal with shareholders on a basis of absolute fair- ness, it would not pay fictitious prices. The statement includes over $185,000,000 as the "value" of shares that earn nothing, and some of which are quoted today at one-third of the price shown in the statement. Fur- thermore, the year 1912 was not a fat year RAILWAY MISRULE 148 for the railways. It was an exceptionally lean year. And there is another factor of importance not disclosed in the statement. Many of the companies have large hidden incomes. The New York Central is entitled to all the earnings of the Lake Shore, but it left over $7,500,000 of surplus in the treas- ury of the latter company in 1912, which might have been declared as a dividend, in which case New York Central net income would have been swollen correspondingly. Likewise the Pennsylvania and many other prosperous companies permitted subsidiaries to keep in their treasuries large amounts really belonging to the shareholders of the parent companies. In the statement the preferred shares of prosperous companies have been omitted be- cause such shares are unnecessary to a con- trol, and, their income being fixed and cumu- lative, they may be dealt with as bonds would be, that is, assumed as an inctmibrance on the properties purchased. In the few cases where preferred issues are included their acquisition is necessary for complete corporate control. One should not lose sight of the fact that 144 RAILWAY MISRULE by buying the railways the Government would acquire nearly all the anthracite in the Alleghanys, and large areas of oU, tun- ber and bituminous coal lands, which, on the one hand, would constitute valuable assets, and, on the other, present responsibilities not lightly to be passed over. If it be assumed that the Government bought all the railways on the basis of the market values indicated, it would be paying a price of exactly $4,066,000,000. On this simi the railways earned for the year 1912 $264,414,753 applicable to the payment erf interest, or over six and one-half per cenL on the cost. Assuming that the Governmeiiit issued and sold its own three and one-half per cent, bonds at par to obtain the money to make the purchase, and that net income continued as at present there would be an annual surplus in the Government's treasury of $121,980,000; and even if the Govern- ment could not borrow on better than a four per cent, basis there would be a surplus of more than $100,000,000. No one would suggest the purchase to make a profit, but it is reassuring to know that the Government could start on a pros- RAILWAY MISRULE 145 parous basis, and without increasing rates could spend large sums for improvements out of surplus. There is no doubt about these deductions. They only assume a mainte- nance of present conditions as to cost of service.* Would the shareholders sell for a fair price ? It is to be hoped so on their account, for any attempt to "hold up" the Government \ii^ould be disastrous for the shareholders. Tl.'he Government would be obliged to offer a, fair price and shareholders would be com- pelled to accept it. Resort to legal proceed- ings would not be necessary, because neither every line nor every share of any line would be necessary, t If the Government owned one line from New York to Chicago and St. Louis, one from those cities to San Fran- cisco, and one to the Gulf of Mexico, the line in each case being equal to any in gradients, distance and curvature, it would make the *Herraann Schumacher, Professor of Political Economy at the University of Bonn, has stated: "The nationalization of (Prussian) railways was a brilliant stroke of business, per- haps the most brilliant ever transacted by a Modern State." Nationalisation of Railways in Prussia: Paper read before Congress of Royal Economic Society, January 11, 1912. tThe Prussian Railways were acquired by purchase of shares on the basis of their market value without resort to the compulsory powers of the laws. See Report Board of Trade Railway Conference, 4677, p. 64. 146 RAILWAY MISRULE rates for the country, for rates are now so based and made that three companies such as the Pennsylvania, the Atchison and the Louisville and Nashville have it in their power to reduce every through rate. The Goverrtoent should in fairness offer to buy all shares of all companies operating impor- tant trunk lines, but there is no reason why it should buy lines built to reach mines, forests and industries or discourage the in- dependent ownership and construction of such lines by either individuals or states. Neither need the Government buy all the shares of companies, for if a minority of shareholders preferred, there could be no objection to their interests being retained. It is worthy of remembrance that a com- mission of Senators whose members were perhaps more conservative and more friendly to capital than any that could be selected now, once recommended, after long study of the precise problem that confronts the country today, that its best solution involved the building of a Government-owned rail- road from the seaboard to the Missouri River with the straightest line and the lowest grades obtainable in order to provide the RAILWAY MISRULE 147 additional facilities required for the country's growth and to make possible lower rates than other lines charged or could afford to charge.* The people of the United States are about to create, with the aid of the railroads, new business equal to twice, or more than twice that now done by them. If any individual had that amount of tonnage to offer, he would say to the companies, "You must either take this new business at lower rates than you now charge or I myself will build lines that can do it on a lower rate basis." For he would know, as every business man knows, that as the volume of any business increases the cost unit should decrease. That average charges on American railroads have even slightly increased, during the past thirteen years, indicates that something is radically and fundamentally wrong with the business itself if charges are proportioned to costs, for during that time the freight business of the companies has more than doubled. One may grant that there are *William Windom, Secretary of the Treasury under two administrations, was Cliairman of this Commission, and John Sherman, Henry G. Davis and Roscoe Conkling were members. — Transportation Routes to the Seaboard, Vol. 1, p. 2i2. 148 RAILWAY MISRULE explanations why costs of producing rail- road transportation have not gone down, but reason forbids acceptance of the idea that the new business should not be done cheaper if it is properly arranged for by a single authority given a free hand to plan and direct railroad reconstruction and opera- tions for the entire nation. Let him who thinks otherwise consider this simple busi- ness proposition: Should responsible persons offer tomorrow to create twice as much new business for one line operating between New York and Chicago as now is done by all the existing lines, and offer it all in per- petuity to any one existing line on condi- tion that it would carry it at less than exist- ing rates, does anyone question what would happen? If the railroads under private ownership are incapable of reducing costs as density of tonnage increases, then private owner- ship is a failure: and yet no one hears it predicted that rates will be reduced. The increase of wages and taxes in American industries has not prevented gradual reduc- tions in the unit costs of nearly every effi- ciently managed industry, and it will be RAILWAY MISRULE 149 found that the greater efficiency has as often been developed by monopohes as by com- petition, and that in every instance where the best results are obtained the volume of business has been increased and concen- trated. Every saving that could follow the con- centration of all business on the lines best adapted for it, did one corporation own all railroads, should inure to the Government. It would send every pound of freight over the line that, logically, should haul it. It would run only the trains and cars required. It would maintain only the offices and sta- tions needed. The savings in interest would be large. No one can foresee the future of private and public credit, or the probable range of interest rates, but one may attempt a forecast of the future by references to the past. We know that Government guar- anty or obligation will secure money cheaper than companies can obtain it. It seems reasonable to conclude that the Government can borrow on a basis at least one and a half per cent, lower than the companies; that is to say, if railroads can borrow for five per 150 RAILWAY MISRULE cent, the Government can borrow for three and one-half per cent. Therefore on the $30,000,000,000 of new money to be raised the annual saving wovJd be $450,000,000, a smn much greater than the aggregate amount paid in 1912 by all the railroad companies in dividends. And what is more important, the Government can raise the new capital needed, while possibly the companies may be unable to do so on any terms. It is to be remembered that there is no limitation on the taxes that can be levied on the bonds of private companies, while Government obligations are exempt from any taxes. There is further a possibly much greater saving that might be made than has been so far intimated. It is not unreasonable to be- lieve that much less capital would be re- quired under Government ownership than has been estimated as necessary if the pres- ent policy is continued. If useless passenger trains could be taken off, tracks and ter- minals would be relieved. If the line that is fittest were to do all the business, then only that line need be improved. Under private ownership unless the public policy is changed RAILWAY MISRULE 151 all lines will be prepared to compete for the new business. We have noted the waste this means in operation. We have now to con- sider the greater waste in useless construc- tion. There are many cases where either one of two lines is equally capable of producing the best service possible. In such cases the government would select for important im- provements that one of the two susceptible of improvement at the least cost. If the Government owned all lines it would consti- tute its through routes of combinations made up by selection of the fittest from all exist- ing lines supplemented perhaps by new lines. A centralized use and control of ter- minals would result in less capital expendi- tures, for existing terminals could be more fully used, and the additional ground ac- tually required could be bought where it would cost least. As matters now stand, all the single track companies are being required to double their tracks long before there is enough business for two tracks simply be- cause there is too much for one. Under a plan of concentration of traffic, additional tracks would be added only as full use of them could be made. Furthermore there are a 152 RAILWAY MISRULE number of companies that today possess facilities which for slight additional expen- ditures could be made to carry an enormous increase of tonnage.* Indeed, a very large percentage of the amounts estimated as necessary, and about to be expended, are for the purpose of putting systems that have not sufficient tracks and terminals on a parity with those that now have a surplus of both. To that extent at least one may be certain that under Government ownership the sys- tem would escape extravagant and unneces- sary expenditures that otherwise will remain forever as a burden on commerce. A fact that all the world seems afraid to face is that the Government should insist up- on a distinction in the rights of labour en- gaged in a private industry and labour em- ployed by a public service corporation. If the employer and his employees in any purely private enterprise become involved in strikes or lock-outs, that can be no concern of the public. These controversies are of benefit to the employer, the labourer and society, and should be regarded as the pri- *To mention them would be to create invidious com- parisons, but every informed railroad man can tell the reader which they are. RAILWAY MISRULE 153 vate affairs of the interested individuals. But a way must be found to avoid general strikes of those engaged in mining coal and in operating telegraphs, railways, and public utilities, whether the employer is the Gov- ernment or a corporation. No foreign foe could do any modern state the harm that would follow a suspension of its railroads for sixty days. It may be said this is impossible. But is it? For railroad labour to save two months' wages as a "war fund" (just what the Syndicalist proposes he should do) would be no difficult thing. With agitators advocating such measures as a general revolt that will "strike terror to the heart of society," society itself should be awake to its dangers, for it is at society, not capital, that the new movement growing so fast in every European country aims, and its deadly weapon is the general strike. It is no answer to say labour will not face hunger and suffer privations through a general strike (such as so far, happily, has never occurred) , for its heroism is not to be challenged, and its daring is beyond bounds. That which before the development of mod- ern industrialism was impossible, is now pos- 154 RAILWAY MISRULE sible. When cities were small; when nearly every man lived near his place of work and found his supply of food where he lived; when food was brought to town by the men who produced it ; when the world neither had nor needed railroads or tram-cars, elevated trains or subways, electric light or gas, tele- phone or telegraph; when coal, still a lux- ury, was no factor of importance in the necessities of life — a general strike was im- possible because it would have been purpose- less. But now those who preach its efficacy make no senseless threat. Ultimately the officer or employee who engages in the service of a railroad must be regarded as one who serves his country, and should no more contemplate striking than would an army officer or a soldier. May it not be that government ownership of rail- ways is not only the best solution of the labour problem, but, in its eventualities, the only one? For will any man ever consent to accept railway service on condition that he shall not strike so long as the railways are owned by private corporations? Perhaps a fear in the mind of everyone is that adding the great number of railway em- RAILWAY MISRULE 155 ployees required (there were 1,728,000 of them, men, women and boys, chiefly men, in 1912) to the nmnber of persons who are now in the immediate employ of the Govern- ment is hazardous. And so it is. But govern- ments can only exist in the midst of dangers. And they advance only in proportion as they are able to overcome obstacles and suffer ordeals. They endure only so long as they can maintain order at home and enforce re- spect abroad. Today it may be the lack of a large army, and tomorrow the existence of one, which menaces us, but the fear of neither should either lead us to become a military people or permit us to be found unprepared for war. No sober-minded person will hail with enthusiasm the idea of adding nearly two million names to the nation's pay-rolls. It is a step menaced by the gravest dangers. But if such a step would be destructive of our Government, would the Government survive otherwise? Does not the suggestion that we are incapable of doing what other nations are doing successfully contain an in- dictment of our form of Government, or a thought discreditable to the capacities of our people? Must it not mean that our Govern- 156 RAILWAY MISRULE ment is feeble or our citizens incompetent? And, logically, is not such argument based on the assumption that there exist hidden dangers much greater than the exposed one we are considering? That Government tasks should be made light, that the strain to which they are al- ways subject ought to be made no heavier than necessary, everyone must concede. But Government ownership should be accepted or refused according to the nation's needs. And let it be considered and reconsidered that railway employees are engaged in a business the people cannot allow to be sus- pended. Trains must be kept running at any cost. A general railroad strike would affect the fortune, the health or the life of nearly every citizen. It is no more to be tolerated than an interference with the water supply of a city, for it is the source of food supply. Every effort should be made to avoid the frightful losses and dangerous is- sues that it would involve. Can that be done with the rail systems in private ownership? While no free man will submit to compul- sory labour it is compatible with honor and self-respect to be willing to enlist in a public RAILWAY MISRULE 157 service requiring the submission to arbitra- tion of disputed questions. There are many things more improbable than that the Gov- ernment will have to acquire the railways in order to provide for their continued opera- tion. CHAPTER X CONCLUSION A STATE of affairs in railway regula- tion has been disclosed that is little less than alarming, yet the past affords much en- couragement for believing that when the imminent crisis comes, means wiU be found to avert consequences which would restrict trade, trammel commerce and check national progress. For despite the mistakes in loca- tion and construction, in no other country have railways done so much for civilisation. And notwithstanding the faults of a public policy that renders unnecessarily high the cost of transportation, freight rates in the United States are as low as anywhere in the world. It is reasonable to hope that a people who have produced a system which, if not the best, is certainly inferior to none, will adopt, ultimately, regulatory methods that will obtain for the nation what its growth demands, and secure for trade what 159 160 RAILWAY MISRULE its prosperity requires. But there is real danger that meantime the people may be too slow in recognizing the necessity for changes in the public policy, and that as a conse- quence a halt in national growth and stag- nation in trade will occur. The present urgent need is a timely recog- nition by the public of facts which at the risk of repetition are here restated. Because railway facilities are yet adequate; because rates are still cheap ; and because prudently financed and well-managed railways are even now yielding their owner ample profits there is ground for apprehending that the public will too long ignore other facts per- haps not equally apparent : that the demand for facilities is increasing faster than the ability of the companies to provide them; and that rates must inevitably rise, and cor- poration incomes inevitably fall, if means are not found for introducing new econo- mies in operations. The transportation facilities now used by the public were made possible because capi- tal thought it profitable to subscribe the money they cost. There is before the writer a banker's prospectus issued in 1874 offering RAILWAY MISRULE 161 in return for the payment of each subscrip- tion of one thousand dollars, a like amount in the seven per cent, bonds of the Atchison, Topeka and Santa Fe Railroad Company, one thousand dollars in the capital stock of that company and seven hundred and fifty dollars in the six per cent, bonds of one of the richest counties in Kansas. As such shares and bonds subsequently sold above par, the subscribers were enabled sub- sequently to withdraw one hundred and seventy-five per cent, in profits on their in- \'estments; and, also to secure permanent seven per cent, incomes thereon. And it may be added that a farmer who bought lands de- veloped by such railway, at two dollars and a half per acre, can now sell them at a profit of from four thousand to ten thousand per cent. How different were these from the conditions that exist now! Now capital is told: "You shall gain nothing from railroad investments. You may receive interest, but no profit; and you incur the risk of losing all — principal as well as interest." Surely, optimism must have an eternal hold on the man who can believe that thirty thousand million dollars, or even half the sum, of new 162 RAILWAY MISRULE capital can be raised for the extension and betterment of railways under conditions such as these. Yet the new money required must be ob- tained. If corporations are unable to pro- vide it then the Federal Government must do so. When the money is obtained, the ques- tion of how it may be expended most advan- tageously will be a public affair, for, as we have seen, it is the people upon whom is really imposed the burden of all additional capital charges. And when the new money required is obtained and has been wisely ex- pended, there will still remain for public concern the problem of possible savings in operating costs ; for, as we likewise know, it is the people who pay every item of expense, as well as every dollar disbursed in interest or dividends. These then are the questions the public must answer: Can Government Ownership be avoided? And, if it can be, is continued Private Ownership still to be preferred? Let the citizen who believes the first may be answered in the affirmative propose the in- ducements which must be offered capital to render that course feasible; and let him who RAILWAY MISRULE 163 answers "y^*" to the second question con- sider, whether the Government or the cor- porations can obtain the new capital re- quired on terms costing the people least in resultant charges; whether the Government with a single direction, or the corporations under many, will expend more wisely the enormous sums which are to be added to the heavy burden now imposed on the country's commerce; and, finally, whether it is advis- able to grant one private corporation that complete monopoly essential to secure for the people the most efficient services and the lowest possible rates. BIBLIOGRAPHY Railroad Transportation: Arthur T. Hadley. G. P. Put- nam's Sons, 1899. The State in Relation to Railways; Papers read at the Congress of the Royal Economic Society, January 11, 1912: P. S. King & Co., London, 1913. Report of the Board of Trade Railway Conference: Cd. S24T. Report of the Board of Trade Railway Conference: Cd. 46T7. Railways (Foreign Countries and British Possessions); Return to an order of the House of Commons, 331. Continental Railway Investigations: Reports to the Board of Trade on Railways in Belgium, France and Italy; Cd. 5106. The Case for Railway Nationalization: Emil Davies. The Nations Library, London. The Case Against Railway Nationalisation: Edwin A. Pratt. The Nations Library, London. Railway Nationalisation: Clement Edwards. Methuen & Co., London, 1907. The RaUways and the Nation: W, BoUand. T. F. Unwin, 1909. The Railways and the State: F. W, Pirn. T. Fisher Un- win, London, 1912. Comparative Railway Statistics: W. Cunningham. A. Romanes & Son, Dunfermline. Transportation Routes to the Seaboard: Government Printing Office, Washington, D. C, 1874. American Railway Transportation: Emory R. Johnson. Appletons, 1903. APPENDIX NAME OP COMPANY. A. T. & S. F. Ry. Co A. N. O. & T. P. Jc. Pfd. . . . do. Com... Atlantic Coast L. R.R. Co. . B.&O.R.R.Co C. & O. Ry. Co C. & Gt. W. R.R. Co. Com. do. Pfd. . C. M. & St. P. Ry. Co C. & N. W. Ry. Co D. & H. Co D. L. & W. R. R. Co D. &R. G. R.R. Co. Com.. do. Pfd. . . Erie R.R. Co Great Northern Ry. Co Illinois Cent. R.R. Co T.St.L.&W.R.R. Co.... E.P. &S.W Kansas C. Sou. Ry. Co M. & St. L. R.R. Co Lehigh Val. R.R. Co M.K. &T. Ry. Co Mo. Pac. Ry. Co N. Y. C. & H. R. R.R. Co. . N. Y., N. H. & H. R.R. Co. Norfolk & Western Ry. Co. . Northern Pac. Ry. Co Penn. R.R. Co Reading Co Rock Island Co. Com do. Pfd Seaboard A. L. Ry S. P. L. A. & S. L. R.R. Co. St. L. & S. W. Ry. Co. Com do. Pfd. Southern Ry. Co Southern Pacific Co Texas & Pacific R.R. Co. . . . Union Pacific R.R. Co The above Companies also control the following Railway Systems: C.H. &D Boston & Maine C. B.&Q C. I. &St. L Western Pacific N.W.Pacific Aransas Pass Hocking Valley C. &N. O. P System Mileage 10,628 510 11,382 4,522 2,263 1,489 9,004 9,549 878 923 2,766 2,531 7,369 8,244 1,448 920 827 1,585 1,440 3,398 7,231 12,812 2,879 2,010 6,032 11,149 2,165 8,041 2,998 1,049 1,572 9,740 10,024 1,990 6,456 CAPITAL STOCK. 167,824 1,039 3,594 11,757 615 921 372 727 836 337 20,098 187,922 $178,610,000' 7,500,000' 12,500,000 67,557,000 98,343,000= 62,792,000 45,246,000 41,021,000 116,348,000 126,099,000^ 42,503,000 30,277,000 38,000,000 49,779,000 112,378,000 209,990,000 86,709,000' 10,000,000 20,900,000 30,000,000 15,370,000 60,501,000 63,283,000 82,702,000 206,185,000= 152,551,000' 100,047,000 248,000,000 453,877,000 49,995,000' 90,888,000 49,947,000 37,019,000 12,500,000' 16,356,000 19,893,000 120,000,000 146,022,000' 32,238,000 216,644,000 Net Income During Year Ending June 30, 1912, Applicable to Dividends. $15,473,122^ 200,000= 7,000,957 11,543,000* 6,403,270 183,609 1,815,213 11,467,331* 5,508,089 10,042,071 1,126,920 821,523 21,654,255 3,466,448 254,980" 2,090,000' 45,950' 967,000" 7,964,631 17,168 1,979,091" 13,879,837 13,385,551 8,462,006 19,663,815 42,153,964 5,282,215 273,385 591,150" 722,405 895,214 3,763,000 21,602,000 1,733,816» 30,058,249* $3,559,660,000 Highest Quotation ON Shares Since 1911. iiii 100 7i 1481 llli 85i 20 1 391 1171 145 1751 597 24 46 i 39 J 1431 14U 161 100' 22^ 271 185J 311 47i 1211 142^ 119i 131i 1261 179i 301 591 271 100' 401 801 32 1151 26^ 1761 $264,414,753 Average 99j Value of Entire issue Based on Highest Quotation Since 1911. $199,696,000 7,500,000 93,000 100,122,000 110,021,000 53,530,000 9,387,000 16,203,000 136,854,000 182,844,000 72,467,000 180,751,000 9,120,000 23,022,000 43,967,000 301,860,000 122,568,000 1,637,000 20,900,000 6,750,000 4,226,000 112,380,000 20,013,000 43,490,000 250,514,000 217,003,000 119,306,000 326,120,000 673,019,000 89,616,000 52,371,000 15,233,000 10,180,000 12,500,000 6,603,000 16,030,000 38,400,000 168,654,000 8,543,000 382,918,000 $4,066,311,000 >Only common Bhares included except where preferred shares do not earn, or pay, dividends. 'Shares sterling converted into U. S. currency $100 shares at £ = S5.00. *After deducting shares in treasury of other companies, •After payment dividends on Preferred. 'Estimated. •Deficit. Interest on Preferred included where there are pre- ferred shares. 'Not quoted. '1910 income. •Income bonds held in treasury Mo. Pacific not deducted.