A CONSTRUCTIVE PUBLIC POLICY TOWARD
OUR RAILROADS.
ADDRESS
BY
MR. DANIEL WILLARD,
President, The Baltimore and Ohio Railroad Company
BEFORE
THE ADVERTISING CLUB,
NEW YORK N. Y.,
DECEMBER 14. 1922.
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19X X
It has been suggested that I take as the topic for my discussion
this noon, "A Constructive Public Policy Toward Our Railroads,"
or something to that effect.
The American Railroad System itself, which we are in the habit
of thinking of in its entirety, is so stupendous in magnitude as
reflected in capital invested, mileage, number of employes, ser¬
vice performed, etc., that it is very difficult to discuss the matter
at all comprehensively in the time available on an occasion such
as this. I shall, therefore, only refer to some of the more important
and outstanding phases of the situation as I view it.
The American Railroad System, so-called, is owned and oper¬
ated by a large number of individual companies, of which upwards
of 200 have annual earnings in excess of %1,000,000 a year. While
our railroads have been almost wholly built by private capital
and operated by private management, it has come to be accepted
as a matter of general policy that the railroads as common carriers
should be and must be regulated in the public interest. The
development of this thought and policy has found its best and
most recent expression in which is known as the Transportation
Act of 1920, which was passed by the Federal Congress after one
of the most thorough investigations which Congress ever made
concerning any industrial problem.
While the Transportation Act perhaps did not meet with the
entire approval of any particular class or individual, it did at
least reflect a most earnest and enlightened effort on the part of
Congress to deal with a very important industrial problem, and
in my opinion the Act as it now stands comprises in its entirety
the best scheme of railroad regulation under private ownership
that has so far developed in this country.
Although the Act has been in effect less than three years, we
are already beginning to hear suggestions as to how it ought to
be amended, and actual demands have been made that Congress
change the Act in certain very essential particulars. Personally
I believe it would be a serious mistake from all points of view
for Congress to attempt any amendment of the Act at the present
time, not because I consider it perfect in its present condition,
because I do not, but I repeat that I do think upon the whole it
provides the best scheme of regulation so far developed and it
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has not yet had sufficient trial to enable us to determine definitely
wherein and to what extent the Act has failed if at all.
Mr. Hoover, in the Tenth Annual Report of the Secretary of
Commerce, sums up what he says therein concerning the Rail¬
road situation, in the following words:
"We must have increased transportation if we are
to maintain our growing productivity. We must
therefore find a way out of the cycle of systematic
starvation of a large part of our mileage and the
denudation of our railway managers of their respon¬
sibilities and Initiative."
I agree with the Secretary that we must have increased trans¬
portation in this country if we are to maintain our growing pro¬
ductivity, and I also agree with him that we ought not to still
further denude the railway managers of their responsibilities
and initiative.
To obtain new and' increased transportation facilities means,
of course, the use of new capital for that purpose. New capital,
however, can only be obtained by the railroads through volun¬
tary investment in their securities by the public, and the public
is not likely to look with favor upon railroad securities unless
they believe that money so invested will be as safe and yield as
good a return as could be obtained in any other direction.
Congress, with a full understanding of this phase of the problem,
wrote into the Transportation Act of 1920, or the Esch-Cummins
Bill, as it is sometimes called, a paragraph designated as Section
15-a which provides among other things that the Interstate Com¬
merce Commission shall fix such rates as will yield to the railroads
under honest, efficient and economical management, as nearly as
may be a fair return upon the value of their properties devoted
to the public use, and the Commission is charged with the duty
of fixing the value of the property upon which a fair return may
be earned, and also of designating what rate of return will be fair.
In rate hearing known as Ex-Parte No. 74, which took place in
the Summer of 1920, the Interstate Commerce Commission fixed
a tentative valuation on the railroads at that time for rate-making
purposes of $18,900,000,000. In a recent order the Commission
also fixed 5% per cent, as a fair rate of return upon railroad
property.
In the Summer of 1920 in Ex-Parte No. 74, the railroads were
authorised to increase their rateë, fares and charges to such an
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extent as would in the opinion of the Commission meet the re¬
quirements of the Transportation Act. Notwithstanding the
very substantial increases then approved by the Commission,
the railroads of the United States during the fiscal year ended
December 31, 1921, actually earned less than 3.4 per cent, upon
the value of their property as fixed by the Commission, and esti¬
mates indicate that during the present year the railroads will
probably as a whole earn not over 4 per cent, upon the value of
their property devoted to transportation purposes. Under such
conditions as to earnings it is not to be expected that the public
will look with much favor upon railway securities as investments.
Notwithstanding the fact that in the two years following
Federal control, in which the railroad companies had complete
control of their properties, they were able to earn less than 4 per
cent, net return, they have nevertheless continued to add to their
facilities and in that connection have been able to secure many
millions of dollars of new capital. That this has been possible
at all in the face of the earnings I have cited, is in my opinion due
in large measure to the provisions of the Transportation Act and
the assurance contained therein that rates shall be fixed so as to
yield to the carriers a fair return upon the value of their property
devoted to transportation purposes. Please bear in mind, however,
that the provision of the Act to which I have just referred, con¬
tains simply a declaration of policy and is in no sense a guarantee
as has been frequently asserted.
The amount of money expended for additions and improvements
during the last two years has been far below what was required.
This is reflected in the fact that there are actually fewer freight
cars and fewer locomotives in the United States today owned by
American railroads than was the case on the first of March, 1920,
at the termination of Federal control. This is because the number
of cars and engines worn out each year was greater than the
aggregate number of new cars and engines purchased or acquired
during the same period. Of course such a condition cannot
in the public interest be permitted to continue for we must, in the
words of Secretary Hoover, have increased transportation if we
are to maintain our growing productivity.
Notwithstanding the fact that railroad rates and fares in this
country today are much higher than they were before the war,
the net earnings of the railroads, as I have already shown, are
4
very much less. This is of course because the railroads have felt
the burden of the increased cost of living like all other agencies
or individuals. The increased cost of living to the railroads has
been reflected in higher wages paid to their employes and justifi¬
ably so, higher prices for materials purchased, as well as greatly
increased taxes. Since the peak of high prices, which seems to
have been reached in the Summer of 1920, a very substantial
reduction in the prices which the railroads are required to pay
for many kinds of material, has taken place. There has also
been a reduction of about ten or twelve per cent, in the wages
paid railroad employes, but notwithstanding the reductions above
referred to, material prices, wages and taxes are still much higher
than they were before the war, and the same is of course, true of
railway rates and charges. However, on the 1st of last July
the railroads made a general reduction of freight rates of approxi¬
mately ten per cent.
It is a matter of general knowledge that the farmer has perhaps
suffered more severely during and because of the readjustment
following the war, than any other class or group in this country,
and it is natural for him to feel that the rates which he is required
to pay for having his wheat shipped out to market and also for
the things that he has shipped in, are too high, and to hold such
rates and charges in large measure responsible for his difficulties.
A careful study of the rate structure, however, will very quickly
and I think clearly disclose that the rates on agricultural pro¬
ducts today are upon the whole the lowest in the country and
are well below the average rates which the railroads receive for
transporting commodities of other kinds, and are only possible
because of the fact that the rates on other commodities are enough
higher to bring the average up to where it is. I have no desire
to minimize the farmer's difficulties, but I venture to suggest
that the remedy is not to be found in a mere reduction of rail¬
road rates, and this of course is not to say that eventually the,
rates which the farmer is required to pay may not be further
reduced as prices of all kinds approach more nearly to a normal
basis. As a matter of fact, I believe they will be reduced but
only as conditions generally justify such action.
Notwithstanding the fact that the railroads, as I have already
said, felt the increased cost of living like all other institutions
and individuals, it should be remembered that in no cçtse werç
r
5
the railroads permitted to increase their charges until after the
Interstate Commerce Commission had made inquiry into the
matter and had decided that the increases asked for were justified
either in whole or in part under the terms of the Transportation
Act, and were in fact, necessary in order to sustain the Trans¬
portation System. It should be kept in mind that for a very
considerable period the public enjoyed the benefit of rates and
charges which the Interstate Commerce Commission later on
found to be wholly non-compensatory.
I believe Secretary Hoover is entirely right in placing special
emphasis on the needs of the country for adequate transporta¬
tion. I am certain that the aggregate amount which the farmers
and shippers of every class have lost in the past because of their
inability to take advantage of favorable market conditions on
account of car shortages, so-called, has been more than enough
to offset many times all the savings they have ever made by
virtue of transportation rates that were non-compensatory.
In fact, during the rate hearing known as Ex-Parte No. 74, when
the Commission had under consideration the application bf the
railroads to increase their rates from thirty to forty per cent.,
shippers who appeared as witnesses in the case almost invariably
stated that it was much more important for them to have ample
and efficient transportation when needed, than to have the rates so
low that the railroads would be unable to provide adequate facilities.
Although from the existing basis of rates the returns of the
carriers as published month by month are shown to be much less
than the standard of a fair return as fixed by the Interstate Com¬
merce Commission, I believe that rates as a whole will gradually
be reduced and that the net earnings of the carriers as a whole,
will gradually increase and get better, provided the Transporta¬
tion Act is left as it is. I have, of course, no means of knowing,
and would not care to venture a guess as to what the outcome
might be if the Act should be amended along lines that have been
suggested in certain quarters. My belief that rates will gradually
come down is based upon a concurrent belief that business will
gradually get back to a more stable and normal basis as regards
volume. While the railroads are unable at times to take care of
the peak load offered, much of the time they have an excess of
facilities. This was the case during the entire year of 1921, and
for more than six months of the present year of 1922.
6
I believe that the railroads will be able to improve their effi¬
ciency of operation and in that way gradually reduce the cost of
transportation. This, I believe, will be brought about in part
by a closer and better informed cooperation between the shippers
and carriers which should be reflected in increased car loads,
reduction in delay to cars at terminals and stations and by the
modification of practices which have grown up in the past, and
which tend to increase operating costs. Much has already been
done in this direction and what has actually been done encourages
me to believe that more can and will be accomplished.
I believe there will also come about a better informed and
more sympathetic understanding and cooperation between the
railroads and their employes. As a whole there is no better class
of men employed in any line of undertaking than the men engaged
in the railroad service, but many things have happened during
the last six or eight years to disturb the harmonious and sympa¬
thetic relations which formerly existed between the railroad
employes as a class and the companies. The conditions that I
have in mind are due in part to the war and in part to the economic
readjustment going on both before and since the war. I repeat,
however, that I believe the tendency today is towards the restora¬
tion of the relationship and sympathetic understanding which
formerly existed in large measure between the railroads and their
employes, and as this comes more and more about it also will
be reflected in greater efficiency, together with reduced operating
costs.
Furthermore, material prices, or some of them, will doubtless
decline to some extent.
The President, in his recent address to Congress, calls attention
to a report submitted by the Committee on Agricultural Inquiry,
and he refers specifically to advantages believed to be possible
through the general pooling of railway equipment. If it be true
that substantial net economies in operation can be so effected
and at the same time the public be better served, then I should
say, of course, that that policy or some other one equally good
ought to be adopted, but before we make any such radical and
fundamental change as would be involved in the taking of the
private property of the independent carriers, regardless of their
consent, and treating it in effect as the common property of all
the carriers, we ought to be very sure that the economies and
7
advantages expected to result therefrom will be net economies,
and by that I mean that what is saved in one direction will not
- be more than lost in another. Personally, I do not believe that
the pooling of the freight equipment of the American railroads,
as proposed, would result in any substantial economy, nor do
I believe the adoption of such a policy would enable the rail¬
roads to meet the transportation requirements of the public
any better than they are now able to do under the terms of the
existing Act.
It should be understood that under the present terms of the
Transportation Act the Interstate Commerce Commission has
full authority in times of emergency to take absolute control of all
the equipment of all the railroads in the United States, and it
actually has under such conditions assumed control and given
positive orders concerning the use of cars, regardless of owner¬
ship. The Transportation Act in its present form, without
doing violence to the rights of ownership, does in fact make pro¬
vision so that in times of emergency all of the equipment shall be
used "in such way as to best serve the public interest, which is,
of course, all that could be expected if there were a general car
pool, as has been suggested. The great difference between the
present plan and the proposed one is this: Under the terms of
the existing Transportation Act the property of the railroads
is not to be taken from their control except in times of emergency,
and then only when it is clear that the public interest will be
advanced by so doing. Under the proposed plan for pooling all
of the cars, the equipment would be taken from the control of
individual owners at all times whether there was an emergency
or not, and whether the public interest would be thereby advanced
or not.
It should be remembered that Congress made a most thorough
investigation of the whole railroad subject, including the pooling
of cars, before the present Transportation Act was written, and
it undertook to provide so that in times of emergency all of the
facilities of all of the railroads, regardless of ownership, should
be used in such way as to best promote the public interest,- and
we have already had sufficient test of this feature of the Act to
know that it actually does work when needed. I am frank to
say that if the Transportation Act had not already provided for
the virtual pooling of cars in times of emergency, and if I did
s
not feel confident that the plan now set up will work, then I
should be forced to admit that a car pool of some kind is neces¬
sary or would be necessary in the public interest. My conten¬
tion now is, that the matter has already been dealt with by Con¬
gress and in an effective and satisfactory manner.
In this connection it is at least illuminating and well to bear in
mind that during the Fall of 1920 and also during the last two
months, the railroads under the terms of the Transportation Act
moved a larger volume of business than was ever moved during a
corresponding period while the railroads were under Federal
Control and during which time there was a complete pooling of
equipment of all kinds. This increased performance was not due
to additional facilities, because, as I hâve already stated, there are
actually fewer cars and locomotives in the United States today
than was the case at the termination of Federal Control.
It has been suggested by the President, and also by the Secretary
of Commerce, that a better and more scientific adjustment of the
rate structure might be brought about; in short, that the structure
should be rearranged more in harmony with the policy of what
the traffic will bear. It will be recalled that some years ago that
policy was rather generally condemned, not because it was any
more wrong than it is now, but simply because it was then generally
misunderstood. However, because it was misunderstood and
mistakenly condemned, it came about that rates were more and
more influenced by distance rather than by the character of the
commodity or commercial requirements. It is coming to be
recognized, however, .that in a country of such great extent as
the United States, the principle of what the traffic will bear—
not what the traffic will not bear—ought to be given more con¬
sideration in connection with rate structures than it has perhaps
received in the immediate past.
A careful study of the rate structure might develop that certain
commodities could very well bear a higher rate, while other
commodities perhaps ought to have a lower rate than could now
be justified. I think such a study should be made. I doubt,
however, whether the increases that could be made in some rates
would in the aggregate be sufficient in amount to justify any very-
substantial reduction in others. The subject is one well worthy of
consideration and I hope arrangements will be made for a com¬
prehensive and sympathetic study of the matter by representa-
9
tives of the carriers and shippers, with the assistance, perhaps,
of the Interstate Commerce Commission and of the Secretary of
Commerce. The question having been raised, in the interest of
the general good it ought certainly to be promptly and exhaust¬
ively studied, and I have no doubt the railroads will be quite
willing to cooperate in a study of that character.
The President, in his recent address to Congress, also suggested
some changes in the labor provisions of the Transportation Act.
In short, he seemed to recommend that the existing Labor Board
be absorbed by the Interstate Commerce Commission, and that
its headquarters be moved from Chicago to Washington. I have
no doubt that such a plan as the President suggests might work
better than the present plan has worked. I see nothing in the
proposed change, however, to guarantee that it actually will
work any better than the present plan might work. If the present
plan has not brought all that was expected from it in the way
of results, it has, in my opinion, accomplished a great deal. In
short, the railroads, largely because of the labor provisions of
the Transportation Act, went through a period of two and one-
half years from the termination of Federal Control until the first
of July last, with hardly any serious labor disturbances, and the
only inconvenience of any moment which the public was put to
in the meantime was in connection with the so-called outlaw
strike in the Spring of 1920, which was not of a general character
and only of moderate duration. In my opinion the labor problem
was never more complex or difficult to deal with than during the
period I have referred to, and I doubt very much if we could have
gotten through the period with as little disturbance to transporta¬
tion if it had not been for the Labor Board
While the labor provisions of the existing Act are not just as
I would have written them, nevertheless I fully believe that we
will be, or at least ought to be, able to satisfactorily work out our
labor difficulties under the terms of the Act as it now is, provided
the railway managers and the employes make earnest and
sympathetic effort to do so, and any other plan is just as likely to
fail without their cooperation. In short, I do not believe the
strike of the shop-crafts would have happened this last Summer
if all of the railway managers and all of the railway employes had
been willing to accept the provisions of the Act in good faith and
had also been willing to comply with the decisions of the Labor
10
Board. I know it is urged in certain quarters that the Act ought
to be made stronger, meaning, I suppose, that it ought to be so
amended as to make strikes unlawful. Personally, I am opposed
to that sort of legislation, not because I am in favor of strikes,
but simply because I do not believe legislation of that kind would
prevent strikes. Certainly it never has prevented them where it
has been tried.
To get back to my topic—"What ought the future policy of'
the public be concerning the railroads?" It seems to me that the
future policy of the public ought to be to give the Transportation
Act in its present form a fair and sympathetic trial. The public
(meaning all of us) ought to appreciate that we cannot as a nation
participate in a world war and devote all of our efforts, as we did
for nearly two years, to the destruction of lives and property,
without having a very substantial bill to pay when it is all over.
We are now as a people engaged in the payment of that bill, and
the payment is reflected in terms of higher rates, higher taxes,
higher cost of living, reduced income and all the different ways
with which we are familiar. Even so, it seems to me that we in
the United States are very fortunate in that our conditions are
no worse than they are, and because the price which we are re¬
quired to pay for our participation in the war is not higher than
it is. We have our difficulties and problems, it is true, but at
the same time we have a much longer list of things for which we
ought to be thankful.
The United States, because of its great area and because of its
general geographical character, has more need for rail transporta¬
tion than any other country, perhaps, in the world, and in response
to that need the American Railway Systém has been developed.
In that connection Secretary Hoover in his last report makes the
following definite statement:
"The management of our principal railways
today, by all the tests of administration, of load
factors, of mechanical efficiency, etc., is the most
efficient transportation machine in the world, in so
far as it is not limited by causes beyond the man¬
agers' control."
. A higher tribute than that could not be paid by anyone to any
enterprise. The railroads in this country have contributed greatly
in the past towards the country's development. They can and will
continue to do so in the future if given an opportunity. They
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cannot, however, enter a foot-race and hope to succeed with their
feet and hands tied. The present Transportation Act contains
as many restrictive measures as the railroads, in my opinion,
can well support. To increase restriction, by amendment would
do harm instead of good, and inasmuch as it is hardly to be
expected at the present time that Congress would remove any
of the restrictive measures already in the Act, I would much
prefer that for a period of at least five years the Act be permitted
to remain as it is and give us a chance to fairly determine whether
it will or will not work. I believe it will work if given a fair
opportunity, and in any event I prefer to bear the ills I have,
rather than fly to those I know not of.