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What Should Be
Done About the
Railroads
Address by W. W. Atterbury, Vice-President,
Pennsylvania Railroad System, before the Phila¬
delphia Forum, November 14, 1923
General Atterbury said:
It is a great privilege to be permitted to dis¬
cuss the railroad problem before so intelligent an
audience as that of the Philadelphia Forum.
I speak to you as an officer of one of your
home roads.
The Pennsylvania Railroad is a corporation
conceived by Philadelphia and originally financed
largely by Philadelphia capital—a corporation
not only with no watered stock, but with
actually more money put into the property than
is represented by the par value of the outstand¬
ing stock and bonds.
It has regularly paid a moderate return to
its stockholders since its incorporation in 1846.
Such has been its credit that its bonds have
been floated at an interest rate so low that the
Company has been able to develop its facilities
upon a very reasonable basis of fixed interest
charges.
The Railroads Want
a Chance to Succeed
It is neither the most nor the least prosperous
railroad in the country. We earn our fixed
charges and dividend, and in past years we put
back into the property from net earnings large
sums which might have been paid out as divi¬
dends, and the facilities thereby provided have
not been financed by additional securities.
The property of the Pennsylvania Railroad
System represents an investment of over two
billion three hundred million dollars; while the
securities outstanding in the hands of the public
represent only one billion five hundred million
dollars.
The railroads are before the country urging
that the Transportation Act of 1920 be permitted
to stand; that at our next Congress no change
whatever shall be made in the Act; and that, as
far as possible, it be kept out of the political
turmoil—unfortunately always associated with
a pre-Presidential political campaign.
We ask. Let us alone, and see if we cannot
work our way out under existing conditions.
In the United States the problem is still
peculiar to a country which has not as yet
reached its fullest development.
In Great Britain and Western Europe the
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railroad plant is practically finished. Exten¬
sion and development is unimportant.
In this country, on the other hand, enormous
sums of money must still be spent to provide
the necessary extensions of facilities to meet
the growing development of the country.
Facilities are what we need; and adequate
service is of more importance than low freight
and passenger rates.
To obtain these facilities we require huge out¬
lays of new capital, which can only be obtained
from private investors.
Wall Street may be the wholesale house,
through which the securities are distributed to
the retail houses; but before they can be sold
or distributed the small investors must feel
that railroad securities are a safe investment
and give a good return. If they do not feel
this way they will not invest in railroad securities.
The striking fact in railroad finance is—that
since 1915 practically not one dollar has been
provided by the sale of common stock to investors,
and in but few cases by the sale of preferred
stock.
Practically all of the money has been raised
by bonds or car trusts.
The Investor and
the "Fair Return"
A railroad property is like a farm. You can
mortgage it up to a certain percentage. But
beyond that no prudent investor will go.
The railroads of the country as a whole are
today rapidly reaching—and in many cases have
reached—the point beyond which no more
mortgage money can be raised.
The problem, therefore, is to attract the nec¬
essary capital with which to continue to provide
the facilities which the public must have if our
country is to develop.
Obviously the investor who is asked to put
his money into railroad securities carefully
scrutinizes the earnings. The fact that a com¬
pany is able to earn a fair return upon its existing
investment is the best argument as to why he
should put his money into railroad securities.
The decision as to what is a fair return on
railroad or any other security is pronounced by
the investors of the world.
The Government, the Congress, the Interstate
Commerce Commission, or any other Govern¬
mental agency may say a certain rate of interest
is a fair return upon the value of the property—
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and legally, if not considered confiscatory, such
decision may be conclusive so far as past in¬
vestment is concerned.
But no Governmental agency can force an
individual investor to put his money in new
capital.
That can only come from the voluntary act
of the individual investor; and the compelling
motives will be security of investment and
return upon the investment.
Railroad facilities cannot be built over night.
We must plan years ahead. Real estate must
be bought far in advance of our requirements as
favorable opportunities for its purchase may
present themselves.
The Transportation Act
a Constructive Measure
This means that in order to provide for the
future there must be a measurable portion of
immediately unproductive capital invested in
the property.
A railroad must be able to finance its require¬
ments for years in advance; and its record of
earnings in the past must justify investors in
trusting to the future if the investors are to be
willing to supply the funds which the railroad
must have to develop the property in a proper
way.
I have gone into these elementary principles
somewhat in detail because they lie at the very
root of the whole railroad problem.
The Transportation Act was the first real con¬
structive measure placed upon the statute books
of the United States since the Government
undertook to regulate railroad operations; and
notwithstanding its many imperfections the
constructive nature of the Act is so important
to the railroads that the managements are
convinced that it would be unwise to tamper
with the Act until sufficient experience has been
had under it to make improvements upon it
with assurance and confidence.
The fundamental feature of the Transportation
Act is its provision that the Interstate Commerce
Commission shall authorize such rates as will
provide a fair return upon the value of the
property used, and in addition attract the capital
necessary to provide for the growing commerce
of our country.
The Interstate Commerce Commission has
declared that a return of S^% should accom¬
plish that result.
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There is a widespread public impression to
the effect that that authorization to earn 5^%
constitutes a guaranty of that amount. As a
matter of fact, since the Act was passed the
railroads have not earned quite 4% upon their '
value as tentatively declared by the Interstate
Commerce Commission.
Some people think that the 5^% authorized
by the Commission is insufficient. That, how¬
ever, will be for the investor to decide. The
point is that it has been made mandatory upon
the Commission to authorize rates which will
provide the net income sufficient to attract the
necessary capital.
If, operating under this law, the Interstate
Commerce Commission in co-operation with the
railroads can bring that result to pass, the law-
will be a success; Government regulation will
have justified itself; and the private ownership
and operation of our railroads will have been
made secure.
I do not believe that the American people
want Government ownership. Government
ownership would not only be most expensive,
but it would constitute a serious menace to
our form of government.
However, keep in mind this fact; the public
must have adequate railroads. If private capital
is not available, the Government will be forced
to furnish it, and that is your first step toward
Government ownership.
Proposed Changes in
the Transportation Act
The way to prevent this is to so regulate the
railroads that investors will supply the money
necessary to provide the facilities which are and
will be required.
There is much agitation to abolish the so-called
rate-making provision of the Transportation
Act. That agitation is largely based upon the
theory that the Act provides a guarantee of
earnings.
I should deprecate the repeal of the rate-
making provision of the Act—not because I
consider the 5^% authorization as of vital
importance, but because I do consider it of
supreme consequence that the constructive
feature of that provision should be retained.
For many years the Commission sought to
regulate po as to authorize rates which would
provide a reasonable return upon the capital
invested, but the Commission interpreted that
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pretty largely as meaning the rates must have
regard primarily to the existing plant. The
great stride represented by the Transportation
Act, and the important feature which cannot be
stressed too often, is that the present Act takes
account of future needs and the attraction of
the capital necessary to provide for future needs
represents the very essence of the situation.
There is, however, a substantial sentiment
to the effect that, even if the rate-making
provision of the Transportation Act should be
retained, there should be an amendment of the
law upon one important factor. The law says
that the rate shall yield a fair return upon the
value of the property devoted to the public
service. Clearly, therefore, such value is a
vitally important element in determining what
amount of money the railroads should be per¬
mitted to earn. The Interstate Commerce
Commission tentatively fixed the value of the
railroads of the country, as of December 31,
1919, for rate-making purposes, at something
like nineteen billion dollars.
Property Value Far
Exceeds Security Issues
Statements are sometimes made that this
valuation is absurd and could by a wave of the
wand be reduced to, say, twelve billion dollars.
The Interstate Commerce Commission has
for the past ten years been making a detailed
valuation of railroad property in this country.
It was predicted by some of those who wanted
this valuation made that, when made, it should
show clearly that the value of the property was
far less than the securities outstanding against
it.
The experience of the Commission, however,
shows quite clearly that the value of the property
when established upon any reasonable basis
will certainly be equal to at least the amount
actually invested therein, and will far exceed
the securities outstanding.
In the case of the Pennsylvania Railroad
System, we have reason to believe that the
minimum value will be found to be some eight
hundred million dollars in excess of the par value
of our outstanding securities in the hands of the
public.
The proponents of the valuation plan, having
thus been disappointed in their expectations,
now seek to accomplish the same result by a
process at once confiscatory and dishonest.
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In the last session of Congress, for example,
there was introduced a bill providing that the
value of the railroads should be taken at the
market value of their outstanding securities. >
To show how absurd such a proposition is,
let me call your attention to the fact that the
Interstate Commerce Commission some years
ago found that the market value of all railroad
securities in this country in 1912 was about
fifteen billion dollars.
Since that time, at least five billion dollars
additional cash has been invested in the develop¬
ment of railroad properties, and this additional
money has been spent under accounting rules
established by the Commission, and represents
definite cash outlay with no possibility of its
being confused with any other item.
Now, the Joint Commission of Agricultural
Inquiry of Congress found that for the week
ending January 14, 1922, the market value of
the railroad securities outstanding was about
thirteen and a half billion dollars.
In other words, having since 1912 expended
upward of five billion dollars in additional
railroad facilities, all the railroad securities
outstanding against the entire railroad plant in
the United States were, in 1922, fully one
billion five hundred million dollars less in market
value than they were in 1912 before the five
billion dollars had been spent.
Consolidation of Strong
and Weak Roads Considered
This would seem a complete demonstration of
the absurdity of so arbitrary a plan for valuing
railroads.
The railroads have confidence that the Inter¬
state Commerce Commission is approaching the
problem of valuation in a broad way, and we
have equal confidence that when the matter is
determined, as it must finally be, by the Courts,
the Courts of this country will vindicate the
rights of those who have trusted their faith and
have put their money in railroad property.
My friend. Senator Cummins, is of the opinion,
I believe, that the only way to avoid Government
ownership in this country is to bring about
consolidation of our various railroad systems
into a relatively few large units.
There is no question that there ought to be
very considerable consolidations of existing
railroad corporations.
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But this problem of consolidation is compli¬
cated, and not nearly so obvious as it seems.
As I interpret the views of Senator Cummins,
his thought is that the weak railroads must be
consolidated with the strong; otherwise a
schedule of rates which will enable the weak
roads to live will give the strong roads inordinate
profits.
To be concrete, his theory is perhaps that a
scheduleof rates which would enable a competing
line to be prosperous would make the Pennsyl¬
vania Railroad unduly profitable. Therefore,
the strong and the weak line should in some
way be consolidated.
My answer would be that the Pennsylvania
Railroad should be able to enjoy rates which
would enable it to give good service to its patrons
both in the present and in the future.
But if in meeting those rates some other line
was not able to obtain sufficient traffic to enable
it to be equally financially successful, some
portion of its capital must take a lower rate of
return commensurate to which it is as an economic
proposition entitled.
Voluntary Consolidations
the Ideal Procedure
I do not for one moment believe that any
railroad company should be allowed to earn in¬
ordinate profits; and indeed I do not believe
that under our present system of regulation it
will be possible for such profits to be earned.
I think it can safely be maintained, there¬
fore, that there is little danger of railroads be¬
coming profiteers; but there is very great danger
that an uneconomic handling of the situation may
seriously interfere with the prosperity of the
country, through the establishment of rate struc¬
tures based on compulsory consolidation of weak
and strong lines.
There are today twenty-two large railroad
systems, which handle 85% of the business of the
country.
Certainly these twenty-two systems should be
permitted to absorb their present lessor and
affiliated companies and thus avoid the necessity
of maintaining the existence of a large number of
subsidiary corporations.
So far as further consolidations are concerned,
I feel that they should be voluntary, and that
the provisions of the law should be permissive
only.
The only requirement should be that the Inter¬
state Commerce Commission should give its
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approval to proposed consolidations after public
hearing.
The difficulty with the present Act is that it
contemplates a series of arbitrarily consolidated
railroad systems—not necessarily of a normal
growth, nor based upon economic conditions.
1 fear that any plan of compulsory consolida¬
tion will break down through the sheer financial
complications involved.
ft may be within the power of private investors
practically to defeat the whole plan, even if rail¬
road managements should be favorable to it.
Thus at the very outset of such a scheme we
might be faced with a situation which would pre¬
cipitate Government ownership, in spite of all
our objections to it.
Under a plan of permissive consolidations, no
railroad would come forward with such a pro¬
posal until it had adequate net earnings and
until it had assurance of adequate financial sup¬
port to carry it through.
State and National
Rate Regulation
And inasmuch as such a proposal would in¬
volve an evolution justified by current economic
conditions, it is entirely probable that long ad¬
vances toward desirable consolidations would be
made if the national policy favored consolida¬
tions along sound economic and financial lines.
ft is impossible to discuss the whole of the rail¬
road situation in so short a time, but there is
another problem which will undoubtedly come
up at the next session of Congress to which 1
should like to refer briefly.
The Transportation Act gives to the Interstate
Commerce Commission practically complete
power over both interstate and intrastate rates.
There is a feeling in some parts of the country
that the power which the States formerly had
over intrastate rates should be restored and that
the power of the Interstate Commerce Commis¬
sion should be limited to jurisdiction over inter¬
state rates.
There are many phases of railroad operation
concerning which the States as such should un¬
doubtedly have the right to regulate. But it
seems to me clear that a railroad's operation
must be judged as a whole. Certainly the finances
of a road must be judged as a whole, and investors
look upon the financial showing of a railroad not
with reference to its earnings within a particular
State, but with regard to its earnings upon its
property as a whole.
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If, therefore, the Interstate Commerce Com¬
mission is to have the power to so fix rates as to
provide adequate return upon the existing in¬
vestment and to encourage the investment of
new capital, clearly that control must be upon
the earnings of the company as a unit.
If a State establishes rates which are unduly
low, the Interstate Commerce' Commission
would be compelled to that extent to establish
interstate rates which would be unduly high.
The Interstate Commerce Commission cannot
exercise its proper function, and railroad regula¬
tion as a whole cannot be made successful, unless
the railroads are regulated with reference to inter¬
state rather than the intrastate service which they
render.
One thought more and I am done. We may
have the most perfect system of railroad regula¬
tion imaginable; we may have the finest plant
and the most perfect equipment; we may have
all the brains which management can provide;
but the ultimate success of railroad operation
depends upon co-operation with the management
by the employes, who carry on the routine oper¬
ations of the property.
Railroading consists of a vast number of small
operations, few of which can be directly over¬
seen. The success of the operation, therefore,
largely depends upon whether or not the individ¬
ual employe actually wants to render efficient
and faithful service.
Thus the vital problem of railroad manage¬
ment is to obtain the active and whole-hearted
co-operation of the employes.
Employe Representation
on the Pennsylvania
We here in Philadelphia have seen the extraor¬
dinary success realized by the Philadelphia Rapid
Transit Company.
And this great success has been largely ob¬
tained through securing the whole-hearted and
earnest co-operation of the rank and file of its
employes—who now own some 20% of the out¬
standing stock of the company.
Some people are inclined to look upon the
relationship of capital and labor as one of con¬
flicting interests. If that conception is sound,
no real progress in industrial relations can be
made.
The Pennsylvania Railroad Company does not
so view the situation.
This Company has no fight with unionism.
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No man enjoys a position on the Pennsylvania
Railroad, or is deprived of it, because of affiliation
or lack of affiliation with a labor union.
We have, however, sought to establish a re¬
lationship with our employes which will gain not
alone all the advantages of the labor union, but
something in addition. We have sought to es¬
tablish a system by which all employes—union
and otherwise—shall be represented in their re¬
lations with the management.
The phrase "employe representation" is, of
course, a vague one, and has a different meaning
to different people; but we have honestly sought
to give the duly elected representatives of our
employes, as chosen by themselves without inter¬
ference, the utmost possible voice in determining
the conditions under wtiich they shall work with
the Company.
The Problems of
Successful Railroading
We are eager to have the employes of the
Pennsylvania Railroad feel that the Pennsylvania
Railroad is the best employer in the country,
and to deal with us unaffected by the relation¬
ships between the employes and management of
other railroads.
We want our service to be the best because the
employes of the Pennsylvania Railroad feel that
they are so well treated by the management of
this Company that they will determine to make
our service the best possible.
We feel that the situation is not one of warfare,
and that we do not need rules to govern the con¬
duct of war between this Company and its men.
Our relationship is not that of a fight; it is that
of a common effort in behalf of the public service.
We believe our employes understand this, and
we know that they are giving us a constantly
greater measure of effective co-operation in our
work.
We believe that the public is increasingly un¬
derstanding the spirit of the effort we are making.
And we have confidence that the public thor¬
oughly understands this and supports the position
we have taken.
To sum up in a word: the problem of success¬
ful railroading is that of efficiently and economi¬
cally operating the railroad facilities which exist,
and with a rate structure sufficient to permit us
to earn such a return upon the existing value as
to be able to attract the capital necessary to pro¬
vide the enlarged and improved transportation
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facilities needed for the present and the future,
and to enable us to most efficiently move the
traffic for the lowest possible cost.
The ultimate success of the whole operation
depends upon the railroads being regulated con¬
structively and in support of wise and progressive
policies; upon railroad management being able
to secure from its employes whole-hearted co¬
operation; and in being able to enjoy from the
public that support and confidence which earnest
effort, progressive management and fair dealing
warrant.
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