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SOME BUSINESS ASPECTS
OF THE
RAILROAD PROBLEM
Address by
WALKER D. HINES
Chairman of Board of Directors of The Atchison, Topeka
and Sante Fe Railway Company to the Annual
Meeting of the Chamber of Commerce
of the United States, Washington,
D. C., January 31, 1917.
Some Business Aspects of
The Railroad Problem
By Walker D. Hines
I propose to talk to you about the railroad problem in its
business aspects and not in its legal aspects.
As business men one of your most urgent needs is continu¬
ous, prompt and efficient rail transportation. That means you
want the railroads to have plenty of main tracks and terminal
tracks, plenty of locomotives and cars, plenty of shops and
round houses. You know that the country is growing rapidly
and that all these railroad facilities must be improved and
increased rapidly in order to keep up with your increasing
needs for transportation. So one of the great business prob¬
lems today, indeed the greatest business problem today, is to
find the proper answer to the question what changes ought to
be made in railroad control or regulation to insure the neces¬
sary increases in facilities and the necessary continuity and
efficiency of railroad service.
I believe you will agree with me that this question ought
to be solved on the broad principle that the sort of railroad
regulation which is best for the people of this country as a
whole is what is best for the business men of the country and
that is the sort of regulation which the railroads ought to be,
and I believe are, willing to accept. When I speak of what is
best for the people of the country as a whole, I mean to put
the welfare of the people as a whole above the selfish interest
of any particular section of the country or any particular class
of citizens. It may be that a particular State with an excep¬
tionally strategic position could so regulate the railroad busi¬
ness as to get for the time being some benefits for itself at
the expense of the rest of the country and it may be that
some classes of citizens, as, for example, the members of
the Railroad Brotherhoods could, if given unrestrained power
to combine to promote their immediate interests, get for the
time being special benefits from the railroads at the expense
of all other employees, and at the expense of the country as a
whole. But I believe you will agree with me that the sort of
regulation which business needs is the sort which subordinates
special interests to the interests of the country as a whole.
3
Protection of Public Against Railroad Strikes.
I do not propose to discuss at length the problem of regula¬
tion of controversies between railroads and their employees.
I am sure you appreciate without elaboration by me the im¬
portance and the urgency of that subject. You know the
danger to which the business of the country is subjected as
long as labor organizations are permitted without restraint to
stop interstate transportation for the purpose of promoting
their private interests. You know that this danger is just as
real now as it was last August and that a failure to deal with
the matter so as to insure governmental control of this problem
in the interest of the whole people will leave business subject
at any time and from time to time to be paralyzed whenever
the Brotherhoods believe that their private interests will be
promoted by bringing about such paralysis. I think you must
appreciate also that the present absence of strike talk on the
part of the Brotherhoods is merely temporary. Perhaps it is
just the velvet glove to cover the iron hand in the hope that
through that expedient Congress may be induced to let the
session end without legislation to protect the public interest
against the paralysis of interstate transportation. In any event
you can count upon it that after the session of Congress shall
end and after the Supreme Court shall have decided the Adam-
son Act test case, the country will wake up to the purpose of
the Brotherhoods to have their own way or paralyze inter¬
state transportation.
This menace will arise whether the Supreme Court holds
the Adamson Act is constitutional or holds it unconstitutional.
That Act, even if constitutional, will necessitate many readjust¬
ments which must be matters of agreement between the rail¬
roads and the train service employees and you can be prepared
to hear threats of strikes if the matters are not agreed to as the
Brotherhoods demand. Moreover, you can also count upon it
that if the Brotherhoods receive the encouragement which will
come from the passage and upholding of the Adamson Act on
the one hand, and from the failure, on the other hand, to pass
any legislation to protect the public against tying up the rail¬
roads, additional demands will soon make their appearance
and somewhat later the country will be forced to do what it
ought to do at present, that is to make effective provision for
subordinating the private interest of the Brotherhoods to the
public interest of the whole country in the continuity of rail¬
road transportation.
You have observed that the Brotherhoods urge that their
ability to paralyze business must be left unrestrained because
otherwise the sacred right of freedom will be impaired. But
when you get right down to fundamentals you find that all
their arguments amount simply to the contention that the right
4
of this special class of society is paramount to the right of
society as a whole and that the ability of this special class to
paralyze business at will is more sacred than the right of the
Nation to prevent such paralysis in the public interest. There
can be no doubt as to the unsoundness of this contention. The
practical question is whether you and others who want this
matter settled in the interest of the whole public will be able
sufficiently to impress your wishes upon the Government to
obtain the protection which the public interest requires.
Government Ownership Means Inefficiency.
Coming now to other questions of governmental control,
I believe we can lay aside at the outset the notion that the
businessmen of this country want Government ownership and
operation of railroads as a means of getting adequate and
efficient rail transportation. I believe you instinctively know
that political railroad management will not give you as good
transportaion service as can be obtained under private manage¬
ment. I am sure the more you analyze this question, the more
you will be confirmed in the view that a change from private
ownership to Government ownership would be a change to an
indescribable extent for the worse.
When you think of what business wants in the way of rail¬
road service, I do not believe you can find any respect in which
your experience would lead you to think that Government or
political management would be as good as private management.
Without taking time to discuss the actual operation of trains
and the handling of freight and passengers, I call your atten¬
tion to the great desire of all buiness men to secure prompt
answers to propositions or requests that they make for new
facilities or new arrangements. You, of course, experience
much delay when you take these matters up with railroad
officers. But can you imagine the amount of delay that would
be involved if you had to apply to political or governmental
railroad managers to pass upon your propositions and re¬
quests? Anybody who has had to deal with governmental
agencies and who has tried to get prompt action on any propo¬
sition, no matter how legitimate or urgent, appreciates the
difficulty of getting from Government officers quick and au¬
thoritative response on any matter which involves a departure
from routine methods.
Another matter to which I am sure the business of the
country is bitterly opposed is "pork barrel" legislation, whether
for rivers and harbors or public buildings or other purposes. I
am sure the business men of the country will not wish to extend
the opportunities for "pork barrel" legislation to the vast
problem of extending and improving the railroads and railroad
facilities. If you have a vivid imagination you may be able to
5
approximate a realization of the efforts which Congressmen
would make to get branch railroads built in their districts, to
get new depot buildings built in towns large and small, and to
get all those things which might tickle the fancy of their con¬
stituents, and along with this you can probably also imagine
how little importance would be attached to the far greater
problem of supplying continuous appropriations to do the
really great things, such as keeping the whole railroad plant
abreast of progress, improving the roadbed, strengthening
bridges, improving rolling stock, and all those things which do
not tickle the fancy of constituents in a particular congres¬
sional district, but which are indispensable to the adequate
handling of business.
I touch upon this matter of Government ownership, not be¬
cause I believe the business of the country has any leaning in
that direction, but because the vague assumption that Govern¬
ment ownership may be a solution appears sometimes to pre¬
vent a clearcut study of the question as to what remedies are
proper. So long as a vague notion exists that in any event we
can fall back on Government ownership as a reasonably satis¬
factory solution, that state of mind will hamper the attainment
of a proper solution. If you can help get the country to appre¬
ciate that falling back on Government ownership would be like
falling back out of the frying pan into the fire, you will aid in
getting a solution of the problem through the adoption of the
best form of regulation to insure the development of the rail¬
roads under private ownership so as to serve the public to the
best possible advantage.
Present Combination of State and Federal Control Against
Business Principles.
When we come to consider the specific things which ought
to be done so that railroad operation shall be adequate and
efficient to meet fully the demands of business and the needs
of the public, I think I am safe in assuming that business men
are in agreement also on the proposition that a reform of great
importance is to terminate the present multiplication of reg¬
ulation by 48 States in addition to the Federal Government.
I believe it requires no discussion to convince you that no
enterprise can prosper when its revenues may be cut down
and its expenses may be increased by 48 different States each
acting independently of the other, and by the Federal Gov¬
ernment in addition.
But there are some striking features of the present system
which I think it worth while to emphasize because of their
being completely at variance with fundamental business prin¬
ciples.
6
The whole scheme of State regulation of rates, in addition
to Federal regulation of rates, rests upon a fiction. Take a
railroad that runs across five States and that not only carries
traffic from each of those States to each of the others, but also
carries traffic that is destined all the way across the Continent.
The railroad crosses various State lines but those State lines
are imaginary and have no business significance in the main¬
tenance of the railroad or in the operation of trains. The
business of this country completely ignores State lines. You
do not ship from one State line to the next and then break bulk
and reship across the next State. Railroad terminals are not
placed at State lines, but they are placed according to geo¬
graphical and topographical and business requirements. A
railroad division may be entirely in one State or may cross
three or four States. The location of the State line is a purely
accidental circumstance as far as the business aspects of the
question are concerned.
The railroad is a single thing. It is operated as a single
unit. The same factors control its operation whether the
particular train happens to be carrying traffic which is in¬
trastate or traffic which is interstate or, as is usually the case,
both interstate and intrastate traffic.
But by reason of the present artificial or fictitious system
whereby intrastate traffic is treated as a substantially distinct
thing from interstate traffic we find processes which offend the
first principles of business management. Take the matter of ac¬
counting and statistics. We find there has to be the most
elaborate accounting in order to create a separation of expenses
between intrastate traffic and interstate traffic. We have to
work on the fiction that the business handled in the State is
handled at a separate cost from the business that crosses the
State line. We have to take a train which handles business
indiscriminately, both intrastate and interstate, and evolve
some elaborate formula to make a series of approximations to
decide what part of the cost of that train relates to intrastate
business and what part relates to interstate business. There
can be as many different formulas as there are people to deal
with the subject and no two States have to adopt the same
formula.
You may have a situation of this sort: A ton of freight
may be hauled 50 miles in the State of Missouri immediately
west of the Mississippi River. Another ton of freight may be
hauled by the same railroad and the same train for 50 miles in
Illinois immediately east of the Mississippi River. Another
ton of freight may be hauled by the same railroad in the same
train 25 miles in Illinois and 25 miles in Missouri. The pres¬
ent theory is that those three transactions represent three dis¬
tinct kinds of business handled at three distinct costs and sub-
7
ject to three distinct sovereignties. We find the traffic offi¬
cers and the statisticians and the counsel of the railroad
company may have to travel to Jefferson City, Missouri,
in order that a Railroad Commission at that place, elected
by the people of Missouri, may decide how much it costs
to handle the ton carried 50 miles in Missouri and what
sort of rate the railroad company ought to have in order to
compensate it and fairly protect its credit. Then we find that
these traffic officers and statisticians and counsel may have to
travel to Springfield, Illinois, and appear before a Railroad
Commission, elected by the people of Illinois, to ascertain the
cost of handling the ton of freight in Illinois and what rate
should be allowed the railroad company to compensate it
therefor and adequately to protect its credit. Then we find
that these traffic officers and statisticians and counsel may
have to travel to the City of Washington and appear before a
Commission appointed by the President in order to find the
cost of transporting the ton which is hauled 25 miles in Mis¬
souri and 25 miles in Illinois, and what rate ought to be allowed
to compensate the railroad and protect its credit. All the
transportation is done by the same railroad company over the
same track and probably in the same train and between the
same division points, and yet we have three separate Commis¬
sions regulating this single and indivisible railroad enterprise.
Such fictitious processes must be obnoxious to every busi¬
ness instinct and in the nature of things they ought to be
terminated so that a single tribunal can deal in a comprehensive
way with this single subject matter. Instead we pile up sta¬
tistics and multiply the labors of the railroad people and
multiply the taxes of the public in order to work out an imagin¬
ary problem as to what is the separate cost and as to what
ought to be the separate rate for each of these 50 mile hauls
performed on the same railroad and by the same train.
State Regulation of Securities Unbusinesslike.
Another feature of great importance is the regulation of
the issue of railroad securities. One of the things of most
vital concern to the railroad world is the raising of additional
money which is necessary to enable the railroads to provide
the additional facilities which the business of the country
needs. This money can be raised only by the issue and sale
of stock or bonds or other evidences of indebtedness. It is of
the highest importance that there should be a consistent public
policy pursued with reference to this vital matter. Let us see
what the situation is at present. Let us suppose there are three
railroads between Chicago and Denver, each of which needs
$10,000,000 to improve its facilities. One of these railroads
may be incorporated in Missouri and it has no powers to issue
8
securities except such as a legislature elected by the people of
the State of Missouri may see fit to give. It may be impos¬
sible, for example, for this company to issue any preferred
stock, although conditions might be such as to make this the
most desirable method of raising the $10,000,000. Again, even
when the Legislature has conferred the power to issue the sort
of security which has been determined upon, a discretion is sup¬
posed to reside in the Railroad Commission of Missouri as to
when and how the security shall be issued and the price at
which it shall be sold, and as to various other details connected
with the issue.
Another of the railroad companies may be incorporated in
Illinois and it is in like manner dependent upon the powers
which a Legislature in Illinois sees fit to give and upon the
discretion which the Railroad Commission in Illinois sees fit to
exercise. Another of these companies may be incorporated in
the State of Kansas and it is dependent upon the powers which
the Kansas Legislature may give and upon the attitude which
the Kansas Commission may take. Indeed, we frequentlv find
that the same company is incorporated in two or more States
and therefore has to look to these different States for its powers
and its supervision.
What each of these three States does is entirely independ¬
ent of what the others do and is entirely independent of what
the business of the United States may need. It requires no
further discussion for business men to understand clearly how
completely obnoxious to business principles is this method of
dealing with a vital business proposition. I believe you will
fully endorse the view that the Federal Government ought to
confer on the railroad companies the power to issue such
securities as may be appropriate to raise funds in the public
interest and ought to confer upon the Interstate Commerce
Commission the exclusive power to supervise these issues.
Multiple Regulation Menaces Railroad Development.
I now come to the fundamental need of the railroad situ¬
ation and that is the need for sufficient net income to enable
the railroad companies to raise enough new capital to continue
to expand their facilities as the growing business of the country
requires. Nearly everything else in the railroad situation is
after all only a means to the accomplshment of this great end.
One feature of the situation is that if a railroad company raises
all its new capital by borrowing money, it will get to the point
where it destroys its credit, because its debt will be entirely om
of proportion to the equity in the property belonging to the
stockholders. Therefore to preserve the credit of the rail¬
roads over a long period of time it is indispensable that a sub¬
stantial part of their new money shall be raised by the sale of
9
capital stock and in order to accomplish this end it is indis¬
pensable that the railroad company shall have a net income
sufficient to enable it to pay an attractive rate of dividend upon
its stock.
Therefore anything which tends to undermine the ability
of the railroad company to earn a net income sufficient to
enable it to pay attractive dividends upon its stock will pre¬
vent the railroad company in the long run from obtaining
enough new capital to continue to meet the growing demand
of business. Undoubtedly the present situation contains a
serious menace to the enjoyment of adequate net income for
this purpose. We find all the different States exercising the
power to cut down rates and also exercising the power to
increase expenses through imposing innumerable requirements
which add to the burdens of operation. Yet each of these
States is entirely independent of the others. The policy of
each is controlled by its own legislature, elected for a short
term, and each member of the legislature generally represents
the interests only of the county or district in which he is
elected.
It would be unreasonable to expect that any member of
the legislature would have a horizon as broad as the United
States or would look at the railroad problem from the compre¬
hensive standpoint which is indispensable if the railroad com¬
pany is to be protected in the enjoyment of the net income
which in the public interest it ought to have. Therefore in my
opinion the necessary net income of the railroads will continue
to be menaced and the proper development of the public serv¬
ice performed by the railroads will continue to be menaced as
long as all the States continue to exercise their present un¬
coordinated power to reduce railroad revenues and increase
railroad expenses as they see fit. So again we reach the con¬
clusion, which seems to be the only one consistent with the
business aspects of the proposition, that the Federal Govern¬
ment ought to exercise the exclusive power to control the
revenues of the railroad companies and to impose substantial
increases in their expenses.
Railroad Earnings Small Compared With Other Business.
You as business men fully appreciate the necessity of look¬
ing backward and forward over a considerable period of years
and the danger of being governed exclusively by the appear¬
ances of the immediate present. This country has been enjoy¬
ing an unparalleled and unforeseen prosperity on account of
the War. It would be strange indeed if the railroads did not
get some crumbs of this prosperity. But we find in some
quarters a disposition to assume that because in the immediate
present on account of abnormal conditions the railroads have
10
been able to earn something less than 6% upon the investment
in the railroads, there is no reason to worry about the future
of the railroads, and hence that adequate reforms in railroad
regulation may be indefinitely postponed. No such argument
can appeal to a business man who takes a wider survey than is
possible if only the immediate present be looked at.
But if we look at the immediate present, the fact is that
the condition of the railroads emphasizes the seriousness of
their situation. We have only to contrast the extraordinary
increases in profits in practically all industrial lines with the
relatively small increases in profits in the railroad business to
appreciate the very serious restrictions that rest upon the
railroads for earning additional profits in times of unusual
prosperity. To realize this we have only to look at the great
increases in dividends on all sides in industrial enterprises and
the comparatively small and infrequent increases in dividends
on the part of the railroads.
State Regulation and Car Shortage Situation.
Another feature of the present situation which throws light
upon this problem is the very serious congestion and conse¬
quent shortage of cars. This emphasizes the inter-relation of
all the railroads in the United States. Heretofore I have talked
about the matter merely from the standpoint that each railroad
is a single thing and ought not to be split up into fictitious
parts to be dealt with separately by the different States. But
further than that the whole railroad system of the United
States is in many respects an entity and should properly be
treated as such.
This is strikingly true in the matter of car supply. If the
Legislatures of New York and Pennsylvania and New Jersey,
by imposing so-called full crew or extra crew laws upon
the railroads and thereby compelling them to spend several
million dollars every year for unnecessary operating expenses,
have operated to discourage the railroads in those States from
providing additional tracks to take care of their business at the
great terminals in the East, those Legislatures have not only
injured the interests of the people in their own States, but they
have injured the interests of the people throughout the United
States, because the congestion at the seaboard has been a
burden upon the commerce of the whole country. The short¬
age of cars in the West and in the South has been aggravated
by the congestion in the East. Again if a Legislature in a
Western State by imposing unnecessary burdens has operated
to discourage a railroad in that State from acquiring additional
cars and that has resulted in that railroad using cars of another
company to a disproportionate extent, that condition operates
to contribute to the general situation of car shortage.
11
I do not mean to say that the present conditions of car
congestion can be attributed solely to the reductions of net
income due to State authorities, but I do believe it is due to a
substantial extent to those causes, and in this matter of car
supply and car shortage it is not only true that no State can
live to itself alone, but no railroad can live to itself alone. The
whole railroad system of the United States is interlaced in this
respect and an undue burden put upon any railroad company
may operate to injure the adequacy of car service on railroads
in remote parts of the country. So here again we find the
present is a striking witness to the necessity for the substitu¬
tion of a comprehensive Federal regulation for the present
multiple regulations.
Enlargement of Interstate Commerce Commission.
Just one other matter, the importance of which as business
men you will all appreciate. Any program for the effective re¬
form of the railroad situation must contemplate the redistribu¬
tion of the functions of the Interstate Commerce Commission
and its enlargement and reorganization so as to enable it to
discharge to its own satisfaction and the satisfaction of the
public the extraordinarily difficult functions which confront it
at present and which will continue to confront it if Federal
control shall be substituted for the present conflicting and
confusing multiple control. I shall not elaborate this idea, but
it is a phase too important to be passed over in silence.
Summary.
The sum of what I have said is that these matters should
be regulated in the interest of the whole public and not in the
interest of special classes or sections; that continuity of trans¬
portation cannot be relied upon so long as the Government
permits that continuity to be interrupted at the pleasure of the
Railroad Brotherhoods; that the adequate and efficient rail
transportation which business needs will be prejudiced by
Government ownership and can only be promoted by recog¬
nition of the plain business fact that a railroad is a single
business concern and its operations ought not to be split up
into imaginary parts for regulation by the various States but
ought to be regulated in a comprehensive way in the interest
of the whole public by the Federal Government. It alone is in
a position to view the whole situation and do what is best to
protect the public and to promote railroad credit, which is
indispensable to the continued development of the railroads to
meet the country's growing business needs.