\/W^ THE POLITICAL ECONOMY AND Business Management of the Railroad T. F. MORAN. TCE LIBRARY OF TKE JAN ^ .V.S.I •i \ A*i c»«*"v/"rv V THK POLITICAL ECONOMY AND Business Management of the Railroad A SYLLABUS OF LECTURES PREPARED FOR USE IN PURDUE UNIVERSITY —BY- THOMAS F. MORAN, Ph. D. Professor of History and Political Economy 1898 rvr f jr»n^flf)Y f\T TMr, (AN - . . • 1898. HOME JOURNAL PRINTING CO. LAFAYETTE, IND. 3SS.Z REFERENCES. 1. Hadley's Railroad Transportation. 2. Dabney's Public Regulation of Railways. 3. Stickney's Railway Probletn. 4. I 5- The Purchasing Agent can tell accurately the cost in cents per mile run for fuel, oil, etc., and can detect extravagance. On the Pennsylvania road there is a coal premiian. There is a definite allowance for every run and when enginemen use less than this allowance they are allowed a per cent of their savings. There is no penalty for using more than the allowance, but an explanation may be demanded. (a) Cost in cents per mile run "under ordinary condi- tions' ' : Cents. For oil, tallow, and waste 0.32 For fuel 7.42 For engineers. 3.60 For firemen , i . 79 For wipers and watchmen. 1.25 For water supply 0.49 For supplies (miscellaneous) 10 For repairs 2.40 Total 17-37 American Railway^ 308. (b) Cost in dollars per 100 miles on Big Four road: Passenger. Freight. Repairs 4.01 5.60 Stores 27 .32 Fuel 4.40 7.80 Wages, E. and F 4.92 6. 15 Cleaning 23 .19 Water supply .27 .50 Other motive power accounts .52 .76 Total $14.62 $21.81 Wastefulness in any line is thus easily detected. 6. Duties of the Store-keeper. 7. Stationery is an important and an expensive item. Thousands of forms or blanks are in common use. Envelopes alone cost from $15,000 to $20,000 per annum on some roads. There must be economy in contracting for supply of stationery and in checking waste. •—16— I 8. Time-tables often cost roads from $30,000 to $40,000 per year. 9. Passenger tickets are an important item of expense. They appear in a variety of different forms and tons of them are used each year on a large system. Contracts are usually let by the year. 10. Supplies for the track. Economy demands that they should be of the best quality and promptly furnished. 11. "Old material" and the scrap-heap. The amount received for old material is considerable. Old rails and wheels yield about 60 per cent of the cost of the new ones. In the case of some other articles the salvage is insig- nificant. — 17— LECTURE V. Economy and Efficiency in Railroad Work. I. The success of a railway system is due not only to sound principles of general management but also to economic ad- ministration of details. In these days of close competition, small margins, and large volume of business, economy in small matters and attention to details often constitute the difference between success and failure in business management. The railroad has attracted to its service large numbers of wide-awake men who must possess the latest information and be conversant with the recent advancements in their particular lines. The way in which the officials of one of the greatest rail- way systems in America keep posted regarding current affairs is well illustrated by the following extract from the letter of Mr. William E. Curtis to the Chicago Record of February lo, 1897: "At Philadelphia the other day I was much interested by a visit to the editorial department of the Pennsylvania railroad. It is composed of about a dozen men, under the direction of Mr. Frank N. Bark.sdale, and in addition to looking after the adver- tising, their chief duty is to read the newspapers for the officers of the company. About 800 papers are received daily from all over the world, which are faithfully examined by experienced readers, who understand all modern languages, and, like the exchange editors of a great newspaper, can detect an interesting paragraph at a single glance. Each man has a pair of scissors in his grasp, and clips every item of news and editorial, every personal and advertisement, that he thinks will interest the head men of the road. "When the day's reading is done the clippings are assorted and pasted according to topics upon sheets of heavy manilla paper, bearing the date and the title of the classification. The sheets are then separated and laid upon the table of the president, who is thus able to get the news of the world and expressions of public opinion upon important topics at a glance. When the president reads them he passes them down to the vice-presidents, the general manager, the general solicitor, the general passenger and freight agents and other officials, and when they have all had their chance the sheets are returned to Mr. Bark.sdale, who files them away in pigeon holes according to their date. Thus the history of the world is preserved for ready reference in a per- manent form, and articles of importance are indexed." —18— 2. There is no business in which the distinction between true and false economy is more apparent than in railroading. The best of service and material is, in the long run, the most economical. "The high object of our profession is to consider and de- termine the most economic use of time, power and matter." 3. The economy of the Purchasing Department. In the purchase and distribution of supplies, there is op- portunity for a vast number of small economies. The total sav- ing possible in a large system is an important item. 4. The railroads of the United States employ over 826,000 men. Strict discipline is therefore essential to efficient and economic service. The "Record Discipline" plan recently adopted by the Erie road seeks to accomplish this end. A com- plete record is kept of the merits and demerits of each employe. ' 'A charge will be made in the record book for every case of neglect of duty, violation of the rules or regulations, improper conduct, etc. ' ' ' ' When the record against an employe becomes such as to demonstrate his unfitness for service he will be dismissed." "Special credit will be given on an employe's record for notably excellent conduct, good judgment in emergencies, loyalty, etc." 5. The track of the Pennsylvania road is not surpassed in the United States. No small part of this excellence is due to the competitive prize system devised in 1879 by Mr. Frank Thomson, then general manager. Economy and efl&ciency are here combined. The road is divided into various divisions and cash prizes are given to supervisors and section foremen having their track and roadbed in the best condition . Advantages of the system: (a) The men are the judges of the work and this participation causes a closer sympathy be- between them and the oflScers of the road. The tendency is to prevent strikes. (b) The standard of excellence is known to the men and they strive to attain it. —19— 5. A complete and exact sj'stem of accounts is an aid to economic and efficient management. The sendees of Albert Fink have been invaluable in this respect. A correct estimate may thus be put upon the economic services of an employe. Some roads give premiums for good results. All roads discharge for very poor results. 7. The business management of railroad shops. (a) Monon Shops, LaFayette. (b) Pennsj-lvania Shops, Indianapolis. (c) The Big Four Shops, Brightwood (Indianapolis) . (i) Discipline. (2) Genuineness of work. (3) Economy in details. (4) The supply house. (5) Care of machinery'. (6) Economic devices. (7) The fire department. (8) The position of the "agitator." 8. The wages paid bj^ American Railroads insures efficient services. An article in The Railway Age, for March 11, 1898, on "lyabor on American and English Railways" furnishes some interesting contrasts. The following table is suggestive : United States. England. Gross earnings • $1,150,169,376 $368,190,000 Operating expenses 772,989,044 208,485,000 Interest and fixed charges 350,250,493 99,625,000 Dividends 87,603,371 63,060,000 Expenditure for labor 468,824,531 97,765,000 The labor charge on English railways is 26.5 per cent of the earnings, while in America it is 40. 7 per cent — a difference of 14.2 per cent. In England the total expense of operation is 57 per cent of the gross earnings; in America it is about 68 per cent. If we deduct the labor charge, however, all other expenses of opera- tion are conducted for 3 per cent less in America than in Eng- land. "For every dollar paid to the stockholders in England labor gets $1.55; for every dollar paid to the stockholders in America labor gets $5.35." "In England labor constitutes 46.89 per cent of the operating expenses. In America 60.35 per cent of the operating expenses go to labor. ' ' — 20 — These facts show ( i ) the economy of American methods of management and (2) that the interest of labor in American rail- ways is much greater than that interest in the railways of England. I,egislation which tends to cripple the railway is hostile to the interests of American labor. 9. The economy and efficiency in American construction are shown by the remarkable demand on the part of foreign nations for American locomotives. -21 — LECTURE VI. The History of Transportation in the United States. ' 'The movement of goods in a year on all the through routes of the world a century ago would not equal the movement on a single one of our trunk-lines of railroad at the present day Transportation has not merely become important in itself, it has become a controlling factor which gives shape to each man's private business, and to the public policy of every civilized nation." Hadley, 4 — 5. 1. The evolution of the present transportation system in the United States. The bridle-path, natural water-ways, the earth-road, the turnpike, canals and railroads. 2. The development of transportation is the natural result of the application of the principle of division of labor. 3. The completion of the Erie Canal (1825). "The con- struction of the Erie Canal reduced transportation charges to little over one-tenth their former figures. ' ' Hadley, 3 1 . 4. The infancy of the railroad (1830- 1850). The Baltimore and Ohio road is the "pioneer." It was chartered in 1827, begun in 1828, and operated in 1830. It was fifteen miles in length, and used horse power and sails. In 1 83 1 steam power was adopted. 5. Land grants and subsidies. Grant to Acres. Union Pacific Railway 13,000, 100 Kansas Pacific Railway 6,000,000 Central Pacific Railway 12, 100, 100 Northern Pacific Railway 47,000,000 Atlantic and Pacific 42,000,000 Southern Pacific 9,520,000 Total 129,620,200 More than $60,000,000 were granted by Congress to the first transcontinental lines. Bryce, II, 507, n. i. 6. Roads were built (i) to meet the demands of existing business, (2) to develop new business and (3) for political con- siderations. —22— 7- Consolidation. The first lines were fragmentary. Press of business demanded consolidation. The New York Central between Albany and Buffalo was made up of sixteen separate lines. (a) Work of Thomas Alexander Scott and Cornelius Vanderbilt. (b) Advantages and disadvantages of consolidation, 8. The development of the Telegraph, Express and Postal Systems. 9. General improvements in transportation. (a) Improvement in road-bed. Introduction of Bessemer steel rails. (1868). ( b) Use of heavier cars. Economy in increasing the "paying weight." (c) Improvements in motive power. (d) Better business methods. Rates fixed to secure [ business. "Back-loading." 10. Development of safety appliances. [ The best and most economical practice combines "disciplined intelligence and perfection of mechanical details. ' ' (a) Air brakes; signals; torpedoes; the block s)^stem; gates at crossings; "safety" switches; inter- locking bolts; guard rails; foot-guards; vesti- bules; watchmen. (b) Many accidents are caused by a disregard on the part of the public of the rules and admonitions of the railroads. There is need of more stringent laws against trespass. "So far as information may be gained from the train accidents of 1892, but few of them can be attributed to causes beyond the control of man. In most of them the remedy is to be sought in more efiicient appliances, regulations, discipline and inspection." Haines, 253. 11. Increase in railway mileage in the United States: • Miles. I 1828 3 I 1830 41 [ 1840 2200 1850 7500 1 860 29000 1870 49000 1 880 9367 1" 1890 163597 1896 182776 —23— LECTURE VII. Railroad Legislation in the United States. "It is safe to say that a large part of the railroad legislation of the last twelve years could never be carried out at all, and that a large part of the remainder would do more harm than good to all concerned. The attempt to legislate for the shippers without regard to the railroads is as much of a mistake as the attempt to legislate for the railroads without regard to the shippers." Hadley, 23. 1. The legislation of the early period was intended to encourage railroad building. (a) General railroad laws. (b) Subsidies. 2. Laws attempting to limit dividends have generally failed to accomplish their purpose. They have sometimes been an obstacle to the reduction of rates. 3. Early attempts at railway taxation were exceedingly crude. There was no fixed basis for assessment. "The difier- ence in the assessment of the New York Central and Hudson River Railroad, where for all the purposes that the road can be used, it is of the same value to the company, is $24,000 per mile." New York State Assessor's Report, 1873. (a) "There is a growing belief that the tax valua- ' tion should be based on earnings or earning capacity." Hadley, 127. 4. Legislation to enforce railroad liability: (a) Accidents. Passengers are now quite well protected by legislation. This is not the case with railway employes. (i) Car- coupler laws. Haines, 38 — 61; and Eleventh Aiinual Report of the Interstate Com- merce Conimissi07i , 127. (b) Liability of railroads as common carriers. 5. Laws to regulate railway rates have been generally unsatisfactory. (a) Granger law*. (1870-1877). —24— "The efiects were most sharply felt in Wiscon- sin. The law reducing railroad rates to the basis which competitive points enjoyed, left nothing to pay fixed charges. In the second year of its operation, no Wisconsin road paid a dividend; only four paid interest on their bonds. Railroad construction had come to a standstill. Even the facilities on existing roads could not be kept up. Foreign capital refused to invest in Wisconsin; the development of the state was sharply checked; the very men who had most favored the law found themselves heavy losers. These points were plain to every one. They formed the theme of the Governor's message at the beginning of 1876. The very men who passed the law in 1874, hurriedly repealed it after two years' trial." Hadley, 135. (b) State Commissions. 6. English and American railway legislation contrasted. 7. Limitation of new construction of railways. Augustus Schoonmaker in the Independent, June i, 1893. Also in Com- pendium, 96. 8. The Interstate Commerce Commission: (a) Its history. (b) Its powers. (c) Its influence. (d) Its reports. 9. Comparative railroad legislation. "But as preliminary to determining on a proper course of action in the direction of harmonizing all American railroad legislation, both state and national, it would seem wise to have a compilation, carefully classified, of the railroad laws of all the states. Being for the benefit of all, this work should be done at the expense of all — that is through the Federal Govern- ment." W. D. Dabney. Proceedings of National Convention of Railroad Co77imissio7iers , April, 1892. Also in Cojnpendiiun, 104. —25- LECTURE VIII. Railway Rates. 1^ No system of railway rate-making has yet been devised which is satisfactory both from the theoretical and practical standpoints. 1. The "cost of service" theory. Much might be said iu favor of this plan from the theoretical standpoint. It is, however, impracticable. (a) The cost of service cannot be ascertained. (b) Even if it could be determined the plan could not be applied as the cost of service on competing lines would not be the same and competition would be done away with. Again, goods of large bulk and small value could not pay the rate thus determined. Ac worth, 52. "The case of a railroad's estimating the cost of doing a particular piece of business is not unlike that of a lawyer estimating the cost of giving an opinion." Alexander, 3. 2. "Equal mileage rates" would not be equitable even on the "cost of service" theory. "And experience has taught even the least observant critic that equal mileage rates, pure and simple, are an absolute im- possibility. In truth equal mileage rates are only cost o.^ carriage rates in their crudest form," Acworth, 37. 3. The method of charging "what the traffic will bear" is the best yet suggested but is not satisfactory. This involves a discrimination in favor of certain classes of goods and certain localities. Great care is necessary in administering this system. See Hadley, iio-iii; 116. Acworth, 60—63. (a) "The principle of charging what the traffic will bear, gives the railroads a dangerous power, and one which is often abused; a power against which com- petition furnishes no remedy. Yet if the analysis of the practice of railroads with regard to freight charges be correct, and if our illustrations mean anything at —26— all, it is unquestionably the principle which enables railroads to render most efficient service to the com- munity." Hadley, 123-4. (b) In speaking of this principle, Acworth says: "Its effect has been to raise rates nowhere, to reduce them somewhere, and therefore on the whole to bring down the average. Secondly, to benefit the consumer by widening the area of supply, and so securing that the products shall reach him charged with no monopoly profits. And, thirdly, to benefit the country at large by opening up fields of profitable industry in districts which were previously handi- capped out of the contest by the cost of carriage." p. 66. (c) Objections to the principle. (i) In theory. (2) In practice. (3) Charging what the traffic will Jtof hcsir. Alexander, 4-5. 4. Fluctuating rates. Stable rates are more to be desired than those which average lower but are uncertain. Business can adapt itself to uniform rates but is disrupted by fluctuating ones. "One could fill pages with extracts from American utter- ances to the effect that what they want is not cheapness but reasonable rates, combined with equality, publicity and perma- nence." Acworth, 157. 5. Discriminations: (a) Freight classification. Discrimination of this sort is justifiable. (b) lyocal discriminations. Some kinds of local discriminations are serious evils. (c) Discrimination between individuals is ruinous. "None of our railroads are able to command all the business their tracks will accomodate, and few of them find it easy to meet their fixed charges and dividends to stockholders. Consequently, the strug- gle for business is sharp wherever they come into competition, and the easiest way for any single road to get a great share of it is to pay the large shippers for it by giving them private rates or rebates. These rebates give the favored shippers undue ad- vantages over their competitors in business, and are —27— most cruel wrongs and injuries to the latter, and to the community as a whole, The common law has always condemned them, and given damages to parties who could show themselves discriminated against." Alexander, 21-22. See also Acworth, 154. 6. The evils of unrestricted competition. 7, Combinations or pools: Co^npcndiiim 229-250. (a) To fix rates. Haines, 335. (b) To divide the joint earnings. (c) To apportion the territory. (d) To divide the business. 8. Diflferentials. 9, The ethics of the free pass system. LECTURE IX. English Railroads. /fw 1. The English railroad is operated under more favorable conditions, in respect to legislative control, than is the American. Parliamentary legislation has been reasonable, and the English railway has not been restricted in its privileges by the legisla- tures of forty-five states. 2. The English railway is characterized by stability in construction and in business relations. The road-bed, bridges, and buildings are made in the most substantial and expensive manner. The average cost per mile for construction in England in 1883 was $204,500; in America the average cost per mile for the same year was $61,800. The average cost for the whole of Europe was about $115,000 per mile. These figures indicate the superior stability of English railway construction. 3. English railway legislation: (a) Period of construction, 1830-1850. (b) Period of combination, 1850 . (c) No subsidies were asked for, as they were not needed. 4. Rates. It is difficult to compare the freight rates of —28— England with those of America, as in England the railroad collects and delivers the goods. Shippers also quite generally furnish their own cars. (a) Passenger rates are lower in England than in the United States. (b) L,ow-class freight rates are higher in England than in the United States. (c) Competition is much restricted in England. "I do not think there is at this moment a com- petitive rate existing in the kingdom." (d) Pooling is legalized in England, but not in the United States. (e) The railway clearing house. 5. Stockwatering, in its most objectionable forms, does not prevail. Dividends are not limited by law, hence there is no incentive to water the stock in order to disguise the profits. The bonded indebtedness of the English railroads is not great, and the dividends are higher and steadier than in the United States. Hadley, 156. 6. The English Railway Commission. 7. Needless railway construction is obviated. It must be shown that there is need for the proposed road before the charter is granted. Massachusetts has a similar provision, and every state should exercise some restraint upon reckless and useless construction. Walker, Effect of Competition Upon Raihvay Constructio7i a7id Operation^ 12. 8. "From the data, I believe the English roads get as much again for freight and passenger traffic as we do, and pay about half as much for wages The following comparison of the wages paid American and English railway labor will suffice, as the same ratio extends substantially through other branches of railway service: Per day. Per month, Engineers. Firemen. Conductors. United States $3-65 $2.05 $82.40 England $1.25 to $1.87 $0.75 to $1.12 I30.40 This comparison is yet more favorable to American railway labor when the longer hours and more onerous conditions which constitute a day's work in England are considered. Of —29— course, wages on the Continent are still lower than those in Euglaud. So it will be seen that the United States presents the anomaly of pa)ang the highest rate of any country in the world to those engaged in transportation, and receiving the lowest rate of any country in the world for carrying freight and passengers." Robert P. Porter in Boston Transcript, August 19, 1897. r those of Austria. Compared with the United States, they are, of course, much lower for passengers, and much higher for freight." Hadley, 201. The German System, 1 . The French system was carefully planned with Paris at the center. The German system was developed without refer- ence to any national plan. Each state built its lines to meet its own particular needs. 2. The services of Bismarck in securing a system of state railroads. The military idea was dominant. Bismarck suc- ceeded in Prussia, but failed in the other states. In Prussia in 1885 there were 13000 miles of state road and 1000 miles owned by individuals. "Prussia is now the typical example of state railroad ownership. " Hadley, 208. 3. Effects of wars of 1866 and 1870-71 upon railroad build- ing and management. The Austrian System, I The Austrian system was influenced by the French and German systems. About one-fourth of the mileage is in the hands of the government and the tendency is toward state management. The Belgian System, 1. Belgium was an almost ideal state for a government system of railroads. 2. The government built the main lines, while private corporations were permitted to construct the subsidiary ones. Manj- of these latter lines were purchased by the government until now the state owns about 75 per cent of the entire mileage. 3. The system has produced many good results. The passenger rates are probably the lowest in the world. The freight rates are lower than those of other European countries. 4. Many of these good results have been erroneously attributed to state management. "While not withholding the freest praise from the Belgian system, we may fairly a.scribe much of its success to other causes than enhghtened state management or deliberate public poHcy." Hadley, 218. —31— 5- The application of the postal principle of state manage- ment to railroads. (a) According to Professor Jevons state manage- ment of any industry is or may be successful under the following conditions: "(i) The work must be of an invariable and routine-like nature, so as to be performed according to fixed rules. (2) It must be performed under the public? eye or for the service of individuals who will at once expose any failure or laxity. (3) There must be very little capital ex- penditure, so that each year's revenue and expense account shall represent with ap- proximate accuracy the real commercial success of the undertaking. (4) The operations must be of such a kind that their union under one all-extensive government monopoly will lead to great advantage and economy." L,. Darbyshire in Evening Leader [New Haven], Sept. 11, 1897. The postal system meets these conditions; the railway system does not. (b) "Who can depict the enormity of saddling upon our national government the political responsi- bilities which would attach to the ownership and control of 185,000 miles of railroad, and of placing upon the pay-rolls of the government 1,000,000 railroad employes, which number, under national administration, would un- doubtedly be enormously increased?" Joseph Nimmo, Jr., in Fo7-u7n for September, 1897. ' .1 '. tiiu -32-