An Era of Consolidations

THE so-called ‘best thought’ in the country to-day favors a consolidation of our approximately 1900 railways into some eighteen or twenty large systems. While at first thought this may appear to be an almost superhuman task, it should be borne in mind that there are but 200 ‘Class I’ railroads, meaning those with annual revenues in excess of $1,000,000, the other roads, for the most part, being short lines with light traffic and scanty earnings. Inasmuch as the majority of these roads serve as feeders for the larger systems with which they connect, and in many cases have but this one outlet for the traffic which they originate, the logical consolidation for such lines is obvious from the outset. In making an analysis of the situation, it becomes apparent that there are fewer than one hundred important railroads to be merged into the proposed score of enlarged systems, and of these, there is little argument as to the proper amalgamations for many. Yet the proper, logical, feasible, and desirable affiliation of these comparatively few important roads is the bugbear of the proponents of the entire subject, and about this controversy revolves the principle of consolidation itself—either voluntary or otherwise.

‘Merging’ railroads is by no means a new practice. Every important system in the United States to-day is merely a consolidation of a number of small railroads, which originally were constructed to meet local needs, but which eventually found it to their advantage to affiliate with their neighbors in order to facilitate the handling of through freight and passenger traffic, to make common use of rolling stock and other facilities, and to reduce overhead costs of organization and management. Thus, in less than a century, our railroads have grown to a point where we have a number of systems, each of more than 10,000 miles of road, notably the New York Central Lines, the Pennsylvania System, the Southern Pacific Company, the Atchison, Topeka, and Santa Fe Railway, the Chicago, Milwaukee, and St. Paul Railway, the Chicago, Burlington, and Quincy Railroad, and the Chicago and Northwestern Railway. Possibly other companies would be included in this category if we were to add to their own mileage the mileage of roads controlled by them but operated as independent units.

It is a well-known and generally lamented fact that not all these mergers have been consummated without financial loss to investors; for the manipulations of the latter part of the nineteenth century and the early years of the present one wrecked many fine roads in which small investors had purchased securities. Yet, regardless of the purposes of certain manipulators and their modus operandi, the fact remains that the results of their work, on the whole, have been beneficial to the country in thus bringing together numerous small, independent roads into larger and more compact units of transportation.

In other words, the results may have justified the means employed.

To-day we are confronted with a different situation. We must view with deep concern the fact that thousands of miles of road not only are not even earning operating expenses, but are incurring such alarming deficits that the Interstate Commerce Commission constantly is being requested by the owners of these lines to permit them to abandon the operation of the properties and to sell the roads for junk. Yet the construction of these now defunct railroads originally was the means of inducing settlers to locate along their rights-of-way, and the villages and towns which have grown up from such beginnings will be deprived of all rail-transportation in many instances by the abandonment of their railroad.

Partly as an experiment, the Commission recently allowed the Kansas City, Mexico, and Orient Railway — a bankrupt line operating through the Southwest, which was ready to give up the ghost — to cut its rates to a point below the scale of its competitors, in the thought that this would attract sufficient traffic to warrant continued operation of the road, and thus protect the panic-stricken towns and individuals that relied upon the carrier to bring them their supplies and to carry their produce to market. However, this is an isolated case. Our present rate-structure is already hectic, and to upset it further by establishing differentials in favor of poor railroads is a policy open to serious comment.

As a panacea for the difficulties of all the railroads, — not only the unremunerative short line, but the almost bankrupt larger system as well, — consolidation of the railroads was proposed. The impetus was given by the Transportation Act, 1920, which was passed when the railroads were returned to their owners at the termination of Federal control. By the terms of this Act, — the authors of which were Congressman Esch (now a member of the Interstate Commerce Commission) and Senator A. B. Cummins, aided by the counsel of eminent economists, railroad executives, and other authorities, notably Walker D. Hines, then DirectorGeneral of Railroads, — the Interstate Commerce Commission was ordered to investigate possible combinations of railroads which might produce greater economies in operation than are possible under independent management. Permission was granted the carriers to make such consolidations as should be deemed to be for the public welfare. Thus, a complete about-face was effected from the provisions of the Sherman Act, which, it is understood, was enacted primarily to guard against railroad manipulations. Consolidation, by the terms of the later Act, became not only legal but desirable for the good of the country. Yet the Commission has no mandatory powers to enforce its recommendations as to consolidations. It can only approve; it cannot order desirable mergers.

There is much to be said for and against the principle of consolidations. In its favor, it is contended that expensive terminals, both freight and passenger, now often operated solely for competitive purposes, may be unified; that many competitive trains, handled often at a loss but yet considered by the railroads to be effective advertising-mediums, may be withdrawn; that the expenses of soliciting traffic with many ‘off-line’ agencies may largely be eliminated; that various departments, by consolidation, will find it possible to curtail their expenses to an amount considerably less than the aggregate of such expenditures by the present individual lines, those cited particularly being accounting, purchasing, traffic, and legal, while the abolition of many official positions, it is asserted, will result in huge pay-roll economies. On the operating side, it is maintained that many long hauls necessitated by competitive practice to meet the short-haul rate will be eliminated, and that equipment will be put to more efficient use by reason of bringing together under one administrative officer the cars and engines belonging to the several units of each consolidated system.

It is as easy to refute these alleged advantages as it is to propound them. Taking these in order, it may first be noted that the terminals now in use were built for the public’s convenience solely. While a unified use of certain passenger stations by all railroads in various cities would be a distinct advantage, the same does not apply in all instances to freight terminals, for this reason: an allocation of the several freight stations in a particular city between a limited number of merged systems might result in such reassignment of stations as would take away from certain lines their choice location and transfer them to other systems with which they have a more direct physical connection. Shippers who have built plants adjacent to the freight stations, or to various spurs of railroads over whose lines it is advantageous for them to ship, might find that their factories were on roads which would not carry their goods direct to the territories in which they marketed their products. A time-consuming switch movement then would be involved.

Regarding the ‘competitive’ train which may be operated at a loss, the traveling public has been educated to a point where it considers it not only its privilege, but its actual right, to discriminate between several roads (and numerous trains on each of these roads) when making out an itinerary. If consolidation means the curtailment of such opportunities, the traveler will not be likely to favor the principle. Again, while many trains may be ‘competitive’ as between the original and final termini, the balance of their route may lie through territory which enjoys no other service, and a curtailment in the number or speed of trains would seriously affect numerous communities. An example of this was furnished by the Railroad Administration’s efforts to control the competition between Chicago and St. Louis, where the Illinois Central, Chicago and Alton, Wabash and Chicago, and Eastern Illinois operated trains on practically the same schedules. ‘Staggering’ these schedules undoubtedly was an economy to the Administration; but ask the man in central Illinois what his opinion is of a service which prevents him from running down to St. Louis and back in a few hours. Under the schedules at that time, some communities found themselves with but two trains each way a day; and in many instances, these ran through many towns at inconvenient hours of the night. The American public will stand for no diminution in train-service, hence those urging consolidation cannot look to this as a means of introducing vast economies.

Combining the detail departments of individual roads — such as accounting — into one organization presumably will result in a considerable saving; for the inter-line accounting, at present necessary, requires much clerical labor, and being work of a highly technical nature, the salaries paid are relatively high. Smaller staffs also would be required in the purchasing, legal, and traffic departments, yet all of these branches are among the smallest in the railroad service and the savings would not reach an appreciable figure. Furthermore, it would take years to establish new systems and routine, and the jealousies resulting from the demotion of many officers and employees would militate against a smooth-working machine.

In fact, it is this very question of what to do with the officers, from presidents down, whose duties would be restricted by a consolidation of the companies with which they are connected, that is causing real concern. Manifestly, it is unfair to discharge officials who have given their entire life’s service to a company; while to subordinate them to officers of other roads (who may be younger and less experienced men) is certain to cause friction. One solution, of course, would be the maintenance of an independent organization on each line of a consolidated system; yet if this were done, even the small economies possible by merging the various units, or departments, would be lost. For many years it was asserted that railroad officials were paid enormous salaries. Recently these salaries have been made public, and it has been found that few executives earn over $75,000 per annum. In fact, with the exception of the presidents of a few of the largest railroads, the great majority receive less than $50,000, while in all instances, the emolument of the vice-president is approximately half of that of his chief. Salaries of lower officials scale down proportionately, so that the general freight and general passenger agents, with whom the public comes in closest contact, receive, in most instances, $6000, or less.

These salaries are mentioned in refutation of the claim that railroad officers are overpaid; and as it is obvious that the amounts are not larger than are paid to executives of other important industries and in commercial business, it can readily be seen that few visible economies can be effected through this source. And even assuming that, in a merger of several railroads, a complete amalgamation of the several independent departments, such as traffic, accounting, purchasing, and legal, shall be accomplished, the experiment may prove a costly one; for it is by no means certain that officers who have managed such departments on roads of perhaps 5000 miles will be able to expand to the responsibilities of roads of thrice that size and revenue.

The same applies to the chief executives. Competent and hard-working as most of them are, we have no precedent to prove that a president of a railroad of 5000 or 10,000 miles of line is big enough, or energetic enough, to manage a system of 20,000 to 25,000 miles. During Federal control it is true that seven Regional Directors managed all the railroads, some of them having some 50,000 miles of line under their supervision; yet in this case the situation was different, for each of the various roads under each Director still maintained its own organization and identity and was run by a Federal manager (in most, cases its pre-war president, or general manager). Pursuing this line of thought, that is, the availability of men competent to handle railroads of 20,000 miles, it is of note that the Pennsylvania System and the Erie Railroad both have decentralized their roads into four ‘regions,’ each with a responsible executive directly on the ground, each region being operated as an independent railroad, to all purposes and intents. Thus, experience would seem to warrant a decentralization of authority, rather than the reverse, as would be the case under consolidation.

The reduction in transportation costs incurred in handling freight by circuitous routes to meet the short-line rate may not be so great as anticipated, inasmuch as it is planned to maintain a certain amount of competition between the enlarged systems. However, this is a matter which hardly can be resolved into dollars and cents, for routing freight is largely in the control of shippers, and it is certain that they will voice strenuous objections to any plan which will restrict this privilege.

It can be seen that both the antagonists and the protagonists of the consolidation theory have much in their favor — each is fortified with apparently sound and logical arguments, yet the other group contends that its counterassertions refute such objections. And while many are engaged in an academic discussion as to the theories of consolidation,—for instance, whether or not a concentration of routine work into the larger departments of a consolidated system is desirable and likely to promote efficiency and harmony, or whether it will throw the work into a chaotic state by the added burdens and responsibilities assumed by officers and men; and whether or not it is constitutionally sound to force a strong railroad to absorb a weaker one and inflict on the stockholders of the prosperous one the debts and deficits of the poorer one; and finally, whether the consolidation of all the railroads into some eighteen or twenty large systems will not make nearer and easier the ultimate step of merging these systems into but one railroad, Government-operated, or -owned, or both, — while these discussions are rife in many quarters, others are looking at the practical side of the matter and are endeavoring to merge (on paper) those railroads in which it will be for the best interests of all concerned.

In the event that railroad mergers are made mandatory, there are, as stated, a number of logical and desirable amalgamations upon which all authorities agree. But there are many others upon which there is no harmonizing of views. Furthermore, there is, in various sections of the country, an amount of local pride and sentiment which the advocates of consolidation must overcome before they can consummate their plans. The case of the New England roads is an appropriate illustration of this. These railroads, notably the Boston and Maine, and the New Haven, have suffered and still are suffering, from the attentions bestowed upon them several years ago by the financiers backing Mr. Mellen, then president of the latter road, in his plans to merge the Boston and Maine, and through it the Maine Central, with the New Haven. Possibly, had the amalgamation gone through, it eventually would have proved beneficial to New England; for whatever else one may say of Mellen, the fact remains that he was a sagacious railroad-man. However, the attempt was frustrated, and the New England roads have been in an impoverished condition ever since.

While there is no consensus of opinion, it is felt by the majority of students of the subject that these lines should be merged with connecting trunk-lines. An exhaustive report compiled last summer by the Associated Industries of Massachusetts favored this solution of the problem. But complications have arisen. A committee representing the governors of the New England States and headed by Mr. James J. Storrow, of Boston, recently made public its findings and urged the formation of a local New England railroad. New Englanders are sensitive about their railroads. They do not welcome the suggestion of ‘absentee management,’ and fail to perceive where New York or Philadelphia would better serve their interests as the executive headquarters of their railroads than Boston can.

Local financiers assert that there is sufficient capital, and railroad officers contend that there is available talent, to finance and manage the New England railroads as a distinct entity. Local pride must be reckoned with, for it has a very definite voting-strength; and, after all, if consolidations are to be made mandatory, Congressional action will be necessary.

In the Southeast, communities along the lines of the Seaboard Air Line fail to see wherein they will benefit by an amalgamation of that road with the Illinois Central, the headquarters of which are in Chicago, and which in turn is controlled by the Union Pacific, still farther to the west. Nor is it entirely clear what is to be done with the Florida East Coast, a privately owned railroad of some 760 miles, famous principally as the road serving Palm Beach, Miami, and Key West, although it also originates a growing volume of fruit and lumber traffic. Professor William Z. Ripley, who prepared a tentative plan of consolidations for the Interstate Commerce Commission, suggested that the road be left as an independent line, and urged the same treatment of theRichmond, Fredericksburg, and Potomac, which is primarily a bridge line of 115 miles between Washington and Richmond, used jointly by the Seaboard and Coast Line freight and passenger trains.

The Southwest is not likely to favor the merging of three of its four competitive systems — the St. Louis-San Francisco, the Missouri-Kansas-Texas, and the St. Louis Southwestern — into one system, leaving the Missouri Pacific (Iron Mountain) as the only other line from St. Louis to Texas; nor is it satisfactorily explained wherein either the Great Northern, or the Chicago, Milwaukee, and St. Paul will be benefited by consolidation into one road, inasmuch as the Great Northern’s financial interests are primarily with the Burlington. Financial interests, such as inter-company holdings of securities, must be studied with almost as much care as is given to the actual operating and traffic features. The Northwest voices its objections to a merger of the Spokane, Portland, and Seattle with either the projected Burlington-Northern Pacific or the Great Northern-St. Paul, preferring that the road remain independent for the joint use of all.

These are isolated cases, yet typical of the sentiment in various parts of the country.

Call it local pride, or what you will, it is a factor which must be considered, for it is apparent that no section will favor mergers which will not positively promise benefits to the territory affected.

And behind it all are the coldblooded statisticians, waiting, pencil in hand, so to speak, for an opportunity to compute the savings to be derived from this revolutionary step. Alas, this is where the rub occurs. No man can definitely prophesy any appreciable sum that may be saved. It is not enough to state casually that Great Britain has undertaken the step which we now contemplate, for the situation is not analogous to that in this country. Our traffic is by no means concentrated in a limited territory, nor are distances comparable.

The problem in the United States is unique, and we must study it on its merits as applied to our own peculiar conditions.

Fundamentally, the purpose of consolidation is twofold — to promote economy in operation, and, through that means, to reduce charges to the public. The burden of proof rests on those advocating the change, and definite proof, rather than hypotheses, it should be. As the writer has pointed out elsewhere, a reduction in freight charges of less than ten per cent is negligible. The total freight-revenue of the American railroads approximates $4,000,000,000 annually. To reduce rates even by ten per cent, it thus would be necessary to introduce economies, through the consolidations, amounting to $400,000,000 a year. Perhaps it can be done, but only the most sanguine economists dare assure us that such will be the case.

Consolidating railroads into some eighteen or twenty systems is a vast and intricate undertaking. Not only must we be prepared to see our favorite railroads, in many instances, lose their names and identities, but we must be ready also to turn a deaf ear to the lamentations of faithful officers and employees of many lines; for unquestionably many of these will face demotion, if not honorable dismissal. In either case, it would be well to consider in advance whether or not esprit de corps will be fostered by this step; and if not, whether the resulting discontent is not likely to reduce proportionately the savings which are being estimated by many theorists.

Few railroad officers thus far have directly opposed the consolidation plan. Few legislators have taken a definite stand either one way or the other. Many newspapers have leaped to a hasty conclusion that it is a panacea for all railroad difficulties. It were well for the Nation to be sure before it leaps.