Making the Grade
ABOUT this railroad problem, so called, there is no mystery; in its solution, no magic. The ‘problem’ is not unlike that of other enterprises which must meet the payroll, satisfy the tax collector, stave off the sheriff, and content the heart of the investor. To achieve that requires business enough to keep plant and facilities reasonably busy, and doing that business with such efficiency and economy as will translate a reasonable share of gross revenues into net income.
In these fundamentals, railroads do not differ from other enterprises privately owned and privately operated. They must have volume, they must have efficiency. With enough of both, they are taken for granted as a part of the natural order of things. With too little of either, they become a ‘problem,’ the subject of anxious analysis and serious searching for remedies.
Remedies offered are numerous and various. Some, while leaving responsibility for results on private capital and management, would transfer essential functions of management to the government. Others would transfer ownership to the government, with private operation on a noncompetitive basis. Others would go the whole route to government ownership and operation — which is to say, political operation. Almost all the proposals agree on the implied assumption that railroads must be subjected to radical changes, differing in kind as well as in degree from the changes which all business undergoes in times of depression strain.
If too much expense is the prime cause of the railroads’ well-publicized difficulties, obviously the remedy would be different from that indicated if the prime cause is too little traffic. In the latter case, it makes a difference whether the lack of volume is due to service shortcomings or to competitive handicaps which are more or less beyond the control of rail carriers.
In the depression year of 1921 the freight business of the railroads amounted to a little more than three hundred billion ton-miles— the equivalent, that is, of hauling a ton 306,840,203,512 miles. To do that job cost the railroads nearly three and one-third billion dollars in operaling expenses — $10.78 for each thousand ton-miles, to be exact. In the same year, freight revenues averaged $12.75 for each thousand ton-miles, a margin that was too narrow to cover adequately the necessary interest, rentals, and other charges on the capital invested in the business.
In the peak year of 1929, the railroads handled 46 per cent more freight than they did in 1921, with an increase of less than one per cent in operating expenses. The cost of hauling a ton a thousand miles was down to $7.44; the average revenue received was down to $10.76. That margin, on that year’s volume of 447,321,561,129 ton-miles, spelled prosperity — a net income of $896,806,611, even after paying almost $400,000,000 in taxes.
Then came depression. Tonnage went down from 447 billion ton-miles in 1929 to 249 billion ton-miles in 1933. But, strange to say, as tonnage slid down to new lows for modern times, the operating cost per thousand tonmiles did not go up, as was to be expected, but down. The figure which had been $10.78 in the trough of the depression in 1921, and $7.44 at the crest of the boom in 1929, stood at $6.48 in 1933, although the volume of business was less by nearly one fifth than that of 1921. This figure is somewhat higher to-day, owing to higher wages and rising costs of materials and supplies, but it still stands more than $4.00 below the cost figure of 1921 — which is one reason why railroads today are hauling a ton of freight a mile for an average revenue of less than one cent. Emphatically, they are not highcost transportation.
That fact is of the utmost importance in any estimate of the railroads’ future. Railroads have shown the essential ability to cut their overall costs in the face of falling business and rising prices. That essential ability has more lasting meaning than the well-advertised fact that many railroads are indebted to the government, that more than one fourth the mileage of the country is in the hands of the courts, and that most of the rest is operating on a narrow margin. It has in it more of promise than any grand scheme of revolutionizing railroads. It means that the railroads have not lost their ancient skill; that the recent spectacular developments in rail equipment and service are indeed but surface symptoms of a deeper determination to do the job for which they were created; and that with anything like equality of treatment the railroads of America will haul that part of this continent’s commerce for which they are best fitted and most suitable.
There is no ‘best’ transportation for all purposes, of course. A boy on a bicycle or a man with a wheelbarrow might be the best and the cheapest transportation in certain situations; a truck, a lake freighter, or a train, in others. Times change, and conditions and means of transport change with them. There was a time long ago, in the stagecoach and wagon-train days, when our inland rivers and canals were genuinely economical channels of commerce, even in the Northern states where during a good part of the year they are useful only for skating. Canal boats and barge tows, to-day, are kept in operation only through the generous subsidy of government.
Railroads, under free and equal conditions of competition, will not follow the wagon train and the stagecoach into the realm of things romantically remembered, nor will they follow inland water transportation into a subsidized dependence on government bounty. Many things now being done or attempted by other forms of transport can be done better and cheaper by rail, all elements of cost and service considered.
To thrive, or even to survive as self-supporting transportation agencies, railroads must have volume as well as efficiency. It is hard to realize just how great an effect even a modest increase in business has upon the net income of railroads. In the last quarter of 1935, gross operating revenues were 16.2 per cent greater than in the same three months in 1934; but net operating income, after payment of operating expenses and taxes, was 45.1 per cent greater. With all our current preoccupation with plans to improve the rail transportation machine and its ways of working, it is well to keep in mind that in the major essentials, so far as they are under their own control, the railroads have made striking progress in translating gross revenue into net income, when they have had enough of gross.
To meet competition with increasing effectiveness, railroads are making changes in their services, their prices, and their methods. The things they have done in the way of better passenger service have attracted wider attention than improvements in the freight field, of course, but in both services there is an encouraging progress. Railway air conditioning is an achievement of eight years’ research and experiment, and the main difficulties have been pretty well solved, as is testified by the enthusiastic public use of the cars now in service on principal trains in all sections. Higher train speeds by the new lightweight trains, whether steamor Diesel-drawn, by the faster scheduling of conventional steam trains, or by the speeding up of electric engines, are matters of almost weekly announcement. These improvements have not added to the cost of passenger transportation, which averaged more than three cents a mile in 1923 and less than two cents in 1934. Nor are they achieved at the expense of safety, which continues to be a distinguishing characteristic of rail travel.
The fact that only one passenger lost his life in 1935 in a train accident, which was caused by the explosion of a heater in a standing car, is an evidence of that characteristic. A more striking one is the fact that, of 142 Class I railroads in the United States, 130 have a clear record of no passenger fatalities in train accidents for more than five years, 114 for more than ten years, and 99 for more than fifteen years.
The average speed of freight trains lias gone up 43 per cent in the past twelve years, and the service has been made more complete through the widespread introduction of new services such as collection and delivery of package freight. As a result of decades of development, there is a free flow of commerce to every corner of this continent through the remarkably effective coördination of freight service on all roads.
This free interchange of cars is made possible by a coördination of railroad methods and standardization of parts. In turn, this means that railroads cannot make the abrupt and startling changes which are possible in those industries where part of this year’s profit comes from outmoding the product of the year before. Railroads have changed, are changing now, and will continue to change. But they will not be changed overnight; they will not be ‘revolutionized.’ The new must fit in and work right along with that already in use.
The major uncertainty as to the future of railroads is not in their own operations or methods, not in what they may be able to do for themselves. It is in the field of public policy. Will our public policies as to transportation allow railroads equal opportunity to compete for a sufficient share of the business moving? We now have, and for many years have had, two distinct and contradictory public policies as to transportation. The man who elects to use rail transport must himself, in the rate he pays, bear all the costs of the service he buys — not only the operating cost of moving the vehicle which carries him or his freight, but the capital cost of providing the way on which the vehicle may move, and real taxes on both vehicle and way. Railroad taxes are not merely contributions toward the cost of providing a way on which trains may run. No part of them goes to maintain tracks. They are contributions to public welfare and general government, to highways, to courts and institutions, and to schools. The school taxes alone paid by railroads are educating 1,600,000 children each year in the United States.
In direct contradiction to this is our policy as to public transportation by highway, by waterway, and by airway. That policy is based upon the idea of creating so-called ‘cheap transportation’ for favored industries or sections, by taking a large part, in many instances a major part, of the total cost out of the transportation bill and concealing it in the general tax bill.
This contradiction in policy is excused on the ground that government must provide ‘cheap transportation.’ If government should use the common resources to create transportation facilities which were in fact efficient and economical, and if those who were to benefit from their use should pay their cost, the policy would not be open to such serious objection.
That, in fact, was the early and sounder policy of government in the great days of opening the continent to settlement. The State of New York built the Erie Canal, in its time and place a genuinely cheap form of transportation, and the people who used it were glad to pay tolls for its use. Somewhat the same was true of other improved waterways and of the early turnpike roads. So long as they represented a real economy in transportation, the users were willing to pay tolls.
But there came another way of inland transport which could haul freight cheaper than it could be moved on the canals and waterways. At first some of the new railroads were required to pay to the state the same tolls as if the goods they hauled had been floated on the waters of the state-owned canals. Even that proving ineffective to hold the freight to the waterways, canal tolls were reduced from time to time. Finally, in 1883, when it became apparent that inland waterway improvements would not continue to be used if their use had to be paid for, all tolls were taken off.
Logically, the continued outpouring of taxpayers’ money on facilities which no one was willing to use except as a free gift should have stopped then and there. Actually, it not only did not stop, but was increased almost from year to year. In fact, the sum total of these expenditures in the past generation is practically incomprehensible, even in these billion-dollar days.
Reducing them to a per-mile basis, however, may bring them within our ordinary comprehension. If we disregard all that was spent on the old Erie Canal, and count only expenditures made since 1903, the capital cost of the New York State Barge Canal is $336,775 per mile; the annual maintenance and operation cost, $5978 per mile. And the theoretical maximum capacity is less than one fourth that of a singletrack railroad if devoted entirely to hauling freight, as the canal is.
The barge canal is, of course, an artificial waterway, but the government has been at work on so-called natural waterways also. To restore river navigation between St. Louis and Kansas City, the United States has spent on the Missouri River, in capital cost alone, $188,931 per mile, and is spending $3447 per mile per year to keep the channel open. The Missouri River, however, is notoriously difficult. The Ohio River, on the other hand, is more gentle and tamable. It is, in fact, the most ‘successful’ of our inland waterway projects covering any considerable distance. On the 979 miles between Pittsburgh and Cairo, the government has expended in capital cost alone $139,325 per mile, and is spending $3624 per mile per year in maintenance and operation. The Mississippi Valley Committee of the National Resources Board reports that this expenditure amounts to a subsidy of five mills per ton per mile on all freight moving on the Ohio River. In making its calculation, the miles are measured as the river winds. If we apply the same figures to the straight-line railroad distance of 640 miles between Pittsburgh and Cairo, the subsidy would be approximately seven and one-half mills per ton per mile; and this, it should be remembered, is only what the government contributes. With the other elements of cost included, it is apparent that ‘cheap transportation’ on the most successful major inland water development costs considerably more than the total cost of doing the same job by rail.
For all these expenditures the government neither expects nor will receive any direct return, either by way of taxes upon the facilities so created or by way of tolls.
Contrast this policy with that prevailing in public aid to railroads in the early days. This aid took two general forms, neither of them gifts. The one best known was the often-mentioned ‘land grant,’ which was, in effect, a trade between the government as owner of a vast acreage of unsettled lands and those who were bold enough to push railroads into the wilderness ahead of settlement. In that trade the government granted unsalable land. In return it secured settlers in its waste spaces, made a market at enhanced prices for the acreage it did not grant to the pioneer railroads, and secured a reduction in the cost of hauling its mails, troops, and supplies that saves the government millions of dollars each year in its transportation bills, being in itself a handsome return on the value of the lands granted to push railroad development.
Less than 10 per cent of the rail mileage of the United States was built with the aid of land grants. A certain other portion, not precisely determinable, was built with the aid of state and local government credit, extended either by endorsement of bonds or by subscription to stock. The governmental unit extending the aid received either a lien on the property or an ownership interest in its stock. In some cases these investments turned out well; in others ill, as is the way of investments, whether made by private citizens or by governmental bodies. But, whether they turned out well or ill from a strict investment standpoint, they made possible an agency of transport which not only was genuinely cheap but began to pay taxes the day it was built, and continues to do so to this day.
Government loans made to certain railroads, through the Reconstruction Finance Corporation and the Public Works Administration, frequently are thought of as being analogous to the subsidies extended to other forms of transportation. The cases are entirely different. The government does not expect repayment or indeed any return on its gifts to other transportation agencies. Its advances to railroads, on the other hand, are loans secured by acceptable collateral, approved by the Interstate Commerce Commission. As to them, the government will be in the position of a secured creditor of any railroad not able to repay its loan.
So short are our memories that it is almost forgotten that much of the expenditure which made these loans necessary was undertaken by the railroads in 1930 and 1931 at the instance of the government. Patriotically, — even if not wisely, as the event proved, — the railroads followed the lead of the government in its early efforts to combat depression by enlarged spending on capital improvements, in the face of a downward trend in business and earnings. To that end, railroads spent $872,000,000 on additions and betterments in the year 1930, with other large sums in the following year to complete the projects then begun. In this bit of transportation history is found one of the reasons why railroads on December 31, 1935, owed the Reconstruction Finance Corporation $396,249,861, after repaying $90,966,963 of the loans made.
Their debts to the Public Works Administration are in another category. The PWA loans to railroads were made for the purpose of stimulating business and employment by enlarging railroad spending for equipment and construction. Just as in 1930 government called on the railroads to defeat depression, so it did in 1933 and 1934, with the difference that in the latter years the government itself provided part of the funds, not as gifts, but as secured loans, to the amount of $188,591,500 as of December 31, 1935. These loans, for the most part, are to be repaid serially over a period of ten to fifteen years.
Counting both classes of loans, railroads owe the government $584,757,361 as of December 31, 1935. That is a lot of money, but it is not much more than half the $1,080,000,000 which railroads owed the government at the end of the war period. Of that great sum, all but $38,000,000 has been repaid, together with enough in interest to yield the government a handsome profit on the transaction. Incidentally, the government agencies received a net premium of about $4,000,000 on their recent sales of railroad obligations to the public.
The repayment of the war-period loans was considered improbable by many students of transportation, who felt in 1921 that there was no solution of the ‘railroad problem’ short of government ownership — which is no solution at all, unless a leap from frying pan to fire be so called. It is not hard to see, however, why there should have been such a feeling in 1921. The railroads owed great sums to the government. They were operating at a deficit, were in poor physical shape, were under continuing pressure to reduce rates to help other industries, and were in the midst of labor difficulties.
By the beginning of the present depression, in spite of all these handicaps, the railroads had repaid practically all their debt to the government; had greatly improved their services, plant, and physical condition; and had substantially reduced costs and rates, in spite of the restoration of wartime wages and the multiplication of taxes. Throughout the depression, with declining volume of business, they have continued to reduce unit costs and to lower rates, to improve service, and to keep themselves in shape to handle their share of American commerce.
But some observers, seeing the diversion of business from railroads to other forms of transport, are led to the conclusion that 1935 and 1921 cannot be compared; that the day of railroads is past, their work done; that, as it is sometimes put, they are but following the course of the stagecoach and the canalboat in yielding to a new and better way of transport. If that be true, it is one of the most important facts in our economic future. It would mean a most profound change in our way of doing business. Common carriage, open to all on equal terms, would give way to individual transportation of the sort which only large-scale enterprises can effectively organize for themselves. Transportation, instead of contributing its fair share to the general cost of government, would become a burden on the taxpayers, as much of it is to-day. The twenty-six billions of investment in railroad facilities would not only become a dead loss, but would have to be replaced by an equal or greater investment in other facilities. If indeed it be true that a ‘better way’ has been found to do the great hauling job which this continent’s business requires, we are facing most fateful and not altogether happy changes.
As to such possibilities, I can only outline the essential facts about transportation in this country as they appear to a railroad man, but a railroad man whose experience has included the presidency of two steamship companies and of one of the major freight and passenger motor operations of the United States.
At bedrock these facts are three. First, the American public is entitled to the best transportation it can afford to pay for. No agency of transport is sacrosanct or entitled to protection from the impact of invention or the penalties of progress. No one has a vested right to haul the business of this continent.
The second fact is one of geography. We live on a continent, most of it dry land, remote from navigable waters or even waters which the ingenuity of engineers and the supposedly inexhaustible credit of the Federal Government could make navigable, its northern half subject to rigorous winters with streams icebound for nearly half the year. On that continent has been built up a commerce which is accustomed to and must have all-yearround mass transportation at a level of rates approximating one cent per ton per mile.
Railroads are able to render that sort of service at that sort of price because of the third fact, a simple fact of physics. They are roads of rails. On rails great loads can be drawn with a minimum of power. Because rails guide the wheels, cars may be loaded at widely scattered locations, assembled in long trains to be moved with a minimum of expense for unloading at other locations, anywhere on the continent, regardless of weather or season. And nowhere but on rails is that sort of transportation possible.
These facts are basic and inescapable. They mean that rail transportation is and must remain the major transportation of America. Fortunately for America, it is a form of transportation which can be produced on a self-supporting, tax-paying, profitmaking basis, given only a sufficient volume of business.
The railroads themselves, with their operations on a new high level of efficiency, are seeking further improvements in service and economy. A gratifying start has been made by Congress toward that equality of treatment and opportunity among carriers which will allow railroads and every other sort of carrier to move that part of the total volume of the country’s business which each is best fitted to move at the lowest level of true cost.
There are difficulties ahead in the way of attaining such a sound state of transportation — plenty of difficulties. If pending bills to reduce the number of cars in trains, to add unneeded men to train crews, or to increase wages and overtime payments by changing the basis of calculation from the present ‘standard day’ of eight hours to one of six hours, should be enacted into law, all the savings achieved by great investment in better track, longer sidings, stronger bridges, improved cars, more efficient locomotives, better operating methods, would be more than wiped out. There are still great inequalities as between rail transport and transport by water, air, or highway, but if we really are on the way toward a reasonable and consistent public policy of equal treatment for all forms of transport there is no reason to despair of the future of American railroads as privately operated, self-supporting, tax-paying institutions. Give them their fair chance to haul the tonnage, and they can make the grade.