Our Railroads: A Balance Sheet


THE railroad industry is more than a hundred years old. As things go, in an age remarkable for inventions, it is an ancient system. Most of the early railroads were constructed to connect the Atlantic seaboard with the Mississippi River and the Ohio, its tributary. But as time passed and the potentialities of railroad transportation became evident, the railroads passed out of the category of auxiliaries and became the principal means of transportation. As railroad lines were extended, the West changed from wilderness to thriving towns and productive countryside.

Not only was the region west of the Alleghenies thus transformed industrially; of equal importance was the strengthening of political ties between the Northeast and the Northwest by the building of the east-and-west railroads.

The nation grew with the railroads; yes, and to a certain extent they shared alike in worthwhile achievements and regrettable mistakes. Some railroads were built where they were not needed; others were unwisely financed. But on the whole the record is a creditable one.

To those of us who have spent our lives in railroad service, it is a source of gratification that, with negligible exceptions, railroads have never received government bounty. Even the early land grants in aid of railroad construction in the West were not gifts, but in the nature of loans, which have been repaid more than sevenfold in reduced rates on government traffic.

Are railroads overcapitalized?

We are concerned here, however, with modern history. What are the facts as to railroad progress, and especially the competency of its management? Dull as most of us find statistics, they sometimes tell the story in a fashion that can be easily comprehended. Some people think that the railroads are overcapitalized. But let us look at the record for the past thirty years. In 1915, the railroads of the nation had a little over $18,000,000,000 invested in their property. In 1945, thirty years later, this figure had risen to more than $28,500,000,000. But had there been a corresponding increase in capitalization — in the amount of outstanding stock and funded debt? Quite the contrary. In 1915, the total net capitalization outstanding in the hands of the public was $16,333,000,000. In 1945, although the investment in property had increased $10,500,000,000, borrowings and stock issues had actually decreased by better than half a billion dollars. This means that the increased investment in property came entirely from earnings — money which in many industries would have been disbursed to stockholders.

A look at the dividend record explains and confirms the settled policy of railroad management to use profits to improve the plant. In the twenties, when earnings were high, dividend disbursements averaged less than 5 per cent of the par value of outstanding capital stock. This figure retreated in the depression period almost to the vanishing point. As illustrative of the conservative policy of the roads in the matter of dividends, consider the year 1944. In that year, railroad operating revenues reached the highest point in the history of the industry. The Class One railroads (roads with a revenue of a million dollars or more a year) collected for their services $9,400,000,000. In that year, they paid in taxes $1,800,000,000, of which more than $1,500,000,000 was Federal taxes. After paying all expenses, taxes, interest, and rental charges, they had a net income of $667,000,000. However, the Class One roads paid out in dividends to stockholders only a little more than $245,000,000. As in previous years, the railroads spent the greater part of the net in reducing funded debt and making permanent improvements to the property.

Railroad funded debt in the hands of the public, about which we have heard so much, reached its peak in 1930, when the figure stood at $11,880,000,000, about 44 per cent of the property investment. In that year, fixed and contingent charges (not all interest, however) amounted to $683,000,000. However, the high point as to fixed charges was 1942, the figure for that year being $716,448,000. In 1945, funded debt had been reduced to $8,659,000,000, in the neighborhood of 30 per cent of the property investment. Fixed and contingent charges had been reduced to $568,000,000, a reduction of $148,000,000 from the high point in 1942.

Expenditures for improvement

Looking for a moment now to expenditures for improvements, technically known as Additions and Betterments, we find that in the period extending from 1921, when the roads were returned to their owners after World War I, up to and including 1945, the roads spent for new equipment, for additional track, for heavier rail, for additional ballast, for enlarged shop and engine houses, and the like, the very considerable sum of $13,144,000,000, while in the same period, total capitalization actually decreased by about $1,333,000,000. Much of this expenditure for improvements occurred in the prosperous twenties. Railroad management had learned some painful lessons in the war period and the car shortage period that followed immediately; and from 1921 to 1930, the railroads spent, mostly out of earnings, $7,700,000,000 for additions and permanent improvements to property. This expenditure is for Class One railroads. If all railroads are taken into account, the expenditure in this decade would amount easily to $8,000,000,000.

The sequel proved that these sums were wisely spent. In the depression period, when the measure of the rates was under consideration, the railroads were charged with lack of foresight in spending these huge sums for railroad improvement. It was sometimes asserted that the railroads should not be permitted to include, in the valuation of their property, those portions alleged to have been imprudently constructed. Even in the years before the Second World War, however, railroad expenditures for improvements more than justified themselves in the savings made in operating expenses. Largely as a result of improved plant and equipment, and the improved methods which better plant made possible, the operating cost of producing a thousand ton-miles of freight service went down from more than $10 in 1921 to less than $7 in the years before the war.

Railroad performance during the war

But it was with the coming of the Second World War that the nation reaped rich harvest from the heavy expenditures made by the railroads in the years between the wars. Without the money spent in the twenties for railroad expansion, our war effort would have been much impeded. Indeed, it was only with the coming of the great tides of traffic which the railroads were called upon to haul during the recent war that some of the improvements made back in the twenties really came into use.

I cannot, resist mentioning an experience of my own. In the twenties, I was on the law staff of the Illinois Central, in general charge of proceedings before the Interstate Commerce Commission. The Illinois Central, severely handicapped by inadequate facilities between Fulton, Kentucky, and Champaign, Illinois, found it desirable to construct an additional track.

A careful survey showed that rather than construct a third track on the existing location, where the grades precluded the economic handling of heavy tonnage trains, it would be better to build a new line from Edgewood, Illinois, to Fulton, Kentucky, by way of Paducah, Kentucky. This was commonly referred to as the “Edgewood Cutoff.” The project was furiously opposed by communities located on the main line, and bitter litigation resulted. Ultimately, however, the Interstate Commerce Commission and the courts permitted the new line to be built. An unpredictable rise in the price of labor and material resulted in the cost’s exceeding all estimates by a substantial amount.

During the depression the cutoff was not of much value, and it was sometimes referred to as “Thompson’s Folly.” Fred L. Thompson was Chief Engineer of the Illinois Central when the cutoff was built, and the principal witness in the tedious and involved proceedings before construction began. But in World War II, the cutoff was in constant use, and a former president of the road said to me in all seriousness that the traffic tendered his line could not possibly have been handled but for the existence of the cutoff, with its shorter mileage and its favorable grades. Thompson’s Folly had become Thompson’s Accolade.

Labor relations

In this period of expansion of railroad facilities, the welfare of labor has not been overlooked. Excluding executives, officials, and staff assistants, who presumably sit on the managerial side of the table, the average hourly wage had risen from 59.5 cents in 1921 to 91.6 cents in 1945. This increase in hourly rates is reflected in the weekly wage. In the 1921 period the weekly earnings were $29.61; in 1945 they were $51.40. In 1946 these earnings were increased by 18½ cents per hour, so that now the average hourly earnings are about $1.12. During the month of September, 1946, the average weekly earnings were about $58.30.

Weekly earnings do not always tell the full story. Yearly earnings are a better measure of compensation. The average of yearly earnings as of September, 1946, is $2998. The comparatively high figure for yearly earnings indicates stability of employment, which is a marked characteristic of railroad service. In addition to comparatively high earnings, railroad workers have the benefit of a liberal pension system, amounting, in the case of employees of long standing, to $120 a month. Furthermore, Congress has provided a system of unemployment compensation which costs the railroads annually about $112,000,000. It is strange indeed, in the light of these favorable conditions, that in the spring of 1946 two labor unions called a strike which for a few days paralyzed the commerce of the country and was terminated only as the result of a firm stand taken by the President in his appeal to Congress and to the country.

Generally speaking, railroad employees are among the best informed and most, patriotic of our citizens. They are influential in their communities; they serve on school boards and on town councils; they are leaders in their churches, and prominent in benevolent enterprises — upright citizens in the best American tradition. At the present time, almost a million and a half persons are in railroad service, to whom perhaps six or seven million persons look for support.

Every now and then someone expresses astonishment at the war performance of the railroads, particularly in view of the reduced number of equipment units and the scarcity of men and materials. There were many factors contributing to this remarkable record. The employees, out of their intense spirit of patriotism, gave their very best at all times to expedite the movement of traffic. When the younger employees were called to arms, many men past the usual working age came voluntarily out of retirement and resumed railroad service, carrying on the essential work of transportation. Shippers and receivers of freight worked overtime and in and out of season to load and unload cars promptly and to load them to capacity wherever possible. The War and Navy Departments coöperated to the utmost with the railroads in the timing of military shipments, so that congestion and delays were avoided.

Carrying power increases

In addition, while the railroad plant did shrink, measured by the number of cars in service, it had in reality substantially increased in efficiency — carrying power — by reason of capital expenditures. In 1915 the average freight train represented a net weight (contents only) of 540 tons. By 1945 this figure had grown to 1129 net tons. Even in 1932, at the bottom of the depression, the net tons per freight train were 663. The ability to handle such increased loads partly grew out of the improvement in the tractive effort of locomotives. In the period of thirty years, this tractive effort has increased 67 per cent. The capacity of freight cars has increased by more than 28 per cent.

As the result of protracted and careful research and experimentation, great economies have been achieved in the use of fuel. For example, in 1921, the earliest date when figures are available, for each ton of fuel consumed in freight service, the railroads transported 12,367 tons one mile. In 1945, however, the railroads were able to move 17,227 tons one mile for each ton of fuel consumed, an improvement of almost 40 per cent.

The tonnage in each car, the number of cars in each train, the speed of trains, and the continuity of their movement over the road have all greatly increased in this period. There is one operating figure which reflects and measures all these factors — what the accountants call the net ton-miles per freight train hour. This measurement of the output of transportation service by the average freight train has gone up from 7000 ton-miles of freight an hour, which it was in 1921, to more than 17,000 ton-miles in 1946. Such a gain is illustrative of railroad progress in the past quarter century.

Railroad research

Some people have accused the railroads of being remiss in research. By reason of the nature of their business, the railroads are unable to make a dramatic, spectacular, concentrated display of their research activities. The railroads are performing and selling a service — transportation. They are not selling to the public objects decorated with new and fascinating gadgets. The research work of the railroads cannot be carried on in spacious and glittering laboratories.

The purpose of railroad research is to improve the movement of people and goods, to make that movement faster, safer, and cheaper. The performance of locomotives, cars, bridges, and track under pressure must be observed and studied by actual tests. In a real sense, therefore, every operating man, every trackman, and every mechanic is engaged in research. Someone invents a device. It stands the tests of the laboratory. But will it work in actual practice? The only way to be certain is to try it out. The man, whatever may be his regular job, who observes and reports upon the behavior of the device is a research worker.

In an investigation conducted in 1944 by a subcommittee of the Military Affairs Committee of the United States Senate, the Association of American Railroads, in response to a request, filed a statement dealing with its research activities in some detail. It required two hundred pages of fine print in a Senate report to state in sketchy outline the research work carried on by the railroads in recent years in the matter of materials and methods of operation.

To illustrate the type of work carried on, I mention research in the matter of crossties. For nearly fifty years, the railroads have been experimenting with a hundred different types of substitute ties, in the effort to reduce expenses and improve efficiency. Nothing has been found to take the place of a wooden crosstie. But by the development of the creosoting process, the life of a wooden tie has been prolonged until now there are ties that have been in service for thirty-two years.

A committee studied for five years the performance of bolts used to fasten the rails to the ties. In the field of metallurgy, research developed the heat-treated track bolt, which is a great improvement over the one originally in use.

Extended research has been necessary in order to improve ballast conditions, in the light of necessity for improving drainage. Originally, when railways were first constructed, the matter of drainage presented many difficulties. In the construction of fills, for example, the condition of roadbeds has been much improved by the skillful use of wooden timbers and steel-pointed pipes.

Research in air brakes, automatic couplers, draft gear, brake shoes, and other devices has resulted in greater safety for the employees and in greater efficiency of operation. Much research has been devoted to investigating condensation in boxcars, a matter of considerable interest to shippers of cereal products. Research has gone on steadily to devise loading rules which would reduce the amount of loss and damage and permit safer transportation. The study of roller bearings has continued for ten or fifteen years, the problem here being the balancing of benefits with expenses. Improvements in every department of the service have been brought about by intensive railroad research, in coöperation with scientists employed by the universities and by the manufacturers of equipment.

There has been improvement in rail, in bridges, particularly small bridges, in automatic air brakes, in methods of signaling, in the use of radio on trains, in air conditioning of passenger trains, in methods of refrigeration, in methods of classifying freight in yards by the use of retarders, and in dozens of other more technical and specialized devices and methods.

The improvements in modern locomotives, whether ordinary steam engines, Diesels, electric or steam turbines, or the new gas turbines which are being built experimentally, are remarkable. Take a look sometime at that ingenious device on all large coal-burning locomotives, known as the automatic stoker. Substitute for the perspiring fireman shoveling coal a coolly alert mechanic sitting on the left side of a locomotive, watching for signals and observing the operations of an electric machine that pulverizes the coal, carries it to the furnace, and sprays it skillfully and uniformly over the fire.

Not only have the roads given their best attention to research and experiment in the technical field; they have been equally alert in the matter of economic research. For the past five years, fifteen competent committees have been studying every phase of railroad activity from the economic point of view. These committees have turned out exhaustive reports on taxation, public relations, relations of employer and employee, motor carrier transportation and its incidents, water, pipeline, and air transportation, traffic problems of the railroads with special reference to particular commodities, accounting practices, consolidations, and so forth. It is hoped that when all these reports have been completed, summarized, and published, the industry will have for its use the most comprehensive study of economic factors that has ever been produced.

The thought may occur to the reader that this rosy picture of performance does not accord with what we have been told about car shortages in recent months. It is true that the car situation has been tight — too tight for comfort. But at that, in spite of inability, due to scarcity of steel, to buy or build new cars, in spite of the fact that loading in boxcars is heavier than ever before in railroad history, in spite of the fact that strikes in the coal industry have disturbed the orderly and normally well-distributed volume of coal, at times causing extraordinary demand for cars, the railroads, under the most adverse conditions, have taken care of 90 per cent of demand. Few other industries have done as well.

What about rates?

In 1921 it cost a cent and a quarter to move a ton of freight one mile; in 1945 the cost was just under a cent. True, as the result of increases permitted by the Interstate Commerce Commission in 1946, the rate has risen slightly above a cent. But happy indeed would be the housewife just now, if prices of all she buys for the family had increased lately no more than 17½ per cent. If one is interested in passenger rates, the average in 1945, only slightly increased in 1946, was 1.9 cents per mile, as against 3 cents per mile in 1921. The American railroads, though privately owned, privately operated, and unsubsidized, maintain their record of furnishing the best and cheapest transportation in the world.

Railroads and the bankers

It is charged, however, that our railroads are under the domination of Wall Street bankers. I am not sure that the average citizen is much interested in such an assertion. Conceivably, he is more interested in the type and cost of service than in the question of whether the control lies in bankers in New York or bankers in Chicago, or any other city, or in bankers at all. As a matter of fact, no one can deny that solvent railroads, as is the case with any other solvent business, are controlled by their stockholders, who elect the directors, who in turn select the officers.

I am, of course, familiar with the oft-repeated statement that shareholders are so scattered and unorganized that real control rests in a few stockholders owning a minority of the stock. But each year these scattered share owners certainly either vote themselves or execute proxies which authorize others to vote for them. If they choose to give power to bankers to vote their shares, it is difficult to see what anyone can do about it. Perhaps the skillful use of propaganda might persuade them to substitute one group for another, but it is doubtful if this would represent much improvement.

There is in reality no such thing as banker control. It is true there are bankers on railroad boards of directors, just as there are physicians, lawyers, manufacturers, farmers, and representatives of almost every line of activity. Men who devote their lives to banking by no means predominate. For example, on the Pennsylvania Railroad, which happens to be the largest railroad in the United States, measured by gross revenues, out of seventeen members of the Board, only four can be classified as bankers and none of these lives in New York. Referring again to my old employer, the Illinois Central, a typical railroad of the Middle West and South, out of sixteen directors, only one can be classified as a banker.

Certainly those at present in control have served the public with conspicuous success. The bankers, if they are in control, have placed at the head of the railroads experienced men, nearly all of whom have risen from the ranks and know the business down to the grass roots. These men are the real masters of the railroads — the real determiners of railroad policy. When we hear the opinion expressed that the control of the railroads should be taken away from the bankers and financiers and lodged in the operating officials, we are listening to sound and fury that signifies nothing at all.

How does sinister banker control manifest itself? In the making of rates? But these are lower than anywhere else in the world. In the number, make-up, and speed of trains? But this service is admittedly on a higher plane than ever before, what with streamlined, air-conditioned, and comfortable passenger trains and freight service greatly spurred up and more reliable than ever. In the issuance of securities? But since 1920, not a single security can be issued without the approval of the Interstate Commerce Commission, a perfectly impartial and competent body of experts whose duty it is to safeguard the public interest.

It is true, of course, that when a railroad is unable to meet its obligations and is thrown into bankruptcy, the creditors come forward and insist upon having something to say as to what shall be done with the property. Again, we are faced with legal rights and responsibilities which are difficult to set aside. Obviously, if the debts of the concern are greater than the value of the property, the stockholders can expect nothing for their equity.

Somewhere must be lodged the responsibility for determining this value fairly. Congress has seen proper to assign the task to the Interstate Commerce Commission. The Commission may have used poor judgment, especially in the delicate and difficult chore of ascertaining just what a railroad is worth, measured by its reproduction cost and the probable earning capacity that lies ahead. If the Commission is incompetent for this task, or if the standards laid down by Congress are faulty, it is for that body to provide the remedy.

Amend the bankruptcy law

Of one thing, I have long been convinced. The present bankruptcy law as applied to railroads should by all means be simplified. Section 77 was enacted in 1933, upon the theory that the procedures there provided for were far superior to those involved in equity receiverships as administered by the Federal courts. Possibly the original Act would have been an improvement. But Congress, accepting the poor advice of certain selfdenominated reformers, and acting upon the assumption apparently that the average railroad president is either dishonest or incompetent, or both, amended the Act so that at least one of the trustees must be someone who is not connected with the industry.

While the courts generally appointed, as trustees, very worthy gentlemen, many of whom were members of the bar, it can hardly be said that taking away control of the railroads from the experienced operating officials and lodging that control in persons inexperienced in railroad matters contributed to the speedy reorganization of the railroads. It would seem to be a sound observation that control of railroads pending reorganization should, in fact, be in the hands of men familiar with the railroad property and capable of handling its affairs in the light of their experience.

The solution of the matter lies in the enactment of a law somewhat of the nature of the Chandler and McLaughlin Acts. Under such a law, if the stockholders and three fourths of the creditors can agree upon a plan of reorganization, it will go into effect without delay or disturbance of the management, provided the Commission and the courts find that the plan is fair to all the creditors and is in the public interest. This is a much needed reform.

Governor Arnall and the South

Reference has often been made in current discussions of the railroad situation to suits now pending against the railroads and their national organization, in which it is alleged that the antitrust laws are being violated by the railroads in the matter of proposing rates, which must be filed with the Interstate Commerce Commission and, in case of protest, approved by that body.

No better answer to Ellis Arnall’s discussion of freight rates in The Shore Dimly Seen has come under my observation than is contained in a letter from Alvin Vogtle of Birmingham, Alabama, an experienced traffic man, representing important shipping interests, who has given me permission to quote the following from a recent communication addressed to an advocate of Governor Arnall’s theory:—

My own thorough studies . . . support positively the conclusion that the Southern freight rate system is correctly adapted to the South’s economy and that the rates are definitely favorable. In fact, seventyfive per cent of our traffic moves at rates not higher than the Northern level — and much of it at a lower level.

Simply stated: (a) Our manufactured products (competitive with like products of the North), and our products of agriculture, forest and mines, move into the North at the Northern level of rates or less.

(b) Our rates within the South are distinguished by low rates on raw materials to Southern manufacturing points (primarily to aid our manufactured products to overcome distance disadvantages to Northern markets, but these low assembly charges also aid manufacture for Southern markets), (c) The rates on Northern manufactured products and Midwestern agricultural products to the South are at the Southern level.

The so-called “parity” you advocate would change all this — and to the advantage of the North, not the South. There would be increases to the North on many of our most important present products. There would be increased rates within the South on raw materials to processing points. And there would be greater reductions to the South from the North on manufactured products and from the Midwest on farm products than within the South.

In effect, the government’s antitrust cases rest upon the desire to oust the Interstate Commerce Commission from its control over rates and vest the authority in the lawyers who constitute the Antitrust Division of the Department of Justice. The theory of the cases, if upheld by the courts, and unless Congress intervenes, would prohibit railroad coöperation in the consideration of rates, would isolate each railroad as if it were in a vacuum, and would turn back the clock of progress not merely to the horse and buggy era, but to the period of the keelboat and the Conestoga wagon.

But sanity will, I hope, prevail. Our railroads should be permitted, under Commission supervision, to coördinate their activities so that we may have a truly national transportation system, with revenues sufficient to improve the service and with credit strengthened by good performance.

May I add this final word: One third of the railroad mileage in the world, and considerably more than one third of the rail hauling capacity, is found in the 6 per cent of the earth’s surface which makes up the continental United States. This one third of the world’s railroads furnishes the most abundant and the cheapest land transportation in the world. This one third of the world’s railroads pays wages which are the highest railroad wages in the world, and among the highest average wages paid by any industry. And the service rendered is fully the equal, from the standpoint of adequacy, dependability, safety, and comfort, of any other transportation service in the world.

American railroads are distinguishable from most other transportation systems in that they are almost wholly the creation of capital coming from private sources. Further and more significant, they are operated without government aids. Financially, they are on their own — not as wards of the Treasury — but as independent business enterprises. Whatever the balance sheet may show, no figures there represent a government dole.