THE PLIGHT OF THE RAILROAD

Remember that the Railroad is the big man in the American business family, the very head of the house, you may say. Sick or well, he dominates his brothers—even that cool, calculating fellow whom we delight to call “the Banking Interests.” All America pays toll to transportation. And, inasmuch as the steam railroads are its dominating form of transportation, the entire country hangs upon them. In the long run this country can prosper only when its railroads prosper.

Do you wish to dispute them? Before the facts your contention will not hold very long. According to the last census more than 1,700,000 persons were directly employed upon the steam railroads of the United States; some 2,400,000 in industries bearing directly upon the railroads—lumber, car and locomotive building, iron and steel production, and the mining of coal. It is a goodly number of folk whose livelihood, or a large portion of it, comes from an indirect relation to the railroad. It has been said, with a large degree of statistical accuracy, that one person in every ten in the United States derives his or her living from the railroad.

Perhaps you are not one of this great family of 10,500,000 persons—more folk than dwell in the great state of New York, including the second largest city upon the face of the world. Granted this—then probably you are one of the 10,000,000 savings-bank depositors in the United States. If you are, you are an indirect holder of railroad securities. The savings-banks of this country have many, many million dollars of their savings invested in railroad bonds. If you have not even a savings-bank account let me assume that you have a life-insurance policy; there are three life-insurance policy-holders for every savings-bank depositor. The value of every one of those 34,000,000 policies depends on the wealth that is locked up within the strong boxes of the life-insurance companies. And a very great proportion of that wealth is expressed in the stocks and bonds of railroad companies.

Try as you may, you cannot escape the dominance of the railroad in financial and industrial America. You might have neither savings-bank account nor insurance policy of any sort, yet the railroad would touch you constantly, through both your income and your outgo. If you were a city man, it would touch you not only in the prices that you pay for milk and meat and vegetables, but for the rent of your house or apartment. As I write, the entire East is panic-stricken for fear of a coal famine, faces steadily rising prices. The production at the mines, despite a scarcity of labor, has not been far from normal. But the railroad has failed in its part of the problem—the providing of sufficient cars to transport the coal from the mines to the consumer. It has been hard put to find cars to move the munitions of war from the interior to the seaboard towns. And the coal mines, because of the lack of railroad cars, have been unable to relieve the situation. So panic has resulted. Upon its heels have come similar, if somewhat lesser panics over the congestion and lack of delivery of foodstuffs—conditions which have been reflected in rises in the prices, if not in the value of most foods. These prices already have reached higher figures than at any time since the Civil War. Today they are nearly even with those which prevailed during the dark days of the sixties. And even if they are due directly to crop shortages and abnormal exports they still are a reflex of the railroad’s intimate touch with every man, woman, and child all the way across the land.

Sitting on the porch of his home at dusk, the farmer looks out over his broad acres, sees the great industrial aids that American invention has given him for the growing and the harvesting of his crops and forgets, perhaps, that on each of these mechanical devices he has paid a toll to the railroad. But when he looks to his wheatlands he must recall that it is the railroad that carries forth their crops—not only to the cities and towns of the United States, but to the bread-hungry land, far overseas. In those markets he competes with the wheat from lands so far distant that they seem like mere names wrenched from the pages of the geography book—Argentina, India, Australia. Because of this alone, it is nationally important that the steel highways which lead from our seaport gateways inland to the wheat and corn fields be kept healthy and efficient. They have become integral parts of that broad national policy which says that the United States is no longer isolated or insular but one of the mighty company of world nations.

Will you permit me for a moment to enlarge upon this point—this competition between our farmer of the West and the farmer of the Argentine Republic, of India, of Australia, and of the nations of the Baltic Sea in the market of the consuming nations of the world? As the wheat fields of each of these nations are nearer tidewater than the wheat fields of the United States, it long ago became necessary for our railroads to lower the transportation rate for grain in order that the American farmer might not become submerged in this great international competition. That this has been done, a single illustration will show:

A bushel of wheat today is transported from the center of the great granary country of our Northwest or Southwest to tidewater—an average distance of 1,700 miles—for 27 cents. This is at the rate of .53 of a cent—a minute fraction over half a cent—per ton-mile. The average ton-mile rate in Great Britain, 2.30 cents, as applied to our average grain haul in the United States of 1,700 miles, would make the transportation cost of American wheat four and one-half times as much, or $1.21. The American farmer owes a far greater debt to the railroad than he sometimes may believe. He may have suffered under the oppressions and injustices of badly managed roads—may yet be smarting from these oppressions and injustices. But how much greater would be the oppression and injustice of a high grain rate such as I have just shown? And if such a rate were imposed upon him, would he be able in an average year to grow wheat at a profit, to say nothing of being able to compete with it in the broad markets of the entire world?

A minute ago and we were speaking of the abnormal prosperity of the railroads. The flood first descended in October, 1915. It rapidly mounted in volume. The railroads declared embargoes, first against this class of freight and then against that. Solicitation ceased. The bright young men of their traffic forces were set to work helping the overworked operating departments, tracing lost cars and the like. The backs of their operating departments were all but broken. I myself saw last winter on the railroads for a hundred miles out of Pittsburgh long lines of freight cars laden with war munitions and other freight making their slow and tedious ways toward tidewater. I saw Bridgeport a nightmare, the railroad yards of every other Connecticut town, congested almost overnight, it seemed. The New York terminals were even worse. For a long time it seemed as if relief might never reach them.

It seemed wonderful, but it was not. It seemed like millions in railroad earnings, but it was not. Translated into the unfeeling barometage of percentages it all represented but five and one-half per cent on the actual value of the railroads of the United States. And that, compared with the long season of lean years that had gone before, was as nothing.

Take the season of years from 1907 to 1914—a season for which the statistical records are now complete. Despite the great financial panic of 1907, these were, in some lines of business, mighty prosperous years. The output of automobiles was to be measured not in hours but in the very fractions of minutes. You might figure the earnings of the “movies” well into the millions each twelvemonth; they were building new theaters in all the cities and the bigger towns, almost overnight it seemed. Manufacturing and selling, nationally speaking, were up to the average. Yet in those very years, it was necessary for some of our very best railroads—the best operated and the best financed, if you please—to dip into their previously accumulated assets to pay the dividends which they had promised to their stockholders, in several cases to either lower or omit dividends. And some of the best of these were also compelled to pinch their maintenance expenses to a point that brought them close to the safety line in operation, or even beyond it.

And what of the weaker roads—the roads upon which whole communities, whole states, if you please, are frequently absolutely dependent? What did these roads do in such an emergency? The record speaks for itself. The best of these second-class railroads made no secret of the fact that they were cutting down on maintenance in order to pay their dividends or the interest upon their mortgage bonds. The worst of them simply marched down the highway to bankruptcy. At no time in the history of this country has as much of its railroad mileage been in the hands of receivers as today.If you are in that glorious company of self-appointed patriots who violently proclaim themselves at every possible opportunity “anti-railroad,” you may be asking me now why so many of our roads have entered bankruptcy. You may be asking me if it is not due in some cases to bad location, and in others to inefficient or dishonest management. I shall reply to you by saying that perhaps fifty per cent of the railroads which are in bankruptcy today are there because they never should have been constructed in the first place and because of the financial management. The lack of judgment, ofttimes the sinister motives that brought them into being are now being paid for and paid for dearly. And in the second place, I will take no issue with you as to either carelessness or dishonesty in management of some of our railroads.

“Why is it that every investigation of a railroad nowadays shows such a rotten condition throughout its affairs?” asked a distinguished economist at a dinner in Chicago last winter.

E. P. Ripley, the veteran president of the Santa FÉ, answered that question.

“It is because a road is never investigated until it is morally certain that its affairs are rotten,” said he, and then told how but one or two rotten apples would send their foul odors through an entire barrel and so seemingly contaminate its entire contents. Would you blacken a whole company because a few of its members have erred? Take another instance. A club for a while shelters a genuine blackleg. Are we to say that, because of this mere fact, its other members are not as good as any of us? So it is with the railroads. You cannot point even the finger of suspicion to such properties as the Santa FÉ, the Burlington, the Pennsylvania, the North Western, or the Baltimore and Ohio railroads—to mention a few out of many, many instances. These are good roads; in some instances because they have been extraordinarily well located, but in most instances because of their continuous enlightened management. Yet some of them have been hard put to it of late to maintain their dividend obligations to their stockholders. And many roads have been compelled to lower or else suspend entirely the dividends paid in the years gone before.

“How about efficiency?” you may interject.

You are not the first to ask that question. It was asked several years ago by a distinguished citizen of Boston—Louis D. Brandeis, now a justice of the Supreme Court at Washington. In the course of a rate hearing in which he appeared as counsel, Brandeis asked the question, then answered it himself.

“I could save the railroads of the United States a million dollars a day, by applying the principles of modern efficiency to their operations,” was his quiet answer to his own interrogation.

The remark was a distinct shock to the railroad executives, to put it mildly. Some of them were angered by it. The wiser ones, however, went home and sent their secretaries scurrying out after all the books on the then new science of efficiency that could be found.

The more they studied efficiency the less these wise men were inclined to anger against Brandeis. Some of them found that they had been practicing efficiency on their properties for a long time past—only they had not known it by that name. They had been rebuilding whole divisions of their lines, relocating and reconstructing them so as to lower grades and iron out curves—all to the ultimate of a more economical operation of their roads. A bettered railroad means invariably a cheaper one to operate. The saving in grades and curves—no matter what may be the initial cost—means a more than proportionate saving in fuel cost, as well as in wear and tear upon the track and cars.

Remember, if you will, that one of the biggest things that efficiency spells is economy. And economy is always a popular virtue in railroading, particularly among those gentlemen whose only interest in the railroads arises from the fact that they own them. If greater efficiency meant greater economy—well, perhaps it was just as well that that smart attorney from Boston made his remark at the rate hearing, only perhaps he might have phrased it in a little less violent fashion.

That is why a man like Daniel Willard, the remarkably efficient president of the Baltimore and Ohio Railroad—the man who has done so much toward rehabilitating that one-time minstrel-show joke into one of the best railroad properties in the United States—spent days and nights reading every scrap about efficiency that could be brought to his attention, why he brought Harrington Emerson, one of the best-known of the efficiency experts into his own offices and staff, why, beginning with his great car and engine repair and construction shops, he is gradually extending the principles of modern scientific efficiency to every corner of the railroad which he heads. Willard’s example has been followed by other railroad executives. And it is because of these and other efficiency principles that the best of our railroads have been enabled to crawl through the hard years of the past decade, without going into bankruptcy.

It is a gloomy record—these lean years in Egypt. They came succeeding a decade of apparent prosperity for most of the railroads. I say “apparent” advisedly. For, when you get well under the surface of things, you will find that even the first six or seven years of the present century were not genuinely prosperous for the overland carriers. Dip into statistics for a moment. They are dry and generally uninteresting things but nevertheless they are the straws which will show the way the wind is blowing. Look at these:

In 1901 the net capitalization of our railroads was, in round figures, $11,700,000,000. Six years later, or at the end of the greatest period of material prosperity that the United States has ever known, this capitalization had increased to $16,100,000,000—approximately thirty-seven per cent.

A great deal has been written about railroad capitalization—a great deal without knowledge of the real facts in the case, and a great deal more with knowledge but also with malicious intent. These figures speak for themselves. Translated, they represent the expenditures of the railroads for permanent improvements and expansions during that busy seven-year period. At first glance an expenditure of more than $4,000,000,000 is staggering. Yet what are the facts? The facts are that hardly one of these roads expended enough that memorable season to keep pace with the vast demands of the freight and passenger traffic—particularly the freight—upon them. We experienced great railroad congestions during the winters of 1903, 1905, 1906, and 1907. And the loss to the large users of railroad facilities because of these earlier congestions is no vague thing; it can be figured high in the millions of dollars. And furthermore it can be said that there is no period of expansion in recent American commercial history that has not been both limited and hampered by the lack of transportation facilities. What a commentary this, on our so-called national efficiency!

Today we are just crossing the threshold of what seems to be an even greater period in the industrial expansion of the nation.[1] Yet how are our railroads prepared to meet their great problem? In 1901, as we have already seen, they met it by an expansion of their physical facilities. But in 1901 the railroads had credit. In 1916 the credit of many of them had become a rather doubtful matter. And this, of course, has been a serious detriment to their expansion—to put it mildly.

An analysis of the service, both freight and passenger, of the railroads in the year 1907, the last of the “big years” in railroad traffic, compared with that of 1914—the most recent year whose figures are available—is illuminating in estimating railroad credit today, or the lack of it. The passenger-mile—representing the progress of one train over one mile of track—is the unit of that form of traffic. In 1914 the total passenger-miles had increased to 35,100,000,000 from the total of 27,700,000,000 in 1907—or 25.7 per cent. Similarly the ton-mile is the unit of freight transportation. As the name indicates, it represents the carrying of one ton of goods of any description for a mile. In 1914 the ton-miles had grown to 288,700,000,000 from 236,600,000,000—or twenty-two per cent.

But, as the traffic grew, it was necessary that the railroad should grow. Despite supreme difficulties in finding credit it did manage to invest some $4,042,000,000 in property expansions and reconstructions during the seven years from 1907 to 1914. Yet this very money must be paid for, and, in view of the gradually impaired credit, paid for rather generously. At five per cent, this expenditure represents an added annual interest charge of $202,101,000 to the railroads of the United States, a figure whose great size may be the better appreciated when one realizes that it is considerably more than half a million dollars a day.

Against this increased outgo one must measure increased revenues for 1914 over 1907, of $452,188,000—one deals in large figures when one speaks of the earnings and expenses of more than a quarter of a million miles of railroad. Yet even increased earnings of more than $400,000,000 are not so impressive when one finds that operating expenses and taxes in 1914 were $506,888,000 higher than in 1907. And both operating expenses and taxes are far higher in 1916 than they were in 1914.Hold this picture up to the light. I have begun to develop the huge plate for you. Now study its details for yourself. An investment of $4,000,000,000—more than ten times the cost of the Panama Canal—produced, at the end of a seven-year cycle, increased transportation earnings of more than $450,000,000; yet it required $500,000,000, or an excess in a single year of more than $50,000,000, to meet the pay-roll, material tax, and other costs of operating the railroads. And in this figure we have not taken account of that annual interest charge of more than half a million dollars a day for the huge $4,000,000,000 investment fund.

That interest charge cannot be ignored. Bankers demand their pay. Add the deficit in a single year—a normal year, if you please. Here it is—$54,698,000 plus $202,100,000—and you have a total deficit of $256,798,000. And this is but a single year. The years that preceded it were no better.

The money that went to meet these deficits was provided from some source. Where did it come from? Most of the big railroaders know. They will tell you, without much mincing of words, that it came from previous accumulations of surplus, or else from money withheld from the upkeep of the physical property of the railroads. Of this last, much more in due course. For the present moment, consider that great $4,000,000,000 expenditure between 1908 and 1914 for additions and betterments. It was none too much—not even enough when one comes to consider it beside the great expansions in service as represented by the showings of passenger-miles and ton-miles. And yet today, as we shall see in due course, the railroads stand in need of far greater development and expansion than ever before in their history. Five or six years ago that supreme railroader, James J. Hill, estimated that the railroads of America would need a further expenditure of $1,100,000,000 a year upon their properties before they would be in shape even to decently handle the traffic that would be coming to them before the end of the present decade. Hill was a master railroader who stood not only close to his properties but close to the great territory which they serve. He knew that the states of the Union which are west of the Mississippi River had been developed to only twenty-seven per cent of their ultimate possibilities. It would be hard to state the lack of development of the railroads of that territory in exact percentage. It certainly would be a figure far less than twenty-seven.

If you are a traveler at all familiar with the Middle West and the South; if you are traveling steadily and consistently these years over all of their rail routes, you must have been convinced of their appalling condition. Many of their main lines are deplorable; their branch lines are unspeakable. Branch-line service in every part of the land has been a neglected feature of railroad opportunity—as we shall see in due course. But in the Middle West and in the South they are at their worst. If they do not actually cry aloud from a physical standpoint for reconstruction, their service, or the lack of it, certainly does. Yet the people, the communities, and the industries which are situated upon them are entitled to a railroad service which shall enable them to compete upon an even basis with the communities and industries which are situated upon rich and efficiently managed railroads. I feel that this is an economic principle to which there can be no dissent. And I think also that there can be no dissent to the wretched plight of many of the roads of the Middle West and the South—more particularly the Southwest. In rough figures, the prosperous railroads of the land, representing some forty per cent of its mileage, are able to give service to their patrons; sixty per cent are unable to render a proper service.

But even in the prosperous sections of the West—of the larger proportion of the country—one who rides and sees and thinks cannot fail to be impressed with another great cost, yet to come. I am speaking of the removal of tens of thousands of highway grade crossings, in our towns and cities and in the open country. Already a good beginning has been made; but it is as nothing compared with the work which remains to be done. The coming of the automobile has hastened the necessity of the completion of this work. The railroads have contrived many ingenious and perfected methods of safeguarding their highway grade crossings. The best of them are most inadequate, however.

The fact remains—a fact that must be particularly patent to you when you ride across Michigan, or Indiana, or Illinois, or Iowa, or any of their sister states—that here is a great and vastly expensive work awaiting the railroads of this country. In the larger cities—New York, Boston, Buffalo, Chicago, St. Louis, Kansas City, to name a few striking examples—many millions have been expended in this work within the past few decades. While the several communities—in some instances the state treasuries—have borne a portion of these expenditures, the burden has fallen invariably upon the backs of the railroads. Fortunately the railroads which have succeeded in absolutely eliminating many of their highway crossings—and, in so doing, reducing a large part of their accident claims—have been the wealthier roads. But that is little satisfaction to a community unfortunate enough to be situated on the lines of a bankrupt road. The chances are that its grade crossings, being more poorly protected, are more dangerous.

One thing more, while we are upon this subject and are speaking particularly of this lack of development of the railroads of the West and of the Southwest. It is an interesting fact that there are but three railroads—the Santa FÉ, the Union Pacific, and the Southern Pacific—which have done any considerable amount of double-tracking west of the Missouri River. Yet, as we shall see when we come to the military necessity of our railroads, it is only a double-track railroad which is competent to handle any really considerable volume of traffic. And it is equally true that it is more than foolish to attempt to build or to develop any considerable mileage of branch lines until there are double-track main stems to serve it adequately. James J. Hill had all these things in mind when he made his definite statement as to the financial needs of the railroads of the United States during the present decade. And he did not need to give consideration to the abnormal traffic which the great war has given to our railroads. The normal development of the West, its gigantic possibilities, were sufficient to convince that man of great vision, to set his ready pencil at statistics.

As a matter of fact and in view of the record of these past half-dozen years, the average well-posted railroader of today will tell you that Hill was only conservative in his estimate. But, being even more conservative ourselves, let us allow that, if the railroads had been unhampered during the past decade, they would have expended as high as $1,000,000,000 a year in permanent improvements.[2] Ten billions instead of four! Ten billions of dollars makes dramatic comparison even with our great trade balance that has accumulated during the European war—the excess of exports over imports already amounting to only a little over $3,000,000,000. And as to what it would have meant to industrial America, poured out through many channels, raw materials, manufactured goods, labor—it takes no stimulated mind to imagine. The flush period into which the war has suddenly plunged us can give a fair indication.

Now consider for a moment not the possible expansion that the railroad might have made in the last decade and did not, and see how it has failed in the ordinary upkeep of its property. This last phase of its plight bears directly upon the great railroad financial problem as it exists in this year of grace, 1916—the epochal year in which the roads need to replenish their equipment; the year in which they find the doors of the money markets, open to almost all other forms of industrial investment, all but closed in their faces. By equipment, I now speak in the broad sense of the word not merely of cars and locomotives but tracks and bridges and terminals as well—the entire physical aspect of the properties. Yet take, if you will, the word “equipment” in its narrow and technical sense. The sense of railroad necessity is not lessened.

The other day the Massachusetts Public Service Commission complained that the largest of the railroads operating out of Boston was using in its suburban service some 700 wooden passenger coaches, varying in age from twenty-five to forty years. The railroad did not deny that allegation. It merely said that it had no money with which to buy modern coaches.

Its condition is typical. Week after week in the glorious autumn of the year of grace 1916, the news columns of the commercial pages of our morning newspapers were telling with unvarying monotony of the shortage of freight cars as bulletined by the American Railway Association—100,000 this week, 75,000 last, 150,000 next—who knows? The merchant and the manufacturer know. They know in shipments of every sort delayed; in the delays running into sizable money losses week upon week and month upon month.

It may not be able to convince them that at the close of the fiscal year 1914—the period upon which we are working—there were upon the roads of the United States 2,325,647 freight cars, a number which, although greatly added to since that date, has not yet been made adequate for the normal traffic demands of the country.[3] And a large proportion of these cars are both obsolete and inadequate. In 1914, out of the 2,325,647 freight cars some 347,000 were of a capacity of but 60,000 pounds or under—a type today considered obsolete by the most efficient operating man. A great majority of this latter number of cars was of all-wood construction. If the financial condition of the railroads had permitted, they doubtless would have been replaced long since with all-steel cars of far greater carrying capacity. This situation in the freight-car equipment is reflected in larger measure in the passenger-car and locomotive situation. There are railroads in the United States that today are compelled by the exigencies of a really serious situation to operate locomotives whose very condition is a menace not only to the men who must ride and operate them but also to the passengers in the trains they haul. The annual number of serious delays that may be charged to “engine failure” is appalling.[4]

Now consider “equipment” in its broader sense. Expert railroaders will tell you that save in the case of the larger and more prosperous roads, there has been, in the course of the past seven or eight years, a serious depreciation in the maintenance of the way and structure of the railroad. In the prosperous years from 1901 to 1907 a very great improvement was made in this physical feature of the railroad. In the last of these years the American railroad reached the highest standard of physical perfection that it has ever known.

In 1907 came the great panic. It made drastic economies immediately necessary. The railroads in their anxiety to meet, first, their dividends, and second, their interest obligations, pinched maintenance to the extreme limit. This was effective in two ways: In the first place the great preponderance of roads did not have earnings to make ordinary improvements, nor credit to provide the capital charge that would apply for improved rights of way, bridges, stations, freight houses, shops, and the like. Expert track engineers say that the loss in the maintenance of line during these lean years in Egypt that have just passed will average at least $2,000 a mile. Multiplied by a total of 245,000 miles of railroad line in the United States this means that the railroads are “back” in the upkeep of their lines alone some $491,788,000.[5]

An expert railroader of my acquaintance takes this great figure—considerably exceeding the cost of the Panama Canal—adds to it as representing a carefully ascertained deficiency in the replacement of rolling stock an almost equal sum—$445,940,586. To these he further adds the dividends paid by the solvent roads out of their surpluses during the seven hard years—$784,563,406—and the depreciation of the value of the securities of the roads in bankruptcy during the same period—$719,528,328. The total of these four great items is $2,441,820,320—a sum instantly comparable with that of the national debt.

There is, however, from a bookkeeping standpoint, at least, an offset against these losses in the equipment account of $394,736,506 which has, under a wise ruling of the Interstate Commerce Commission, been charged to expenses during the seven years and set up as a reserve to meet the accruing deficiency of equipment. However, there have been no restrictions as to the maintenance of this fund, or how it should be handled. The very prosperous lines—representing some 100,000 miles, or less than half the total mileage of the country—probably have their contribution to this depreciation fund as an asset. In the case of the poorer roads—speaking financially—it doubtless has been applied to other purposes, in order to help them maintain their bare existence. It has come home to these, and with great force, that the governing conditions which make their income fixed take little cognizance of the vast annual increases in material, in tax, and in labor costs. In rough figures—decidedly rough, it seems to me—it has been estimated that the losses of our railroads during the past ten years alone have amounted to approximately one-half the entire cost of the Civil War. That figure is impressive—it is little less than appalling.

Even with the depreciation accounts of the American railroads deducted as an asset, we still have this awe-inspiring total of $2,000,000,000 confronting us. Some of this—the unpaid dividends of more than seven attenuated years—is water that will never come to the mill again. But the neglected rights of way, the ancient buildings, and the bridges needing rehabilitation on some of our railroads, the locomotives and the cars travel-racked and fairly shrieking for repairs, are all of them physical matters that must be set right before the sick man of American business can stand firmly on his feet once again. And when these things are done, the railroad will stand physically just where it stood from eight to nine years ago. And who can deny that it should stand nine years ahead of 1917 instead of nine years behind it?