PROBLEMS CONFRONTING AMERICAN RAILWAYS

Previous

By Daniel Willard,
President of the Baltimore & Ohio Railroad.

[An Address delivered at Galesburg, Illinois, to Burlington Railroad Employes, February 20, 1909, by Mr. Willard, then Second Vice-President of the Chicago, Burlington & Quincy Railroad Company.]

A short time ago I had occasion to explain to some of your associates who happened to be in my office, some of the difficulties the railroads had been contending with during the two years just past, and I was asked if I would be willing to come to Galesburg and explain to other Burlington employes the things I had endeavored to make clear to them. I replied that I would be very glad to do so, and I suppose that is how I happen to be here tonight.

I understand that this audience is composed largely of employes of the Burlington Railroad Company, and I am glad that that is so, and what I shall say will be addressed particularly to them.

So much has been said and written about railroads during the last two years, and by many well qualified to do both, as well as by some not qualified to do either, that it can hardly be possible that any new thing remains to be said, and I fear I shall only be able this evening to repeat to you collectively the same things I have already said to many of you individually.

Under the Burlington plan of organization the Second Vice-President has direct charge of the operation of the line (responsible, of course, to the President), and for the last five years I have had the privilege and honor of holding that office. I refer to this only that I may by so doing establish my relationship with the various matters to which I shall later specifically refer, because I propose to confine my remarks chiefly to home matters; that is to say, to matters pertaining directly to the Burlington Company. I feel that I ought to be qualified to speak clearly on that subject, and while I have naturally read much concerning the general railroad question as a whole, the same sources of information have also been open to you, I have no doubt many of you have given the general subject as much or even more study than I have.

In October, 1907—16 months ago—the Burlington Company did the largest business in its entire history—ran the most trains, earned the most money and employed the most men. During that month the names of 53,000 men appeared upon its pay-rolls; and the same condition existed quite generally throughout the entire United States. There was a well-nigh universal complaint of car shortage and lack of motive power.

Four months later, reports from the Car Efficiency Bureau in Chicago showed a surplus of over 325,000 freight cars on the American railroads. In the meantime the Burlington Company had reduced its force by nearly 18,000 men and it was estimated that the transportation business of the country had fallen off more than 30 per cent.

What caused this unprecedented change? Men far abler than I have undertaken to explain, and many reasons have been given, all, I presume, more or less in harmony with the facts, but influenced no doubt by each man's point of view. I say, candidly, I do not know what caused it; that is, assuming that there was any one cause, but I think I can point out to you some of the contributing causes, at least so far as the Burlington Company is concerned.

A railroad, as you all well know, is a living, growing thing. It is never finished, or if we think we have finished some certain part, as was probably thought when the original stone engine houses were built here some years ago, or when the first bridge was built across the Mississippi River at Burlington, it always happens that heavier, larger, and longer engines come along in course of time, forced upon us by the changed conditions, and our engine house which was built for all time becomes too short, and our bridge is too light, and both must be rebuilt. The same thing is going on in every department of railroad operations—ballast, ties, rails, coaches, station buildings, even grades and curvature, all come within the changing influence of time and progress. I referred to the engine house specifically simply to illustrate my point.

Because of the constant change or evolution which is going on, it is necessary that Railroad Companies, if they expect to keep abreast of the times, should make annually large expenditures for such improvements as from time to time become desirable or necessary, if the standard of service is to be raised, or even maintained. These are called extraordinary expenditures, and it is customary on this Line to prepare each year, as of January 1st, what is called a Budget, being in effect a list of the more important improvements considered necessary by the officers of the Road. The Budget shows the separate items, with description of each, and also estimated cost. It may and does include such items as new cars or engines needed, additional sidetracks, new terminal yards, such as you have here, water treating plants, new coal chutes, etc.

On January 1, 1907, the sum total of the Burlington Budget, as it stood approved by the President on that date, amounted to something over $16,000,000.00. It included some new equipment and also some quite large improvements, such as new yard at Lincoln, grade reductions between Galesburg and Savanna, etc.

The Burlington System is over 9,000 miles in length, and goes through parts of eleven different states. On the 1st of January, 1907, the legislatures in all of the eleven states, I think, were in session. The Federal Congress was also in session at Washington. Bills having special reference to railroads were being introduced daily in some of the legislative bodies above mentioned. I cannot say now that all of them were against the railroads, but I feel I am justified in saying that while perhaps some of them if passed might not have injured the railroads much, none, or at most very few, were intended to help the roads. In fact, the attitude of the Federal Congress as well as of most of the state legislatures was considered by nearly all railroad owners, and officers as well, as distinctly hostile. This belief may or may not have been justified by the facts—at any rate it existed. The owners of the Burlington Company believed it. Its executive officers believed it. I believed it.

The number of bills affecting railroads introduced in the legislatures of the eleven states above referred to, and in the Federal Congress, during the session of Winter of 1906-1907 was over 800—at least, over 800 such bills were actually laid upon my desk. Among these were bills reducing the passenger fares in several states; others about reciprocal demurrage—if any one can explain how such a matter can be made reciprocal; still others fixing the speed of stock trains, and the size of caboose cars; fixing the hours of labor for men in certain branches of the service (and I wish to say here that that part of the Federal law fixing limit of hours for men in train and engine service has my hearty support); bills having reference to the liability of the railroads to their patrons and employes, etc., etc. I do not wish you to understand that I criticise all, or for that matter, any, of the bills by this enumeration. I am now simply reciting the facts. But whether the bills were good or bad, desirable or undesirable, it was clear if some of them became laws that the expenses of the railroads would in consequence be largely increased, and no way was provided whereby the revenue or earnings would be correspondingly raised—in fact, there seemed to be a demand from all directions that rates should be reduced, and they were reduced in many states.

Another important movement was also under way at the same time, and that was in the direction of a general wage increase in practically all departments. This one item alone cost the Burlington Company $3,000,000.00 a year.

Now, what effect do you suppose all these things had upon the Budget and similar questions? Just the same effect that the same kind of questions in a personal way would have had upon you and your personal affairs.

You will remember that I said the Budget amounted to $16,000,000 on January 1, 1907. That was just before this wave of anti-railroad legislation referred to had fully developed; but when we saw what was happening, when we read the bills that were being passed daily, and the others that were under consideration, we became very much concerned. It seemed clear to us that even if business continued good—and remember this was ten months before the panic of November—that our earnings would probably be considerably reduced by the reduction of freight and passenger rates in various states, and our expenses were certain to be much increased by some of the legislation and also by the advance in wages, and it was necessary to consider where the money was coming from to pay the large bills that would come due in connection with the Budget program. After considering the matter very carefully early in January, we decided, first, not to authorize anything further in the way of improvements unless actually necessary; and, second, to stop as many things already authorized as it was possible to get along without. Among the things so put off or deferred were the building of a new engine house and necessary shop buildings at Clyde; the construction of a new line about 55 miles in length from Herrin to the Ohio River; double track between Galesburg and Bushnell; new passenger depots at Monmouth and several other places; work on new terminals at Lincoln, etc. Of course, it may not have seemed to you at the time that we were stopping, because we still had so many things under way, and you cannot prudently stop large undertakings all at once—for instance, we could not stop work on the new yard at Galesburg when it was half done, and you will recall that it required more than two years to complete the plan, but we did slow up as much as possible; that is to say, we tried to finish up such things as were authorized before January 1, 1907, and which were still considered necessary, but we did not start any new things. The effect of this is best shown by the size of the Budget on January 1, 1908—it was then a little over $8,000,000.00, or about one-half what is was twelve months before. In the meantime the November panic of 1907 had come upon us, and it seemed not only best, but necessary, to continue the policy decided upon in January of that year, and on the 1st of January, 1909, the Budget, as it then stood, and as it now stands, amounts to a little less than $1,000,000.00; and this brings us up to the present time.

In February, 1907, I had the honor to be invited to the annual banquet of the Commercial Club at Clarinda, Iowa, and I was asked to speak about the railroad situation. After referring to some of the proposed laws that were then under consideration in the various states, I continued as follows: "I will not speak of the probable effect of such a public policy as I have referred to, on the general railroad situation, as others are much better qualified to do that, but speaking for the Company which I represent, we view the situation with much concern, and we have done, I think, what any prudent manager would do if he saw confronting him conditions which he was certain would increase his cost of operation a large but unknown amount and at the same time reduce his revenues—we have planned to curtail our expenditures wherever possible. I do not mean that we shall let the property suffer, or lower the character of the service, but we will not undertake extensions or large improvements until we can see more clearly where the money is coming from, or if it comes at all. How far reaching this policy of retrenchment, or perhaps I should say curtailment, will be, I, at least, cannot say; it will depend upon the future. Certain it is that our expenditures in that direction will be much less this year than last, which means, of course, fewer men employed and less material purchased." It is two years since that was written, and I regret to say that circumstances have not yet seemed to justify any considerable change of policy.

The Burlington Company has on its pay-rolls today about 38,000 men, 15,000 less than in October, 1907, and 7,000 less than in February, 1907. We are doing all the things that we consider necessary for the safe operation of the trains, and for the proper maintenance of the property, but conditions so far have not seemed to us to justify a resumption of the policy of betterments and extension followed during 1906 and the preceding years. I do not know absolutely that it is so, but I imagine that the other Railroad Companies have been pursuing much the same course as we have here. The latest reports indicate that the total railroad mileage of the United States is about 230,000, so that the Burlington's mileage is about one-twenty-fifth of the whole, and if you multiply what has happened on this road by twenty-five, you will get a result for the whole country which will probably not be far from the truth. In fact the Eastern roads suffered much more from the actual business depression than we did in the West.

It has been stated by men who should be competent judges that from one-third to one-half of all manufactured steel and iron is used either directly or indirectly by the railroads, and that fully one-half of all the lumber manufactured is so used. When it became necessary for the railroads to stop buying new cars and engines, and also to stop all new construction and improvements, when possible to do so, you can well understand the effect that that course must have had upon the two particular lines of business just mentioned. Of course, many other lines were similarly affected, and it would seem logical that no full and real resumption of business can be expected until the railroads are again able to resume the policy which they were forced to abandon early in 1907.

When will that time come? I do not know. What will bring it about? I do not know that either, but I do know what will help matters greatly, at least so far as the Burlington Company is concerned; but before saying what I have in mind in that connection, I will digress a little, and briefly explain something of the financial responsibilities of a large Railroad Company, because in spite of all we hear about corrupt management, stock watering, etc., it is still a fact that the railroads did cost something, and the money that was used for that purpose was all, or very nearly all, furnished by private persons like yourselves, and it was furnished by them for investment because they thought or hoped such an investment would be profitable to them, for there is, there can be no other reason for investing money in anything, unless it be invested for charitable purposes. The Burlington System today, as I have said, is over 9,000 miles in length. It has large terminals in Chicago, St. Louis, Kansas City, and the other great cities it reaches. It owns 1,600 locomotives, 1,200 passenger cars, and 52,000 freight cars. The last annual report shows that its bonded debt (or the size of its mortgage) amounts in round numbers to $165,000,000.00, equal to about $18,000.00 a mile. This mortgage is legally entitled to interest at the average rate of 4.185 per cent per annum, because it is so specified in the bond, and that interest must be paid, or the mortgage would be foreclosed just as would happen if you failed to pay the interest on a mortgage, in case you happened to have one on your home. In addition to the bonded debt above referred to, there is outstanding $110,000,000.00 of stock in round figures, or about $12,000.00 a mile, making a total capitalization of $30,000.00 per mile. We are constantly told that the American railroads are overcapitalized, and yet the Burlington Road could not be replaced today for twice its capitalization. I doubt if it could be duplicated for three times its outstanding capital. The stock, as you know, receives as interest or dividends whatever sum the Directors may decide to pay, out of what is left after paying the operating expenses, taxes, and interest on the mortgage. If there is nothing left after paying the other items mentioned above, the stockholders receive nothing, so that there is a certain risk connected with an investment in railroad stock that does not apply to railway or Government bonds. For a number of years the Burlington Company has paid 8 per cent dividends to its stockholders. It has earned more than that, as the annual reports show, and the Directors might legally and properly have paid larger dividends, but they did not, and all the money earned in excess of 8 per cent on the stock has been spent for betterments, new equipment, etc. This policy, pursued through a long period of years, as it has been, explains how it is that the Burlington is in such good physical condition as it is today, and with such a low capitalization. With this explanation, you will understand, I am sure, that with an increase per year in wages alone of $3,000,000.00, together with other increases due to legislation, such as $325,000.00 per year because of the nine-hour law for operators, and a smaller income because of rates reduced (freight and passenger) in many states, the surplus, if any, after paying dividends would be much less than formerly, and if any new work was undertaken it would be necessary to keep its cost within such surplus as might be available, or else borrow the money with which to pay for such work. I hope I have now made clear why it was that we became worried about the Budget in January, 1907, and why for the last two years we have been trying, so to speak, to get our house in order. It will perhaps be said that we could have borrowed money for new extensions, betterments, etc., and that is actually what we were compelled to do, in order to complete the Budget plans above referred to; but what prudent man would want to borrow beyond his forced necessities, at a time when the future seemed so uncertain, and when the interest on the money so borrowed would add that much more to his existing burdens? The same sound principles should and do underlie railroad operations that you should and do apply to your own personal affairs. The items are larger in the case of the railroad—that is all.

I will now repeat the question—What will bring about a resumption of business on railroads? And if I have succeeded in making clear what I sought to explain, I think you can answer the question just as well as 1 can, but I will give you my views, and you will now be in position to judge whether they seem sound or otherwise.

In my opinion, railroad business, which really means all business, will recover its former proportions when the influences and forces at work during the last two or three years shall have ceased doing the things that have contributed so largely towards bringing about the depression which we all deplore. Perhaps that is not quite clear. I do not mean that laws already made must necessarily be unmade, that wages raised must be reduced, but we must have a rest. We must be given time and opportunity to work out the new problems that have been forced upon us during the last two years. We must be given a chance to find out what it is going to cost to meet the new requirements, and also how much our revenues are going to be reduced by reduction of rates. Perhaps it will be found that by new methods growing out of the exigencies of the case we will still be able to earn a surplus sufficient to justify the resumption of extraordinary expenditures as formerly. If not, then, either rates must be advanced, or wages be reduced, or improvements must wait or be carried on with borrowed money and railroads will be slow to increase their interest-bearing debt under such circumstances.

As I have said, two years ago during the legislative period, 800 bills affecting railroads were introduced in states reached by the Burlington System, including those proposed at Washington. So far this season, 272 such bills have been presented. It is too early now to venture even a guess as to how many of them will become laws, but until we know just what to expect, you can clearly see, I am sure, that we will not feel like incurring any new or unnecessary obligations.

Among the bills so far introduced are two in Illinois, called the full-crew bills. These two bills, if passed, will increase the cost of operation on the Burlington Road alone $96,000.00 a year, on basis of present business. In Nebraska a similar bill is under consideration. It is true that the two Illinois bills if they become laws will not necessarily make our operations in Illinois unprofitable, but that class of legislation will do much to discourage new developments, by making such developments more difficult, or rather, less profitable; and besides, in my opinion, such laws are not necessary.

As Burlington employes, you may be interested in what I am now going to tell you about the development of the coal business north through Galesburg. I need not tell you how much it has increased during the last four years, for you have seen it grow from practically nothing up to its present proportions. Some six or seven years ago the Burlington officers gave careful consideration to the problem of increasing the Company's business, and you must bear in mind that freight shipments do not just happen to go this way or that. Well, they finally decided that the most promising opening was to try and develop a coal movement from Southern Illinois to the cities of St. Paul and Minneapolis, and the Northwest generally, where the winters are severe and fuel supply limited. It was found that if coal from Illinois was taken to the Twin Cities it would have to be sold in competition with coal from Pennsylvania and other eastern states shipped by water to Duluth. It was also found that the coal from Franklin and Williamson Counties in the southern part of the state, while of very good quality, would not bring the same price on the market in St. Paul as the eastern coal. It was also found that in order to be sold at a sufficient profit to the dealer, in competition with the eastern coal, the railroad would have to carry it from Herrin, Ill., to St. Paul, 648 miles, for not more than $2.10 per ton, or 3.2 mills per ton mile. It was also found that it was impossible to do this at a profit to the railroad, as conditions then were; that is to say, we could not haul coal at that rate and make money on a road full of one per cent grades. The engineers were put to work, however, and an estimate was prepared showing what it would cost to put the line from Savanna to Herrin all to a standard grade not exceeding sixteen feet per mile, the line above Savanna being all right. It was believed that it would pay to make the improvement—and you know the rest. The line was built from Centralia to Herrin, the Fenton-Thompson cut-off was built, grades were cut, and, altogether, more than $5,000,000 were spent to put the road in shape to haul coal to St. Paul in 3,000-ton trains. Of course, many new engines were bought, as well as new and high capacity cars suitable for the coal trade. It is a low rate business, and as you know, the cars as a rule return empty, but handled over low grades and in full trains it pays a fair profit; but every additional item of cost, of course, reduces the profit.

Now to show the effect of proposed legislation. In Nebraska a bill has been introduced placing the limit of cars that can be legally handled in one train at fifty. If this bill becomes a law, how long will it be before somebody will want a similar one in Illinois, and if you are going to fix a limit so as to make it necessary to run more trains, and consequently employ more men, and that is the undoubted purpose of the bill, how long will it be before the limit will be reduced to forty, or even twenty-five? Where will the thing end, and when? With the mere possibility of such legislation looming up in the future, can you expect improvements such as I have just described to continue? Would you recommend them if in my place?

How long will such legislation find favor in our halls of Congress? Just as long as your representatives think you want it—by you I mean the majority of their constituents—and no longer. Your representatives and senators are human. They seek to obtain political preferment at the polls, and desire to remain in office. They must have a majority of the votes to be elected, and naturally they will shape their course so as to meet your wishes, as they understand them, because by so doing they hope to retain your support.

No one today questions the right of the properly constituted authorities to supervise the railroads. No one defends the rebate, or discrimination of any kind, but, as the Supreme Court of the United States has recently well said, "It must be remembered that railroads are the private property of their owners; that, while from the public character of the work in which they are engaged, the public has the power to prescribe rules for securing faithful and efficient service and equality between shippers and communities, yet in no proper sense is the public a general manager."

No doubt there may be much in connection with railway management in the past (and for that matter at the present time as well) to criticise; but please tell me what line of human undertaking since the world began, be it industrial, educational or religious, has been free from criticism; and, granting all that is said against the railroads, then what? This is what we find: That the railroad rates in this country are the lowest in the world, with few minor exceptions not worth considering; that the wages paid railroad employes in the United States are higher than anywhere else in the world, and that the capitalization of American railroads per mile, as reported by the Interstate Commerce Commission, is but one-fourth as much as that of English railroads, and one-half that of the railroads of Germany and France, and one-third that of Belgium; and this has all been accomplished in a country where a high protective tariff obtains, and where everything the railroad uses costs more on that account. It is claimed that our manufacturers must have the protection of a high tariff in order to enable them to meet the prices of their foreign competitors and pay American wages; but the American railroad sells its product, that is, transportation, for less than any other nation and still pays higher wages. A locomotive engineer, for instance, receives $4.01 per day here as against $1.62 per day in England, and $1.01 per day in Belgium.

It is sometimes said that railroads have received great help from the people in the shape of land grants, and on that account should give much in return. Let me give one instance of how this has worked with the Burlington Company. In order to induce the original projectors of this line to extend the road through Iowa, this Company was given 359,000 acres of government land in that state, selling at that time at $1.25 per acre, amounting to less than $450,000 cash value. By an act of Congress, passed over thirty-two years ago, a reduction is made of 20 per cent from the mail pay on all land grant roads. At the present time the amount so deducted from the Burlington, because of the Iowa grant, amounts to over $65,000 a year, and since the law was passed has amounted in the aggregate to over $1,500,000, or more than three times the original value of the entire grant. Not only that, but it goes on without end. Do you think that is fair?

We do not ask for favors. We wish to be treated fairly; that is all. No one can possibly be more interested in the prosperity of the railroads than the railroad employes. From every dollar earned by the railroad forty-two cents go directly to pay wages of railway employes, while only twenty-one cents, or one-half that amount, go to pay interest and dividends. In no other country in the world does the railroad employe get so large a share and the security holder so little. Why should not the man who invests his money in railroad stock receive as much return in shape of dividends as the man who invests his in a farm or factory? The last census report of the government, that for 1900, showed that money invested in farm lands in the United States earned an average return of over 10 per cent, and money invested in manufactures earned over 19 per cent. The governor of Iowa, in a printed article over his own signature, appearing in the February, 1907, number of "Farming," gave a number of specific instances where money invested in farm lands in Iowa earned from 18 to 23 per cent, and he referred to such cases as typical. The last report of the Interstate Commerce Commission shows total earnings of all railroads in the United States for year ending June 30, 1907, to have been $2,589,105,578. It also shows total capitalization as $13,053,974,156, and money paid as interest and dividends $551,128,713, equal to 4.2 per cent on capitalization. Certainly this does not seem excessive when compared with profits in farming and manufacturing as given above.

We are glad to know that our farmers and manufacturers are prosperous, because we have long since learned that when they are not prosperous the railroads cannot prosper. I fear they have not yet fully realized that it is better for them, also, that the railroads should prosper. We hear no complaints in Congress or elsewhere because our farmers and manufacturers are prosperous; in fact, we are all inclined to boast about it.

The last annual report of the Interstate Commerce Commission gives the aggregate capitalization of the railroads in the United States as over $13,000,000,000, showing that the railroad investment in our country is second in amount only to that in agriculture. It is estimated that the number of railroad stockholders today is over 400,000. We know that in 1907 over 1,600,000 men were employed on American railroads. Do you know of any good reason why this army of railroad men, together with the 400,000 stockholders, should not receive as fair consideration from government and people at large as the farmer and manufacturer receive? And yet the government in effect lets the one have money without interest to buy his land, and by means of a tariff makes you pay more for much that you buy, so that the other can pay his employes good wages. Personally I make no complaint because of either of these things; but so far as I can learn no one in Congress has suggested that railroads should raise their rates so that you might receive higher wages, and yet the two things, rates and wages, are very closely related.

If anything I have said has helped you to a better understanding of the railroad problem, I am glad. If it has caused you to take a renewed or deeper interest in the subject, I am glad. I could go on and multiply cases in confirmation of what I have said had I the time, but what I have said already is perhaps sufficient. Do you intend to make railroading your life business? Are you interested in the prosperity of railroads, and particularly of the Burlington? Do you clearly see the relation between rates and wages? Do you think wages are too high? If not, perhaps you do not agree with one of your congressmen in Washington, who has just recently, on the floor of the house, urged that the Interstate Commerce Commission be given more power over rates, which means power to reduce them still more, because they have never, so far as I have heard, exercised their power over rates in any other way. Personally, I am glad I can claim to be a railroad man, and not only glad, but proud of it as well. I think the American railway is the one great institution above all others that Americans should be proud of.

Mr. W. R. Lawson, an Englishman, who investigated our railroads in 1903, wrote upon his return, in his book on American Industrial Problems: "The science of transportation is going to be the special contribution of the American people to political economy."

Mr. Neville Priestley, an English gentleman and Under Secretary to the Government of India, Railway Department, came to this country in 1904 for the purpose of investigating our American railroads. His report was submitted to the English government and printed.[C] Among other things he said: "American railway men are quick to see a new idea. They are quicker still to try it. They take a great pride in their profession and are striving to get at the science of it. That their methods are not always perfect is what might have been expected, but they have managed to do what no other country in the world has done, and that is, carry their goods traffic profitably at extraordinarily low rates, notwithstanding the fact that they pay more for their labor than any other country. It is in the study of how they do this that much benefit can be derived by other countries."

Mr. Leroy Beaulieu, a distinguished French economist, who visited this country in 1905 and made a careful examination of American economic conditions, wrote as follows upon his return to his native country: "All in all, the prosperity of the American railway system as well as the excellence of service it renders, is undeniable. If, therefore, one were in search of model railway methods, it would be wise to turn to those practiced under the free American system, not to those illustrated by a system operated under the debilitating control of the state."

It has been well said that "a prophet is not without honor save in his own country and in his own house."

FOOTNOTE:

[C] A condensation of Mr. Priestley's able report was made for the Bureau of Railway News and can be had on application.


                                                                                                                                                                                                                                                                                                           

Clyx.com


Top of Page
Top of Page