9~>3 •2^ The Outlook for the Railroads Remarks by Ivy L. Lee before the Boston City Club Boston, Mass., November 13, 1916 The United States this winter faces the most acute railway congestion this country has ever known. We are threatened with commercial apo¬ plexy because our transportation arteries are not large enough to accommodate the circula¬ tion of our trade. Further than that, while industrial com¬ panies are earning enormously increased profits, with promises of still more, the railroad business during the coming year faces the probability of greater traflSc and reduced profits. Railroad enterprise is palsied under a regime of regulation which fails to recognize the fact that railroad rates are fixed while railroad expenses are continually rising. Industries may meet enlarged expenses by charging higher prices for their product—and thus enlarge their profits more and more as prosperity increases. But the railroad, no matter what the demand for its product, must hold its prices stationary and in seasons of greatest prosper¬ ity see its profits crumble before a rising tide of costs. Regulation is necessary, and in the public interest, but regulation must take account of the fact that increased facilities vitally needed cannot be supplied except with money from investors—and investors no longer find it attractive to put their savings in securities to build and develop new railroad facilities. But from the 'public point of view some¬ thing is wrong, and the public knows it. Business men are losing large sums of money because they cannot get their freight to market. The railroad manager—as a railroad manager is content to go along as matters are now, but the public cannot get along with no more railroad facilities. As a citizen, therefore, the railroad man¬ ager points out the meaning of conditions— and the fact that certain elementary economic laws are certain to assert themselves in spite of the imprecations of Courts, Legislatures, Commissions or Peoples. The railroads are now doing all the busi¬ ness they can possibly handle. But facilities are woefully inadequate. The disparity be¬ tween facilities available and traffic presented is becoming greater every day. When the railroads asked the Interstate Commerce Commission in 1910 for an increase in freight rates, railroad presidents predicted just what has now happened—if the railroads were unable to obtain the capital with which to provide facilities against future needs. But the Commission decided that it knew what was wanted better than the unanimous opinion of the railroad experience of the coun¬ try, and no increase was granted. Again, in 1913, in asking for an increase of five per cent in freight rates, the railroads said even a five per cent increase was not enough, and they once more pointed out the danger of inadequate facilities which faced the country. But the Commission allowed only three per cent. * * * And this is what has happened: On July 1, 1913, there were 2,430,758 freight cars on all the railroads of this coun¬ try; on July 1, 1916, there were 2,447,178—an increase in three years of only 17,000 or seven-tenths of one per cent. Fewer miles of railroad were constructed in this country in 1915 than in any year since the Civil War. S Railroad managers, full of plans and eager to go ahead with new work, knowing what ought to be done, telling the public so, and telling commissions so, yet find that the public will not listen and commissions will not heed. The public has turned over the regulation of railroads to the Interstate and various state commissions. In their power to name a "reasonable" rate these Commissions have the ability to limit the return all railroads might earn. The Commissions define what they con¬ sider a "reasonable return" upon the capital invested. But they take little note of the fact that the man with savings to invest is the man who really determines whether the re¬ turns from an enterprise are suflBcient to attract his money. And after all, that man has the right to do with his money exactly what he pleases. * * * The attitude investors have taken is very clearly to be gathered from the fact that dur¬ ing the year 1916 not a dollar of new railroad stock has been listed on the New York Stock Exchange to provide money for new railroad building. Yet during this same period, securities of all kinds have been issued in this country amounting to $1,712,826,300, and new cor¬ porations have been organized in the Eastern States alone with authorized capital of $1,967,000,000. 4 The President of the United States, in his annual message to Congress, December 7, nearly a year ago, stated "The transportation problem is an exceedingly serious and pressing one in this country." The President recommended that Con¬ gress appoint a commission to inquire into the whole situation. But in spite of those solemn words of the President, Congress took no action for seven months, or until the middle of the next July. A joint resolution was approved by the President, July 20, 1916, providing for the inquiry, but notwithstanding the pressing needs of the situation, the Congressional investigating committee has now allowed four full months to elapse while its members look after their political fences and allow the future of the commerce of this country—so vitally dependent upon adequate railroad facilities—to take care of itself. Not until November 20th will this commis¬ sion assemble for its first hearing on this subject—undoubtedly the most important now affecting the domestic welfare of our people. ♦ ♦ * The railroads are not to blame for the national predicament. They have begged and implored; they have shouted from the house¬ tops and they have used the printed page— telling the people what the situation was. s The bankers are not to blame. They can¬ not finance requirements of the railroads unless they can sell railroad securities to the man with savings to invest. Bankers are most eager to earn the commission they gain from selling railroad securities if they can pass them on to the ultimate investor. But if the ultimate investor will not take the new securities, the banker is helpless. Indeed the commissions are not to blame. Our railroad commissioners, both state and Interstate, have felt they had a mandate from the people to put the heavy hand of repression upon railroad management. The people felt that railroad managements should be punished for past misdeeds, and it came about that the one and supreme sin which seemed to disqualify any person for appointment upon a railroad commission was the fact that he had had actual experience in the conduct of a railroad. In a word, the railroad policy of the United States for the past ten years has been largely designed to prevent persons here and there who may have juggled with railroad management from reaping the benefit of their knavery. That was all very well, in its way, but our people have been so bent upon that object that they have largely neglected the no less important duty to take intelligent steps to provide the railroad facilities necessary for 6 the normal development of our trade in the future. * » * It is true that the railroads earned last year $308,000,000 more than in the previous year. But in the nine years since July 1, 1907, our railroads had invested upward of $5,000,- 000,000 in new money in increased facilities, and the additional money earned in 1916 over 1915 is less than six per cent return upon the additional investment of the past nine years. In 1915 the railroads actually earned less than in 1907, before that enormous new invest¬ ment began to be made, and in only two years other than 1916 have the railroads since 1907 earned as much net operating income after paying expenses and taxes—as they did before the $5,000,000,000 began to be spent. When the Hepburn law was enacted in 1906 and the country began to regulate railroads in earnest, great improvements were already under way, and it has taken many years to complete them. Some indeed are not yet completed. The New York terminal facilities of the Pennsylvania Railroad, started by President Cassatt in 1902, will not have been completed until the Hell Gate Bridge is done, probably a year from now. Great railroad improvements and increased facilities cannot be provided over night. They must be provided by a long look ahead, 7 and the railroads in order to provide them must earn suflScient surplus over present requirements to provide the credit absolutely necessary to attract the capital. * * * The great diíBculty of the present situation is this: Though 1916 saw a large increase of net earnings over 1915, there is now evident a distinct tendency in the opposite direction. The railroads handled a business practi¬ cally up to capacity during the past fiscal year. It was a year following many years of depression in which great economy and efiBciency had been perfected. Contracts for materials and supplies had been made upon most favorable terms, and labor was efficient. The companies in 1916 were prepared to handle a greatly increased business over 1915 under most favorable conditions. But now all costs are enormously inflated; labor is hard to get and not nearly so efficient, and congestion of traffic is making economical operation difficult if not impossible. In other words, during the fiscal year 1917, the railroads cannot handle a quantity of business greatly in excess of 1916, and the expense of doing this business is certain to be very much greater. This will mean reduced net revenues as compared with last year. 8 As last year's net income was insufficient to provide adequate return upon the capital invested, the promise for the ensuing year is even less alluring. And all this is at a time when the demand for railroad facilities was never so great! * * * The solution of the problem lies in develop¬ ing without any delay a system of railway regulation which shall not be controlled by political animus or prejudice, and which will frankly recognize this fundamental fact: If we are to obtain the railroad facilities absolutely necessary to move our national trade, we must be willing to pay the bill. That means that we must permit railroads to earn sufficient profits to attract the necessary private capital. Otherwise private capital will put its money elsewhere, and Government ownership, with all its inevitable blight upon our national life, with all its red-tape, waste and cost to the people, will be the only recourse. »