s u. / / ^
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Solving the Railroad Problem
BY
SAMUEL M. FELTON
President, Chicago Great Western Railroad
AN ADDRESS
Delivered before the Traffic Club of Minneapolis
Minneapolis, Minn.
Thursday, October 21, 1920
SOLVING THE RAILROAD PROBLEM
By SAMUEL M. FELTON
President, Chicago Great Western Railroad
ACCEPTED your invitation to discuss the railroad
situation tonight not only because it gives me pleas¬
ure to come here and break bread with you, but
because I believe it is of great importance at the present
time for the facts regarding the railroad situation to be
fully presented and discussed from all points of view. All
classes of our people—working-men, farmers, business men,
railway officers, public men—have been discussing proposed
solutions of the railroad problem for years. We still have
it with us, however, and, frankly, I think we shall have it for
a long time to come.
When the state and national governments about fifteen
years ago began adopting strict policies of regulation, many
believed those policies would solve the problem. Some
of the policies adopted were beneficial, but others were
harmful, and the outcome showed that as a whole they
had not solved but aggravated the problem.
In the midst of the war, government operation was
adopted. Many believed that it would so improve labor,
transportation and other conditions as to show it was the
solution of the problem. But the public decided that gov¬
ernment operation also did more harm than good and that,
therefore, the roads should be returned to private manage¬
ment.
The Transportation Act.
Preparatory to the return of the railroads, Congress last
February passed the Transportation Act. This measure
partially or wholly reverses some of the policies of regula¬
tion formerly followed. Many believed, and still believe,
that the Transportation Act is the greatest constructive
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railroad measure ever enacted, and that a full and fair trial
of it. will solve the railroad problem. Some, on the other
hand, are conducting a propaganda to show that the Trans¬
portation Act is adverse to the interests of railway em¬
ployees and the public and unduly favorable to the compa¬
nies, and that it should be repealed and government owner¬
ship and management, or government ownership and em¬
ployees' management under the Plumb plan, substituted.
There are also financiers and railway officers who are not
satisfied with all the provisions of the Transportation Act
and fear the effects that it will produce.
It is therefore very uncertain whether the Transporta¬
tion Act will afford a satisfactory solution of the railroad
problem. Indeed, I think we should frankly recognize the
fact that probably no solution of it ever will be reached
which all classes will accept as entirely satisfactory. The
railway employees have certain opinions as to the condi¬
tions of employment and the wages they ought to be given.
The shipping and traveling public has certain opinions
as to the rates and service it ought to be given. The owners
of railroad securities have certain opinions as to the in¬
terest and dividends they ought to be paid. It has been
found impossible thus far to give to any one of these classes
all it bas held itself entitled to without depriving one or
more of the other classes of a very large part of what it
has considered itself entitled to.
It has been hoped, however, that, by establishing cer¬
tain governmental agencies to mediate between the classes
holding these conflicting views, it would be possible to se¬
cure adjustments which all would recognize as doing a
rough justice. The Interstate Commerce Commission was
established over thirty years ago primarily to determine
controversies arising between the railways and their pa¬
trons regarding rates. The Transportation Act has given
it new powers and duties with respect to the fixing of rates,
and also new powers and duties regarding the regulation of
service. In addition, the Transportation Act has created
9
a new body, the Railroad Labor Board, to settle controver¬
sies concerning wages and conditions of employment aris¬
ing between the railways and their employees. "Whatever
differences of opinion may exist as to how this new law
has worked thus far or will work in future, there is one
point concerning it on which all must agree. This is, that
it is the most important piece of railroad legislation ever
enacted in this country.
The railways were returned to private management un¬
der the Transportation Act on March 1st, and therefore
have now been operating under it over seven months. Not
only are there differences of opinion as to how the Trans¬
portation Act will work in future, but some controversies
have arisen as to the results it has produced already. I
am going to try, in the short time at my disposal, both to
review briefly the developments which have occurred since
the railways were returned to their owners and to indicate
some of the things I think must be done in future if their
operation under the Transportation Act is to result in a
solution of the railroad problem which will be approxi¬
mately just and satisfactory to shippers and travelers, to
railway employees, to investors in railway securities, and
to the public.
The Results of Government Control.
Before anybody attempts to pass judgment on the de¬
velopments in the railway field within recent months, he
should picture to himself the conditions which existed when
the Transportation Act went into effect and the railways
were returned to their owners. The railways had been in
the hands of the government over two years. Their traffic
departments had been largely destroyed, and much traffic,
especially freight, had been diverted from its normal chan¬
nels. Both the tracks and the locomotives and cars had
been subjected to the hardest kind of service without being
maintained to as high standards as under private operation.
The number of new locomotives and freight cars purchased
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liad been less than half the number previously bought
merely to replace those worn out, and not a single new pas¬
senger car liad been bought.
The eight-hour day and other policies which had been
adopted had resulted in an increase of 250,000 in the num¬
ber of employees, without any appreciable increase in the
traffic handled. Many classes of employees who previously
were unorganized had been unionized. Piece work had
been abolished where it formerly had prevailed, and griev¬
ance eases liad been appealed to central boards of adjust¬
ment sitting at "Washington until discipline among the em¬
ployees had been demoralized.
The freight ears of the individual lines had been scat¬
tered all over the country and, partly owing to this and
partly to the effects of the coal strike last winter, the east¬
ern lines found an excessive number of their coal cars
were in the AYest, while the western lines found that an
excessive number of their box cars were in the East. Oper¬
ating expenses had been increased far more than rates
and earnings, with the result that all net operating income
had been wiped out. There was pending an unsettled wage
dispute between the Railroad Administration and the em¬
ployees of the railways involving $1,000,000,000 a year. A
very active propaganda was being carried on among the
employees against private ownership and management, and
in favor of the Plumb plan of government ownership and
employees ' management.
The companies had to resume the operation of the prop¬
erties not only under these adverse conditions, but at a
time when the productive industries of the country were,
offering to the railways a business so large that under
government operation it had been overtaxing the facilities.
The situation that existed is illustrated by the fact that
about 100,000 loaded cars were accumulated in the vari¬
ous large terminals because of inability to move them.
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Recent Improvements in Operating Conditions.
An improvement in operating conditions was effected in
the first month of private operation. The business moved
in March was the largest ever handled in that month. About
April 1st, however, chiefly owing to the unsettled wage
controversy which Avas a heritage from the Railroad Ad¬
ministration, there began a series of "outlaAv" strikes of
switchmen in large terminals throughout the country that
created a serious condition. They greatly reduced the
amount of freight that could lie moved, and increased the
accumulations of loaded cars in terminals to almost 300,000.
It required herculean efforts by railway officers and the
loyal employees to cope Avitli the situation. Gradually,
hoAvever, labor conditions improved, and they have slioAvn
still more marked improvement since the Railroad Labor
Board made its Avage aAvard at the end of July.
The raihvay executives formed a co-operative organiza¬
tion to secure the most efficient possible use of locomotives,
cars and all other facilities. The result lias been the most'
remarkable improvement in transportation conditions ever
made Avithin an equal period. In July and August the
amount of freight handled Avas the largest ever handled
in those tAvo months in history. There Avas at one time
very serious danger of a coal famine, especially in the
XortliAvest. By co-operation betAATeen the Interstate Com¬
merce Commission, the coal mine operators and the raihvay
managements, production and transportation Avere so in¬
creased that the danger of any serious shortage of coal in
the country as a Avhole, or any section of it, noAV seems to
be practically past. The Avestern lines have had great
difficulty in handling the grain business. This lias been
largely due to the fact that Avhen the raihvays Avere returned
to private operation an excessive number of box ears Avere
011 the eastern lines and the "outlaAv" strikes rendered it
very difficult to moATe sufficient numbers of them Avest. With¬
in recent Aveeks, hoAvever, the box car situation 011 the Avest-
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era lines lias improved and there is now more grain being
moved than at this time last year.
Comparative Cost of Government and Private
Operation.
During the time when the railways were struggling with
the switchmen's strike, and business Avas someAvliat de¬
moralized by it, the defenders of government control and
advocates of the Plumb plan began to criticize private op¬
eration upon the ground that it Avas proving incapable of
handling the country's traffic as Avell as it had been handled
under government operation. Xoav that under private op¬
eration, in spite of all the difficulties that have had to he
overcome, the railways are moving more freight than exrer
Avas moved under government operation, and have reduced
congestions until the accumulations of loaded cars amount
to only -11,000, the defenders of gOA'ernment operation and
critics of private management have begun to use ammuni¬
tion of a different kind. As you knoAV, the government
guaranteed to the railway companies during the first six
months of private operation the same return that it guar¬
anteed to them under gOA'ernment control. Recently
Avidespread publicity has been giA'cn to the effect that since
the raihvays Avere returned to their owners they have
been incurring a large deficit Avliich the taxpayers Avili have
to pay. It is estimated the total deficit for the six months'
period will exceed $600,0110,000. The inference is that
the loss to the public during these six months Avas much
more than it Avould have been if gOA'ernment operation had
been continued. Propaganda to this effect is being spread
all over the country by advocates of government oAvncr-
ship and the Plumb plan.
It is, unfortunately, true that during the first six months
of private operation the companies-did incur a large deficit
Avliich the taxpayers of the United States must meet. Prob¬
ably the estimate that it will amount to $600,000,000 is not
far from correct. XoA'crtheless, 1 am prepared to main-
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tain, on the basis of the showing made by the Railroad Ad¬
ministration in the closing months of government control,
that the government saved the taxpayers of the country
a large amount of money by returning the railways to pri¬
vate operation when it did—in other words, that if gov¬
ernment operation had been continued the deficit in these
six months would have been much larger than it actually
was under private operation.
Most people know that under government control the
operating expenses of the railways greatly increased and
that a large deficit was incurred. Most people apparently
do not know that the increases in the expenses and in the
deficit continued month by month right up to the termina¬
tion of government control. As a matter of fact, both the-
operating expenses and the deficit incurred in the very last
months of government control were the largest that ever
were incurred under government control. Reviewing the
last six months of government control we find that in Au¬
gust, 1919, the operating expenses were $359,000,000, while
in February, 1920, they were $415,000,000, an increase of
$56,000,000. In August, 1919, the net operating income
earned was $92,000,000. In September it declined to $78,-
000,000; in October it was $76,000,000; in November, $22,-
000,000; and in December, $13,000,000. In January the net
operating income reported was $64,000,000, but this in¬
cluded $50,000,000 of back mail pay which the Interstate
Commerce Commission held that the Post Office Depart¬
ment owed the railways because of underpayments over a
period of years. The true net operating income earned in
that month was only $14,000,000. In February, the last
month of government operation, the operating expenses
and taxes of the roads exceeded their total earnings by
over $12,000,000—in other words, they earned that much
less than no net operating income at all.
Since within six months the net operating income of the
railways had dwindled under government operation from
$92,000,000 to $12,000,000 a month less than nothing, it is
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reasonable to assume that if government operation had been
continued the loss incurred would have kept on growing
relatively greater. Let us, however, give government op¬
eration the benefit of the doubt and assume that if it had
been continued for six months more the results obtained
would have been relatively 110 worse than they were in the
first two months of the year—January and February. This
is very fair to government operation, for in those two
months the total business handled and the total earnings
made were the largest ever recorded in January and Febru¬
ary. The government's guarantees to the railway com¬
panies in January and February, based on the net operat¬
ing income actually earned by the companies in the three
test years, were $104,551,000. The net operating income
actually earned in those two months under government
operation was only $1,930,500, or but 1.84 per cent of the
guarantees. The government's guarantees to the com¬
panies for the six months from March 1st to September 1st
would have been, if government operation had been con¬
tinued and they had been based on the amounts actually
earned by the railways in the three test years, $457,676,000.
If in those six months the government had earned only
1.84 per cent of the guarantees, as it did in January and
February, the net operating income earned by it would
have been onlv $8,421,000, leaving it with a deficit of $449,-
255,000.
But there are other most important factors to be con¬
sidered. One of the principal reasons why under private
operation the railways have incurred a large deficit is that
advances in wages amounting to $52,000,000 a month, and
effective during four of these six months—from May 1st
to September 1st—and therefore amounting for the four
months to $208,000,000, were granted by the Railroad Labor
Board in July. It is fair to assume that corresponding ad¬
vances in wages would have been made if government con¬
trol had been continued, and if this had been the case the
deficit incurred by the government during these six months
8
would have been increased to $657,255,000. In addition to
all this, the railways have been subjected to increases in
the prices of coal which caused their total fuel bill in July,
1920, to be $14,000,000 more than it was in July, 1919. It
is a fair assumption that this increase in the cost of coal
also would have occurred under government operation and
would have further increased the government's deficit dur¬
ing the six months by $50,000,000 to $75,000,000. It is,
therefore, a fair conclusion from all the facts that if gov¬
ernment operation had been continued the deficit incurred
by the government during these six months would have
been not less than $700,000,000, a figure much larger than
the estimated deficit actually incurred under private opera¬
tion.
Increases in Expenses and Expenditures Under Private
Control.
It is undeniable that there have been large increases in
expenses since the railways were returned to private opera¬
tion. But these increases have been due to causes beyond
the control of the managements. One of the reasons has
been the large increase in wages granted by the Railroad
Labor Board I have already mentioned. Another has been
the large increase which has occurred in the price of coal.
Another has been that, as I have said, the government re¬
turned the railways to their owners in a greatly deteri¬
orated condition, and it has been necessary to spend larger
amounts for maintenance than were spent under govern¬
ment control. For example, there was a large increase
under government control in the number of freight cars in
bad order, and, in addition to repairing all the cars they
could in their own shops, the companies have had to turn
over many thousands to be repaired by outside car building
and car repair companies. In the five months from March
to July, inclusive, the companies spent $103,000,000 more
for maintenance of way and structures and $132,000,000
more for maintenance of equipment, a total of $235,000,000
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more for maintenance of both kinds, than was spent dur¬
ing- the same months of 1919 under government control.
Another factor of great importance which must not be
forgotten is that the railways have had to go through a
series of "outlaw" strikes which were a result of the fail¬
ure of the government to settle the wage controversy Avhich
was pending when the railways were returned to their own¬
ers. These strikes reduced the earnings and increased the
expenses of the companies to an extent which made the
deficit incurred probably $200,000,000 more than it other¬
wise would have been.
The Results of Recent Inceeases in Efficiency.
On the whole, the results gained indicate that in spite
of the great increases in maintenance expenditures which
have been made necessary by the deterioration of the prop¬
erties under government control, the railways have been
much more economically operated under private control
than they would have been under government control. How
has this relatively greater economy of operation been se¬
cured .' It has been secured by increasing efficiency, in
spite of strikes and other difficulties, in almost every way
in which it could be increased. The lates't complete sta¬
tistics regarding operation which we have are those for
July, when the effects of the "outlaw" strikes were still
seriously felt. Even in that month, as compared both with
February, when the railways were returned to their owners,
and with July of last year, very great increases in efficiency
had been secured. The average number of miles each car
was moved daily in July, 1919, was 24.1 miles, while in July,
1920, it was 26.1 miles. This had the same effect as in¬
creasing the available supply of cars by 200,000. The aver¬
age number of tons hauled per car in July, 1919, ivas 27.8,
and in July, 1920, it was 29.6. This had the same effect
as increasing the number of available cars by 135,000. The
number of cars unfit for service in July, 1919, Avas 8.7 per
cent, Avhile in July, 1920, it had been reduced to 7.2 per cent.
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This had the same effect as increasing the number of cars
by over 35,000. The average tons hauled per train was in¬
creased from 761 to 769. All these improvements helped
to secure the great increase in the amount of traffic moved
which has been obtained within recent months ; and the
increases in the average miles moved by each car daily
and in the average number of tons handled in each car and
each train tended strongly to keep down operating ex¬
penses, although of course the economies effected were more
than offset by increases in the cost of fuel, in wages and
in maintenance expenditures.
Considering all the difficulties under which they have
labored, the record of increased efficiency the railways have
made since they were returned to private operation is one
of which they are proud, and justly proud. As I indicated
in beginning my remarks, however, the railroad problem is
not by any means solved yet. It will require years of pa¬
tient co-operation between the patrons and the managers
of the railways, years of strenuous exertion by the officers
and employees of the railways, and the investment of vast
amounts of capital in new facilities, to solve the problem
in a way that will be even approximately satisfactory to all
concerned.
Aftekmath of the Rate Advances.
Realizing the need for large increases in the earnings
of the railways to put them on their feet financially and
make possible the rehabilitation and expansion of their fa¬
cilities, the Interstate Commerce Commission has granted
advances in rates which, it has been estimated, will yield
about $1,500,000,000 of additional revenue and enable the
companies to earn a 6 per cent return on the total valuation
placed on them, or about $1,150,000,000 net operating in¬
come annually. One of the most important questions con¬
fronting us is whether all the advances in rates contem¬
plated by the Commission actually will be made. A com¬
mittee of three, representing the State Railroad and Public
11
Utility Commissioners, sat with the Interstate Commerce
Commission throughout the rate hearings and afterward
recommended that advances in all state rates should be
made corresponding with those authorized to be made in
interstate rates. Many of the state commissions have thus
far failed, and many have directly refused, to act favorably
on this recommendation. In some states smaller advances
than those authorized by the Interstate Commerce Commis¬
sion have been granted, while in others no advances have
been granted.
If advances in all state rates are not made corresponding
with those made in interstate rates, the railways will be
denied the opportunity to earn the net returns the Inter¬
state Commerce Commission and the committee of state
commissioners who sat with it have held that they should,
in the public interest, be allowed to earn. The inevitable
result will be that the roads will be prevented from ade¬
quately rehabilitating their properties and expanding their
facilities. This is not a matter which concerns merely the
railway companies. It is the producing and consuming
public of the United States which most needs improvement
and increase of the facilities of transportation. The rail¬
ways with their existing facilities cannot, even with the
most strenuous exertions and the most efficient operation,
handle all the traffic offered to them when business is good
and production is at its maximum. They cannot handle
all the coal the mines can produce, or all the lumber or iron
and steel that the manufacturing plants can turn out, or all
the grain and cotton that the farmers can grow. Therefore,
failure to improve and increase the facilities of transporta¬
tion is bound to prevent an increase of production, and
without an increase of production there cannot be an in¬
crease in the necessities, comforts and luxuries provided
for the people or a permanent and substantial reduction
in the cost of living. The state railroad commissions that
are refusing to follow the lead of the Interstate Commerce
Commission in advancing rates are not defending, but
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jeopardizing the interests of the people, and it is hoped
public sentiment, acting, if necessary, through the federal
regulating authorities, will cause them to change their at¬
titude.
Suppose that all the advances in both interstate and state
rates contemplated by the Interstate Commerce Commis¬
sion when it rendered is decision shall be made. Will that
put the railroads on their feet financially again and enable
them in time to so improve and increase their facilities as
to make it practicable for them to render adequate and
satisfactory service ? That is a question which only the
future can answer. It will be determined by future de¬
velopments affecting the amount of traffic offered to the
railways, the trend of their operating expenses and their
ability to sell their securities. While the traffic handled
by the railways as a whole has continued to increase, the
amount of it offered to some railways has declined within
recent months. This has been especially true of the so-
called "granger" roads in the Middle West. Most of these
roads in September, owing to declines of traffic, did not
have much larger earnings than they did before the ad¬
vances in rates were made. As to operating expenses, the
increase in the price of coal is forcing the railways as a
whole to pay at an annual rate of $150,000,000 to $200,000,-
000 more for fuel than they did during the period on whose
operating results they based their applications for ad¬
vances in rates.
The Relation of Labor to Increased Expenses.
There are other reasons why they are having great dif¬
ficulty in preventing undue increases in expenses. Rela-
tively the largest increases in their expenses have taken
place in the shops used by them for the maintenance and
repair of equipment. Before government control was
adopted the employees in many railway shops were paid
on a piece work basis. During government control all piece
work on railways was abolished. The result has been a
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Serious decline in the efficiency of certain classes of em¬
ployees. The Railroad Administration entered into na¬
tional agreements with many classes of employees which
have imposed burdensome restrictions and have greatly
increased expenses. The Railroad Administration also
established at Washington a number of boards of adjust¬
ment to which employees of all the railways could appeal
discipline and grievance cases from the individual manage¬
ments. These hoards rendered numerous decisions which
greatly increased expenses, and we are now confronted with
demands from the labor unions for the establishment of
similar hoards under private operation.
I do not intend now to enter upon any extended discus¬
sion of the present labor situation on the railways, hut I will
say what ought to be perfectly obvious, viz : that the
railways cannot restore the efficiency and economy of op¬
eration which formerly prevailed unless they can secure
efficient work from their employees. The employees are
to-day paid the highest wages in history and are working
on an eight-hour basis, and it is their duty, not merely
to the companies but to the public, to give one good hour's
work for every hour's pay that they receive. If the rail¬
way managements are opposed to certain labor policies
adopted under government control it is because they know
that those policies have resulted in a decline in the effi¬
ciency of labor, and if the employees persistently refuse
to increase their efficiency under those policies, then we
maintain the labor organizations and the public should co¬
operate with the railway officers for the welfare of all in
establishing other policies which will result in an increase
in the efficiency of labor.
Present Situation is One of Uncertainty.
As what I have said would indicate, the present situation
is, from the standpoint of the railway managers, one of
uncertainty. They do not know as yet what rates they are
going to get, or what net return they will be able to earn
14
when they get them. They do not know whether the net
return earned will be sufficient to enable them in the present
unsatisfactory money market to sell enough securities to
raise the new capital required adequately to improve and
increase railroad facilities. But the railway managers
have accepted the Transportation Act in good faith and
are doing their best, and will continue to do their best, to
operate the roads under it with maximum efficiency and
economy. They did not secure even from the Interstate
Commerce Commission all the advances in rates for which
they asked, and are being very unfairly treated by many
state commissions, but they believe that the Interstate
Commerce Commission acted with as much fairness, wis¬
dom and foresight as any government body could have been
expected to in the circumstances. Xot only have they no
complaint to make about the Interstate Commerce Commis¬
sion's decision in the rate case, but they feel and express
the most cordial appreciation of the wise and energetic
assistance which it has given them in solving the extremely
difficult problem of moving the country's business with
which they have been confronted ever since private opera¬
tion was resumed. If the railway executives find that the
net income they are able to earn under the new rates is not
sufficient they will not hesitate to say so, but at the same
time they will make the best use possible of what they do
earn in improving and increasing the service rendered.
Whatever may have been the attitude of railway managers
in the past, they all to-day frankly recognize the fact that
they are trustees not only for those who own the railways
but also for the public, and they insist, and shall continue
to insist in future, that they must be given opportunity to
operate the properties efficiently and to earn an adequate
return, not merely in the interest of the bondholders and
the stockholders, but also in the interest of the public, whose
welfare is vitally dependent upon the provision of good,
economical and adequate railroad service.
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