The Present Railroad Situation
BY
SAMUEL M. FELTON
President of the Chicago Great Western Railroad Company
Chairman Sub - Committee Western Classification Territory
An Address
Delivered Before the Chamber of Commerce
of Kansas Cit^, at Kansas City, Mo.
cn fune 30, 1920
THE PRESENT RAILROAD SITUATION
By SAMUEL M. FELTON
I am glad of this opportunity to come here and talk to
you ahout the railroad situation. If ever there was a time
when the welfare of the public imperatively demanded that
the railroad situation should be fully and frankly discussed,
that time is now. It will be possible in the time at my dis¬
posal to touch upon only a few features, and I intend
to deal chiefly, first with the conditions affecting the move¬
ment of commerce which have existed since the railways
were returned to their owners, ahout which there seems to
he much misunderstanding, and, secondly, with the reasons
why the railways must be given an opportunity to earn ade¬
quate net returns if any progress is to he made in solving
the general railroad problem.
It is just four months since the railways were returned
to private control after twenty-six months of government
operation. These four months have been a period of tur¬
moil and stress in the railroad business. "When the roads
were returned the public was greatly dissatisfied with the
results of government management, and more friendly to
private management, than ever before.
In consequence of developments which have occurred, or
which are alleged to have occurred, since private operation
was resumed, the managements of the companies already
are being subjected to bitter criticism by persons and news¬
papers who are in favor of government management, or
of employes' management under the Plumb plan. "While ,
these attacks are unjust, they cannot safely be ignored.
The question of what advances in rates, and what increases
in net operating income, shall be granted to the railways is
now under consideration by the Interstate Commerce Com¬
mission. The future success of private management of rail¬
roads, and even whether private management will endure at
all, will be largely determined by the decision of the Com-
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mission in these rate cases and by the way in which its de¬
cision is received by the public. Since every attack which
is made upon private management is likely more or less to
influence public opinion, I shall make no apology for using
some of the attacks which are being made upon it now as a
basis for the discussion of recent developments in the raiP
road field and the present situation.
CRITICISMS OF PRIVATE MANAGEMENT
The character of these attacks is illustrated by certain
statements which a former prominent government official
is quoted as having made in a recent address. He said,
in substance, that during the war the railways had ' ' broken
down," that the government had to assume their operation
to keep the country's commerce moving, that within a few
months the government had the railways running efficiently,
and that it continued to run them efficiently until they were
restored to private operation. Now, he alleged, after they
have been back in the hands of the companies only a fe\V
months they are again "broken down."
These allegations as to what occurred before the govern¬
ment took the roads and as to what has occurred since it
returned them, are equally untrue. In 1917, the last year
before government operation, the railways moved a
much larger traffic than ever before, and coritinued to
do so until the very day government operation was
adopted. The Eailroad Administration had power to
do many things which the private companies previ¬
ously were forbidden by law to do. It could, and did,
disregard shippers' routing of freight, pool the traffic and
facilities of the railways, and abolish the preference orders
for the movement of freight by which the railways were
literally overwhelmed by the government departments in
the last months of private operation. Did the government,
with all of its opportunities and power, increase the amount
of traffic handled anywhere near as much in proportion aS
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the private managements had been increasing it? In the
last two years of private operation the railway companies
increased the freight handled 40 per cent. The increase in
the freight handled in 1918, under government operation,
was less than 2 per cent, and in 1919 the amount of freight
handled was much less than it had been under private
operation. If ever the effects of the so-called "breakdovm"'
under private operation would have been plainly mani¬
fested, this surely would have been in the last two months
of 1917, just before the government took the railways over.
In those months the railways had to fight the worst weather
conditions ever known. On the other hand, in November
and December, 1918, the business offered to the railways
under government operation was the largest ever known,
and weather conditions were exceptionally favorable. Now,
in the months of November and December, 1918, the number
of tons of freight moved one mile under government opera¬
tion was 69,193,000,000, while in the last two months of 1917,
under private operation, it was 68,365,000,000, or barely 1.2
per cent less.
In view of these facts, it is amazing for an advocate of
government operation to assert that under private opera¬
tion the railways "broke down," while under government
operation they were raised to a high plane of efficiency.
THE AFTERMATH OF GOVERNMENT CONTROL
With respect to developments since the railways were re¬
turned to their owners, it must be admitted that they have
been unsatisfactory to both the railway managements and
the public. But consider for a moment the conditions that
existed when the railways were returned. The government
had followed a policy which many people at one time, be¬
lieved would render it impossible ever to return the rail¬
ways to private operation. The official organizations of
many roads were disrupted. Traffic was diverted from its
normal channels. Freight cars were pooled and the cars
of the various railways were scattered all over the country,
so that even today the railways have upon their own lines
only a small percentage of their own cars. Not a single pas¬
senger car was bought during the more than two years of
government operation. About as many freight cars and loco¬
motives were bought as had ordinarily been scrapped by the
railways in a single year. Eepairs of freight cars were so
inadequately done that when the roads were returned an
abnormally large number of freight cars were in bad order.
The number of new rails and ties laid in the tracks was
abnormally small. While the eight-hour day was estab¬
lished and advances in wages amounting to over $1,200,-
000,000 a year were made, railway labor conditions were
not improved, but made much worse. For several months
before the roads were returned the employes were demand¬
ing vast additional advances in wages. The government did
not definitely grant or refuse these, thus greatly aggravat¬
ing the dissatisfaction and unrest among the employes.
Operating expenses increased enormously while no cor¬
responding advances in rates were made, with the result
that when the railways were handed back to their owners
their net operating income had been practically wiped out.
In February, the last month of government operation, the
railways failed by about $12,000,000 to earn enough to pay
their operating expenses and taxes.
In addition to all these things, there had been a strike
in the coal mines in November and December, 1919. The
accumulated fuel supplies of the country had been enor¬
mously reduced, resulting in great increases in the demands
upon the railroads for transportation. The other kinds of
traffic demanding movement also were larger than ever be¬
fore. The Transportation Act was passed only a week be¬
fore the railways were returned. Therefore, almost up to
the day that they were returned there was such uncer¬
tainty as to their future that the managements of the com¬
panies could take hardly any important steps to provide for
the resumption of their operation.
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A COMPLEX AND DIFFICULT PROBLEM
If there had existed no conditions except those I have
mentioned to render enormonsly complex and difficult the
problem presented to the managements during the months
immediately following the resumption of private operation,
the conditions I have mentioned would have presented a
problem suiBcient to tax their energy and ability to the ut¬
most. In the latter part of March, however, less than a
month after the roads were returned, there began a series
of sporadic strikes on the railways in all parts of the coun¬
try. These were "outlaw" strikes begun because of dis¬
content created under government control.
The demands which the employes had before the
Eailroad Administration for months were then under con¬
sideration by the Eailroad Labor Board, a government body
which had been created by the Transportation Act to settle
railway wage controversies. Since the railway companies
could not have granted the demands of the employes with¬
out practically disregarding the provisions of the Trans¬
portation Act, and since the strikes came in less than a
month after private operation was resumed, it is obvious
that private operation should not he held responsible for
the results produced by these strikes.
INCREASE IN FREIGHT HANDLED
Many persons, however, seem to think, and some charge,
that the railway companies have failed to meet adequately
the situation created by the strikes and by the other con¬
ditions which they inherited from government management.
Many seem to think, and some charge, that the serious in¬
dustrial and financial conditions which developed were due
to the fact that there was an enormous reduction in the
amount of freight handled by the railways. As a matter of
fact, in spite of all the adverse conditions with which they
have had to contend the railways, even since the strikes be¬
gan, have moved more business than they did in the same
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weeks of last year. Reports made to the American Rail¬
road Association by a very large majority of the railways
of the country show that between March 21 and June 12,
1920, which includes the period of the strikes, the numbei'
of cars of freight moved by these roads was 8,264,485, as
compared with only 7,708,927 during the same weeks of last
year, an increase of 555,518 carloads. In the week ended
June 12 the number of carloads of freight handled by these
roads was 754,857 as compared with 726,176 last year, or
an increase in that week of almost 69,000.
With respect to coal, the statistics of the United States
Geological Survey show that up to June 12 the railways had
transported 39,000,000 tons more than they did during the
same period of last year. Why, then, are there complaints
of a serious coal shortage all over the country? Chiefly be¬
cause the country's coal supplies were enormously depleted
by the coal mine strike last November and December, and
that it has never been possible to offset this depletion of
the supplies.
It seems to me the facts I have presented afford a con¬
clusive answer to the propaganda which is being carried on
to show that the railway managements, since private opera¬
tion was resumed, have not solved as efficiently as could be
reasonably expected the extremely difficult problem pre¬
sented to them—a problem which is largely a heritage from
government operation. In fact, I think they show that;
considering all the conditions, the railway managements
have been doing much better than might reasonably have
been expected.
It is, however, far from my purpose to imply that the
problem confronting the railway companies and the pub¬
lic is solved, or anywhere near solved. Unfortunately, it
is far from solved and it will take not merely months, hut
years, of good understanding and close co-operation be¬
tween the railway managements, the railway regulating au¬
thorities and the public to solve it in a way that will be bene¬
ficial and satisfactory to all.
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INADEQUACY OF TRANSPORTATION LIMITS PRODUCTION
There are many factors in the situation which are im¬
portant, but perhaps the one which should give the most
concern to the public, as well as to the railway manage¬
ments, is the great inadequacy of the present facilities of
the railways to the demands of the country's commerce.
Developments over a period of years have showm with
increasing force and conclusiveness that the facilities of
the railways have become insuflBcient to handle the com¬
merce of the country. During the railroad strikes, many
industries were forced partially or wholly to close down.'
This was not merely because of the strikes. It was due to
the fact that before the strikes, even when the railways were
operating to their capacity, they were not able to handle
anywhere near all the trafSc offered; and, of course, when
the strikes reduced the amount of freight they could handle
the industrial situation rapidly became acute.
Let us imagine what the conditions would soon be if we
should go on increasing the investment in and the capacity
of our other industries without largely increasing the invest¬
ment in and the capacity of the railways. The amount of
traflSc which the industries would offer to the railways, and
which they would be unable to handle, would grow larger
and larger. This inability of the railways to handle addi¬
tional business would more and more drastically limit the
increase of production. But without an increase of produc¬
tion in the industries in which increased investment is being
made it would become impossible to earn any return upon
the increased investment in them. This would inevitably
result in financial disaster to these industries and to the
country. Every day that the nation, or those who represent
it in governmental affairs, delays to adopt the measures
necessary to enable the railroads to expand their facilities,^
we are courting disaster.
Congress, in drafting and passing the Transportation
Act, had these facts and dangers of the situation more or
less clearly in mind. Therefore, it put into the law a pro-
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vision directing the Interstate Commerce Commission, in
regulating rates, to give consideration to the need of the
country for adequate transportation facilities.
The railways have suggested to the Interstate Commerce
Commission that the return allowed to he earned by thenï
should be 6 per cent upon the basis of their property in¬
vestment as shown by their books, first, because this is the
only tangible basis now available as to all roads; second,
because they believe the valuation of the railways as a
whole will exceed their book cost as a whole; and, third,
because they believe that any return averaging less than
6 per cent upon the book cost of the railways as a whole will
be insufficient to enable them to refund the large amounts
of obligations which are coming due, and to raise anywhere
near the amount of new capital that they must raise if
they are to provide adequate and good service.
It is inconceivable to me how anybody familiar with ex¬
isting conditions can doubt the necessity of the Interstate
Commerce Commission so fixing the rates as to enable the
railways to earn an average of 6 per cent. Judge C. A.
Prouty, Director of Valuation of the Interstate Commerce
Commission, one of the most experienced regulating offi¬
cial in the United States, recently indicated his view upon
this subject when he said, in an address to the Chicago
Association of Commerce, "Will any sane person contend
that for the next two years 6 per cent is too great a re¬
turn ? ' '
And in that same connection. Judge Prouty said to the
business men of the country: "Your first and most im¬
portant duty is to see that these carriers are allowed ade¬
quate rates. * * * Without proper facilities, a suitable
road, adequate equipment, the service which you require
cannot be adequately performed."
ADVANCES IN RATES IN OTHER COUNTRIES
While the advances in rates which will have to be made
to put the railways on their feet will be large, they will be
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not nearly as large as those which have been made in some
other countries. The railways of Great Britain advanced
their passenger rates 50 per cent during the war. Re¬
cently they have advanced the freight rates from 25 to 100
per cent, and the demurrage charges from 100 to 200 per
cent. The Italian government railways have advanced
their passenger rates 60 to 120 per cent and their freight
rates 40 to 100 per cent. The Swiss government railways'
have advanced passenger fares 100 per cent and freight
rates 180 per cent. Passenger rates of the French railways
have been advanced 70 to 80 per cent, and their freight rates
120 per cent. In Belgium both passenger and freight rates
have been increased by the government railways 100 per
cent. The total increases in passenger fares in Austria
have been 290 per cent, and in freight rates 390 per cent.
In Germany the advances in passenger rates have averaged
about 700 per cent, the increase in the first-class rate being
825 per cent, in the second class rate 650 per cent, and in the
third class rate 590 per cent. Freight rates of the German
railways have been advanced 800 per cent since pre-war
times.
The fact should not be overlooked that it is not the fault
of the railway companies that they will require a very large
advance in rates to put them on a 6 per cent basis.
The present wide disparity between the income and outgo
of the railways of the United States, which makes necessary
large advances in rates here, was created under government
operation, when the increases which occurred in operating
expenses greatly exceeded the advances which were made
in the rates.
WESTERN RAILWAYS MUST BE EXPANDED
While it is necessary in the public interest that railway
rates shall be made adequate in all parts of the country, it
is peculiarly essential that this shall be done in western
territory. This territory needs much more extensive rail¬
way facilities for the transportation of the commodities
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that it is already producing. The lumber manufacturer^
of the Northwest are finding that their business is being
severely restricted by their inability to ship all the prod-
nets which their mills are capable of turning out. There
are hundreds of millions of bushels of grain being held on
the farms and in the elevators of the West because the rail¬
ways have been unable to haul it away. All classes of pro¬
ducers are finding their operations are being limited by'
insufficient transportation.
The West also needs the construction of many thousands
of miles of new railway lines to open up extensive terri¬
tories which are now undeveloped. In the year 1917 there
were only two states east of the Mississippi River and
north of the Ohio that had less than 12 miles of railway for
each 100 square miles of area. In that same year there
were only two states west of the Mississippi, viz., Iowa and
Wisconsin, which had as much as 12 miles of railway for
each 100 square miles of area.
And yet, within recent years, the growth of the railroads
of the West has practically stopped, and in several states
the mileage torn up or abandoned has been greater than the
new mileage built. It cannot be regarded otherwise than
as ominous that in the newest and most undeveloped section
of the United States the growth of the railroads should
temporarily at least, have been stopped.
The, railways of the country as a whole are asking for an
advance in freight rates averaging 28 per cent. After it
had been made the advances in freight rates in this coun¬
try since pre-war days would be less than the advances iri
the prices of almost any class of commodities or in the
wages of almost any class of labor. Under government
control freight rates were advanced 25 per cent. A further
advance of 28 per cent would make the average advance
since government operation was adopted about 65 per cent.
The average advance in annual wages per railway employe
since before the war has been 96 per cent, and the increases
in the prices of almost all railway materials and equipment
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1
have been from 100 to 200 per cent. Government reports
indicate that the increases in the prices of all the principal
commodities that enter into the cost of living have averaged
about 100 per cent. After the proposed advances had been
made railway rates would be lower in proportion to general
wages and prices than before the war.
WHAT THE WESTERN LINES ARE ASKING
In western territory the net operating income o^f the rail¬
ways has not declined so much since pre-war days as in
the other parts of the country, and therefore the western
lines are now asking for an advance in freight rates- of
24 per cent. Four years ago—in 1916—these railway»
earned $460,000,000 net operating income, or an average of
5!|j per cent upon their property investment at that time.
The amount of net operating income required to yield 6
per cent upon their present property investment account
is about $538,000,000. I call your attention to the fact that
the net operating income which they are asking the Inter¬
state Commerce Commission to allow them to earn is hut
$78,000,000 more than they actually did earn in 1916, and
that one-half of this additional $78,000,000 is needed to pay
a return upon additional investment which has been made
in their properties since 1916. Only the remaining $39,000,-
000 is being sought to enable them to earn a higher rate
of return than they earned four years ago.
In view of the great changes which have occurred in finan¬
cial conditions since four years ago, and especially the great
increases which have taken place in interest rates, is it not
obvious that these western lines should he allowed to earn
a higher rate of return than they earned four years ago,
and that, indeed, they must be allowed to earn a higher rate
of return if they are to be enabled to raise large amounts
of new capital? It seems to me the judgment of business
men must be that the increases in their net operating income
for which the railways of the country, and especially the
western lines, are asking, are very reasonable, and that
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there is much more danger that after they are granted
they will prove insufficient to enable the railways to raise
the new capital they need, than that they will prove more
than what the railways will need. It is only fair to say,
in this connection, that the advances in rates for which the
railways are asking do not provide for any further advances
in wages, and that if the Kailroad Labor Board, in the
proceedings now pending before it, should award the rail¬
way employes further advances in wages, the railways
would be obliged to ask for advances in rates in addition
to those for which they are now asking.
In my opinion, the decision of the Interstate Commerce
Commission in this rate case will largely determine the
future development of our railways, and thereby the future
development of our country, and its natural resources for
years to come, because the country's natural resources can
be developed and its production can be augmented only in
proportion as it is provided with means of transportation.
The railways cannot be adequately developed, and they can¬
not render adequate and satisfactory service under private
ownership, unless they are allowed to earn a net return
sufficient to raise the vast amounts of capital that are re¬
quired to increase the capacity of the existing lines and to
build the new lines which the welfare of the country de¬
mands.
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