Relations Between Shipper and Railroad
RISING VALUES —CAUSE AND EFFECT
Address of
William C. Brown
Senior Vice-President, New York Central Lines
at ANNUAL BANQUET of
ILLINOIS MANUFACTURERS' ASSOCIATION
CHICAGO, ILL., DECEMBER 8, 1908
Mr. President and Gentlemen of the Illinois Manu¬
facturers' Association :
I doubt if during the business life of any man within the
sound of my voice we have had to do with a more critical
juncture than that through which we are passing at this time.
The embers of business, which have been smouldering and-
lifeless, are being carefully fanned into a fitful flame.
The gradual, halting, revival of commercial and manu--
facturing prosperity is being watched with anxious solicitude',
not only by our own people, but by the commercial interests
of the world.
It is not a time for recrimination or calling hard names.
For this reason, Mr. President, I shall not, in what I shall
say this evening, emulate Mr. Barber by calling any man
or association of men engaged in any legitimate business in
this country "highway robbers." It is, in my opinion, a time
for conservatism, a time for carefully weighing words, and
above all a time when self-interest should be subordinated to
that which will make for the general good. It is in this
spirit, Mr. President, that I shall attempt to discuss the topic
that has been assigned to me this evening:
1
Four years ago I was honored with an invitation to
address the Illinois Manufacturers' Association at its annual
banquet, and I appreciate rnore than I can express the com¬
pliment and honor of this second opportunity to meet with
and address this representative gathering of business men and
manufacturers of the State of Illinois.
Since that meeting, four years ago, two of the honored
ex-presidents of the Association, Hon. Charles H. Deere and
Hon. John H. Pierce, have passed from life's activities into
the mists and shadows of the future life.
It is fitting that we pause for a moment to recall the mem¬
ories of these men, who acted so important a part in laying
the foundation for the present prosperity of the great manu¬
facturing industry, not only of the State of Illinois, but of
practically the entire Valley of the Mississippi.
The great manufacturing plants at Moline and Kewanee,
which these pioneers built up, employing thousands of well-
paid, prosperous workmen, are their enduring monuments.
The passing of these leaders in this great industry is a
distinct loss not alone to the communities in which they lived,
but to this Association, the State of Illinois, and the Nation,
as well.
I have been asked, Mr. President, to say something this
evening about the railroad and its relation to the shipper;
and also upon the subject of the almost continuous rise in
value of nearly every commodity, the cause of this rise in
value, and its effect upon both the shipper and the railroad.
First, let us consider for a moment what the railroads are
and how important a factor they are in the business of the
Nation.
In mileage the railroads of the United States approximate
225,000 miles. They employed in 1907 in the neighborhood
of 1,675,000 men, and their gross earnings amounted to
$2,585,913,000, or more than $7,000,000 for each of the 365
days of the year. Figures of this magnitude can be better
comprehended by comparison, and it may be stated that the
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number of employes on the payrolls of American railroads
in 1907 was only about 80,000 less than the standing armies
of the United States, Great Britain, Germany, France and
Japan combined. Their gross earnings were three times the
total revenue of the United States Government; 29 times the
total gold production of the United States, and six times the
total gold production of the world.
Mr. Barber was right in saying that practically every
dollar of money in the United States—gold, silver, paper,
nickel and copper—passes through the treasuries of the rail¬
roads every year. He might have gone a little further, how¬
ever, and told you' that approximately seventy-one cents of
every dollar is almost immediately paid out for labor.
Let us see how this vast sum of.money is disposed of by
the railroads—what becomes of it.
Out of each one hundred dollars earned, forty dollars are
directly and immediately paid out to employes on the pay¬
rolls of the railroads. Eight dollars are paid for fuel, waste,
oil and water; and seven of the eight go to pay for labor
required to produce these supplies. Eighteen dollars are paid
for steel rails, ties, cars, engines, structural steel, stationery
and thousands of other things necessary in the operation of a
railroad. Of the eighteen dollars, approximately sixteen go
for labor.
Five dollars are paid for permanent improvements, such
as additions to yards, additional tracks, additions and exten¬
sions of shops, roundhouses and the like ; and four of the five
dollars are paid for labor.
Three dollars go to pay taxes ; two dollars for rent of
terminals, joint track, etc.
Fourteen dollars are paid as interest on bonds, which repre¬
sent borrowed money for original construction or subsequent
improvements ; and this sum amounts to less than an average
of four per cent on the face value of the bonds.
Nine dollars go to the owners of the railroads—the share¬
holders—representing less than four per cent on the face value
of the stock.
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One dollar is put into the surplus fund to provide for
necessary improvements to the property and as a reserve
against periods of hard times.
Approximately seventy-one dollars out of every hundred
dollars earned by the railroads of the country are, therefore,
almost immediately redistributed in pa)-ment for labor, or
equipment and material of which labor forms by far the largest
component part. The railroad receives more and keeps less
than almost an}' other department of business activity of the
nation.
During the ten years from 1897 to 1907, the United States
has enjoyed an almost continuous and uninterrupted advance
in prices of the product of its farms, factories and mines.
With a succession of bountiful harvests the price of grain
has steadily advanced until the prices of 1907 show increases
over those of 1897 as follows:
Corn, an increase of 96.2 percent
Oats, " 108.9
Rye, " 63.5
Barley, " 76.6
Wheat, " 8.2
Buckwheat, " 65.8
Potatoes, " 12.8
Hay, " 76.4
With a full, normal increase and no disease or epidemic
to deplete our flocks and herds, values have increased mar-
velously. Notwithstanding the advent of the automobile,
horses and mules show an increase in value of more than
150 per cent. Milch cows show an increase in value of 32
per cent; sheep, 113 per cent, and swine, 47 per cent.
The products of forests make an equally marvelous show¬
ing:
Yellow pine has advanced
White pine "
Hemlock
Oak
77,1 per cent
44.7
53.4
57.9
4
Poplar has advanced 72.6 per cent
Cedar " 66.1
Ash " 53.7
Chestnut " 30.8
Our Southern neighbors have shared in full measure in
these enhanced values.
Middling cotton shows an increase of 72.9 per cent
Standard sheeting " " 61.1 "
Standard drilling " " 60.4 "
Bleached sheeting " " 40.5 "
Standard prints " " 27.7
64 by 64 printing cloths " " 86.3 "
Ohio fleece wool in the Eastern market shows an increase
of from 78.9 per cent to 89.5 per cent.
Anthracite coal shows an increase of 28.6 per cent
Bituminous coal " " 55.5 "
Lard " " 108.1
Pork " " 99.0
Tallow " " 88.8
During this time farm land in all portions of the West
and Middle West has fully doubled in value.
This list of increased costs might be extended to embrace
almost everything grown or manufactured—almost every item
of the thousands of things in which men barter and trade.
The increase has been almost continuous and so gradual as
to cause little comment or suggest serious consideration as
to the underlying cause.
It seems to me that this unusual phenomenon of steadily
rising values in the face of a long succession of bountiful
crops is one of the most interesting problems that confronts
the political economist to-day, and to its solution may well be
directed the most earnest consideration of every thoughtful
man.
5
When the polls closed on that eventful November day in
1896, which marked the first defeat of Mr. Bryan, the Ameri¬
can people had decided definitely and finally that gold should
be the future measure of all values in this country. Since
that time one country after another has followed the wise
precedent thus established, and only last month the far-off
Siamese nation adopted the gold standard. It may be said
truthfully that to-day gold is the measure of value the world
over.
Economists agree that there is a direct relation between
the quantity of the metal that is the basis of value and the
general industrial condition ; that, as the basic metal increases
in quantity—and as a consequence decreases in purchasing
power—the value, the price of everything measured by and
paid for with that metal, is invariably enhanced in value.
The total gold production of the world in 1896 was ap¬
proximately $202,251,600. In 1907 it was $404,000,000, an
increase of almost 100 per cent in twelve years. It is confi¬
dently predicted that by the end of the first decade of this
new century the annual production will equal $500,000,000.
The tremendous significance of these facts and figures in
their effect upon present and future values may be better
comprehended when we recall the fact that gold is inde¬
structible. In some form the gold that Columbus carried in
the Caravels is in existence somewhere to-day ; and the product
of each recurring year is added to the accumulation of all
the years that have preceded it.
The crop of wheat, corn, oats and other cereals grown in
1906 has been almost consumed. The coal mined last year
has been burned, but the gold produced year after year piles
up, is accumulated ; and as it augments and accumulates it
becomes cheaper—that is, as measured by the things for
which it is exchanged. As it accumulates it takes more gold
to buy a bushel of wheat, a suit of clothes, a pound of beef¬
steak, a sack of flour, or any of the other necessities of life.
For this reason the pay of labor has steadily advanced and
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must continue to advance in some fair ratio with the increase
in the cost of the things that labor must buy. To put it in
another way, wages must go up in about the same proportion
that the purchasing power of the money the laborer earns
goes down.
Judge David W. Fairleigh, of Kentucky, recently said in
a paper on this important subject:
"Paradoxical as it may at first appear, this in¬
crease in the world's production of gold means
higher interest rates. This would seem to be a con¬
tradiction, since the proposition is: That a pro¬
gressive increase in the amount of money will result
in making it necessary to pay a higher price for the
use of money.
"In its last analysis, however, the thing loaned
by the bank or capitalist is simply a commodity, the
value of which is fixed by the amount of other neces¬
sary commodities for which it can be exchanged. In
order to protect himself, therefore, the lender must
endeavor to exact in return, at the maturity of the
loan, a sum that will equal the purchasing power of
the money at the time it was loaned, and in addition
'thereto, the usual rate of interest.
"Supposing the usual rate of interest to be 4 per
cent per annum, and the average rate per annum
at which prices have increased for, say, ten years
past to have been 4 per cent ; the lender, assuming
that the depreciation in the purchasing power of
money will continue at substantially the same rate,
must exact 8 per cent per annum interest in order
that his capital may not be impaired. If he should
loan his money at 4 per cent per annum the interest
would only counterbalance the rising prices of com¬
modities; and at the maturity of the loan he would
receive back (adding the interest and principal)
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simply the equivalent in purchasing power of the
amount he loaned, in the meantime having received
nothing whatever for the use of the money."
This influence will have comparatively little effect on de¬
mand and short time loans, but must very powerfully affect
the interest rates on long term bonds such as the railroads
must sell to provide money for the great work of construction
and improvement.
Every visible indication points to a continued increase in
the production of gold. It is the opinion of the most profound
students of geology that the development of mines and the
production of gold is in its infancy.
Professor E. W. Parker, the expert in mining and metals
of the United States Geological Survey, says :
"I am assured that the world's gold production
to this date is not sufficient to have scratched the
surface of the huge reserves that nature has
scattered all over the earth."
Fifty-nine years ago the discovery of gold in California
drew multitudes to that far-off country, and they toiled pain¬
fully past the rich fields of Tonopah, Rawhide and Goldfield,
little dreaming that they were passing undeveloped gold mines
richer than any that awaited them on the western slope of
the mountains.
A decade later, the slopes of Pike's Peak swarmed with
men drawn by the reported discoveries of gold, and the plains
from St. Joseph and Omaha to the foothills were dotted with
caravans bearing that once familiar legend "Pike's Peak or
bust" (most of them busted, whether they reached their des¬
tination or not). But a generation afterward Stratton de¬
veloped the "Independence Mine" ; and Cripple Creek, located
under the very shadow of that lofty peak, became the richest
gold camp on the continent.
The production of gold, once a matter of indefinite search
8
and great hazard, the dream of the adventurer and the argo¬
naut, has become a matter of almost exact demonstration by
the engineer and the chemist. Improved machinery, enlarged
knowledge and use of chemical processes for treating refrac¬
tory ore, and above all, improved transportation facilities, have
made mining properties that, without them, would be worth¬
less, the richest, most dependable gold producers in the world.
One whose experience, observation and study of the sub¬
ject entitles his opinion to great weight, recently said :
"The experience of recent years together with the
knowledge that science has given, concerning the dis¬
tribution of gold-bearing ores, seems to justify the
prediction that before the middle of the present
century the world's annual production of gold will be
worth a round billion dollars."
What it will mean if this prediction shall be fulfilled can
in some measure be comprehended when it is remembered that
the world's total production of gold from 1492 down to 1907
is approximately twelve and one-half billions of dollars.
Twelve years will produce almost as much gold as has been
produced in 416 years. Who would attempt to predict the
effect of such a condition upon the price of labor and com¬
modities during the next twenty-five years?
What optimist is extravagant enough to attempt to fore¬
shadow the era of development, expansion and prosperity of
which such a condition would be the harbinger?
In this rising tide of values, how has the railroad fared
and what is the promise of the future for these interests?
The last ten months have been months of profound study
and investigation of railroad conditions by railroad men; and
we all know more about actual conditions, more about where
we stand, than we have for years.
The great increase in the cost of things has affected the
railroad directly and severely. Comparing the prices of 1907
9
Fuel 38.0 per cent
Ties 76.4
Steel rails 47.4 "
Angle bars 58.0 "
Gray iron castings 46.9 "
Malleable iron 41.6 "
Bar iron 47.9
Wire nails , 36.2 "
Cast-iron pipe 62.8 "
Track spike 37.3 "
Cast-iron car wheels 39.2 "
Barbed wire 47.1 "
Bridge timber 77.3 "
Car axles 41.4 "
Locomotive steel forgings 45.4 "
Stationery, paper, etc 20.0 "
Locomotives 50.0 "
Cars 72.0
Labor shows an average increase of approximately 30 per
cent.
If the material used in 1907 by the railroads of the United
States, in operation and maintenance alone, could have been
purchased at the prices of 1897, it would have resulted in a
saving of approximately $176,500,000.
If the labor actually employed by the railroads in 1907,
in operation and maintenance, had been paid on the wage
scale of 1897, this item would have cost $254,000,000 less than
it did. If the taxes of 1907 had been at the same rate per mile
of road as in 1897, the railroads of the country would have
paid $26,800,000 less taxes than they did in that year.
If the locomotives, cars, rails, ties, etc., purchased in
1907 for additions and improvements and charged to "Capital
Account" could have been bought at the prices of 1897 they
10
would have cost $219,100,000 less, and the bonded debt of the
roads, on which interest must be paid, and for the retire¬
ment of which at maturity funds must be provided, would
have been that much smaller ; and these figures do not include
the added cost of labor employed in making these improve¬
ments.
The money raised by railroads for extensions and improve¬
ments in 1897 was obtained at an average interest rate of
3.90 per cent, while the average rate of interest in 1907 was
4.62 per cent, in increase of 18.46 per cent.
Summarizing these several items, shows that the cost to
the railroads in purchase of material, in payment of labor,
and in making necessary extensions and improvements in 1907,
amounted to approximately $676,000,000 more than the same
materials, the same character ar.d amount of labor, the same
improvements, would have cost at the prices and on the scale
of wages of 1897.
These are the conditions with which the railroads of the
country have had to contend during the last ten years, and
the conditions that confront them to-day. These are the facts
that must be frankly spread before investors to whom we are
trying to sell securities to obtain money for necessary im¬
provements.
Let us look at the other side of the ledger and see what
the railroads have been able to secure in the way of increased
rates to offset these tremendous increases in cost.
In a communication under date of May 18, 1907, Mr. J. M.
Glenn, the very able and efficient secretary of the Illinois
Manufacturers' Association, stated that rates had been ad¬
vanced on more than 800 articles; that by changes in classi¬
fication many "Lake and Rail" rates had been substantially in¬
creased ; and, in a general way, challenged my statement
that, considered as a whole, rates in Central Traffic and Trunk
Line Territory had been reduced.
I could not at that time answer Mr. Glenn's statement;
there was not a traffic officer in the United States at that
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time who could; and it is only after ten months of the most
thorough, painstaking investigation and analysis that I can
answer it now.
Mr. Glenn was right (as he almost always is) in stating
that during the last ten years increases have been made, by
changes in classification, in the freight rates on approximately
800 articles. To be exact, in the ten years from 1898 to 1908,
rates have been advanced in this manner on 897 articles.
But, during the same period, rates have been reduced, by
changes in classification, on 876 articles; and the net result in
money on the 1,773 articles on which changes in rates have
been made was a reduction of 10.69 per cent.
Concisely stated : If the railroads could have purchased
the material and equipment used, and obtained the labor em¬
ployed, in the year 1907, on the basis of prices and scale of
wages in effect in 1897, their cost of operation, plus the cost
of improvements and extensions, would have been approxi¬
mately $676,000,000 less; and had they received for doing
the business of 1907 the rates of 1897, their earnings would
have been approximately $90,000,000 greater than they were.
Facts of this character furnish their own argument.
Figures such as these require no elaboration.
The four great departments of business activity of the
nation, upon which our present marvelous position as a com¬
mercial power has been builded, upon which our future
progress and prosperity depend, are agriculture, manufac¬
turing, ' merchandising and transportation. I have placed
transportation last, but it may well be placed first, because
the prosperity of all the others depends absolutely upon the
prompt, efficient, dependable carriage and interchange of com¬
modities.
Agriculture, manufacturing and merchandising, in the free
and untrammeled rise and fall of prices to meet changing con¬
ditions, act promptly, almost automatically. The great busi¬
ness of transportation alone, vital to the prosperity, yea, the
very life of all the others, is hedged about and restricted by
12
legislative enactment and supervision of commissions, national
and in almost every state. In addition to this, every act,
every change in tariff made or suggested by the railroads is
watched and questioned by hundreds of alert, aggressive-asso¬
ciations such as )'ours.
I do not dispute this right of the nation or the states to
regulate the corporations they have created. I do not question
the right and duty of your association and kindred organiza¬
tions to most minutely scan and closely inquire into changes
that may affect your interests; but I want to urge upon this
association, upon the nation and the states, the all-important
necessity of exercising power with conservatism and wisdom.
Samson possessed power—the ruins of the temple attest the
fact—but I fail to find in any history, sacred or profane, a
suggestion that that power was wisely exercised.
Mr. President, you may build your great manufacturing
plants, equip them with the most modern machinery, and man
them with the most skilful artisans. You may build your
great jobbing houses, grand and imposing in their architec¬
ture, perfectly appointed and completely stocked ; but, with¬
out transportation facilities, without the railroad, all you have
done would be as worthless as though the manufacturing
plants and the great marts of commerce you have builded were
merely paintings on a canvas.
In every business undertaking, to be successful, you have
to have a partner; and that partner is the railroad, located
outside of your gates, having no voice in the management of
the affairs of your company, but nevertheless an active, help¬
ful, indispensable partner. The 325,000 miles of railroads,
which have served the great commercial interests of the coun¬
try so well, were built by private capital. If these roads are
improved and extended, or new roads built, to meet the re¬
quirements of this rapidly developing nation, it must be done
by private capital.
How long will capital continue to be invested in railroads
—incurring, to say the least, equally as great risk and hazard
13
as is incident to any other class of business—on a return of
four or five per cent, when the same capital invested in manu¬
facturing, agriculture or merchandising will pay on an
average three times as much?
The question is an exceedingly serious and important one
to you ; important to the state and to the nation. Think of
it, study conditions in a spirit of fairness and liberality. Don't
dismiss this important matter with the assumption that, be¬
cause the railroads have for years in some way met these
conditions without any compensatory increase in rates, they
can continue to do so.
Don't assume that because the railroads, under the spur
of dire necessity, have met these conditions in the past by
practicing every device for cheapening the cost of operation
that the highest skill, ingenuity and ability could resort to,
they can continue to do so indefinitely.
In my opinion, the limit of cheapening cost of operation
by more powerful locomotives, larger cars, reduced grades
and improved facilities, has practically been reached, at least
in the territory east of Chicago.
And yet I say to you, Mr. President, that what the
railroads want, what they desire to co-operate with the busi¬
ness interests of the country in bringing about, is a return
of the abounding prosperity of the last few years ; and if a
great majority of the business men of this country, repre¬
sented as they are by associations of this character, after such
a study and investigation of this great question during the
past year as it has never before received, believe that an in¬
crease in freight rates at this time would act as a check to
returning prosperity ; if they believe that the situation I have
endeavored to outline may possibly be offset by largely in¬
creased tonnage incident to improved conditions, while it would
be against my better judgment, I am strongly inclined to
think that I would recommend the experiment.
Whatever may be the result of the present agitation, I
believe that every thoughtful, conscientious business man must
14
recognize the fact that increased cost of operation of rail¬
roads in the future must be met by increased compensation,
and I beg of you to-night, as representatives of one of the
most important branches of industrial activity in the great
and growing Middle West, to earnestly appreciate how inter¬
dependent our relations are, to realize in what closely parallel
lines our interests run and to deal fairly and justly with
your partner just outside of your gate.
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kcmpstcr print, n. v.-