»^
 
 UNIVERSrTY OF ILUNOB-URBANA 
 
 3 0112 062004830
 
 AN ADDRESS 
 
 BY 
 
 Daniel Willard 
 
 President of the Baltimore and Oliio Railroad Company 
 
 BEFORE THE 
 
 BOSTON CHAMBER OF COMMERCE 
 
 JUNE 12. 1913 
 
 Outlining the position of the railroads in the matter of 
 
 application by the Eastern Railroads to the 
 
 Interstate Commerce Commission 
 
 for a general increase of 
 
 five per cent, in 
 
 freight rates
 
 K^^ 
 
 •60- 
 
 In the summer of 1910 the railroads operating within 
 what is known as official classification territory — which 
 may be roughly described as that part of the United 
 States lying east of the Mississippi and north of the Ohio 
 and Potomac Rivers — filed with the Interstate Commerce 
 Commission new tariffs which provided for an increase 
 of certain freight rates, chiefly those known as class 
 rates, and the advance so proposed varied from 8 to 20 
 per cent. 
 
 At the request of the Commission the new tariffs were 
 suspended, and a hearing was ordered at which the rail- 
 roads were given opportunity to present their case and 
 tliose opposed equal opportunity to present theirs. The 
 railroads based their claims chiefly upon the argument 
 that their expenses had been greatly increased by higher 
 wage schedules recently granted to their employes, but 
 they also called attention to the fact that taxes had in- 
 <-1creased largely within recent years, and that legislation 
 ■/enacted during the same period — both State and Federal 
 ^"^> — had also very considerably increased the cost of opera- 
 '_.tion — all of which so narrowed the margin between in- 
 come and outgo that unless they were permitted in some 
 /^ manner to increase their revenue, the net earnings of the 
 future would not be sufficient to enable them to maintain 
 _; tlie properties in a satisfactory condition, or provide such 
 '^ improvements and additions as the growing commerce 
 ; of the country constantly demanded. The Commission 
 took the case under consideration and in its report dated 
 ^February 22nd, 1911, in which it reviewed in a careful 
 r and able manner the whole question, announced its deci- 
 ^ ^ion withholding its aj^proval of the new tariffs, and 
 ^ordering tlinl tlio rates in effect at fliat fimo should be 
 '-^continued. 
 
 5 A careful reading of the report known as I. C. C. No. 
 
 ''3400 discloses — first, that the railroads failed to establish 
 
 in the minds of tlie Commission, a necessitv for increased
 
 revenue; second, it was suggested tliat even though a 
 necjessity had been established, it was doubtful if the 
 plan proposed was the right or best way in which to 
 obtain such revenue; third, it was further pointed out 
 that there was a general depression of business at that 
 time, and that the carriers ought not to expect to raise 
 their rates when business was dull. However, the Com- 
 mission also said, in effect, that should it come about 
 that their views were not sustained by future develop- 
 ments, and should it appear at any time that there was a 
 real necessity on the part of the carriers for increased 
 revenue, in order that they might be in position to pro- 
 vide such facilities as the public required, that they 
 would, upon request, give the matter fui'ther considera- 
 tion. They said that they would not hesitate, under such 
 circumstances, to authorize such rates as would be 
 reasonable. 
 
 During the first two years immediately following the 
 decision, the commerce of the country showed little, if 
 any, increase, but during the present fiscal year, there 
 has been a marked activity in business of all kinds, and 
 the gross earnings of the railroads generally for the 
 yeav ending June 30, 1913, will probably be the largest 
 in their history. It might be supposed from this, and as 
 a matter of fact, it has been urged in some quarters that 
 the railroads should now be able because of increased 
 earnings to show sufficient surplus above interest and 
 di'sddend requirements to justify such further capital 
 expenditures as may be necessary. I shall undertake to 
 show that such is not the case. 
 
 First of all, the rates which were in effect in 1910 have 
 not in the aggregate been maintained — that is to say, 
 while certain increases have been made during that 
 period, decreases have also come about. The net result 
 has been, for example, a reduction in the earnings of thfl 
 Baltimore & Ohio Company on the freight businesj
 
 handled by that company in October, 1912, of more than 
 $100,000 when compared with wliat they would have been 
 in October, 1909. In other words, if the same rates, 
 classifications and conditions had been in effect in 1912 
 that were in effect in 1909, the Baltimore & Ohio Railroad 
 Company would have received in October, 1912, $100,000 
 more than it did receive for the business actually handled 
 ill that month, and it is estimated that for the year, such 
 ■ Iccreases would amount to not less than $800,000. 
 
 I mention the Baltimore & Ohio figures because I hap- 
 pen to have them in mind, and because I believe that con- 
 ' lit ions on that road are not unlike what they are on the 
 other roads in similar territory. 
 
 Not only has the general basis of rates, as I have 
 shown, been lowered to some extent by orders of the 
 regulating commissions, and perhaps, to an equal or 
 greater extent by commercial conditions or influences 
 which are beyond the power of the carriers to resist — • 
 but during the same period expenses have also very 
 greatly increased, as I will endeavor to show. 
 
 Again in the case of the Baltimore & Ohio, the wage 
 increase of 1910 amounted to approximately $2,500,000 
 per year, and the increases which have been granted — 
 either voluntarily or by virtue of arbitration awards — 
 within the last twelve months hav^e resulted in adding 
 over $800,000 more to our expenses each year. Further, 
 ;is is well known, the conductors and trainmen are now 
 tiigaged in taking a strike vote for the purpose of enforc- 
 ing their demands for an advance of approximately 17 
 per cent., and while it is not likely that they will obtain 
 ;iil they ask for, it is probable that if the matter should 
 uo to arbitration under the provisions of the Erdman 
 Act as it now stands, that they would receive a substan- 
 tial increase. 
 
 Prices of various kinds of material have also advanced
 
 since 1910. The coal bill of the Baltimore & Ohio Eail- 
 road Company amounts to approximately $6,000,000 per 
 year, and within the last two years there has been an 
 advance in the price of coal of upward of 10 per cent. 
 The increase in price of ties has also been considerable. 
 Prices asked and paid for locomotives, freight and pas- 
 senger cars are also higher today than was the case 
 three years ago for equipment of the same kind. 
 
 Legislation of various kinds — both state and federal — 
 has had an important influence upon expenses. The so- 
 called Full Crew Bill, which has become a law in many 
 of the States, requires the railroads to employ an extra 
 man on all trains of more than certain length, regardless 
 of the local conditions. 
 
 The hours of service law, boiler inspection law, laws 
 in various States prescribing standards of construction 
 for caboose cars, laws with reference to the construction 
 of postal ears, revised orders with reference to safety 
 appliances upon new equipment, as well as upon exist- 
 ing equipment ; laws with reference to grade separation, 
 etc., etc., — all have tended to very greatly increase the 
 cost of operation. It is not my purpose, at this time, to 
 question the wisdom of any of the laws referred to, be- 
 cause regardless of whether they are wise and necessary, 
 the added expense is there and must be paid. 
 
 Taxes have increased largely during the last three 
 years. In the case of the Baltimore & Ohio Company, 
 the increase in that one item since 1909, amounts to more 
 than $900,000 a year. I think it is perhaps not a matter 
 of common knowledge, although one of public record, 
 that the American railroads, as a whole, pay each year 
 in taxes more than $120,000,000, a sum nearly two and 
 one-half times as much as the total amount received by 
 all the railroads for carrying the mails. 
 
 Another very important element to be considered is 
 the rate of interest which railways are obliged to pay
 
 upon new capital raised for improvements and better- 
 ments. It may be said that the interest basis on all in- 
 vestments has been raised within recent years, and that 
 the very best securities must pay higher rates today than 
 ever before, and that the railroads are not peculiar in 
 this respect; but even so, they are still required, in com- 
 mon with others, to pay a much higher rate of interest 
 than was the case some five or ten years ago. Ten years 
 ago, for instance, if a railroad company with well estab- 
 lished credit, decided to increase its capital for improve- 
 ment purposes — we will say $1,000,000 — it was custom- 
 ary to assume that the interest charge on that account 
 would be approximately $40,000 per year. Under exist- 
 ing conditions, the interest charge would be between 
 $50,000 and $60,000 per year as a minimum, and in some 
 cases, even in excess of $60,000. This item alone, as you 
 will see, becomes very important when large systems — 
 like the Baltimore & Ohio — are spending upward of 
 $20,000,000 a year, and ought to do so, for betterments, 
 extensions and new equipment made necessary by the 
 growing demands of a constantly expanding commerce. 
 
 Further, the public demands, expects and receives a 
 higher standard of service in all directions than has 
 ever been the case before. This results, for instance, in 
 the running of a greater number of passenger trains than 
 the business itself would justify over the lines where 
 the traffic is light; and also in a higher standard of 
 freight service — that is to say, carriers are required to 
 furnish cars more promptly, and to move them with less 
 delay. While no one recognizes better than the railway 
 managers that the service is not always satisfactory, 
 and is frequently not such as they would like to furnish, 
 I believe it is, nevertheless, a fact that upon the whole 
 it is on a more satisfactory basis today than ever before, 
 but this also means greater expense in operation. 
 
 The various influences which I have mentioned have
 
 6 
 
 all tended to further reduce the margin between income 
 and outgo, and it has become so narrow that the rail- 
 roads — ^many of them, at least — do not feel justified in 
 further increasing their capital account, regardless of 
 the rate at which money may be obtained, because the 
 burden assumed by so doing might seriously interfere 
 with their ability to maintain reasonable payments upon 
 their capital issues already existing. 
 
 The Federal Census report of 1910 showed that during 
 the previous decade, capital invested in agriculture had 
 increased 100 per cent, capital invested in manufactures 
 had increased 105 per cent, and capital invested in rail- 
 roads during the same period had increased only 40 per 
 cent. One result from this disparity of investment was 
 to place the manufacturing industries as a whole, when 
 measured by the amount invested, second only to agri- 
 culture, and in the place previously occupied by the rail- 
 roads, while the railroads in turn drop back from second 
 place to third. 
 
 Mr. James J. Hill, in an address delivered in Chicago 
 in 1908, said that he was convanced that the railroads of 
 the country as a whole should spend not less than one 
 billion dollars per year for the next five years for ad- 
 ditions and betterments, including, of course, equip- 
 ment. The published reports of the Interstate Commerce 
 Commission show, however, that during the four years 
 ending June 30, 1908-09-10 and 11, the actual invest- 
 ment in the railroads increased $2,044,000,000, or at the 
 rate of $511,000,000 per j^ear, about one-half of Mr. Hill's 
 estimate. The same reports also show that the net earn- 
 ings of the railroads for the year ending June 30, 1911, 
 after paying operating expenses and taxes, were actu- 
 ally $8,787,000 less than they were in 1907, and before the 
 additional $2,000,000,000 had been expended, and the 
 per cent, of return on cost of road and equipment in 
 1911 was only 4.97, as compared with 5.82 in 1907.
 
 AVitli the situation as I have endeavored to show it, 
 clearly in mind, those responsible for the policy and 
 management of the railroads in ofiicial classification 
 territory- have become seriously concerned regarding the 
 future of the properties, of which they are in charge. 
 
 I hardly think it is necessary to take your time for 
 the purpose of endeavoring to show that the railroad is 
 necessary as a means of transportation in a cx)untry of 
 magnificent distances, such as the United States. Of 
 course, it is recognized that there can be no such thing 
 as commerce without transportation of some kind, and 
 at the present time the railroad affords the only means 
 of tiansportation worthy of consideration, so far as the 
 inland traffic of the country generally is concerned, and 
 it is of the utmost importance if industrial development 
 is to continue, that the trans j>ortation system as a whole 
 should be adequate to meet the reasonable requirements 
 of the countiy's conmierce at all times. 
 
 If I am not mistaken in my understanding of the gen- 
 eral situation-, and if I have stated it to you as it actu- 
 ally exists, it would seem, that we all must agree that we 
 are confronted with a serious condition, and one worthy 
 of the careful and dispassionate thought of everyone in- 
 terested in the development of our country. Granting 
 for the sake' of argument that the situation is substan- 
 tially as I have stated, it seemed to me that the most im- 
 portant question next to be considered is — how can the 
 matter be adjusted? and that too, for the best interests 
 of all concerned, including not only the railroad bond- 
 holders, shareholders and employes, but also from the 
 standpoint of the manufacturer and consumer, because 
 in the last analysis the consumer is the one who will 
 ultimately pay the freight. 
 
 It was suggested in case No. 3400, as I have already 
 shown, that the railroads had not only failed at that time 
 to establish the necessity for increased revenue, but that
 
 8 
 
 the method proposed for the purpose of raising addi- 
 tional revenue was perhaps not the best or fairest under 
 all the circumstances. It was pointed out that the rela- 
 tion of rates which then existed, had come about through 
 a long period of competition and regulation, and that 
 anything which tended to disturb that relationship 
 should be avoided if possible. In light of all that has 
 since transpired, I am personally prepared to admit the 
 force of that suggestion, and my associates are also gen- 
 erally in accord and when it was decided a short time 
 since to take the matter up again with the Interstate 
 Commerce Conmiission, it seemed best to those who had 
 given the subject much study, that instead of seeking 
 to obtain the necessary revenue by the methods proposed 
 in 1910, it would be better to obtain it, if possible, by a 
 small percentage of advance, uniformly applied to all 
 items. It was believed that in view of all the circum- 
 stances the increase should be not less than 10 per cent., 
 but desiring to obtain the necessary relief in a manner 
 which would cause the least possible disturbance of ex- 
 isting commercial conditions, it was concluded to ask 
 permission to make a 5 per cent, advance only, and then 
 should it develop later on that the relief so obtained 
 was not sufficient, the matter could be given further con- 
 sideration, in view of the then existing conditions. 
 
 It has been suggested that if the railroads need ad- 
 ditional revenue, they ought, before making any general 
 advance, to raise certain rates now in effect which are 
 quite generally believed to be too low. The carriers 
 recognize the force of that argument, and they hope to 
 be able, as time goes on, with the assistance of the In- 
 terstate Commerce Commission and also of the shippers 
 themselves, to bring about, if possible, a more equitable 
 rate adjustment ; but a careful review of that question— 
 with particular reference to the business handled by the 
 Baltimore and Ohio Company— shows that even if all
 
 9 
 
 the low rates referred to could l>e advanced, and that, 
 too, without aifecting the amount of business handled, 
 the increased revenue so obtained would be less than 
 half a million dollars, and while of course that amount 
 when considered by itself is a large sum of money, it 
 is not at all atlequate for the requirements of the situa- 
 tion. 
 
 Further, it should l)e borne in mind that commissions 
 will continue from time to time to order specific rates 
 reduced, because they are found to be relatively too high, 
 and commercial conditions will also tend to bring about 
 reductions in the future, such as I have shown to have 
 taken place in the last three years. 
 
 Three years ago the commission said tliat the rail- 
 roads had failed to establish a necessity for increased 
 revenue. I believe that necessity is apparent to all at 
 the present time. It suggested that the plan then pro- 
 posed was not the right one, and with that suggestion 
 the railroads now agree, and they have proposed another 
 method which seems under all the circumstances to be 
 fair and equitable. It was also suggested that if rates 
 were to l>e raised at all, it should be done when times 
 were good, and upon the whole business was never better 
 than it is at the present time. 
 
 I have used chiefly in support of my arguments, figures 
 referring specifically to the Baltimore & Ohio Railroad. 
 I have done this because I am naturally more familiar 
 with the affairs of that company than with the railroads 
 as a whole in the territory involved, but I think it can 
 safely be said that the Baltimore & Ohio Company is 
 typical of the situation. There are doubtless some rail- 
 roads interested in this present move which do not need, 
 at this time, such an increase of revenue as might come 
 from the proposed advance in rates, and there are doubt- 
 less others which should have a much greater increase 
 than Iho oTio proposed, n?Hl in tliai ponnoj'tion \i mny 1)0
 
 10 
 
 recalled that 'Commissioner Prouty in discussing the 
 New York Central, Pennsylvania and Baltimore & Ohio 
 Companies in case No. 3400, used the following words : 
 
 " Under rates reasonable for these three systems 
 there may be lines whose earnings will be extrav- 
 agant, but that is their good fortune. There may 
 be lines which can not make sufficient earnings, 
 but that is their misfortune. We out not to impose 
 upon this territory, for the purpose of allowing 
 these defendants additional revenues, higher rates 
 than are adequate to these three systems considered 
 as a whole." 
 
 It is believed that the increased rates proposed are fair and 
 reasonable when considered in connection with the opera- 
 tions and requirements of the three railroads specifically 
 referred to by the Commission, and it is urged that if they 
 are reasonable when so considered, they ought not to be 
 withheld simply because they might result in greater 
 earnings on the part of some other cai-rier, than v^ould be 
 justified, when considered of and by itself. 
 
 I wish to say just a word with reference to the general 
 railroad situation. There can no longer be any doubt that 
 the public has ample and efficient machinery for the 
 thorough control and regulation of the railroads. We 
 have not only a Federal Commission in Washington which 
 has been granted the widest possible powers to regulate 
 and supervise, but we have also commissions in nearly all 
 of the individual States, with powers relatively as great as 
 those delegated to the Fedei-al body. The Intei-state 
 Commerce Commission is empowered to prescribe the 
 manner in which the railroad accounts shall be kept, even 
 to the minutest detail, and the roads are now keeping 
 their accounts in harmony with the requirements of the 
 Commission. It is also provided by law, under penalty of 
 heavy fine and imprisonment, that no discrimination shall 
 be shown either with reference to rates paid or service 
 given, as between individuals or commimities.
 
 11 
 
 It has come to be uuderetood that the railroad is a semi- 
 public iustitution, and that it is expected to treat, and 
 must treat, all with equal faii'ness. The executives in 
 charge of the railways by virtue of what has come about, 
 occupy the dual position of semi-public officers, charged 
 with the duty of operating the properties in harmony with 
 the laws of the country, and also with the equally impor- 
 tant duty of trustee, representing those whose money is 
 invested in the enterprise. It should be remembered that 
 although the railroad is considered a public utility with 
 important public functions to perform, it nevertheless 
 ovv^es its very existence to the employment of private 
 capital, and Mr. Commissioner Prouty has well said in 
 one of his public addresses that "we can provide by 
 legislation the sort of cars which a railroad shall use, 
 and the rates which it shall impose; we cannot by 
 legislation force one single dollar of private capital into 
 railroad investment against its will". 
 
 Those who to-day manage the railroads are chiefly men 
 who have devoted the greater part of their lives to that 
 service, and will not as a rule be personally afiCected one 
 way or the other by the outcome of this movement. They 
 appreciate fully their obligations to the public, while at 
 the same time not unmindful of their duty as trustees, and 
 I should personally feel that I had failed absolutely to 
 measure up to the requirements of my position, if I felt as 
 I do about the situation and remained silent. I feel 
 it incumbent upon me as the chief executive of the 
 Baltimore & Ohio Company, to do what I can to bring the 
 situation as I see it clearly before, not only the Commission 
 which in the end will decide the question at issue, but also 
 before those who, like yourselves, are vitally interested in 
 the proper solution of this problem. Should the Commis- 
 sion, however, after a full hearing, decide again against 
 the contention of the carriei-s, I at least— and I am sure I 
 can speak with equal clearness concerning my associates — 
 shall continue to do the best that I am able to meet the 
 requirements of the situation, but it ought to be clearly
 
 12 
 
 understood that in that event the policy of cheapness 
 instead of quality, which the railroads have already been 
 obliged in a measure to adopt, must of necessity be con- 
 tinued, and I cannot believe that the American people 
 want their railroad system run permanently on that basis. 
 Before closing, I wish to quote from the language used 
 by Mr. Commissioner Lane, now Secretary of the Interior, 
 in his report given in case known as No. 3500, with refer- 
 ence to this same question. He says, speaking for the 
 Commission : 
 
 "We do not say that the carriers may not in- 
 crease their income. We trust they may, and 
 confidently believe they will. If the time does 
 come when through changed conditions it may 
 be shown that their fears are realized, or 
 approaching realization, and from a survey of the 
 whole field of operations there is evidence of a 
 movement which makes against the security and 
 lasting value of legitimate investment and an 
 adequate return upon the value of these properties, 
 this Commission will not hesitate to give its 
 sanction to increases which will be reasonable," 
 
 Conscious of the statements that are sometimes made 
 concerning the alleged over-capitalization and excessive 
 freight rates of American railroads, I wish to quote again 
 from one who has justly earned his title as empire builder, 
 and who is qualified because of a lifetime experience and a 
 careful study of the whole question to speak with author- 
 ity. The following quotation is taken from Mr. James J. 
 Hill's book, entitled "Highways of Progress" : 
 
 "The American railway pays the highest wages 
 in the world, out of the lowest rates in the world, 
 after having set down to capital account the 
 lowest capitalization per mile of all the great 
 countries of the world." 
 
 Of what other great American industry can the same 
 claim be made and successfully defended ? 
 
 I