Should 
 
 / I 
 
 Railroad Rates 
 Be Raised? 
 
 AN 
 
 AFFIRMATIVE 
 
 ANSWER 
 
 ADDRESS OF 
 
 WILLIAM A. HAYES 
 
 -AT- 
 
 y 1 
 
 ANNUAL BANQUET OF MILWAUKEE TRAFFIC CLUB 
 JANUARY 20. 1914
 
 ■s 
 
 ■A 

 
 
 ^'^'^ 
 
 Extract From 
 
 Address at Annual Banquet 
 of Milwaukee Traffic Club 
 
 Milwaukee, January 20, 191 4. 
 
 Considering American railroads as a system, 
 traflfic rates are too low, and ought to be substan- 
 tially increased. Such an increase would prove 
 advantageous to the general public as well as to the 
 companies. I am not here to ask you to accept my 
 conclusion, but to point out certain facts for the 
 consideration of intelligent men, and to suggest in- 
 quiry as to further facts, which, taken in connection 
 with those to be mentioned, compel the conclusion 
 indicated. 
 
 To come to any sound conclusion in respect of 
 the sufficiency or the insufficiency of existing rates, 
 we must take into account the larger facts touching 
 American railroads as a whole. Governors, sena- 
 tors, legislatures, courts, judges and commissions 
 have each and all failed to deal effectively and just- 
 ly with railway problems because a consideration of 
 the subject in hand was limited either to a particu- 
 lar railroad or to a group of railroads without refer- 
 ence to its or to their relation to the other rail- 
 roads of the country. There can be no fair solution 
 of the railway problems unless we become familiar 
 with these larger facts and comprehend the rail- 
 roads of the country in their entirety. 
 C Therefore, as preliminary to more specific re- 
 
 1 
 
 ^% •.««
 
 marks upon the subject of rates, I invite you briefly 
 to consider a few facts which show that the rail- 
 roads of the country constitute the greatest system 
 of transportation on the face of the earth, and the 
 greatest piece of constructive work for the serving 
 of the people, accomplished by man since the begin- 
 ning of recorded history. 
 
 There are in the country, at this time, two hun- 
 dred fifty thousand miles of line and three hundred 
 eighty thousand miles of track. There is enough 
 line to go around the earth ten times at the equator 
 and more than fifteen times in the latitude of Mil- 
 waukee. There is enough track to go around the 
 earth nearly twenty-five times in the latitude of Mil- 
 waukee; enough to lay nearly one hundred twenty 
 parallel tracks from New York to San Francisco, 
 and all of this has been constructed within the life 
 time of men still living. All of this trackage is of 
 standard gauge, and every mile is a connected part 
 of the whole; it penetrates every part of the three 
 million square miles of our public domain, and over 
 it the products of the farm, the forest and the mine 
 may be, and daily are shipped to the cities and the 
 seaports of the land, and over it in turn are daily 
 shipped, for distribution, the finished products of 
 every foreign country and of every section of our 
 own. 
 
 This great system is equipped with nearly sixty- 
 five thousand locomotives, more than fifty thousand 
 passenger cars and more than two million three 
 hundred thousand freight cars. The locomotives, if 
 placed in a continuous line, would extend almost 
 from Chicago to New York. The passenger cars, if 
 placed in a continuous line, would extend nearly 
 
 2
 
 from Chicago to Washington, and their capacity is 
 sufficient to house at one time all the people of the 
 state of Wisconsin, and still leave enough room to 
 shelter from the chilling winds of winter all of the 
 people of Montana and Nevada. There are enough 
 freight cars to make a continuous line around the 
 earth in the latitude of Milwaukee; to fill nearly 
 five parallel tracks from New York to San Fran- 
 cisco, and their carrying capacity is sufficient to 
 hold nearly three thousand pounds of freight for 
 every man, woman and child in the United States. 
 
 This great plant is manned by about fifty thou- 
 sand conductors; nearly sixty-five thousand engi- 
 neers ; a like number of firemen, and in all by nearly 
 one million seven hundred thousand men. Its ac- 
 tivities never cease. Every month, every day, every 
 hour, every second, in darkness and in daylight, in 
 the face of fire and flood and storm and tornado; 
 in the extreme cold of winter and the extreme heat 
 of summer it is operated for the convenience and 
 the comfort of the people. The products of the 
 farm, the forest, the factory and the mine ; the 
 wheat of the Dakotas ; the corn of Iowa and Kansas; 
 the fruits of California and Florida; the cotton of 
 Mississippi and Texas, and the coal of Pennsylvania 
 and West Virginia derive their value very largely 
 from its existence and its operation. The freight 
 carried annually, at the lowest rates in the world, 
 is equivalent to more than twenty-five tons conveyed 
 one hundred miles for every man, woman and child 
 in the nation, and the yearly passenger traffic is 
 equivalent to the taking of the entire population of 
 Wisconsin around the earth in this latitude, or to 
 the travel of a party of more than thirty persons.
 
 going at the rate of a mile a miuiite, night and day, 
 every second of the time since Christ was born. 
 
 Owned and operated by many companies, the 
 various lines have, by reason of matters which time 
 will not permit me to discuss, come to constitute one 
 great system, and the process of nationalization, as 
 it may be called, is now going on more rapidly than 
 at any previous time. It may be said that the rail- 
 roads constitute one great system of commercial 
 highways, the activities of which are in an intricate 
 and delicate wav most vitallv connected with the 
 economic, the industrial and the social life of the 
 nation. Like the arteries and nerves of the human 
 body they penetrate and vitalize every part, and the 
 agricultural, the manufacturing, the mining, the 
 commercial, the financial and the social activities of 
 the people, as they exist today, would be incon- 
 ceivable without them. Considered in their en- 
 tirety, our railroads are the most wholesome eco- 
 nomic force in existence. Thev are the balance 
 wheel, as it were, of proiluction, distribution and 
 consumption, and next to agriculture contribute 
 most to the prosperity and the comforts of the peo- 
 ple. Whatever, therefore, affects their management 
 and their finances, affects their service, and through 
 their finances and their service affect everv other 
 Industry and all persons throughout the country. 
 
 The Interstate Commerce Commission and com- 
 missions in the several states have for some years 
 past exercised large authority in the matter of rates, 
 while at the same time determining to a consider- 
 able degree both the cliaracter and the extent of the 
 service, thus reducing income and increasing ex- 
 pense. 

 
 Wages and the cost of materials, supplies and 
 taxes have been largely increased, but net earnings 
 have not been increased accordingly, and as a result 
 the financial condition of the railroads has been 
 most seriously affected. There are, therefore, many 
 good reasons why a substantial increase in traflSc 
 rates would prove beneficial generally, but I shall 
 limit myself to a very brief discussion of three. 
 
 FIRST. The laborer is worthy of his hire. So 
 is the man possessed of capital, or, as it may be 
 termed, crystallized labor entitled to a fair return 
 for itsi use, and the return upon capital now invested 
 in the railroads of the country is too low. It is 
 lower than the return received by many of the large 
 life insurance companies, whose securities are of 
 the strictly investment class, and very much lower 
 than the return on capital invested in banking, 
 manufacturing and other industries generally. I 
 am well aware that some will question the accuracy 
 of this statement, and reply by saying that, while 
 the interest and the dividend rates upon the bonds 
 and the stocks of the railroads may be low, the 
 capital as shown by the bonds and stocks is exces- 
 sive, and that the rate upon the actual investment is 
 higher than it ought to be. Indeed, it is generally 
 assumed that the railroads of the country are gross- 
 ly over-capitalized, and it is widely charged that 
 the people are paying vast sums in the form of 
 interest and dividends upon such over-capitaliza- 
 tion. It is not so. The charge is contrary to the 
 facts in so far as the facts have been ascertained. 
 It has been made again and again by certain maga- 
 zine writers and by some public men, but I care not 
 by whom made, it can be substantiated by no one.
 
 Whenever, wherever and by whomsoever made, it is 
 made either in ignorance of the fact, or in dis- 
 regard of the fact. 
 
 The best available information at present ob- 
 tainable is to the effect that the American railroads 
 as a ichole are not over-capitalized. It is not un- 
 likely that an impartial valuation of their proper- 
 ties, as they exist today, by competent and impar- 
 tial men would find such values to exceed by from 
 ten to twenty per cent the net face value of all of 
 their bonds and stocks. Let us examine a few facts. 
 A physical valuation of railway property has been 
 made by public commissions in five states, namely : 
 Michigan, Wisconsin, Minnesota, South Dakota and 
 Washington. The value of the railway property in 
 these states, as shown at the time by their stocks 
 and bonds, was approximately |1,210, 000,000; yet 
 the Commissions found the value to aggre- 
 gate a little more tlian |1,211,000,000, and the 
 actual value was fixed by other competent and dis- 
 interested authorities at considerably more than the 
 values found by the Commissions. 
 
 Again, we have in the country about one-six- 
 teenth of the world's land area, and one-sixteenth 
 of the world's population, but we have forty per 
 cent of the world's railway mileage, nearly all built 
 without any guarantee of profits upon the invest- 
 ment, other than faith in the future of the country. 
 Yet the average capitalization per mile of railway 
 in this country is considerably less than the average 
 capitalization per mile of the railways of the world. 
 It is probable that rights of way here have cost less 
 per mile than in many of the other countries, but 
 nowhere else in all the world has the cost of labor, 
 
 6
 
 the chief item in the cost of railway construction, 
 been so high as in our own country. Another con- 
 sideration is this : The average capitalization per 
 mile is less than the average capitalization per mile 
 of railroads now being constructed in Japan, India 
 and elsewhere; yet we are informed that labor in 
 India is cheaper than in any other country of the 
 world. 
 
 If we turn to the matter of taxation, we arrive 
 at the same conclusion. The taxes of the railroads 
 have been Increased more than |50,000,000 a year 
 within the last seven years, and they are now pay- 
 ing a tax of about |130,000,000 annually. If the 
 value is in the railroads, why not the rate to pay a 
 fair return thereon? If the value is not there, and 
 the tax is, then it would seem that we have at least 
 a few public officials who are violating their oaths 
 of office and committing grand larceny in the name 
 of the state. Is it fair treatment that one set of 
 public officials should increase the taxes upon the 
 theory that the capital indicated is actually i/n- 
 vested, and that another sat of public officials should 
 refuse to permit the railroads to charge an adequate 
 rate upon the theory that the capital is largely 
 water? For my own part, I am satisfied that the 
 capital is invested and that the rates ought to be 
 raised. I hope that the physical valuation to be 
 undertaken by the Government will be promptly 
 carried out, for, if the work should be thoroughly 
 and fairly done, the result will remove a very erron- 
 eous idea from the public mind. 
 
 Let us approach the question of investment from 
 another point. Let us consider for a moment the 
 cost of what may be termed a table of accessories. 
 
 7
 
 There are aloug the railroads of the country about 
 325,000,000 fence posts and 2,500,000 miles of wire, 
 and the fences have cost approximately |125,- 
 000,000. There are cattle guards, plankings, wing 
 fences and warning signs from 400,000 to 500,000 
 in number, and these have cost almost |50,000,000. 
 There are upon the ground about 1,140,000,000 ties, 
 which have cost from |G00,000,000 to |700,000,000. 
 There are more than 5,000,000,000 spikes and fast- 
 enings; there are enough of these to put at least 
 three into the hands of every human being on the 
 face of the earth ; enough to give an armful of fifty 
 to every man, woman and child of all the 100,- 
 000,000 people in the United States, and these little 
 things have cost nearly f60,000,000. There are 
 more than 55,000,000 tons of rail, which have cost 
 approximately ^1,600,000,000. There are water 
 tanks and watering plants costing nearly |100,000,- 
 000. There are roundhouses, small repair shops and 
 the like, costing upward of |500,000,000. There are 
 80,000 passenger depots and more than 100,000 
 depots in all, which, according to the best informa- 
 tion at hand, have cost approximately |1, 750, 000,- 
 000. There are about 65,000 locomotives varying in 
 cost from |1 0,000 to |50,000 apiece, and having an 
 aggregate value of nearly |1 ,200,000,000. There are 
 50,000 passenger cars that have cost upward of 
 $600,000,000, and there are more than 2,300,000 
 freight cars, which have cost approximately |2,000,- 
 000,000. We have in these accessories an invest- 
 ment of from 18,000,000,000 to $9,000,000,000, and 
 at a most conservative estimate such investment 
 amounts to more than forty per cent of the net 
 capitalization of all of the railroads of the country. 
 
 8
 
 But we have not yet a railroad. We have not an 
 acre of right of way, nor have we a shovelful of 
 earth turned, nor a rock blasted, nor a river 
 spanned, or a tunnel bored. 
 
 So I repeat that, as the laborer is worthy of his 
 hire, the men and the women of the land who have 
 both directly and indirectly invested their savings 
 in the railroads of the country are entitled not only 
 to a reasonable security for such savings, but also 
 to a fair return thereon, and in the present state of 
 things they are not getting it. It is unjust and it 
 is unwise from an economic view-point to seek to 
 compel those who have invested their means in these 
 great public service undertakings to go without an 
 adequate return. In the long run and in a large 
 way such a policy is certain to re-act upon other 
 lines and ultimately to have an adverse effect upon 
 all of the country's industries and upon every in- 
 dividual. 
 
 Last year the people of this country paid only 
 about 1700,000,000 as a return upon the tremendous 
 investment in their railroads ; that is all that was 
 paid for the use of all the vast machinery of trans- 
 portation which stretches from ocean to ocean and 
 from the lakes to the gulf, and upon which the pros- 
 perity and the comfort of the nation depend. Mark 
 it : For these purposes, they paid only about |7 per 
 capita, yet they paid almost |11 per capita to run 
 the federal government alone. Senator Burton of 
 Ohio, writing two weeks ago in the "Saturday 
 Evening Post," said that two-thirds of all of the 
 appropriations made by Congress last year were on 
 account of wars that have been or wars that may 
 be. If this statement be true, then the people of this 
 
 9
 
 country paid last year less for the use of the capital 
 invested in their splendid transportation system 
 covering the whole country than they paid on ac- 
 count of war. 
 
 SECOND. Another reason whv rates should be 
 advanced is this: Th^ return on existing capital is 
 so loio as to discourage further investment in rail- 
 tcay securities, and, if this situation continues the 
 development of the country's transportatimi fa<^ili- 
 ties is likely to be arrested to an extent certain to 
 hinder the developjuent of other industries. Ade- 
 quate transportation facilities are indispensable to 
 the prosperity of agriculture, manufacturing, min- 
 ing, jobbing and other industries generally. Such 
 facilities can be secured only by improving and 
 extending existing lines; building new lines; pro- 
 viding larger and more conveniently arranged ter- 
 minals, warehouses, depots and additional locomo- 
 tives and cars. These require vast sums of money, 
 and to provide them there should be a further in- 
 vestment within the next few years of from five to 
 seven billions of dollars. If the railroads are to 
 keep up with the growth of the country in other 
 respects, and if they are to afford the farmer, the 
 manufacturer, the jobber and the shippers generally 
 the facilities which these industries are demanding, 
 and which all well-informed railroad men concede 
 should be afforded, then the investment of addition- 
 al capital must be encouraged. It is probable that 
 there is not at present a large city in the country 
 where the railroad facilities are sufficient to accom- 
 modate the handling of traffic as promptly and as 
 cheaply as it ought to be handled, and this is equally 
 harmful to the shippers and to the railroads. It 
 
 10
 
 means expense to the former without benefit to the 
 latter. 
 
 Transportation facilities which keep pace with, 
 and contribute to the growth of other industries can 
 be secured only by that fair treatment which gives 
 confidence to those who are charged with investing 
 the means necessary to develop such facilities. It is 
 idle to talk of compelling. There is nothing either 
 in law or in morals by which one man can compel 
 another to put his means into a given enterprise for 
 the benefit of the first without a reasonable return 
 to the second. We must not forget that, by reason 
 of the events of the past few years, the custodians 
 of capital have justly become cautious; that the 
 reservoirs of capital, from which the vast amount 
 needed to make improvements must be drawn, are 
 the banks, the trust companies and the insurance 
 companies of the country; that these institutions 
 are merely the custodians of trust funds belonging 
 to the millions of individuals throughout the land, 
 and that the law as well as sound business judgment 
 forbid their putting these funds into railroad enter- 
 prises, no matter what the need for additional facili- 
 ties may be so long as existing capital is insecure, 
 and the return thereon inadequate. 
 
 A further investment of from three to five billion 
 dollars is required to satisfy the public demands 
 for improvements, which, if made, would not appre- 
 ciably, if at all, increase the earnings of the rail- 
 roads. These demands cover the elimination of 
 grade crossings; more commodious and more con- 
 veniently arranged passenger depots ; the substitu- 
 tion of steel passenger cars in place of present equip- 
 ment; more and better train service generally, and 
 
 11
 
 many other minor improvements. It may be con- 
 ceded that all of these changes are desirable, but 
 they would not materially increase the earnings. 
 Then, whence the money? Railroad managers are 
 not magicians. Like the great mass of men in other 
 pursuits they can but work in "common ways with 
 common men." If such improvements are to be 
 made, and railroad men generally, as well as the 
 public, would be glad to see them made, the expense 
 must be met either by another large addition to 
 capital or they must be paid for out of net earnings. 
 If the expense is to be met by the first method, the 
 net earnings must be increased sufficiently to pro- 
 vide the sums adequate to pay not only a reasonable 
 return upon existing capital, but a reasonable re- 
 turn upon the additional capital required. If such 
 expense is to be met by the second method, the net 
 earnings must be correspondingly increased in 
 order that there may be a sufficient surplus out of 
 which the improvements may be gradually made. 
 
 There appears to be little appreciation of the ex- 
 tent of the demands made upon railroad companies 
 in recent years. For instance, men talk freely 
 about the substitution of steel cars in place of pres- 
 ent passenger equipment, as if the matter were of 
 no great consequence from a financial standpoint, 
 and members of congress and senators make 
 speeches and introduce bills to compel an immediate 
 change. They appear to think that steel equipment 
 could be quickly provided and that it would result 
 in a great saving in operating expense, whereas the 
 fact is, that it would require nearly ten years for 
 the car builders of the country to turn out sufficient 
 cars to make the change ; the expense of operating 
 
 12
 
 would be considerably greater than the present cost 
 of operation, and the initial cost would be approx- 
 imately six hundred million dollars. As a further 
 illustration, it may be said, that there are upon the 
 railroads of the country more than 350,000 highway 
 crossings, and that the elimination of the entire 
 number would probably cost more than |5,000,- 
 000,000. It may truthfully be said that railroad 
 men generally are more keenly appreciative of the 
 importance of making the improvements about 
 which so much is said, but they have not yet found 
 a way to paj' out two dollars where they receive but 
 one. 
 
 THIRD. Another reason why the rates should 
 be increased is this : A substantial increase is nec- 
 essary to preserve the economic balance in the coun- 
 try generally. While the rates are insufficient to 
 pay a reasonable return upon the present invest- 
 ments, not only are further investments discour- 
 aged, but the development of transportation facili- 
 ties is arrested with a consequent disastrous effect 
 upon all other industries. There is also a serious 
 disturbance of the finances of the country at large, 
 for the finances of the railroads are quite as ex- 
 tensively interwoven with the finances of the coun- 
 try generally as is the physical system of tracks and 
 terminals and cars with the several parts of the 
 land. I know of no other single agency in all the 
 land which so widely and so promptly returns to 
 the pockets of the people so large a proportion of 
 the moneys received as do the railroads. 
 
 The gross earnings at present are about |3,000,- 
 000,000 a year, and of this about |1,5^P00,000 is 
 immediately disbursed in the form of wages; |600,- 
 
 13
 
 000,000 to 1700,000,000 are paid out for materials 
 and supplies, and about 1130,000,000 is paid in 
 taxes. For example, during the fiscal year ending 
 June 30, 1913, the three large systems operating in 
 Wisconsin, namely: The Chicago and North- 
 western, the Chicago, Milwaukee & St. Paul, and 
 the Minneapolis, St. Paul & Sault Ste. Marie had 
 gross earnings in the state of a little more than 
 #57,000,000, and of this sum, these three companies 
 paid out to the people of the state, during the 
 same fiscal year, the sum of $45,000,000 in three 
 items, namely : for wages, materials and supplies, 
 and taxes. It is not likely that such a showing 
 could be made by any other industry. 
 
 What is true of the vast sums paid out for 
 wages, materials and taxes is almost equally true of 
 the remaining §700,000,000 paid as interest and div- 
 idends. Only in a very limited sense are the stocks 
 and the bonds the property of the few and the 
 rich. There are from eight to nine millions of peo- 
 ple w^ho draw their daily sustenance from the rail- 
 roads, but there are in addition to these more than 
 a million stockholders, thus adding approximately 
 three millions more who have a direct interest in 
 the properties of the various companies. 
 
 But the number who have a financial interest, 
 only slightly less direct, exceeds in number both of 
 the classes mentioned. To illustrate : A few days 
 ago the New York Life Insurance Company pub- 
 lished a statement showing more than one million 
 policy holders and more than three hundred mil- 
 lions of the Company's assets invested in railroad 
 bonds and stocks. It follows, therefore, that from 
 twelve million to fifteen million dollars of the 
 
 14
 
 moneys disbursed last vear in the form of interest 
 and dividends upon the bonds and stocks of the rail- 
 roads, a fairly substantial part of the seven hun- 
 dred millions mentioned went into the treasury of 
 a single life insurance company for distribution 
 among more than a million policy holders, includ- 
 ing farmers, mechanics and other laborers, as well 
 as the merchants, manufacturers, bankers and the 
 like. Were we to trace the moneys paid as interest 
 and dividends we would find a very large propor- 
 tion of it returning to the pockets of the thrifty men 
 and women residing throughout the country. 
 
 This invisible connection of vast numbers of the 
 people with the very financial resources and ac- 
 cumulations of capital which they are wont to at- 
 tack as antagonistic to their own interests is the 
 most strange phenomena of the age. It suggests 
 the question, whether as a people we are not some- 
 what wanting in the power of analysis and in the 
 habit of calm reflection. There are within five min- 
 utes' walk of where we now sit, in the bank vaults 
 of the city, more than a hundred millions of assets. 
 Next to the labor of her people, this is the most 
 potent force in the industrial and commercial life 
 of the city. Each little sum is without productive 
 capacity while it remains hoarded in individual 
 hands. On the other hand, even the single dollar 
 to the credit of the baby in the cradle when de- 
 posited in bank and rendered active in the product- 
 ive enterprises of the community becomes a con- 
 tributing factor in moving and expanding the 
 mighty manufactories which are the support and 
 the pride of the city.' So it is with the capital of 
 the railroads. It belong-s to the manv. It is the 
 
 15
 
 capital of the people generally, and when the situa- 
 tion is rightly understood the people will see that 
 in attacking the railroads they are attacking their 
 own interests. 
 
 It is well to take account of these things, for 
 they help us to think straight, and to comprehend 
 the great principles of finance which lie at the 
 foundation of prosperity in every well-ordered 
 state; principles which have endured and will en- 
 dure, for "On the rocks primeval, hidden in the past 
 their bases be, block by block the endeavoring ages 
 build them up to what we see." It must be clear 
 that any policy which affects the value of railroad 
 securities by reducing the return thereon, below 
 what is reasonably adequate, tends to disturb all of 
 the country's industries and its entire financial sys- 
 tem to the detriment of all of the people. 
 
 16
 
 -s
 
 3 0112 062004491