OAK ST. HDSF ;.«'.»;4i*''' ^1^^ i .*rT '^'l ^^"^^ °^ °^ before the Latest Date stamped below. A ciiarge is made on all overdue books. University of Illinois Library JRN 26 I55S APR 2 993 m 2 2 W M32 THE FUTURE OF THE RAILROADS Copyright. 1914 by Roger W. Babson The Future of the Railroads Historic and Economic Facts for Railroad Men, Shippers, and Investors BY ROGER W. BABSON President of the Babson Statistical Organization Wellesiey Hills Station, Boston, U.S.A. Based on various reports and letters issued by the author AMERICAN EDITION BOSTON BABSON S STATISTICAL ORGANIZATION (Incorporated) 1914 Dedicated to Fred I. Brown A Business Man With a Vision 2^%^ t ^\\'^ Contents >n THE FIRST SECTION Page Preface 7 Government Ownership . . 11 Property Valuation Ownership of Freight Cars How the Nation Could Save Millions Steel Cars Cost of Equipment O f THE SECOND SECTION Railroads and Employees . . 49 - A Fallacy ^^ Social Questions Involved ^ A Solution •^^ Ownership of American Railways ^ Employees and their Compensation ta THE THIRD SECTION j^ervice versus Rates . . .91 ^^ Wise versus Questionable Legis- 5P^ lation ^ The Real Question J^ Things to Consider o s i ^ 309322 Preface UNEASY lies the head that wears a crown " certainly now applies to the heads of railroad corporations. They are apparently worse off than the man between the "upper and nether mill- stones"; in fact, our railroads are between three millstones, viz., the shippers repre- sented by the government, the investors represented by the directors, and a vast army of employees who are better organized than either of the other two combinations. To show the probable outcome of the struggle among these three forces, is the purpose of this little book. Many insist that the different objects of the three inter- ests are so conflicting that any reconcilia- tion is impossible. Rather, these interests are so bound together that one cannot long prosper except as the others prosper like- wise. To prove certain statements the writer has used tables, together with comments thereon, prepared by Mr. Slason Thompson, to whom credit is hereby given. R. W. B. WeUesley Hills, August 1, 1914 The First Section Government Ownership eovernment o^vnership is something always to be desired but always to be post- poned. Government owner- ship should be classified with war; namely, something to be continually preparing for, and something at the same time to be steadfastly avoided. His- tory shows that government OAvnership is one of the many things which, when we have it not, we want; and which when we have it, we do not n want. Most men look upon the government ownership of railroads as some men look upon family life, when they long for the comforts of a home without the responsibili- ties. Unfortunately, however, comforts and responsibilities go hand in hand in this world. Homes, railroads, and most other factors of civilization are subject to the same fun- damental laws. "The fiddler must be paid" is an old saying; but it contains an economic truth which must constantly be recognized, or else there will follow a crash, either po- litical or financial. It seems as if the public own- ership of railroads were as nat- 12 ural as the public ownership of highways and bridges; while there appears no logical reason why the government should not operate the railroads as well as the postal service. On the other hand, there is no doubt that private operation is more efficient and satisfactory than government operation, provided it is properly super- vised. In fact, exponents of the latter theory even go so far as to state that the time will come in the succeeding centu- ries when the operation of the postal service, the maintenance of highways and certain other things now carried on by gov- ernments, states and munici- palities may again be turned 13 over to private corporations for operation. Moreover, these people submit much evidence to substantiate their theory. The Law of Action and Re- action applies to political and social movements as well as to industrial and financial. The wheel keeps going around; civ- ilization gradually approaches the socialistic state for tv^o or three generations, and then the tide turns and the individual again is fostered for two or three generations. A study of the history of only the past century suggests strongly a gradual approach to the social- istic state; but a study of the history of the last forty centu- ries clearly shows that people 14 have gradually alternated from one tendency to the other, and that progress has by no means been always in the same direc- tion or by the same means. As one reads a list of all the different societies organized today for social, political, and economic purposes, it seems as if the millenium might be reached during the present century, so that our great- grandchildren would have no problems to solve. On the other hand, when one realizes that man has probably existed for a hundred thousand years, and may exist for a hundred thousand more, it seems rea- sonable to suppose that there will always be problems to 15 solve. Certainly it is conceited to attempt to solve all these difficulties in the present cen- tury. If one will consider cor- porations over a number of centuries, he will realize that the demand for government ownership will spread and subside many times, and that neither public nor private own- ership will ever be found to be satisfactory. Hence, the practical question is whether it is v^ise noAV to attempt the ideal, or simply the best under the circumstances. Moreover, may not the ideal thing for one generation or one nation be unsatisfactory for another.^ If the railroads of a nation were properly operated, it 16 would make no difference whether they were operated by the government or by cor- porations. Therefore, is it not best to assume that they will not be operated properly in either case, and then to ascer- tain w^hether public or private interests will operate them more efficiently? It is natural for people to be divided upon this problem in accordance with ho^v their interests lie, but should such a question be decided by popular vote? The Determining Factor So much for the philosophy underlying the question; but unfortunately the ultimate outcome of the railroads will 17 not be decided either by phi- losophy or economics. More- over, Avhether or not the government purchases the railroads will not be decided by the government, but by the railroads themselves. A study of the transportation situation of any of the Euro- pean nations now owning their railroad systems, shows con- clusively that such railroads as were profitable to build, were never built by the government, and so long as railroads were profitable for private interests to operate they were not pur- chased by the government. When a European government originally constructed a rail- road, it was because private 18 capital would not take the risk. In most cases, these European governments were forced to build the railroads. The great railroad systems of Europe, Asia, and Africa have been con- structed for political, strategic, and social purposes. They were not built as money- making propositions. The German government does not construct its great east and west lines to carry merchan- dise and passengers, but rather for the purpose of rushing troops to the Russian and the French frontiers. When Rus- sia constructs railroads across Siberia, or France finances railroads in Africa, it is for po- litical rather than financial reasons. 19 If a study is made of the cases where railroads previously built by private enterprise have been purchased by foreign gov- ernments, it will be found that the purchase was made either for the above reasons or else to help out stockholders who were loaded with an unprofit- able proposition! The idea of attempting government own- ership to secure more efficient management has never entered the minds of these European nations when building or pur- chasing railroads. The purpose has been either to relieve stockholders of unprofitable investments or else to form a part of some military or politi- cal policy. Hence, it will be 20 seen that if the United States government should take over the ownership of its railroads, it would not be following in the footsteps of European na- tions, as our problem is entirely different from that abroad. The only excuse which the United States government could have for OAvning or oper- ating its present railroads, is that it thought it could do so more efficiently than private parties. Therefore, if the ques- tion is ever put to a vote, the referendum should not read: "Shall the government pur- chase the railroads.^" Rather the question should read: "Will the government more efficiently operate the rail- 21 roads than will private corpo- rations?" Hence, students of funda- mental conditions believe that holders of legitimate railroad securities have little to fear and much to hope for from govern- ment ownership. So long as it is profitable for private cor- porations to operate the rail- roads, they will not be pur- chased by the government; but when it is unprofitable for pri- vate corporations to operate the railroads, then the govern- ment will probably be induced to purchase them. The tax payers have much more to fear from government ownership than have the stockholders of the railroads. This is espe- 22 cially true in view of the de- cision of the United States Congress to make a valuation of the various railroad proper- ties of the nation. Property Valuation This valuation of the rail- roads of the United States is the greatest and most impor- tant development in statistical work ever attempted since the inauguration of the Census De- partment. Although this val- uation was at first feared by investors, yet it already is proving a protection. At times, all eyes are focussed on the Interstate Commerce Commis- sion, but it would be much wiser to give less attention to 23 this Commission and more to the men who appraise the rail- road systems. Few people rea- lize the tremendous political, economic, and social impor- tance of this great work, the results of ^vhich will be far- reaching for many years. The report of this valuation board will be to the Interstate Commerce Commission what the Constitution of the United States is to Congress and legislatures. At present this Commission at Washington has a free hand to do almost anything it wants to do; but after the railroads are prop- erly valued and a basis has been provided upon which rates, wages, and dividends can justly be based, a different situ- ation will exist. Moreover, this \vork should be especially beneficial to the bonds of American railroads, the secu- rity of which is sure to be im-^ proved by both the work of the valuation board and any legislation which regulates the issuance of further securities. Industries in which the gov- ernment can easily supply a duplicate service have much to fear from government compe- tition or operation, but the rail- roads are not in such a class. The United States government will never duplicate nor com- pete with the present railroads as it has competed with the ex- press companies. The only 25 thing it can do is either to reg- ulate private ownership or else to purchase outright or guar- antee securities. So long as it gives investors a fair deal, the government will continue to have the privilege of control- ling without real ownership; but whenever it does not give investors fair treatment, it will be forced to purchase ;— not for the protection of the shippers, but for the protection of the investors! Had the govern- ment not attempted the work of valuation, one might have feared that the Interstate Commerce Commission would abuse its power and soon force government ownership upon the citizens of the United 26 States; but now that this work of valuation has been started, there is little to fear on this score. It is a case of "heads I Avin, tails you lose" in favor of the owners of the railroads. This valuation is showing such high figures as already to delay thoughts of purchase, and later , it may even result in restrict- ing the activities of the Inter- state Commerce Commission to fairly narrow limits. Ownership of Freight Cars There is, however, one factor slowly developing which may change the entire aspect of the situation. The great ad- vantage to the public of the 27 railroad consolidations, which was so evident until the North- ern Pacific-Great Northern de- cision, was the interchange and joint ownership of equipment. For instance, if the Northwest were favored with bounteous crops and the crops of the Cen- tral West were not very good, then it was the plan that any of the equipment of the "Bur- lington" could be used by these two northwestern roads. In the same way, under oppo- site conditions, the equipment of the latter roads could be sent into "Burlington" territory. Mr. Harriman's plan for much larger railroad systems pro- vided for the interchange of equipment on even a more radical scale. 28 Of course, the railroads already have an association which performs certain joint services; but no association could safely be formed under private ownership actually to control this tremendous power and finance the purchase of new locomotives and cars. Yet the growth of the country de- mands the constant increase in railroad equipment, which, for economic purposes, should al^vays be sent to the section most needing it. For this rea- son the writer believes that a movement to have the govern- ment assume the responsibility for the building and control of future equipment might be a step in the right direction. 29 Such a procedure would ulti- mately mean the unification of the railroads without pri- vate monopoly and also the just and equal treatment of all sections Avithout the necessity of full government ownership or operation. Moreover, by allow^ing this equipment to move freely in accordance Avith supply and demand under one ownership, great economic Avaste Avould be avoided. How the Nation Could Save Millions Railroad men say that the freight cars of the country are in actual use during the twenty- four hours of the day on an average of only about two 30 hours each day. In other words, the cars are idle all but one-twelfth of the day. As one of the following ta- bles show^s, there are about 2,300,000 freight cars in the United States, and these are worth in round figures about $2,300,000,000. If only one- twelfth of this investment is in operation, there is lost dur- ing the year interest on about $2,000,000,000. Continuous operation for twenty-four hours could not be expected, but on a reasonable basis of efficiency $60,000,000 or more could be saved each year. This distinct loss to the rail- roads by reason of their own- ing and operating their own 31 freight cars could be obviated if all the freight cars of the country viere owned by one company, or by the govern- ment which ^vould rent them to the railroads as needed at a regular per diem rate. This would save much expense and loss of sending empty cars back to their owners, and of allowing equipment to lie idle at one point when it was badly needed in another part of the country. The w^riter suggests that such a great government equipment company could be organized, Avhich would take over from each road all of its freight car equipment, paying therefor, say, half in cash and 32 half in the stock of the com- pany. In this way each road \vould also benefit in whatever saving was effected by divi- dends on the stock of the equipment company. The work also could be car- ried on without the creeping in of graft or favoritism, as very feAV additional employees would need to enter the gov- ernment employ for such work. It appears that since 1889 there has been an increase of over 117 per cent in the num- ber of locomotives. As their average weight exclusive of tenders in the meantime has increased from 40 to 80 tons, their capacity since that time 33 has increased over 300 per cent. Their tractive power has probably increased in a still greater proportion. It is only the increase in size and po^ver that has enabled American rail- ways to meet the transporta- SUMMARY, SHOWING NUMBER, POWER, AND WEIGHT OF LOCOMOTIVES IN THE UNITED STATES SINCE THE YEAR 1902 Tractive Weight Average Year Number Power Without Weight (Pounds) render (Tons) (Tons) 1902 41,225 839,073,779 2,323,877 66.3 1903 43,871 953,799,540 2,206,687 59.4 1904 46,743 1,063,651,281 2,889,492 62.1 1905 48,357 1,141,330,082 3,079,673 63.6 1906 51,672 1,277,865,673 3,459,052 66.9 1907 65,388 1,429,626,668 3,828,045 69.1 tl908 56,867 1,498,793,551 4,012,553 71.0 1909 *56,468 1,503,971,444 4,056,733 72.0 1910 *58,240 1,588,894,480 4,224,208 73.5 1911 *60,162 1,681,495,905 4,637,653 75.0 1912 60,890 1,758,337,381 4,790,645 78.7 1913 63,198 1,907,899,088 6,172,213 81.8 1914 (est, .) 65,000 s 53.3% 2,000,000,000 127.4% 5,350,000 122.5% 82.0 Increase in eleven year 45.3% t Excludes 831 unclassified locomotives, but includes 868 loco- motives of switching and terminal companies. * Excludes locomotives in service of switching and terminal companies and unclassified locomotives, also Mallet locomotives in 1911. 34 tion necessities of the Ameri- can people, and this increase must continue if the people are properly to be served in the future. Hence, the govern- ment must either itself finance the purchase of this new equip- ment or else give an induce- ment to investors which will cause them to provide the necessary funds. Taken in connection with the following table, which gives the number of cars built annually, these figures show how large a proportion of new cars is continually required to replace those destroyed, worn out, or abandoned. For in- stance, where more than 3,000 new passenger cars were built, 35 Pi _M w H H npany ervice umbel < oWa h^ O f^ O >H bfitn H 2« h-l 0)0 o >H <3 ^ p^ < s g 3 D Ui o>tDiHTi(e<5oeoc5i-ioo>i-i o ■* «o t- i>,o,t-^<^'^c>^'^°o, t> i-T o o" otT T-T cd' oT ocT ■ Tj< t;)< >a io u3 CO cq CO CD 00 (N 00 O eq -^ 10 00 10 1-1 o lO^ irs^ eo^ co^ i-j^ 00^ O^ co" t-^ TjT eo" of co" o" 00 CO CO 00 00 CD o O^ i-J^ 00^ O^ tH^ ■ri<^ O^ eo" co" co" i-T c4~ 00" eo~ c- c» c- 00 00 00 OJ rHNrMOSTlft-NOOiHiHt-iOO 0000»OiHU3(NCqOlT-IOOa>0 1-J^ C-^ T-J_ Tj<^ OS^ lO_ 10^ eo^ tH^ lO^ (35^ rj^ o^ cD_ co^ t-^ oo_ o o_ O^ th^ i-j_ 1-1^ ea^ CO T-T T-T T-T T-T i-T i-T ef c ■« ^ to le us a ^ •« t^ W rA CO 13 2 . S g •0 V 3 4> _r to .a;: •t; 0) a C T3 <0 Ii4 0! u 3 S « 73 0.2 ^ 2 n «g ♦ -t- Is 5 H.a 36 there was an increase of only 620 cars reported; and where over 200,000 new freight cars were built, the number re- ported showed an increase of only 63,576 cars. This indi- cates that it takes approxi- SUMMARY SHOWING THE NUMBER OF CARS AND LOCOMOTIVES BUILT SINCE 1899 Number Number Year Locomo- Passenger Freight tives Cars Cars 1899 2,475 1,306 119,886 1900 3,153 1,636 115,631 1901 3,384 2,066 136,950 1902 4,070 1,948 162,599 1903 5,162 2,007 153,195 1904 3,441 2,144 60,806 *1905 5,491 2,551 168,006 *1906 6,962 3,167 243,670 *1907 7,362 5,457 284,188 *1908 2,342 1,716 76,656 *1909 2,887 2,849 96,419 *1910 4,765 4,412 186,357 *1911 3,530 4,246 72,161 tl912 4,916 3,060 152,429 tl913 5,332 3,296 207,684 1914 (Est.) 5,000 3,000 200,000 Total 70,241 44,849 2,435,536 ♦Includes Canadian output. t Includes Canadian output and equipment built in railroad shops. 37 mately 4.7 per cent as many passenger cars and 6.2 per cent as many freight cars as those already in service to make good the annual losses. During the six years follow- ing 1907 there was an increase of only 12 per cent in freight cars and 31 per cent in their capacity, against 31 per cent and 54 per cent, respectively, for only five years preceding 1907. It is the condition demon- strated by these figures that causes the writer to regard a re- turn to normal traffic demands with great apprehension. Steel Cars In August, 1913, the Special Committee on Relations of 38 Railway Operation to Legisla- tion issued a bulletin giving the number of steel and steel under-frame passenger cars in service and an approximation of what it would cost to re- place the remaining wooden equipment with steel. After showing that the construction of wooden equipment in the United States had practically ceased (only 3.3 per cent of that built in 1913 being wood), the Committee gave the fol- lo>ving approximation of cars in service: STEEL PASSENGER CARS IN SERVICE steel Steel Under-frame January 1, 1909 . January 1, 1910 . January 1, 1911 . January 1, 1912 . January 1, 1913 . 629 . 1,117 . 3,133 5,347 . 7,271 673 1,098 1,636 2,399 3,296 Increase 1913 over 19 Per cent of increase 99 . 6,642 . . 1,055% 2,623 389% 39 The Committee further fur- nished a summary giving an ap- proximation of what it would cost to replace the remainder of the passenger equipment \vith steel cars, as follows: COST OF REPLACING WOODEN CARS WITH STEEL Average Number Cost Amount Postal 680 $11,000 $7,480,000 Mail and baggage 2,724 10,000 27,240,000 Mail, baggage and passen- - ger 679 10,000 6,790,000 Baggage and passenger 3,757 10,000 37,570,000 Baggage or express 7,431 8,500 63,163,600 Passenger 23,692 12,800 303,257,600 Parlor, sleeping, dining 6,864 22,000 151,008,000 Business 774 15,000 11,610,000 Motor 326 20,000 6,500,000 Total 46,926 $614,619,100 Cost of All Equipment In the process of renovation and replacement, four-fifths of the locomotives, three- quarters of the passenger cars, and four-fifths of the freight 40 cars have been bought since 1899. Each year the average cost of all locomotives ap- proaches the average sales price of one of the largest manufacturers in 1911, viz., $18,270 per engine. It is within the mark to place their average cost at $ 1 6,000. A fair estimate for wooden passen- ger equipment is $6,500 per car, for freight cars $1,000, and for company's cars $600. Accepting these figures, one arrives at the following ap- proximation : COST OF ALL EQUIPMENT (240,600 miles represented) 63,198 locomotives at $16,000 10,567 steel passenger cars at $12,000 40,282 wooden passenger cars at $6,500 2,300,000 freight cars at $1,000 . 119,819 company cars at $600 . $1,011,168,000 126,804,000 261,833,000 2,300,000,000 71,891,400 Total cost of equipment . $3,771,686,400 41 " The cost of American pas- senger cars alone would pur- chase the entire railway sys- tem of Switzerland; the cost of ^^ American locomotives alone would pay for all the railroads of Belgium, Sweden, Norway, and Denmark; the cost of American freight cars alone would buy the state system of Italy and Hungary with that of Holland thrown in, and the cost of all American rolling stock would pay for the entire French railway system— pri- vate and state— and in each case the American trader would get the worst of the bargain. The mere maintenance and replacement of the three and three-quarter billion dollar in- 42 vestment in equipment cost over $520,000,000 in 1913. If 4 per cent is a reasonable allowance for yearly deprecia- tion, the reader will perceive that nearly $150,000,000 of this amount was required to take care of this account alone. In fact, the annual replacements of locomotives, passenger cars, and freight cars figure out more nearly $165,- 000,000. If either of these sums be deducted from the total cost of maintenance of equipment, it would leave at most only $370,000,000, from which the million dollar a day efficiency theorists would save $365,000,000!"* * Slason Thompson 43 xn CO H lO o 00 w o 00 6 to 00 t- ih" *s 1- 0) o CO Bits tA » 00 o ^- 3 OS o o ^^ CO o O 00 H S o o OS o o Si U M O PQ OS »H to Tji o •«* lo t- eo t- t- co 1-1 lo lo 00 00 00 c~ OS la en TjH^ lO^ O^ O^ lO O^ lO^ o^ os^ 00 1* o 00 lo i-T so" t^ o o o w 1-1 eo OS OS ooo->#ot-c 00^ t-^ TjJ^ c^ cT od" t-^ w" T-T to" oot-cococo>ata o^Tjiosi-e^oooooo coooa>T-iosooot-os«o la^ rJJ^ ~ eo" «d" of TjT of rjT T-T t^ t»t»C-«0«OWtOCD»0 eo»oosocooc» i>c40o>iot^ot~ot-co>OTi< 55 C*t*^^''i,'^'*i^'^'^*^"^"5 0> iH OS t~ CD lO »o C100t>00OTHt-t-O^C~t>Tt*iac<300C^0000 eq OeOrtlTtlOTttOOOOTHi-IOOTltCOOC^C^OOeOiH ooiHooxoc^ciooooooc-^^cceoeo ioeoTHe««DeoTitooc^«eocjOTcqT-iOi-i«N 2; t-oioOT»i»ooocq«oeoco -T iH iH «i "t; H o o Cli >> o >^ »>; i-H to OT K^ ?^ rt 5 iJ CUOi^ o8 fe C v^ o o t; X! J rt g -s ■ OwSopqapq O 13 *i^ ■ ca o o X3 o o O W 0) 3 C4 «D CI of C3 u 05 U ^ '^ V3 ^ ■ o-3. a, 4)Siu 0) B 3 85 d CO t- dd -NOTlJtONeOiOOSOi-JOO JNTHeoeocici^T-ieidiHio M- ooeo 00 o> 00 00 of CO t- Neoeo o o tHOIO s C4tHIO 5 »-4 C4e4C9 II aToi eocT CD t-eo N OStJ* ooco oo eoT-HN lo OS « t- lo o_M oq^co Oi^ d"r-rorc4"to" CO CO 00 CO >a CO lOOOO CO <0'-J.t^ oTi-roT th CO to C4 rH TjJ ^ lo o> t-^ OS »-J d U5 c4 ei 00 ^ eoTHcoffJNOicocieO'HiHio >aooo<-ioscot-e4ooo)iooQOT-i i-llOOO>OCOOSCOOOOOCOeOr}( 00 lo © o t- eo Tij^ o_ 00 1^ CD o ■;>a T-t O COtHCO eoE-t- o t-« 00 CO 00 ■^T^rjl CI _, a d a> S w to *;< 0) b< O IH SuQwO a •H ..S w _ o a U CA CO I CO a . OS CO Is I.- o < g o. a> d> ui ii Ci O J3 V rt o< o CO d" C4 ■^ CO t- co » eo CO T3 0) •4-* a CO a> ki a. a> be V buO « •2 § fe5 CO o» o H 76 «oooe««'«i»«oooooo>N^oot-Tt< o»i>oqocoTjjoeoeot^c«eooqoqt-;»ot-;'«* weflTHi-4mi-Jc>OTHOo>ododo>ojiHC>i-i 52 eooioooioc-MOOioMiHiHeooot-iTHiH « « cs cs ts cs « c-lHlOloe^e^laoO'H,HOJO•«i^csT^oococo+it;*i-^■tJtJ < '-^O 00 <'^(N TJJ^CO «0 00 '^^'O t^OO 00 toio »o c^^ ^ ^ ^ ^ ^ "^ THOOTj°'?-"i^ & S ^ ^ S >■ eo'cTio'io'TH'efcrCTrt- »o"«d cTt^cf lo lo oo~io S Tj4eocDO»ot-eoeoT-'*C0 0>lO^0>Tj<»H^lO«0O0»0> OOOi-ie<5«eOCO«iHeO0>rJt-'*U3'*Tl«THOOOt-lO o (i) aoriiiooO'^^>o«OiHb>iao>eo^ooeoOTtOTHcc S iHtDWOTtlt-lOOTCiieOTHOlONlOt-OlWOOTHOOOTjf CO oTefei'oo'ocrei'i-rof co^cf oTi-Tt- ocT^ eocoioo»eoTH^o»^ 3 e»oeoNiot»(Nooo>THoot-i-icqt-o<>«ooc-t-e«oO'«*oot-{DiOTt(«frJ»Hoa>oot-«o>0'*eoe«i-too> r^lH1-lOOOOOOOOOOoa>cJ50505<3JmOTC^c^>oo OOswoosoJOJOTOJOiCJOsoMoocoootacoeooooococooo 77 In talking with these em- ployees, including those of the most radical tendencies, the writer seldom hears the orig- inal founder of an enterprise criticized. The man who started with nothing, but who through economy, industry, and intelligence has created a large business, commands the respect of workingmen. They know that he started with no more than they had, but through sheer industry and perseverance has forged ahead. Moreover, as long as such a man continues in control of his plant, he has very few, if any, labor difficulties. Having himself worked at the bench, he sympathizes w^ith his men, 78 while the men likewise, know- ing his struggles, respect or fear him. The trouble comes Avhen the original founder dies or retires from business and the man- agement falls into the hands of inefficient sons or else ab- sentee stockholders. Work- men do not object to the orig- inal founder having both the property and the control; nor do they object to the children or other heirs holding the property, but for these chil- dren or other stockholders Avho know little about the business to have control, seems unjust and unwise for all interested. Often do men who have long been in the 79 employ of a plant know much more about the management than these rich men's sons or distant stockholders. More- over, such conditions not only act adversely on labor, but are detrimental to the interests of capital as well. Absentee ownership and the failure of men to act as really efficient trustees in a business in which they are not pecuniarily inter- ested are the causes of most of the large railroad and in- dustrial disasters. Valuable railroads such as the New York, New Haven and Hart- ford, the Boston and Maine, the Pere Marquette, the Chi- cago, Rock Island and Pacific, the Cincinnati, Hamilton and 80 Dayton, are in their pres- ent unsatisfactory condition, owing to this very cause. Hence, in order both to avoid future labor conflicts and to protect one's invest- ment, is it not wise now^ to devise plans which will tend to prevent absentee control in the hands of persons who are not engaged in the industry or acquainted with conditions? This of course means the de- vising of methods whereby the more important employ- ees will be encouraged gradu- ally to acquire the control and the equity belonging thereto. As a preliminary step, the writer believes much could be accomplished by repealing the 81 existing legislation relating to the present use of proxies, which use was never intended when such legislation was first devised. In place thereof, leg- islation could be passed per- mitting the voting by a joint committee of three, of such stock as is not represented in person by actual OAvners at stockholders' meetings. This committee should be made up of one member chosen by the directors— subject to the ap- proval of stockholders pres- ent—one member chosen by the employees, and a third chosen by these two members jointly. To prevent a dead- lock, it could be provided that if such a committee were not 82 formed and ready to act for any meeting, such stockhold- ers' meeting must adjourn with the understanding that if an agreement on all three mem- bers was not reached within thirty days, vacancies on said proxy committee could be filled by certain public offi- cials. -jt 1* -< < < This chapter and the remain- ing one have been written under the supposition that the capitalistic policy is longer to remain in force and that rail- roads will continue to be operated for profit rather than to transport persons and freight safely and expedi- tiously. When the nation 83 realizes that the capitalistic system is foolish, wasteful, and unjust, and frankly determines that railroads shall be run to facilitate communication with the greatest good and least harm to human life— irrespec- tive of profit— then govern- ment ownership will be justified and the remainder of this book not worth the reading. ^ Before such a time comes, however, the voters of the nation should be systematic- ally trained for the event through the teaching in the homes and schools of the fundamentals of life,— such as honesty, moral responsibility, and the necessity of sacrifice. 84 In fact, if Congress should today decide to take over the railroads, it should make the date of change ten years hence and begin at once systematically to prepare the people for the event. Legisla- tion alone cannot bring about better conditions. It must be accompanied at every step by an advance in the intelligence and character of the people. Religion must go hand in hand with legislation and intelli- gence. If government owner- ship of railroads or certain other socialistic plans were tried today, they would sig- nally fail in accomplishing their purpose because the great majority of people are 85 still selfish. When the major- ity of voters see the follies of the capitalistic system, and themselves determine to lead a life of service, then legisla- tion is desirable to make the minority adopt the better methods. Until, however, the majority have truly reached a certain stage of religious development, any legislation in advance of their position is useless. This is a great lesson which the friends of labor and all socialistic movements must learn, viz.: that legislation is of no avail in affecting the actions of the majority, nor in bringing about changes for which the majority are not intellectually 86 and religiously prepared. "A river cannot rise higher than its source," and a government cannot attain a greater degree of unselfish efficiency than the people who form the government have attained. Further, not only is the above true, but the efficiency of a government, owing to the law of action and reaction, is to a certain extent limited by the condition of the worst element in the nation. This is an eco- nomic reason for all social movements tending to benefit conditions in sections and in- dustries with which we are not directly related. 87 The Third Section Service Versus Rates (D |Ould you rather pay two and a half cents a mile and have a comfortable jour- ney, arriving safely and promptly at your destination, or pay two cents a mile and be killed en route?'' This is a question Avhich a famous rail- road president once asked me in connection with a discus- sion of the subject treated in this chapter. He also showed what a little difference a quar- 91 ter, or even a half cent a mile makes to each individual, and yet what a great difference it makes to the railroads. With a given individual, such an increase would amount to only 1/1000 of his annual expenses, but it would result in doubling the net income of the railroads from passenger traffic. In the same Avay, a slight increase of only 5 per cent in freight rates would result in an increase of from 15 to 25 per cent in the total net earnings derived from freight traffic. Briefly, the immediate future of the railroads depends on the collection and proper use of a quarter of a cent per mile! Of course, if railroads are 92 ^'^ivthi.. aiKOiS ^ t^.^fj pen rate divi in rate ol usei lort the slig are adi the: lab( sar t^'i on am th( ac pa permitted to charge additional rates only to declare additional dividends, there is little object in allowing them additional rates, but if a fair proportion of the additional income is used for increasing the com- fort and safety of travel, is not the public better off with a slightly higher rate? There are only one hundred cents in a dollar, and if seventy-five of these cents are required for labor, taxes, and other neces- sary expenses, this leaves only twenty -five cents for interest on funded debt, betterments, and dividends. Moreover, these percentages represent actual conditions during the past few years. Of the twenty- 93 Wise Versus Questionable Legislation The Avriter is certainly not one of those persons who be- lieve in letting the railroads and other corporations alone. Were it not for the present legislation, ^ve doubtless would today be almost slaves to these corporations. On the other hand, there is a vast dif- ference in legislation. Such legislation as attempts to set aside the fundamental laws of supply and demand, action and reaction, reward and punish- ment, is unwise, while a large additional class of legislation is questionable. The most flagrant example 96 of unwise railroad legislation is the arbitrary rate reduction demanded by certain states, when the primary object de- sired is better service and safer travelling conditions. The idea that a farmer can obtain empty cars by favoring legisla- tion for reduced rates, shows an utter lack of knowledge in elementary arithmetic. Yet 90 per cent of the anti-railroad legislation can directly be traced to personal spite on the part of disgruntled shippers and passengers. A man, for instance, who has been treated disrespectfully by a poorly paid freight agent or a saucy conductor determines to have vengeance on the railroads, 97 Instead, however, of demand- ing that the railroads employ a higher grade of help, and alloAving them to assess a proper proportion of the in- creased expense on the public, this disgruntled patron inaug- urates legislation to reduce freight or passenger rates or to inflict some other uneco- nomic burden on the corpo- ration! An illustration of wise legis- lation is that of providing for the elimination of grade cross- ings \vhere the expense is equitably divided among the railroad, the state and the mu- nicipality. To remove all the grade crossings on one railroad alone in this country w^ould 98 cost about $600,000,000, and to remove grade crossings on all railroads in the United States would cost about $5,000,000,000, a sum equal to more than one-third of the entire market value of all rail- roads in the United States to- day. Yet the removal of a grade crossing is a permanent improvement resulting in in- creased safety to the public and decreased operating ex- penses to the railroad, and legislation demanding such improvements is wise, pro- vided the cost is properly dis- tributed among all those bene- fited therefrom. The build- ing of double track and stronger bridges, the purchase 99 and use of steel cars, the instal- lation of block signals, and all legislation developing greater publicity of railroad affairs and more courtesy on the part of railroad employees may be classed as wise legislation, provided arrangements are made for properly distributing the expense. There is of course, another group of legislative acts known as questionable legis- lation, which may or may not be in accordance with eco- nomic law. The so-called extra cre^v law which seeks to make the number of cars the sole determinant of the number of the crew which the train shall have is an illustra- 100 tion of such legislation. Cer- tain railroads have doubtless run trains without a sufficient crew; but to make a hard and fast rule to be applied irre- spective of all other operating conditions is unjust to the railroads and unwise for the public. The dollar simply has one hundred cents, and every one of these cents which a railroad wastes upon an extra crew, leaves one cent less to be spent on double tracking, steel cars, block signals, and similar much-needed im- provements. The law passed by Congress a few^ years ago restricting the working hours of railroad telegraphers may likewise be classed as ques- 101 tionable legislation. An offi- cial of the Pennsylvania Rail- road Company states in this connection: "The application of this law has had a curious effect. Instead of reducing accidents or contributing to that result, instead of making men more likely to take adequate rest, the actual ex- perience has been that we have found more men asleep on duty since that law^ has been in effect than we did before." Legislation providing for compulsory arbitration boards is seldom founded on merit, as the work of such boards almost invariably results in a mechanical compromise. 102 Wages should either be left to supply and demand or else to a court of justice whose decisions are based on actual conditions and not on com- promise. Even legislation providing for the regulation of new security issues by the Interstate Commerce Com- mission may be classed as questionable. When the gov ernment is prepared to under- write the sale of securities which it authorizes, then such authorization will mean some- thing, but otherwise such leg- islation can do little good and may do much harm. Instead of endeavoring to determine how money is to be raised, which should be determined 103 by demand and supply, the federal authorities ought for a while to rest content with seeing that the money raised is properly expended. Cer- tainly there is no reason why the government should favor the purchasers of securities rather than the purchasers of a thousand other commodi- ties. The purpose of the government toward investors should be to see that the game is played fairly, so that the people shall have free ac- cess to all facts connected \vith the issuance and sale of the securities, together with the way in which the proceeds are spent. The writer, how- ever, believes that when people 104 are given every opportunity properly to select an invest- ment, they should both be protected in their profits and compelled to take their losses. Every attempt on the part of legislators to set aside the law of reward and punishment results in disaster. The Real Question This little book does not permit treating of these sub- jects in detail. The writer must be content to emphasize a few fundamental principles. In the first section, under the discussion of government ownership, the point was made that such a step should be postponed as long as pos- 105 sible; but if it were desired to experiment along these lines, a start could be made by the government building all new equipment until it ultimately owned and controlled all the railroad equipment in the country. In the second sec- tion, when discussing the rela- tion between stockholders and employees, the point was made that the best thing stockholders can do is to ac- quire a preferred position as to holdings with a fair but fixed rate of dividend, and to aid employees to acquire the control and equity, since ab- sentee-ow^nership is unfortu- nate for all interests. In this chapter, which treats J06 of service versus rates, this is the point which the writer de- sires to drive home, namely,— instead of the federal government arbitrarily determining rates, and then getting what it can for the people in the way of service, it first should demand better service and improved conditions, allowing the railroads such a rate as will properly distribute the expenses among all persons benefiting there- from. Of course this means that the rights of separate states should gradually be eliminated, since the first requisite is that all sections of the country should be treated equitably and that no special section or industry should be shown partiality. Legislation 107 preventing rebating was dis- tinctly economic and a step in the right direction. Other leg- islation now under considera- tion along similar lines should also receive the hearty support of all. When occasions exist for the Interstate Commerce Commission to determine a rate, irrespective of impending or proposed improvements, what rule then is it to follow? The arbitrary rules based on mileage, cost of operating, or even on the valuation of property, will be found to be unsatisfactory. The great variation in different sections under which railroads are com- pelled to operate, as well as a 108 score of other reasons, make such arbitrary rulings both unjust and unwise. It seems to the writer that the Inter- state Commerce Commission, when attempting to adjust a rate, should endeavor to im- agine what rate would auto- matically exist under ideal competitive conditions, re- membering that ideal com- petition does not mean destructive or monopolistic competition. Experiments will doubtless be tried along more complicated and me- chanical lines, but the Com- mission will finally cast all these formulas and theories aside. Rates can be justly de- termined only by considering 109 what Avages employees would be receiving, w^hat dividends investors w^ould be obtaining, and what rates shippers w^ould be paying under an ideal com- petitive system where the rewards of all were great enough to permit of growth and yet small enough to pre- vent needless duplication. The greatest opportunity, hoAvever, which the Interstate Commerce Commission has in rate-making is in the use of its power in directing the manu- facture and distribution of goods along economic lines. The body which determines passenger and freight rates has the greatest power to distrib- ute properly the inhabitants of 110 a nation. If the cities are be- coming over-cro\vded, and it is desired to build up the coun- try districts, the power to do so lies with the railroad rate- making authorities of the nation. If goods are being un- economically manufactured under artificial conditions in a certain section of the country, the power to change this rests with the rate-making body. If such an opportunity is ever accepted, I am certain that there will be a tendency to raise rates between large centers, and to favor the rural districts and smaller manufac- turing cities. This will per- form the double function of reducing the present rapid 111 growth of terminal expenses and of distributing industries over the entire country, thus relieving congested centers. In fact, the Commission here has a great opportunity to aid in re-locating manufacturing so that it v^ill be done in the section where nature meant it should be done, rather than where railroad officials have designated it should be done. Of course the most vital question now before the Com- mission is that of helping to finance the railroads and to raise new money for exten- sions, improvements, etc. In connection with this, a crisis must be reached before long, as many of the proposed ex- n2 tensions are absolutely neces- sary and capital will not, under present conditions, take chances for a hope of only 6 per cent interest. If capital has an opportunity of either making 20 per cent or losing all, it will take the chance of building new lines and fur- nishing additional money, but if the choice lies between making 6 per cent or losing all, capital will refuse the ven- ture. As the public will soon insist on the new lines, greater terminals, steel equipment, and many other improvements, this means that either there must some day be a reaction from the present stringent laws, and the railroads will be U3 given more latitude, or else the states must some day guarantee certain securities and purchase stock when the stockholders will not take it at par. Things to Consider The railroads today are un- prepared to carry any consid- able increase in tonnage. The net car surplus (aggregate sur- plus minus aggregate short- age) when business is dullest is only about 6 per cent of the cars o\vned. Hence, a small increase in tonnage will quickly convert this net sur- plus into a net shortage. If the government does not al- low the railroads to earn more 114 money, or does not itself finance the purchase of new equipment, shippers will soon find themselves seriously handicapped by equipment shortage. Thus the future of the railroads and the future of the manufacturers, merchants and workmen of a nation are intimately bound together. Without sufficient equipment properly distributed, the ac- tivities of all are handicapped. Hence, the writer earnestly urges his readers to give more thought to procuring addi- tional equipment, double track, block signals, the elim- ination of grade crossings, and the proper expenditure of money, and less to a dis- 115 cussion of the abstract sub- ject of rates. People must be taught the importance of the vote, both the political vote and the cor- poration vote. It is bad enough to neglect going to the polls on election day; but is it not worse to throw into the waste-basket proxies upon the proper use of which the destinies of thousands of em- ployees and scores of com- munities depend I Of course, I recognize the difficulty under the present system of absen- tee ownership of voting with any intelligence. Rather than vote for men about whom he knows nothing, one naturally throAvs proxies into the waste- 116 basket; but under such condi- tions, should such a person be entitled to vote? Should not an absentee stockholder be content to hold bonds or non- voting preferred stock and let the equity and control be held by those actually em- ployed in the business? This, of course, does not mean that one should take collateral trust bonds and let the con- trol rest with gamblers, as did the old stockholders of the Chicago, Rock Island and Pacific Railway Company. It, however, does mean that if one cannot personally and in- telligently exercise his right to vote, it should be exercised by somebody who can. Here ^ 117 again, this readjustment of the equity and control of our great industries can be brought about only through economic education. When corpora- tions were originally started, it never occurred to the founders that the stock would be purchased by persons who were not directly connected with the industry. Condi- tions have changed entirely from what was at first ex- pected. Hence, present con- ditions can likewise be reme- died only by a change, and the writer appeals to rail- road stockholders either to assume personally the respon- sibility of management or else allow it to be acquired by 118 employees who will be re- sponsible therefor. When discussing what is a reasonable return for money invested, the following defi- nition was given by the late Railroad Securities Commis- sion: "One which, under hon- est accounting and responsible management, will attract the amounts of investments needed for our railroad facili- ties." Much has been said here about service and rates, but little about the necessity of paying the market wage for capital. The price of capital is subject to the same laws of supply and demand as the price of labor and the price of any commodity. Capital enters that line of busi- 119 ness and goes to that section of the world where, everything else being equal, it obtains the greatest rate of interest. Hence, the future of the rail- roads depends upon their being able to attract new cap- ital as well as to get employees or patrons. The public de- mands compulsory arbitration in order to provide the rail- roads with employees, but it does not think of compelling the railroads to pay additional dividends in order to provide itself with capital for much- needed improvements. The latter procedure, nevertheless, would be fully as logical as the former. Of course, if only the re- corded stockholders were the 120 real owners of the railroads it might be possible, even though unjust, to sand-bag these stockholders into providing additional capital. The facts are, however, that the owner- ship of the railroads is much more deeply rooted than ap- pears on the surface. One life insurance company with $200,000,000 of assets has more than $120,000,000 in railroad stocks and bonds. The life insurance companies doing business in NeAv York State report about $4,000,- 000,000 of assets, of which nearly one-half are in stocks and bonds owned. Most of this consists of railroad securi- ties, and this proportion prob- 121 ably applies on the average to all the life insurance com- panies in the United States. But for whom are these invest- ments held in trust? They are not held in trust for any few rich individuals but for millions of people who hold life insurance policies, of which there are said to be about 33,000,000 outstanding, under which there must be at least 50,000,000 beneficiaries. This means that the future of one-half of the inhabitants of the United States is indirectly dependent, through these life insurance companies, upon the value of the outstanding secu- rities of the railroads of the United States. 122 This is not all. From the statistics in the possession of the Babson Organization it appears that the entire bond issues of the steam railroads of this country amount to about $9,250,000,000, of which the life insurance com- panies of New York State alone hold about $1,250,000,- 000. Considering the entire country, this probably means that the life insurance com- panies as a whole hold from one-sixth to one-eighth of all the bond issues outstanding of American railroads. When to these investments of the life insurance companies are added the railroad securities held by savings banks, together 123 with various educational, re- ligious, and benevolent insti- tutions, the result is still more astounding. Hence, the writer appeals to the man in the street who thinks he is not an owner of a share of rail- road stock, to recognize these facts. Although he is not a recorded stockholder, yet the value of his savings bank ac- count and his life insurance policy depends directly upon what treatment is being given to the security holders of American railroads. Of every dollar which a workman pays on the premium of his life insurance policy, about 30 per cent is invested in railroad securities, and any legislation 124 adversely affecting the value of such securities adversely affects the value of such poli- cies. In view of the above, two facts are self-evident: (1) The future of the rail- roads depends not simply on their relation to the govern- ment, to the employees, to the investors, or any other one factor, but their future depends on many factors and on har- monizing all factors. The conflict is not simply between certain classes such as the stockholders and the em- ployees, or the government and the shippers, or the invest- ors and the politicians; but all are intimately and almost equally involved. 125 \ (2) The future of every sec- tion of the country, every line of industry, and almost every individual is likewise depend- ent upon the future of the railroads. The brick-layer is temporarily laid off. Why? Because a car-load of bricks has not arrived. Why? Be- cause the manufacturer has been unable to obtain equip- ment. Why? Because the railroad has been unable to obtain the funds for purchas- ing new equipment. Why? Because the savings banks are fearful about buying any more securities, or perhaps because the above-mentioned brick- layer and his associates, on account of being out of work, 126 have not made their custom- ary deposits. Thus the wheel revolves. * * * * Doubtless some of the sug- gestions in this book seem im- practical, if not absurd, to many readers; and some of them are now perhaps un- reasonable. It should, there- fore, be remembered that these thoughts are given, not as recommendations, but simply as suggestions as to what the future of the railroads may bring forth. Moreover, they are published in this way in order to make you— the reader —think. Of one feature, however, the w^riter is certain, viz., that the 127 best interests of all parties- government officials, employ- ees, stockholders and shippers —are ultimately dependent upon mutual co-operation. In accordance with Newton's law, an injustice to anyone will react to the disadvantage of all: while the prosperity of anyone will react to the ad- vantage of all. This means that the future of the railroads depends upon the develop- ment of all interests in charac- ter and intelligence. Finis 128 FUNDAMENTAL STATISTICS KNOWN AS BABSON'S REPORTS Relative to the Underlying Monetary, Mercantile and Investment Conditions We are able to supply and distribute statistics on the subjects upon which the Babson Composite Plots are based. These we supply to Stock Exchange Firms, Bond Houses, Mercantile Houses, Manufac- turers and Investors. By a study of these data each week, one can readily ascertain for himself whether we are in a period of prosperity, a period of depression, or are passing from one to the other; and what should be the next major change in trade, money rates, commodity and investment prices. The cost of this information is very small in comparison with what it is costing firms to collect such data independently, and these figures are absolutely accurate and more up-to-date than if collected by subscribers independently. Following are the several services issued by the Babson Statistical Organization. MEftCANTILE— A service for the manufacturer and merchant, showing favorable and unfavorable business conditions throughout the country, where to push sales, advertising, etc., together with an accurate, up-to-date report of specific industries and their probable trend. INVESTMENT— Designed for the conservative, intelligent investor desiring to obtain the maximum of profit with all losses eliminated, through a use of the "long swings." COMMODITY— Distinctly different from the "Mercantile," as it takes up specific commodities rather than industries, showing whether to buy or hold off, whether to stock up or liquidate. BANKING— A condensed service for bankers, treating of present bond purchases, commercial paper, money rates, etc., aiming to give all information in concise form. LABOR AND SOCIAL— A practical service, showing the trend of the strike and labor situa- tion and discussing Labor, Social and Religious problems from all sides with a view to helping if possible to solve these questions for Employers, Employees and Social Workers. GENERAL SERVICE— A service providing important world wide business, real estate and investment information not otherwise discussed in the preceding services. Advance information on profitable opportunities through- out the world. Further particulars relatl?e to the atwve will be sent gratis on application. Address the BABSON STATISTICAL ORGANIZATION Wellesley Hills, Mass., U. S. A. Books by Roger W. Babson * * * rsrsESS b.krometers COMMBaCIAL P.\PER BONDS AND STCXIKS T^ gCTPKE MBTBOP Of TS\TSTTSG MCSEY SIjM THE FXTI-'RZ OF THE WORKING CI_\S5ES ,hdiz T—ti — ^?^ir4 i_ J. FL~rL"RE OF THE NATIONS =s ti.:o THE FL"TI"RE OF THE THE FITL'RE OF - fti ce B.\B>ON~S STAT15TIC.VL QRG.\-VlZ-\TION WeJiesiey Hills. Mms^. U. S- A. MOODY MANUAL SERVICE ON RAILROAD AND CORPORATION SECURITIES This is believed to be the most comprehensive and reliable year book on American Railroad, Industrial, Public Utility and other Corpora- tions. It contains the history, earnings and full particulars regarding their various stocks and bonds. The two volumes complete with Monthly Supplement. Moody Manual Co.. 33 Broadway, New York City, U. S. A. CORPORATION AND MUNICIPAL BOND AND STOCK OFFERINGS A confidential service for dealers only, which shows the market on all unlisted securities, where they may be bought or sold. Cumulatively and self-indexed, covering about 15,000 issues and always up to date. The National Quotation Bureau, 66 Liberty Street, New York City, U. S. A. INSTRUCTION COURSES For investors, employees of bond houses, stock exchange firms and banks. These courses were prepared by able specialists on railroad, public utility, and other corporations, and are now being studied by the keenest students of England and America. Full details will be sent on request. Investment Bankers Bureau, Wellesley Hills, Mass., U. S. A. « OFFICIAL" CARD SYSTEM Statistics relative to railroad, industrial and copper stocks and bonds are collected, analyzed, indexed and forwarded to subscribers in all parts of the world; printed on standard-sized (Sin. x Sin.) cards, thus allowing for the daily revision of any individual security without interfering with the alphabetical arrangement. Sample cards and complete details on request. Standard StatisUcc Co., 47 West St., New York City, U. S. A. MOODY MANUAl 0« **SJK>AO O RPOtUTlON AiND M AND STOCK Ol tNSTRUO f * • * • • ^ • • * ■■.t », V/^>V^\? ^'^OsW^''^' l// iJ^UK M