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Obtaining the best possible rail transportation at the lowest possible cost.

By Ivy L. Lee, Vice President, Pennsylvania Railroad.

An address delivered to the Transportation Meeting of the
Transportation Directorate of the Maine State
Chamber of Commerce and Agricultural League
Augusta, Maine - June, 1921

Mr. Chairman, Mr. Mayor and Gentlemen:

    I esteem it a real privilege to be here on this occasion to discuss with you some of the current problems of the railroad situation. I am particularly gratified at the presence of the boys from your high school, because the railroad problem is not merely one of the present but of the future, and unless we view it in its future aspects as well as its present aspects, we can get no conception of the propositions involved.

    Mr. Mayor, in your very appropriate remarks, you mentioned the fact that to the railroads this transportation problem was of acute and vital interest. I venture to suggest that while it is of course of very great interest and importance to the railroads that the present difficulties be surmounted, it is of really greater interest and importance to the public itself.

    The railroad situation is in a peculiar state. Some years ago, as you know, the Congress passed a law providing for the valuation of the railroad property of this country. There had been a great deal of talk about watered stock, and a great many people had supposed that our railroads did. not have anything like the value in them stated in the securities representing the property. This valuation has now proceeded to such a point that it is pretty clear that the actual intrinsic value is substantially greater than the outstanding security issues of the railroads of the country as a whole.


Railroad Problem Affects Every Citizen.

    The security holders of the railroads of this country are in a position at the moment, if they desire to be entirely selfish, to sit back and let nature take her course in perfect confidence that if the government of this country took over the railroads, the security holders would, perhaps, benefit more than they would if they were to attempt to sell their securities in the open market. The problem, however, has become a very serious one for the citizen. He has got to determine whether to allow the situation to drift along into government ownership or whether he will by intelligent action see to it that private ownership is maintained. It has ceased to be merely a matter of the selfish interest of the security holders.

    We have got to have transportation. That goes without saying, and if private management does not provide adequate transportation for us, we will, of course, insist upon the government doing so. The problem is to determine whether we will get the best results by having the government carry on the service or giving sufficient encouragement to private capital to induce capital to provide the money required to provide the necessary service.

    Our railroad problem is very different from what it is in many other countries. In England, for instance, there is a highly developed railroad system entirely adequate for the needs of their trade. There is a network of lines covering the whole country. The possibilities are pretty well determined and the system is adequate for the present and future needs; therefore, the only problem to determine is what method of regulation and arrangement will secure the best operation of the existing facilities.

Necessity to Provide for Expansion.

    In this country we have thought so often of the situation as it exists today. We have said, "Here is a great network of tracks, bridges, cars, locomotives, and so on."Some of it has been built under conditions we do not like and under methods concerning which there might be some question. We have, therefore, without due thought set out to regulate and restrict the railroads and we have omitted consideration of the fact that the real problem in our country is not to take care of the existing plant. It is an awfully easy matter to pass laws placing restrictions upon existing property we know has got to continue to operate. It is practically an impossibility to stop operating a railroad.

    But our real problem is this: How are you going to get money to build new tracks, provide new cars and new locomotives if your business is going to expand?

    Do you realize that in this country we have very little double track railroad? Up in this part of the country you find single track railroads all around you. Go west of Pittsburg and you find very little double track line; go south of the Potomac and it is almost all single track, and go west of the Missouri and you find only two double track railroads, and yet the Missouri River and Kansas City are still several hundred miles away from the geographical center of this great country.

    Go to Oregon and you will find that great State, larger than Pennsylvania, with just one trunk line railroad across the whole great Commonwealth.

    There are great railroads penetrating sections of our country which are intensely developed. Coming up along the Maine Central this morning I noticed some excellent stations and some that needed rebuilding. When that rebuilding takes place, money must be provided to do it. When your industries develop, when you need more tracks, more locomotives, more bridges, the money has got to be provided to get them.

    How is that money to be obtained? That is the real question. It confronts not so much the railroads themselves. They can stand still, if you like, and continue to run on their existing plants, but that is a problem which really confronts the citizen who wants commerce to expand and is depending upon railroad transportation for its expansion.

    The President of your Chamber of Commerce mentioned the isolation of this State. You might say the State of Pennsylvania was not isolated; nevertheless the State of Pennsylvania must get raw materials necessary for its great manufacturing plants. In order to obtain markets for the products of these great manufacturing plants it must be able to command adequate transportation reaching all parts of the United States. We are absolutely dependent upon transportation for our prosperity.

Best Transportation at Lowest Possible Cost.

    The real test to apply to any efforts to deal with the railroad problem is this question: By what method can we obtain the best possible transportation at the lowest possible cost? I am sure you will agree with me that is the vital question. We have had in this country a system of transportation developed under private ownership. Up to a few years ago there were relatively few restrictions upon freedom in railroad management. Through freedom from restrictions there developed a number of abuses, and we now find it necessary, and wisely so, to regulate the railroads and pass measures to prevent the growth of such abuses.

    But do not overlook this fact, that in spite of the abuses which developed in the history of our railroad progress, we built up a magnificent railroad system, a system paying the highest rate of wages to its employees, paying the greatest amount of taxes in proportion to the investment of any railroad system in the world, and at the same time providing the lowest freight rates and the lowest passenger rates of any great railroad system in the world. Those were great achievements.

    I believe in regulation, and yet at the same time I want to submit this proposition to you business men. We want the government to provide against dishonor and yet at the same time we want to proceed upon the theory that the great majority of business men are honest.

    If we do not proceed on that theory we are lost, but I am sure we all agree that the great majority of business men of all kinds are honest. What is the object of this regulation? Is it to prevent dishonesty? Is it to apply the collective conscience of the country where abuses might develop, or is it to apply the business discretion of the country to the railroad problem? Is it better to give a group of commissioners, a group of regulators free opportunity to regulate fully, or is it better for the country to obtain the benefit of the wisdom and experience and discretion of men who have perhaps devoted their whole lives to the operation of the railroads? The principal fault has been that Commissions have felt themselves empowered to use their business discretion as opposed to the business discretion of the men who really knew the business.

Effects of Regulation in Past Years.

    Prior to the war, and up to 1917, a very peculiar situation developed in this country. Up to 1906 we had very little railroad regulation. In that year we passed what was known as the Hepburn law, which gave the Interstate Commerce Commission power over rates, and that example was followed by the establishment of State Commissions with very great powers; and all these commissions had the power practically to control all railroad rates.

    About the same time the cost of railroad operation began rapidly to increase, wages began to go up through recognition on the part of the railroad managers that raises in wages were justified, and through the operation of arbitration. Communities began to demand better and better transportation, the installation of all kinds of safety appliances, and the general improvement of the standard of transportation. In other words, it was necessary to furnish a better character of transportation for the same money.

    During that same period the railroads made repeated efforts to get increased rates, but practically without success, so that between 1906 and 1917, labor costs and the costs of operation generally were steadily going up and yet the rates were, remaining stationary. The result was that the fat, if you can call it such, on the railroad body was steadily being depleted.

    We are asked very often why we do not reduce freight rates at the present time? We are told that every other business is deflating and taking its medicine; therefore, why do not the railroads cut down their rates and take their medicine?

The Question of Freight Rates.

    I would agree with you perfectly that the railroads should take their medicine, but last year, a year of great prosperity, the railroads made no money at all. During that year the railroads took in $6,000,000,000 revenue and after the smoke had blown away the railroads had $62,000,000 left to pay all charges against invested capital of $20,000,000,000. If the government had not made the guarantee to bridge them over this period you would have had practically every railroad in the United States bankrupt.

    The reason why we can't reduce freight rates today is that during those years, 1906 to 1917, the railroads were unable, as other businesses were, to accumulate fat on their bodies to carry them over the depression of last year, so that we entered this lean year of depression with practically no reserve power to meet the situation.

    Freight rates must of course be adjusted. As soon as operating expenses come down the schedule of rates can gradually be reviewed, but do not for one moment suppose that if you are to have the same standard of transportation this country expects, we can get our rates down to the basis they were before the war. It is not the disposition of the railroad managers that counts in this matter; it is simply a mathematical equation.

    Railroad managers are responsible not alone for providing you with transportation today at certain rates; they are responsible to see that you are provided with facilities when you need them—against a period of great business activity, and if the railroad managers today were to agree to such a reduction in rates as to deflate their capacity to provide for future business so much that when the business was offered they were unable to take care of it, you would accuse them far more than today.

Heritages from Government Control.

    I would like to show you that many of the restrictions and difficulties surrounding the present railroad situation are the heritages of government control during the war. When Mr. McAdoo took over the railroads I think he honestly felt that the end of private management had come and that his job was to make government ownership a success.

    I think he honestly felt that by cutting out the salaries of a lot of Presidents and combining freight offices and passenger offices in a lot of cities and by practicing a lot of obvious economies he could save a lot of money and enable the railroads to earn more money than they had under private management. He became disillusioned very quick and instead of making money, the two years of government operation will cost the government something over $1,000,000,000.

    But the cost of operating the railroads in war times should not necessarily be an indictment against government ownership. I think that government ownership is always a failure, and particularly so under a democratic government. It has always proved so, but I do not think we ought to indict Mr. McAdoo necessarily for the extra cost during the war. I think that we should regard that item as a part of the cost of the war.


Demoralization of Personnel.

    The cost of running our railroads during the war was not the most serious thing that Mr. McAdoo and the government attempt at operation did to this country. The most serious injury inflicted by the government was in the demoralization of the railroad personnel. When Mr. McAdoo took charge he sent out to the railroad personnel of this country a message the effect of which was this:

    Hereafter your allegiance is to the United States government, not to the corporation for which you work or to its managers by whom you have been employed. If you have any injuries that you want redressed come to the United States government henceforth to get them fixed up; if you want any benefits, if you want any promotion, if you want any improvement in your working conditions, hereafter the United States government is the one to whom you should look.

    I won't suggest that it was in Mr. McAdoo's mind that as a result of the gratitude for his efforts in their behalf the employees might feel themselves disposed to pick the Director General as the candidate for President, but if he did (not have that in his mind he was not a human being.

    In addition to that Mr. McAdoo called down to Washington the heads of the great Railroad Labor Unions of the United States, and he practically dealt with the railroad employees of, this country through the representatives of the great Labor Unions assembled at Washington.

    I am not for one moment suggesting any attack on the great railroad labor unions. I believe in them, but I believe they have their proper functions and their proper fields of activity; but let me say this: that putting in Washington the authority to deal from Washington with all the railroad employees of the country took away the power and advantage of experience of every local supervisory officer in obtaining morale and esprit de corps from his men, so that when the government withdrew from operating the railroads and turned them back to their private owners, they found the whole situation disorganized.

    The spirit of loyalty had broken down and an entirely new spirit pervaded the men. The men had been taught by their organizations to object to the return to private ownership so that when private ownership again became a fact these men had no spirit or enthusiasm toward making it a success. Therefore, today, the greatest problem with which the railroads have to deal is to restore the old feeling of loyalty and esprit de corps on the part of the employees of the different lines.

Esprit De Corps Must be Restored.

    There are 2,500,000 railroad employees in this country under normal conditions. These men are performing uncounted millions of tasks, many of them without supervision, and on the performance of each operation depends the success of the machine as a whole. If those 2,500,000 men do not want private ownership to succeed it cannot succeed because the margin between income and outgo with the railroads is necessarily very small and if those employees are careless, indifferent or hostile they can make that slight difference which is now in favor of income a very decided difference in favor of outgo. The great problem before the people and the great problem of the railroad management is to restore the right kind of attitude of the men toward their work in order to make the operation of our railroads as efficient as it ought to be.

    There is one other matter which was a heritage from the government control, to which I would like to call your attention, and let me interject right here, what is often asked when addresses of this kind are made? Yes, we recognize what you say and there may be something in it. It does not look right. What of it, what can we do about it?

    You can do this: If you find anything which I suggest that seems to be wrong and if you find on further inquiry that I am right, put it right up to your congressman and your senator, or write to any other man in public office and tell him how you feel about it. The laws which are placed on the statute books by Congress or by your state legislatures are put there because your representatives believe that you want them to vote for these particular things.

    Those representatives of yours want to do what you want. If the railroad regulating system of this country is wrong in any particular the way to correct it is to have the citizens of this country make an expression to Congress and to the state governments of their views and it will take very little time to correct the evils.

    So many things go on without our realizing what they mean. Let me mention to you two heritages from the government railroad administration which at the present time are embarrassing and of which very few people have any knowledge.


Government's Promises to Railroads Must Be Kept.

    When the President took the railroads over he issued a proclamation to the effect that the security holders of the country could rest assured that the government in its management of the railroads would as scrupulously regard its trusteeship as would a board of directors and that each property would ultimately be returned in as good condition as if it had continued in control of its directors.

    It was found, however, that due to war conditions it was impossible to keep the railroads up as they had been previously kept. Many kinds of material were not obtainable. For instance, it was found that there were not as many cross ties available as were needed or as had been put in during previous years because a great many million ties had to be sent to France. It was perfectly justifiable to skimp what we call "maintenance" on railroads to some extent during war times, but after the government had gotten through with the railroads, of course it was due the managers that their properties should be restored to them in as good condition as that in which they were taken over by the government.

    The government, however, is today maintaining this attitude: that if it puts into the railroad treasury an amount of money equivalent to the sum paid by the railroad companies for this maintenance during the three years previous to which the government took them over, that would be a discharge of its moral and legal obligation. But in the meantime the price of rails, ballast, cross ties, etc., has gone up so that the paying to the railroads of that sum of money does not begin to restore the railroads to the condition in which they were before the government took them over. That is one of the questions which is seriously embarrassing the treasurers of the railroads

Capital Expenditures During Federal Control Should Be Funded.

    The third and last matter I want to bring to your attention is another heritage from government control. During the war it was, of course, necessary for the railroads to make improvements, buy locomotives and do other things, some necessary to take care of the ordinary commerce, some necessary to provide facilities to handle the war business. They were unable to raise money. The government was selling Liberty Bonds and had practically forbidden any private organizations to raise money. So the government said we want you to keep out of the market for money and we will give you the money you need and you can pay us back in the form of securities.

    Under that plan the government advanced $1,200,000,000, which was put into improvements for the benefit of the public. A portion of that amount was "funded" as we say, or represented by temporary obligations on the part of the railroads to the government, but the larger portion of that sum, $800,000,000, I think, was not funded when the properties were returned, and Congress passed a law, the effect of which was that insofar as the railroads owed the government money for these capital improvements, that should be an offset against the amount of money the government owed the railroads as payment for the rent of property under government control.

    This rental money was cash for payment of current expenses; it was part of the working capital; it was absolutely necessary for the railroads to meet their requirements. This capital expenditure was on account of money which if not obtained from the government would have been obtained from the security markets. So that the withholding by the government of this money due the railroads on account of their rentals because of this offset of advances for capital expenditures is a most serious situation and the railroads are today asking Congress to fund this into long time securities so that their capital can be put into working condition.

    The Pennsylvania Railroad ordinarily has a working capital of $50,000,000, not a large sum. At the present time the Pennsylvania Railroad working capital is about $10,000,000 because the government has failed to pay to the railroad some $80,000,000. It is an unheard of thing in the history of that great property to delay for a moment the payment of a voucher after it is once approved, and because the government withholds the payment of $80,000,000, the company is compelled to withhold $10,000,000 due to suppliers of goods.


Necessity for Faith in Railroad Managers.

    There are problems which you ought to consider and if you think they are not right I think you ought to tell your congressmen so, and I think your advice on the subject will be of very great value.

    What we need in this country above all else in matters of relationship between business and government is the restoration of faith in our fellow men. The reason why there is so much need for regulation in this country is because the people had come to distrust a great many men in high places who were running our railroads. There were some instances of betrayal of public trust, but our railroads today are pretty well taken care of.

    I know the railroad executives of this country intimately and I think you will find today there is no group of our citizens which is seeking to discharge its trusteeship to the public service on a higher standard than the railroad men. Look around you and if you find that the railroad men of this country are discharging their trusteeship in that spirit, get behind them and make them feel you are with them.

    It is wise and necessary to have regulation but it is also wise and necessary to have the benefit of the years of experience and ripened judgment of practical railroad managers and you do not want to tie the hands of those railroad managers so that they cannot exercise their discretion and give the railroads and the public the benefit.

    Make the managers of the railroads feel that you are behind them, that you want to see the railroads produce the best service at the lowest possible cost and you will find that the railroad situation is pretty nearly solved.

Transcribed by and courtesy of the Cooper Collection of U.S. Railroad History.


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