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SHOULD THE GOVERNMENT TAKE OVER OUR RAILROADS?
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.
Copyright © 2013 CPRR.org. [Last Updated
8/1/2013]
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