Critics of private railroad management state that the railroads "broke down" in 1917, just at the time when transportation efficiency was most vitally necessary. If it is true that the railroads then failed in the emergency, we are as much interested now in the causes of the failure as in the failure itself. To get at the causes it is necessary to trace the events of the decade preceding the period of the war. Until a few years prior to our entrance into the war, it had been the traditional policy of the typical American railroad to keep its equipment and facilities well ahead of the demands of growing traffic. The cost of additional or improved equipment, and of additional or enlarged terminals, trackage, and other physical facilities, was met either from current income or from the sale of new securities. As a result of this policy, the typical railroad was always equipped to handle its growing business economically. There was an ample factor of safety, so that the ever-increasing volume of tonnage and passengers could be handled expeditiously and without congestion. The ability to continue this policy depended upon net earnings sufficient to insure ample credit. So long as net earnings justified appropriations for improvements, or were sufficient to assure the investor in new securities, there was no difficulty in keeping pace with expanding traffic. In most cases the earnings from the additional traffic sufficed to pay a reasonable return upon the additional investment. The law of increasing returns had its full application as the improve ments or enlargements in equipment and facilities made it possible, with the larger traffic, to operate at lower unit costs. These lower unit costs enabled the railroads to absorb the gradually increasing wage rates or other additional operating expenses and taxes, and because investors had confidence in railroad securities they were easily marketable. This situation continued as long as net earnings were sufficient. But the gradual tendency of higher operating costs, coupled with a national and state policy of regulation which tended to reduce rather than to increase rates, soon had the effect of reducing net income. The turning point came about 1906, or coincident with the passage of the Hepburn amendment to the Interstate Commerce Act. This amendment, with its power to prescribe maximum charges, gave the Commission complete control over rates. The 1910 amendment went a step further in giving the Commission the power to suspend rates. The period, too, was marked by unusual activity on the part of state commissions and state legislatures. Many new laws were passed, nearly all of which either reduced revenues or increased expenses. The difficulty was aggravated by a conflict of regulating laws as between the states themselves, and as between the states and the Interstate Commission. Coupled with these adverse influences on net earnings came greater activity on the part of the railroad labor organizations in their demands for higher wages. While the steadily growing burdens of increased operating expenses and taxes impinged upon and forced net income downward, the railroads were unable to convince the Government regulating authorities that rates should be increased in a degree which would maintain net income. Consequently it became difficult to appropriate money for betterments, and during the decade which preceded our entrance in the World War the program of extensions, enlargements, and improvements was far below the normal rate of earlier years. Not only were the railroads as a whole unable to raise the funds necessary to equip themselves for prospective increases in traffic, but many were in such financial straits that they found themselves unable to maintain their solvency. The year 1915 marked the peak of railroad receiverships. In September of that year approximately 42,000 miles, or about onesixth of the entire railroad mileage of the country was in the hands of the courts. Among the bankrupt properties were included the following important railroads: Atlanta, Birmingham & Atlantic..... 645 miles 1282 66 1015 66 Chicago, Rock Island & Pacific. Besides these 14 important railroads, 68 smaller properties were then in the hands of the courts. The combined mileage of the 82 roads was 41,988, and their total capitalization amounted to $2,264,002,178.* Under such strained financial conditions it was but natural that railroad development should be halted. New construction practically ceased. The mileage of new railroad built in that year was less than in any year since the period of the Civil War. The figures speak for themselves: MILES OF NEW FIRST TRACK BUILT DURING DECADE The slowing up in railroad development was reflected also in the statistics relating to new *Railway Age Gazette, Oct. 1, 1915, p. 587, and Oct. 15, 1915, p. 676. **Railway Age Gazette, Dec. 31, 1915, p. 1247. equipment. Orders for new locomotives and cars dropped to an unprecedented low level, and drastic retrenchment and curtailment in service were everywhere in evidence. The spokesmen of the railroads made earnest and continued appeals in an effort to arouse the interest of the public and, through the public, the interest of the governmental regulating authorities in the seriousness of the railroad situation. Among these spokesmen none presented the railroad case with more vigor or with more vision than the late James J. Hill. For several years before the World War he foresaw the ultimate effect of the slowing down of railroad development, and he sounded a note of warning, predicting that national embarrassment would come. He plead for a policy of regulation which would make it possible to invest one billion dollars annually in railroad facilities, particularly in terminals. But the warning and the plea were not heeded.* The railroads were able to spend but a fraction of the sum which he regarded as necessary. Consequently the natural increase in traffic (ton-miles double about every 12 or 13 years) soon overtook and exceeded the capacity of the railroads *The inadequacy of our railroad system to meet the demands of our rapidly increasing population and the volume of transportation that our foreign trade demands, and to meet the requirements of a state of war which we face, is startling. We have had many warnings from railroad men as to what would occur under conditions like the present. Their warnings are now being vindicated. The embargoes which the railroads have been obliged to impose on legitimate shipments are a mathematical demonstration on how far short is our arterial system of interstate commerce." (Ex-president Taft, in address at Johns Hopkins University, Feb. 22, 1917.) |