THE RAILROADS
Nothing in this country furnishes a better example of how a business may
be turned from its function of service than do the railroads. We have a
railroad problem, and much learned thought and discussion have been
devoted to the solution of that problem. Everyone is dissatisfied with
the railways. The public is dissatisfied because both the passenger and
freight rates are too high. The railroad employees are dissatisfied
because they say their wages are too low and their hours too long. The
owners of the railways are dissatisfied because it is claimed that no
adequate return is realized upon the money invested. All of the contacts
of a properly managed undertaking ought to be satisfactory. If the
public, the employees, and the owners do not find themselves better off
because of the undertaking, then there must be something very wrong
indeed with the manner in which the undertaking is carried through.
I am entirely without any disposition to pose as a railroad authority.
There may be railroad authorities, but if the service as rendered by the
American railroad to-day is the result of accumulated railway knowledge,
then I cannot say that my respect for the usefulness of that knowledge
is at all profound. I have not the slightest doubt in the world that the
active managers of the railways, the men who really do the work, are
entirely capable of conducting the railways of the country to the
satisfaction of every one, and I have equally no doubt that these active
managers have, by force of a chain of circumstances, all but ceased to
manage. And right there is the source of most of the trouble. The men
who know railroading have not been allowed to manage railroads.
In a previous chapter on finance were set forth the dangers attendant
upon the indiscriminate borrowing of money. It is inevitable that any
one who can borrow freely to cover errors of management will borrow
rather than correct the errors. Our railway managers have been
practically forced to borrow, for since the very inception of the
railways they have not been free agents. The guiding hand of the railway
has been, not the railroad man, but the banker. When railroad credit was
high, more money was to be made out of floating bond issues and
speculating in the securities than out of service to the public. A very
small fraction of the money earned by the railways has gone back into
the rehabilitation of the properties. When by skilled management the net
revenue became large enough to pay a considerable dividend upon the
stock, then that dividend was used first by the speculators on the
inside and controlling the railroad fiscal policy to boom the stock and
unload their holdings, and then to float a bond issue on the strength of
the credit gained through the earnings. When the earnings dropped or
were artificially depressed, then the speculators bought back the stock
and in the course of time staged another advance and unloading. There is
scarcely a railroad in the United States that has not been through one
or more receiverships, due to the fact that the financial interests
piled on load after load of securities until the structures grew
topheavy and fell over. Then they got in on the receiverships, made
money at the expense of gullible security holders, and started the same
old pyramiding game all over again.
The natural ally of the banker is the lawyer. Such games as have been
played on the railroads have needed expert legal advice. Lawyers, like
bankers, know absolutely nothing about business. They imagine that a
business is properly conducted if it keeps within the law or if the law
can be altered or interpreted to suit the purpose in hand. They live on
rules. The bankers took finance out of the hands of the managers. They
put in lawyers to see that the railroads violated the law only in legal
fashion, and thus grew up immense legal departments. Instead of
operating under the rules of common sense and according to
circumstances, every railroad had to operate on the advice of counsel.
Rules spread through every part of the organization. Then came the
avalanche of state and federal regulations, until to-day we find the
railways hog-tied in a mass of rules and regulations. With the lawyers
and the financiers on the inside and various state commissions on the
outside, the railway manager has little chance. That is the trouble with
the railways. Business cannot be conducted by law.
We have had the opportunity of demonstrating to ourselves what a freedom
from the banker-legal mortmain means, in our experience with the
Detroit, Toledo & Ironton Railway. We bought the railway because its
right of way interfered with some of our improvements on the River
Rouge. We did not buy it as an investment, or as an adjunct to our
industries, or because of its strategic position. The extraordinarily
good situation of the railway seems to have become universally apparent
only since we bought it. That, however, is beside the point. We bought
the railway because it interfered with our plans. Then we had to do
something with it. The only thing to do was to run it as a productive
enterprise, applying to it exactly the same principles as are applied in
every department of our industries. We have as yet made no special
efforts of any kind and the railway has not been set up as a
demonstration of how every railway should be run. It is true that
applying the rule of maximum service at minimum cost has caused the
income of the road to exceed the outgo--which, for that road, represents
a most unusual condition. It has been represented that the changes we
have made--and remember they have been made simply as part of the day's
work--are peculiarly revolutionary and quite without application to
railway management in general. Personally, it would seem to me that our
little line does not differ much from the big lines. In our own work we
have always found that, if our principles were right, the area over
which they were applied did not matter. The principles that we use in
the big Highland Park plant seem to work equally well in every plant
that we establish. It has never made any difference with us whether we
multiplied what we were doing by five or five hundred. Size is only a
matter of the multiplication table, anyway.
The Detroit, Toledo & Ironton Railway was organized some twenty-odd
years ago and has been reorganized every few years since then. The last
reorganization was in 1914. The war and the federal control of the
railways interrupted the cycle of reorganization. The road owns 343
miles of track, has 52 miles of branches, and 45 miles of trackage
rights over other roads. It goes from Detroit almost due south to
Ironton on the Ohio River, thus tapping the West Virginia coal deposits.
It crosses most of the large trunk lines and it is a road which, from a
general business standpoint, ought to pay. It has paid. It seems to have
paid the bankers. In 1913 the net capitalization per mile of road was
$105,000. In the next receivership this was cut down to $47,000 per
mile. I do not know how much money in all has been raised on the
strength of the road. I do know that in the reorganization of 1914 the
bondholders were assessed and forced to turn into the treasury nearly
five million dollars--which is the amount that we paid for the entire
road. We paid sixty cents on the dollar for the outstanding mortgage
bonds, although the ruling price just before the time of purchase was
between thirty and forty cents on the dollar. We paid a dollar a share
for the common stock and five dollars a share for the preferred
stock--which seemed to be a fair price considering that no interest had
ever been paid upon the bonds and a dividend on the stock was a most
remote possibility. The rolling stock of the road consisted of about
seventy locomotives, twenty-seven passenger cars, and around
twenty-eight hundred freight cars. All of the rolling stock was in
extremely bad condition and a good part of it would not run at all. All
of the buildings were dirty, unpainted, and generally run down. The
roadbed was something more than a streak of rust and something less than
a railway. The repair shops were over-manned and under-machined.
Practically everything connected with operation was conducted with a
maximum of waste. There was, however, an exceedingly ample executive and
administration department, and of course a legal department. The legal
department alone cost in one month nearly $18,000.
We took over the road in March, 1921. We began to apply industrial
principles. There had been an executive office in Detroit. We closed
that up and put the administration into the charge of one man and gave
him half of the flat-topped desk out in the freight office. The legal
department went with the executive offices. There is no reason for so
much litigation in connection with railroading. Our people quickly
settled all the mass of outstanding claims, some of which had been
hanging on for years. As new claims arise, they are settled at once and
on the facts, so that the legal expense seldom exceeds $200 a month. All
of the unnecessary accounting and red tape were thrown out and the
payroll of the road was reduced from 2,700 to 1,650 men. Following our
general policy, all titles and offices other than those required by law
were abolished. The ordinary railway organization is rigid; a message
has to go up through a certain line of authority and no man is expected
to do anything without explicit orders from his superior. One morning I
went out to the road very early and found a wrecking train with steam
up, a crew aboard and all ready to start. It had been "awaiting orders"
for half an hour. We went down and cleared the wreck before the orders
came through; that was before the idea of personal responsibility had
soaked in. It was a little hard to break the "orders" habit; the men at
first were afraid to take responsibility. But as we went on, they seemed
to like the plan more and more and now no man limits his duties. A man
is paid for a day's work of eight hours and he is expected to work
during those eight hours. If he is an engineer and finishes a run in
four hours then he works at whatever else may be in demand for the next
four hours. If a man works more than eight hours he is not paid for
overtime--he deducts his overtime from the next working day or saves it
up and gets a whole day off with pay. Our eight-hour day is a day of
eight hours and not a basis for computing pay.
The minimum wage is six dollars a day. There are no extra men. We have
cut down in the offices, in the shops, and on the roads. In one shop 20
men are now doing more work than 59 did before. Not long ago one of our
track gangs, consisting of a foreman and 15 men, was working beside a
parallel road on which was a gang of 40 men doing exactly the same sort
of track repairing and ballasting. In five days our gang did two
telegraph poles more than the competing gang!
The road is being rehabilitated; nearly the whole track has been
reballasted and many miles of new rails have been laid. The locomotives
and rolling stock are being overhauled in our own shops and at a very
slight expense. We found that the supplies bought previously were of
poor quality or unfitted for the use; we are saving money on supplies by
buying better qualities and seeing that nothing is wasted. The men seem
entirely willing to cooperate in saving. They do not discard that which
might be used. We ask a man, "What can you get out of an engine?" and he
answers with an economy record. And we are not pouring in great amounts
of money. Everything is being done out of earnings. That is our policy.
The trains must go through and on time. The time of freight movements
has been cut down about two thirds. A car on a siding is not just a car
on a siding. It is a great big question mark. Someone has to know why it
is there. It used to take 8 or 9 days to get freight through to
Philadelphia or New York; now it takes three and a half days. The
organization is serving.
All sorts of explanations are put forward, of why a deficit was turned
into a surplus. I am told that it is all due to diverting the freight of
the Ford industries. If we had diverted all of our business to this
road, that would not explain why we manage at so much lower an operating
cost than before. We are routing as much as we can of our own business
over the road, but only because we there get the best service. For years
past we had been trying to send freight over this road because it was
conveniently located, but we had never been able to use it to any extent
because of the delayed deliveries. We could not count on a shipment to
within five or six weeks; that tied up too much money and also broke
into our production schedule. There was no reason why the road should
not have had a schedule; but it did not. The delays became legal matters
to be taken up in due legal course; that is not the way of business. We
think that a delay is a criticism of our work and is something at once
to be investigated. That is business.
The railroads in general have broken down, and if the former conduct of
the Detroit, Toledo & Ironton is any criterion of management in general
there is no reason in the world why they should not have broken down.
Too many railroads are run, not from the offices of practical men, but
from banking offices, and the principles of procedure, the whole
outlook, are financial--not transportational, but financial. There has
been a breakdown simply because more attention has been paid to
railroads as factors in the stock market than as servants of the people.
Outworn ideas have been retained, development has been practically
stopped, and railroad men with vision have not been set free to grow.
Will a billion dollars solve that sort of trouble? No, a billion dollars
will only make the difficulty one billion dollars worse. The purpose of
the billion is simply to continue the present methods of railroad
management, and it is because of the present methods that we have any
railroad difficulties at all.
The mistaken and foolish things we did years ago are just overtaking us.
At the beginning of railway transportation in the United States, the
people had to be taught its use, just as they had to be taught the use
of the telephone. Also, the new railroads had to make business in order
to keep themselves solvent. And because railway financing began in one
of the rottenest periods of our business history, a number of practices
were established as precedents which have influenced railway work ever
since. One of the first things the railways did was to throttle all
other methods of transportation. There was the beginning of a splendid
canal system in this country and a great movement for canalization was
at its height. The railroad companies bought out the canal companies and
let the canals fill up and choke with weeds and refuse. All over the
Eastern and in parts of the Middle Western states are the remains of
this network of internal waterways. They are being restored now as
rapidly as possible; they are being linked together; various
commissions, public and private, have seen the vision of a complete
system of waterways serving all parts of the country, and thanks to
their efforts, persistence, and faith, progress is being made.
But there was another. This was the system of making the haul as long as
possible. Any one who is familiar with the exposures which resulted in
the formation of the Interstate Commerce Commission knows what is meant
by this. There was a period when rail transport was not regarded as the
servant of the traveling, manufacturing, and commercial publics.
Business was treated as if it existed for the benefit of the railways.
During this period of folly, it was not good railroading to get goods
from their shipping point to their destination by the most direct line
possible, but to keep them on the road as long as possible, send them
around the longest way, give as many connecting lines as possible a
piece of the profit, and let the public stand the resulting loss of time
and money. That was once counted good railroading. It has not entirely
passed out of practice to-day.
One of the great changes in our economic life to which this railroad
policy contributed was the centralization of certain activities, not
because centralization was necessary, nor because it contributed to the
well-being of the people, but because, among other things, it made
double business for the railroads. Take two staples--meat and grain. If
you look at the maps which the packing houses put out, and see where the
cattle are drawn from; and then if you consider that the cattle, when
converted into food, are hauled again by the same railways right back to
the place where they came from, you will get some sidelight on the
transportation problem and the price of meat. Take also grain. Every
reader of advertisements knows where the great flour mills of the
country are located. And they probably know also that these great mills
are not located in the sections where the grain of the United States is
raised. There are staggering quantities of grain, thousands of
trainloads, hauled uselessly long distances, and then in the form of
flour hauled back again long distances to the states and sections where
the grain was raised--a burdening of the railroads which is of no
benefit to the communities where the grain originated, nor to any one
else except the monopolistic mills and the railroads. The railroads can
always do a big business without helping the business of the country at
all; they can always be engaged in just such useless hauling. On meat
and grain and perhaps on cotton, too, the transportation burden could be
reduced by more than half, by the preparation of the product for use
before it is shipped. If a coal community mined coal in Pennsylvania,
and then sent it by railway to Michigan or Wisconsin to be screened, and
then hauled it back again to Pennsylvania for use, it would not be much
sillier than the hauling of Texas beef alive to Chicago, there to be
killed, and then shipped back dead to Texas; or the hauling of Kansas
grain to Minnesota, there to be ground in the mills and hauled back
again as flour. It is good business for the railroads, but it is bad
business for business. One angle of the transportation problem to which
too few men are paying attention is this useless hauling of material. If
the problem were tackled from the point of ridding the railroads of
their useless hauls, we might discover that we are in better shape than
we think to take care of the legitimate transportation business of the
country. In commodities like coal it is necessary that they be hauled
from where they are to where they are needed. The same is true of the
raw materials of industry--they must be hauled from the place where
nature has stored them to the place where there are people ready to work
them. And as these raw materials are not often found assembled in one
section, a considerable amount of transportation to a central assembling
place is necessary. The coal comes from one section, the copper from
another, the iron from another, the wood from another--they must all be
brought together.
But wherever it is possible a policy of decentralization ought to be
adopted. We need, instead of mammoth flour mills, a multitude of smaller
mills distributed through all the sections where grain is grown.
Wherever it is possible, the section that produces the raw material
ought to produce also the finished product. Grain should be ground to
flour where it is grown. A hog-growing country should not export hogs,
but pork, hams, and bacon. The cotton mills ought to be near the cotton
fields. This is not a revolutionary idea. In a sense it is a reactionary
one. It does not suggest anything new; it suggests something that is
very old. This is the way the country did things before we fell into the
habit of carting everything around a few thousand miles and adding the
cartage to the consumer's bill. Our communities ought to be more
complete in themselves. They ought not to be unnecessarily dependent on
railway transportation. Out of what they produce they should supply
their own needs and ship the surplus. And how can they do this unless
they have the means of taking their raw materials, like grain and
cattle, and changing them into finished products? If private enterprise
does not yield these means, the cooperation of farmers can. The chief
injustice sustained by the farmer to-day is that, being the greatest
producer, he is prevented from being also the greatest merchandiser,
because he is compelled to sell to those who put his products into
merchantable form. If he could change his grain into flour, his cattle
into beef, and his hogs into hams and bacon, not only would he receive
the fuller profit of his product, but he would render his near-by
communities more independent of railway exigencies, and thereby improve
the transportation system by relieving it of the burden of his
unfinished product. The thing is not only reasonable and practicable,
but it is becoming absolutely necessary. More than that, it is being
done in many places. But it will not register its full effect on the
transportation situation and upon the cost of living until it is done
more widely and in more kinds of materials.
It is one of nature's compensations to withdraw prosperity from the
business which does not serve.
We have found that on the Detroit, Toledo & Ironton we could, following
our universal policy, reduce our rates and get more business. We made
some cuts, but the Interstate Commerce Commission refused to allow them!
Under such conditions why discuss the railroads as a business? Or as a
service?