the trouble was not that money was tight, or that money was scarce,
but was due to the scarcity of collateral or security, which is only
another designation for guaranteed confidence.
This is the situation today. There is not a railroad in the South,
North, East or West that could not secure all of the funds necessary
for any development it might desire to make provided it could show
the capitalists to whom application for the loan was made that it
could furnish security which would insure the repayment of the loan
and the interest thereon as due.
I doubt if there is a single southern railway system, the officers of
which would not gladly today take up, consider and block out a scheme
for the improvement and betterment of their property, and commence
preparations to enable their system to fully perform the increased
functions of a common carrier, which the abundant years of the
immediate future promise to require, if they could be sure, and in
turn could assure their financial backers, that the earnings of their
road would be amply and safely sufficient to provide for, and take
care of, the investment necessary.
Therefore, _remember that the needs of the railroads are the needs of
the South_.
I presume there is no planter, miner, manufacturer, producer of any
sort, banker, merchant or professional man in the wide South who
would not say in a moment that every thousand dollars of capital
invested in his vicinity, or in his town, or in his state, would
be gladly welcomed and eagerly sought for, by the planter paying
eight per cent and the merchant and miscellaneous producer from six
to eight per cent, and that approximately one billion of dollars
injected into the commercial channels of the southern states during
the next ten years would bring a relative measure of prosperity to
every man, woman and child within its borders.
When it is considered that this amount of money could be invested in
additional railroad improvements and facilities; that under proper
conditions it could be secured at a rate not in excess of five per
cent; that approximately eighty per cent or more would be spent for
southern labor and southern material, and would find its way through
every artery and vein of southern trade and commerce, it would seem
that the solid South would be thoroughly alive to the burning fact
that--_The needs of the railroads are the needs of the South_.
I might talk to you for hours about the evil and unfairness of
legislative enactments to retard and make unproductive railway
investments; of the injustice of any body of men attempting by
legislation, without giving the railroad corporations proper hearing,
to arbitrarily adjust their rates of toll for either passenger or
freight simply because politicians consider it a popular thing to do.
I might suggest a multitude of things which could be done to increase
the credit of railroads throughout your section.
I might mention a multitude of things which have been done to injure
and impair and prevent railroads securing the necessary capital to
provide for their needs.
I might also attempt to enumerate the ill-advised actions of railroad
managers and employees toward the public.
I might expatiate upon the foolishness and unwisdom of a
corporation--the creature of the public--attempting to dictate to its
master or declining to obey its commands.
It is doubtful, however, if the enumeration of the errors and
shortcomings of the fellow-members of the same family ever tends to
a better understanding or more harmonious relationships. The need
of the hour is a recognition of the interdependent relations which
exist between us all, and to remember--intensely, actively, potently
remember--that an "injury to one is an injury to all," and that
"united we stand, divided we fall."
FOOTNOTE:
[B] This includes $15,000 per mile of duplicated capital.--S. T.
PROBLEMS CONFRONTING AMERICAN RAILWAYS
BY DANIEL WILLARD,
PRESIDENT OF THE BALTIMORE & OHIO RAILROAD.
[An Address delivered at Galesburg, Illinois, to Burlington
Railroad Employes, February 20, 1909, by Mr. Willard, then
Second Vice-President of the Chicago, Burlington & Quincy
Railroad Company.]
A short time ago I had occasion to explain to some of your associates
who happened to be in my office, some of the difficulties the
railroads had been contending with during the two years just past,
and I was asked if I would be willing to come to Galesburg and
explain to other Burlington employes the things I had endeavored to
make clear to them. I replied that I would be very glad to do so, and
I suppose that is how I happen to be here tonight.
I understand that this audience is composed largely of employes of
the Burlington Railroad Company, and I am glad that that is so, and
what I shall say will be addressed particularly to them.
So much has been said and written about railroads during the last
two years, and by many well qualified to do both, as well as by some
not qualified to do either, that it can hardly be possible that any
new thing remains to be said, and I fear I shall only be able this
evening to repeat to you collectively the same things I have already
said to many of you individually.
Under the Burlington plan of organization the Second Vice-President
has direct charge of the operation of the line (responsible, of
course, to the President), and for the last five years I have had
the privilege and honor of holding that office. I refer to this only
that I may by so doing establish my relationship with the various
matters to which I shall later specifically refer, because I propose
to confine my remarks chiefly to home matters; that is to say, to
matters pertaining directly to the Burlington Company. I feel that I
ought to be qualified to speak clearly on that subject, and while I
have naturally read much concerning the general railroad question as
a whole, the same sources of information have also been open to you,
I have no doubt many of you have given the general subject as much or
even more study than I have.
In October, 1907--16 months ago--the Burlington Company did the
largest business in its entire history--ran the most trains, earned
the most money and employed the most men. During that month the names
of 53,000 men appeared upon its pay-rolls; and the same condition
existed quite generally throughout the entire United States. There
was a well-nigh universal complaint of car shortage and lack of
motive power.
Four months later, reports from the Car Efficiency Bureau in Chicago
showed a surplus of over 325,000 freight cars on the American
railroads. In the meantime the Burlington Company had reduced
its force by nearly 18,000 men and it was estimated that the
transportation business of the country had fallen off more than 30
per cent.
What caused this unprecedented change? Men far abler than I have
undertaken to explain, and many reasons have been given, all, I
presume, more or less in harmony with the facts, but influenced no
doubt by each man's point of view. I say, candidly, I do not know
what caused it; that is, assuming that there _was any one cause_, but
I think I can point out to you _some_ of the _contributing_ causes,
at least so far as the Burlington Company is concerned.
A railroad, as you all well know, is a living, growing thing. It is
never finished, or if we think we have finished some certain part,
as was probably thought when the original stone engine houses were
built here some years ago, or when the first bridge was built across
the Mississippi River at Burlington, it always happens that heavier,
larger, and longer engines come along in course of time, forced upon
us by the changed conditions, and our engine house which was built
for all time becomes too short, and our bridge is too light, and
both must be rebuilt. The same thing is going on in every department
of railroad operations--ballast, ties, rails, coaches, station
buildings, even grades and curvature, all come within the changing
influence of time and progress. I referred to the engine house
specifically simply to illustrate my point.
Because of the constant change or evolution which is going on, it is
necessary that Railroad Companies, if they expect to keep abreast
of the times, should make annually large expenditures for such
improvements as from time to time become desirable or necessary, if
the standard of service is to be raised, or even maintained. These
are called extraordinary expenditures, and it is customary on this
Line to prepare each year, as of January 1st, what is called a
Budget, being in effect a list of the more important improvements
considered necessary by the officers of the Road. The Budget shows
the separate items, with description of each, and also estimated
cost. It may and does include such items as new cars or engines
needed, additional sidetracks, new terminal yards, such as you have
here, water treating plants, new coal chutes, etc.
On January 1, 1907, the sum total of the Burlington Budget, as it
stood approved by the President on that date, amounted to something
over $16,000,000.00. It included some new equipment and also some
quite large improvements, such as new yard at Lincoln, grade
reductions between Galesburg and Savanna, etc.
The Burlington System is over 9,000 miles in length, and goes through
parts of eleven different states. On the 1st of January, 1907, the
legislatures in all of the eleven states, I think, were in session.
The Federal Congress was also in session at Washington. Bills having
special reference to railroads were being introduced daily in some of
the legislative bodies above mentioned. I cannot say now that all of
them were against the railroads, but I feel I am justified in saying
that while perhaps some of them if passed might not have injured the
railroads much, none, or at most very few, were intended to help the
roads. In fact, the attitude of the Federal Congress as well as of
most of the state legislatures was considered by nearly all railroad
owners, and officers as well, as distinctly hostile. This belief may
or may not have been justified by the facts--at any rate it existed.
The owners of the Burlington Company believed it. Its executive
officers believed it. I believed it.
The number of bills affecting railroads introduced in the
legislatures of the eleven states above referred to, and in the
Federal Congress, during the session of Winter of 1906-1907 was
over 800--at least, over 800 such bills were actually laid upon my
desk. Among these were bills reducing the passenger fares in several
states; others about reciprocal demurrage--if any one can explain how
such a matter can be made reciprocal; still others fixing the speed
of stock trains, and the size of caboose cars; fixing the hours of
labor for men in certain branches of the service (and I wish to say
here that that part of the Federal law fixing limit of hours for men
in train and engine service has my hearty support); bills having
reference to the liability of the railroads to their patrons and
employes, etc., etc. I do not wish you to understand that I criticise
all, or for that matter, any, of the bills by this enumeration. I
am now simply reciting the facts. But whether the bills were good or
bad, desirable or undesirable, it was clear if some of them became
laws that the expenses of the railroads would in consequence be
largely increased, and no way was provided whereby the revenue or
earnings would be correspondingly raised--in fact, there seemed to be
a demand from all directions that rates should be reduced, and they
were reduced in many states.
Another important movement was also under way at the same time, and
that was in the direction of a general wage increase in practically
all departments. This one item alone cost the Burlington Company
$3,000,000.00 a year.
Now, what effect do you suppose all these things had upon the Budget
and similar questions? Just the same effect that the same kind of
questions in a personal way would have had upon you and your personal
affairs.
You will remember that I said the Budget amounted to $16,000,000 on
January 1, 1907. That was just before this wave of anti-railroad
legislation referred to had fully developed; but when we saw what
was happening, when we read the bills that were being passed
daily, and the others that were under consideration, we became
very much concerned. It seemed clear to us that even if business
continued good--and remember this was ten months before the panic of
November--that our earnings would probably be considerably reduced
by the reduction of freight and passenger rates in various states,
and our expenses were certain to be much increased by some of the
legislation and also by the advance in wages, and it was necessary
to consider where the money was coming from to pay the large bills
that would come due in connection with the Budget program. After
considering the matter very carefully early in January, we decided,
first, not to authorize anything further in the way of improvements
unless actually necessary; and, second, to stop as many things
already authorized as it was possible to get along without. Among
the things so put off or deferred were the building of a new engine
house and necessary shop buildings at Clyde; the construction of a
new line about 55 miles in length from Herrin to the Ohio River;
double track between Galesburg and Bushnell; new passenger depots at
Monmouth and several other places; work on new terminals at Lincoln,
etc. Of course, it may not have seemed to you at the time that we
were stopping, because we still had so many things under way, and you
cannot prudently stop large undertakings all at once--for instance,
we could not stop work on the new yard at Galesburg when it was half
done, and you will recall that it required more than two years to
complete the plan, but we did slow up as much as possible; that is
to say, we tried to finish up such things as were authorized before
January 1, 1907, and which were still considered necessary, but we
did not start any new things. The effect of this is best shown by
the size of the Budget on January 1, 1908--it was then a little over
$8,000,000.00, or about one-half what is was twelve months before.
In the meantime the November panic of 1907 had come upon us, and it
seemed not only best, but necessary, to continue the policy decided
upon in January of that year, and on the 1st of January, 1909, the
Budget, as it then stood, and as it now stands, amounts to a little
less than $1,000,000.00; and this brings us up to the present time.
In February, 1907, I had the honor to be invited to the annual
banquet of the Commercial Club at Clarinda, Iowa, and I was asked
to speak about the railroad situation. After referring to some of
the proposed laws that were then under consideration in the various
states, I continued as follows: "I will not speak of the probable
effect of such a public policy as I have referred to, on the general
railroad situation, as others are much better qualified to do that,
but speaking for the Company which I represent, we view the situation
with much concern, and we have done, I think, what any prudent
manager would do if he saw confronting him conditions which he was
certain would increase his cost of operation a large but unknown
amount and at the same time reduce his revenues--we have planned to
curtail our expenditures wherever possible. I do not mean that we
shall let the property suffer, or lower the character of the service,
but we will not undertake extensions or large improvements until we
can see more clearly where the money is coming from, or if it comes
at all. How far reaching this policy of retrenchment, or perhaps I
should say curtailment, will be, I, at least, cannot say; it will
depend upon the future. Certain it is that our expenditures in that
direction will be much less this year than last, which means, of
course, fewer men employed and less material purchased." It is two
years since that was written, and I regret to say that circumstances
have not yet seemed to justify any considerable change of policy.
The Burlington Company has on its pay-rolls today about 38,000 men,
15,000 less than in October, 1907, and 7,000 less than in February,
1907. We are doing all the things that we consider necessary for the
safe operation of the trains, and for the proper maintenance of the
property, but conditions so far have not seemed to us to justify a
resumption of the policy of betterments and extension followed during
1906 and the preceding years. I do not know absolutely that it is so,
but I imagine that the other Railroad Companies have been pursuing
much the same course as we have here. The latest reports indicate
that the total railroad mileage of the United States is about
230,000, so that the Burlington's mileage is about one-twenty-fifth
of the whole, and if you multiply what has happened on this road
by twenty-five, you will get a result for the whole country which
will probably not be far from the truth. In fact the Eastern roads
suffered much more from the actual business depression than we did in
the West.
It has been stated by men who should be competent judges that from
one-third to one-half of all manufactured steel and iron is used
either directly or indirectly by the railroads, and that fully
one-half of all the lumber manufactured is so used. When it became
necessary for the railroads to stop buying new cars and engines, and
also to stop all new construction and improvements, when possible
to do so, you can well understand the effect that that course must
have had upon the two particular lines of business just mentioned. Of
course, many other lines were similarly affected, and it would seem
logical that no full and real resumption of business can be expected
until the railroads are again able to resume the policy which they
were forced to abandon early in 1907.
When will that time come? I do not know. What will bring it about?
I do not know that either, but I do know what will help matters
greatly, at least so far as the Burlington Company is concerned;
but before saying what I have in mind in that connection, I will
digress a little, and briefly explain something of the financial
responsibilities of a large Railroad Company, because in spite of
all we hear about corrupt management, stock watering, etc., it is
still a fact that the railroads did cost something, and the money
that was used for that purpose was all, or very nearly all, furnished
by private persons like yourselves, and it was furnished by them
for investment because they thought or hoped such an investment
would be profitable to them, for there is, there can be no other
reason for investing money in anything, unless it be invested for
charitable purposes. The Burlington System today, as I have said, is
over 9,000 miles in length. It has large terminals in Chicago, St.
Louis, Kansas City, and the other great cities it reaches. It owns
1,600 locomotives, 1,200 passenger cars, and 52,000 freight cars.
The last annual report shows that its bonded debt (or the size of
its mortgage) amounts in round numbers to $165,000,000.00, equal
to about $18,000.00 a mile. This mortgage is legally entitled to
interest at the average rate of 4.185 per cent per annum, because
it is so specified in the bond, and that interest must be paid,
or the mortgage would be foreclosed just as would happen if you
failed to pay the interest on a mortgage, in case you happened
to have one on your home. In addition to the bonded debt above
referred to, there is outstanding $110,000,000.00 of stock in round
figures, or about $12,000.00 a mile, making a total capitalization
of $30,000.00 per mile. We are constantly told that the American
railroads are overcapitalized, and yet the Burlington Road could
not be replaced today for twice its capitalization. I doubt if it
could be duplicated for three times its outstanding capital. The
stock, as you know, receives as interest or dividends whatever sum
the Directors may decide to pay, out of what is left after paying
the operating expenses, taxes, and interest on the mortgage. If
there is nothing left after paying the other items mentioned above,
the stockholders receive nothing, so that there is a certain risk
connected with an investment in railroad stock that does not apply
to railway or Government bonds. For a number of years the Burlington
Company has paid 8 per cent dividends to its stockholders. It has
earned more than that, as the annual reports show, and the Directors
might legally and properly have paid larger dividends, but they did
not, and all the money earned in excess of 8 per cent on the stock
has been spent for betterments, new equipment, etc. This policy,
pursued through a long period of years, as it has been, explains how
it is that the Burlington is in such good physical condition as it
is today, and with such a low capitalization. With this explanation,
you will understand, I am sure, that with an increase per year in
wages alone of $3,000,000.00, together with other increases due to
legislation, such as $325,000.00 per year because of the nine-hour
law for operators, and a smaller income because of rates reduced
(freight and passenger) in many states, the surplus, if any, after
paying dividends would be much less than formerly, and if any new
work was undertaken it would be necessary to keep its cost within
such surplus as might be available, or else borrow the money with
which to pay for such work. I hope I have now made clear why it was
that we became worried about the Budget in January, 1907, and why for
the last two years we have been trying, so to speak, to get our house
in order. It will perhaps be said that we could have borrowed money
for new extensions, betterments, etc., and that is actually what we
were compelled to do, in order to complete the Budget plans above
referred to; but what prudent man would want to borrow beyond his
forced necessities, at a time when the future seemed so uncertain,
and when the interest on the money so borrowed would add that much
more to his existing burdens? The same sound principles should and
do underlie railroad operations that you should and do apply to
your own personal affairs. The items are larger in the case of the
railroad--that is all.
I will now repeat the question--What will bring about a resumption
of business on railroads? And if I have succeeded in making clear
what I sought to explain, I think you can answer the question just as
well as 1 can, but I will give you my views, and you will now be in
position to judge whether they seem sound or otherwise.
In my opinion, railroad business, which really means all business,
will recover its former proportions when the influences and forces
at work during the last two or three years shall have ceased doing
the things that have contributed so largely towards bringing about
the depression which we all deplore. Perhaps that is not quite
clear. I do not mean that laws already made must necessarily be
unmade, that wages raised must be reduced, but we must have a rest.
We must be given time and opportunity to work out the new problems
that have been forced upon us during the last two years. We must be
given a chance to find out what it is going to cost to meet the new
requirements, and also how much our revenues are going to be reduced
by reduction of rates. Perhaps it will be found that by new methods
growing out of the exigencies of the case we will still be able to
earn a surplus sufficient to justify the resumption of extraordinary
expenditures as formerly. If not, then, either rates must be
advanced, or wages be reduced, or improvements must wait or be
carried on with borrowed money and railroads will be slow to increase
their interest-bearing debt under such circumstances.