capitalization. Now it may be that there have been abuses; but if
one asks any of these critics what is the grievance to be remedied,
great silence usually falls upon them, for they are unable to
show any more relation between rate-making and either physical
valuation or capitalization than there is between the price of a
pair of suspenders and the physical valuation or capitalization of
a department store. Railroads are continually importuned to make
rates that will "move the business," as in the case of the Western
road just cited, and those parts of the United States which have the
highest railroad capitalization have the lowest average freight rate.
If you will look at the _American Review of Reviews_ for the month of
June, 1908, you will find a very interesting article by Interstate
Commerce Commissioner Lane on "Railroad Capitalization and Federal
Regulation." His program is a very simple one, and while pointing
out that there should be some way of insuring that the proceeds of
all railroad securities shall be actually invested in "acquisition
of property, construction, completion, extension, or improvement
of facilities, the improvement or maintenance of service and the
discharge or lawful refunding of obligations," he says:
"Fundamentally, there is at present no inter-dependence of
capitalization and rate--the latter is not in law, nor in
railroad policy, the child of the former--though railroad men
have sometimes expediently urged the claim, and courts have
sometimes too kindly given it their nod of sanction."
Also,
"The most potent kind of regulation is that which casts the
burden upon the individual to do the regulating himself and
makes him responsible to the law for dereliction; and the plan
for the regulation of capitalization here presented is founded
upon that theory--to require the directors of the railroad
companies to make public announcement of their security issues,
to publish the objects for which such issues are made, and be
responsible for the use of the proceeds in the precise and
limited manner announced. This is far too modest a program to
please those who delight in elaborate methods of procedure
involving much filing of forms and petitions and many hearings,
appraisements, viseings, and solemn givings of consent; and
without question it is not nearly as thoroughgoing a plan as
others which have been devised. But the simpler the plan is,
the better, if it may effect its purpose."
He further says that his program
"does not guarantee the prospective purchaser of the stock that
the stock certificate which bears a printed par value upon
its face does in fact represent property of the full value so
designated; _but this is not a duty which the Government for
any reason is bound to assume_, and I know of no motive arising
out of national policy which compels the assumption of such
responsibility--certainly not at present."
If our complex government shall control all future issues of railroad
capitalization, we may rely upon it that most of the new railroad
construction in this country, instead of being independent, will be
fathered by existing railroad systems, because their established
credit, whatever it may be, will be required.
RECONCILIATION.
Is it not evident that these contradictions never can be reconciled
by untrained men? I believe that for the American railroad the time
has gone by when illiterate men will be put in charge of millions of
dollars' worth of machinery and other property. We are in a new era.
Railroading is rapidly coming to be a profession. We are necessarily
in all things doing more and more specializing. Why not insist that
the regulation also shall be in accordance with ethical principles
and not determined by political expediency?
The great over-shadowing problem of reconciling private capital
and the users of railroads, and the contradictions which I have
mentioned, are the inheritance of this generation of railroad men;
and I have no doubt that this generation, like all previous ones,
will be equal to the task put upon it. Out of the painful processes
of the last four years, we have emerged with some gains. In the
first place, the country now realizes that the one million, five
hundred thousand employes and officers of American railroads are
not surpassed in integrity by any other similar number of business
men. During the four years hardly a voice has been lifted to say
this, and so I am glad to have this opportunity to raise my own in
their commendation. In the second place, it is easier for shippers
and railroad traffic men to be honest than it ever was before.
The stoppage of rebates is a distinct gain, morally as well as
financially. In the third place, it has been demonstrated, I think,
that our Government _ought_ always to be bigger than any corporation,
or any man, or any set of men, and this is a good thing for us never
to forget.
Already publicity has brought about a friendlier feeling between the
people and the railroads, and along certain paths I have no doubt we
shall find our way out of our difficulties, for the American people
are _not_ unfair when they understand a situation.
Upon one occasion I was making a trip over a division of road
where there was no competition and where we therefore enjoyed one
hundred per cent of the business. There was an unexpected stop for
something and a brakeman went to the rear to protect the train.
Presently a wagon-load of girls came in sight. The brakeman took
out his handkerchief and initiated a flirtation. Then discovering
that I had seen the performance and evidently desiring to square
himself, he said without hesitation, "If we make friends of these
people they ride on our road." One could hardly convey better than
that brakeman did to me, an idea which we should never abandon,
namely, that one of the best assets a road can have is friends, and
I suggest that probably our first duty is to keep in good humor and
be considerate one for another. That involves and includes good
service to the public, and nothing will help more to keep the public
in good humor. The people of this country already have the lowest
rates and the highest wages in the world. They are the best people
in the world and are entitled to the best service in everything. I
believe they should insist upon having the best railroads, and when
they so insist, and realize that our population has thus far doubled
every thirty years and will soon be one hundred million, and not
very long after that one hundred and twenty-five million, and that
our transportation necessities double faster than our population
does, they will set about finding out what is necessary to obtain
adequate railroads, and then we shall probably hear less about rates
and more about efficiency and safety. When the people do this they
will soon discover that it is no more disgraceful to make money in
building railroads than in selling land or in merchandising or in
manufacturing or in mining. They will also discover that although
the courts have said railroad investors are entitled to a reasonable
return upon a fair value, no court--not even that great tribunal,
the Supreme Court of the United States--can finally say what is a
reasonable return. This question would still be unsettled because we
have not yet gotten away from our dependence upon private capital.
What is a reasonable return must be answered by the investor as well
as by the commissions or the courts, because it always takes two to
make a bargain, and money, like its human owners, will go where it
has the best prospective reward and the greatest liberty. The people
will find that what we need in this country is not more bureaucratic
government by untrained officials with brief tenures of political
office, or more power to commissions, but more responsibility upon
boards of directors. If statutes are necessary to insure this, well
and good; but if regulation is general in character and national
in scope, is directed against oppression and discrimination, and
designed to promote safety and efficiency and faithful accounting,
the people will get better results from intelligent and honest
directors than they will from the best governmental management which
can be devised; and so long as the railroads are owned by private
investors, those investors will doubtless insist upon their directors
having more and more to do.
I am aware that there is a socialistic trend all over the world.
There is more and more disposition to prescribe medicine for other
people to take, but no amount of legislation will change the
fundamental laws of the universe. The fact is,--notwithstanding our
Declaration of Independence,--men are not created equal. It is a
fine thing for all of us that they are not. There is a diversity of
gifts; money-making is one of them, but a man may have the talent
for making money and be totally unable to build a bridge or paint
a portrait or lead an orchestra or an army, and if fortunes are
acquired under the laws which we ourselves have made, why should we
be envious? Unless a rich man hoards money like a miser, it is--if
not alarmed--continuously at work for all of us, through the banks
or otherwise, in spite of anything he can do, and the cheaper it
can be had, the greater the economy to society as a whole. It is
impossible to reduce everybody to a dead level, and how monotonous
it would be if we could! We don't satisfy everybody even in our form
of government, which we are prone to think is the best in the world.
For example, at the last election six and a half million people
did not get what they voted for. Part of them got what they really
wanted, but on the face of the returns, six and a half million were
disappointed, and yet the country goes happily on, apparently to
greater prosperity than ever.
But how much happier and how much more prosperous we might be if
there were not so much untrained meddling--if there were not so many
brakes upon the wheels of our progress! A brake, we all admit, is
a good thing in its place, but it has no _propulsive_ power, and
the efforts of the time to combine in one man or in any one body
of men the four functions of prosecuting attorney, judge, jury and
executioner, must sooner or later give way. First, because it is
un-American, and where such a condition exists, as Alexander Hamilton
pointed out to the people of New York, "There is no liberty." Second,
because it will not work practically.
Reconciliation of private capital and the users of railroads might,
of course, be brought about by government ownership, because if
there were a deficit the people could pay it in their taxes. Even
then railroad rates could not be made mathematically consistent,
for government is never mathematically consistent. For example, if
I mail a letter to San Francisco or London, I pay two cents, and if
you mail a letter to Evanston you pay two cents. But nobody seems to
want government ownership, although many people contend that that
would be much fairer and more honest than governmental control of
railroads without financial responsibility. Perhaps a middle ground
may sometime be worked out by a profit-sharing arrangement, as in
Chicago between the city and the street railway companies. That would
have its advantages. Among the advantages would be cheaper money for
railroads, if the government would guarantee a minimum return on
agreed valuations. But of course this would be much more complex than
to work out an arrangement with corporations like street railways,
which do a single kind of business at one rate, instead of a business
affecting every commodity of human consumption and stretching through
forty-six states and two territories. However, I think there is
food for thought for all of us in what has been accomplished here
in Chicago, and the professional intellect present tonight may well
think it over.
Finally,--while a man has as good a right to increase his fortune by
investing in railroads as in any other manner, no matter what it may
be, I believe we shall find a solution for some of the puzzles that
beset us,--not through the gospel of tyranny on the one hand, nor
the gospel of equality on the other hand, but through a gospel of
stewardship. Let us all feel that although the acquisitive faculty
is undoubtedly planted in the human breast for some wise purpose,
we are not here primarily for personal aggrandizement. We are
here for service, and the greater our talents or our wealth or our
opportunities the greater our responsibility. We are trustees--for
the users of our railroads, for our employees, and for investors;
and let us welcome all the additional responsibility which may be
put upon us as directors or salaried officials. I am sure this
sentiment will commend itself to all of you, because there is no body
of men in the world which has a higher code of ethics and which has
demonstrated personal fidelity in a higher degree than the Engineers
of America.
FOOTNOTE:
[D] In the United States in 1908 the average contents of loaded
freight cars was 19.6 tons and the average of a freight train
was 351.80. On some of the mineral roads the averages were much
greater.--S. T.
TRANSPORTATION CHARGE AND PRICES
BY LOGAN G. MCPHERSON,
Lecturer on Transportation, Johns Hopkins University. Author of "The
Working of the Railroads."
CHAPTER VI.
Reprinted by permission from "Railway Freight Rates in Relation
to the Industry and Commerce of the United States," by Logan G.
McPherson. Copyright 1909 by Henry Holt and Company, New York.
Vastly the greater proportion of the commodities moved by the
railroads are in the processes of commerce; that is, the conveyance
from the place of consignment to place of receipt in the majority
of cases is sequent to a transfer of ownership. The seller cannot
continue in business unless he obtain a market for his material,
or his merchandise, and the purchaser can not continue in business
unless he secure the material, or the merchandise, which he needs.
The margin within which the added charge for transportation may be
adjusted is therefore limited in one direction by the amount which
the seller of a commodity will accept and the purchaser will pay and
continue in business. If the seller or the purchaser cannot make a
profit at least approximately as great as from other operations in
which it might be feasible for him to engage he will, other things
equal, change his business, and the railroad will no longer have
the traffic that flowed from his operations. A railroad, therefore,
must adjust its transportation charges that production may continue.
This includes the adjustment of rates that products may be sent to
markets, that the products of the region tributary to one railroad
may reach markets in competition with similar products of other
regions, and in competition with other products that will answer the
same purpose.
The wider the markets that the producers can reach, the greater is
the encouragement to production. The more numerous and varied the
sources of supply of which the purchaser has choice, the more likely
that his requirements will be met to his satisfaction. This is the
case whether the sale or purchase be of food, whether it be of raw
material to feed the processes of mill or factory, whether it be
of wares for wholesale distribution, or whether the purchase be of
merchandise by the retail dealer, or the final consumer.
It has long been claimed by the railroads of the United States that
their rates of freight are lower than those of any other country,
and that the nation's progress in industry and commerce has in
large measure been due to the cheapness and the efficiency of its
transportation service. By way of proof has been instanced the
proportion that the transportation charge bears to the selling price
of the staple commodities. It is said that the rate charged for the
transportation of food products does not affect their selling price
in any market of the United States--that price being fixed by the
processes of supply and demand which the amount of the freight rate
does not influence. In the spring of 1907 inquiry was made upon this
point among the produce dealers of the city of New York, who gave the
information contained in the following paragraphs.
The price paid by the housekeeper per dozen for eggs during the
season of shipment seldom exceeds by more than five cents the price
received by the Western farmer who takes them to the country store.
That is, the railroads bring eggs a thousand miles to New York for a
cent or a cent and a half a dozen, and two thousand miles or so for
about two cents and a half a dozen, the dealers taking the remainder
of the five cents as payment for handling. The net difference between
the price paid per pound for butter at the creamery, whether in New
York City or in the Mississippi Valley, and that paid by the New York
retail dealer averages about one and one-half cents for commission
and one cent for freight.
In December, January and February turkeys are taken from the Texas
ranches to marketing centers, the transportation charge on ten
birds weighing one hundred and twenty pounds being about 25 cents.
After these ten birds have been dressed and packed they weigh about
one hundred and two pounds, and the freight rate from Texas to New
York is $1.50 for 100 pounds. That is, a Texas turkey that retails
in the New York market for 20 cents a pound will have paid one and
three-fourths cents per pound to the railroads that took it from
the ranch to the concentration point and thence to the market. The
farmer in Texas received about nine cents per pound, leaving a trifle
over nine cents to be divided between the packing house, the produce
merchant and the retail dealer. Chickens and other dressed poultry
that come from Chicago pay a freight rate of about three-fourths of a
cent a pound, the railroad company supplying a refrigerator car, and
keeping them iced while in transit.
The rail rate from Chicago to New York on grain and grain products
for domestic consumption has been about 17½ cents per 100 pounds;
that is, a bushel of oats or corn or wheat, that may bring in New
York anywhere from 40 cents to $1, has been brought from the Western
farm for from eight to fifteen cents. Hay that has yielded the farmer
$18 or $19 a ton and sells in New York at about $24 has paid the
railroads somewhere from $3 to $5 per ton, according to whether it
came from the meadows of the Ohio or the Mississippi Valleys.
A bullock that weighs 1,200 pounds will, at Chicago, bring on an
average $5.50 per 100 pounds, which includes an average of five cents
per 100 pounds for freight from the grazing grounds. Its total value
at the stock yards, therefore, is $66. When it has passed through
the packing house its weight will have been reduced to 700 pounds.
From Chicago to New York it will pay 45 cents per 100 pounds freight
or, in other words, the 700-pound carcass, which, if retailed at an
average of 15 cents a pound would bring $105, has paid the railroads
between $3.50 and $4 from the far West to the metropolis.
On potatoes the freight rate per barrel containing about two and a
half bushels is $1.05 from Florida, 65 cents from South Carolina, 45
cents from North Carolina, 30 cents from Virginia, and from this 12
cents per bushel the rate scales down to five or six cents per bushel
from nearby regions. The freight rate on tomatoes from Florida is
25 cents per package of six baskets, from Texas 15 cents for twelve
quarts, from Mississippi 76 cents per 100 pounds, and from the nearby
farms eight cents per bushel of twenty-eight quarts. The freight
rate on cantaloups to New York ranges from less than a cent for a
melon from the Carolinas to about two and a half cents for that from
California. Oranges from Florida to New York pay the railroads from
four to nine cents a dozen, and those from California six to twelve
cents a dozen, as they may be large or small. A three-pound can of
tomatoes from Maryland pays the railroad about one-half cent per can.
The freight rates to New York on foodstuffs have been selected as
typical of the transportation charges applying on such commodities
in the main channels of traffic from the West to the East; and, in
so far as fruits and vegetables are concerned, from the South to
the East. The transportation charge per consumer's unit on these
foodstuffs is a trifle less to Philadelphia and adjacent Delaware and
New Jersey; another fraction lower to the great Pittsburg district,
and still lower to the cities of the West and South that are nearer
the places of production. As prices of food products fluctuate within
a fairly wide range and freight rates also fluctuate, though within
but a very narrow range, the rates and prices specified in the
foregoing, as well as in the succeeding paragraphs of this chapter,
cannot be considered as of specific application at any given time in
the future. They were exact at the time they were collated and will
very closely approximate accuracy at any period.
As New York may be considered representative of the places to which
edible products of the West and South are consigned, so also may St.
Louis be considered a typical center of reception of the manufactured
products of the East. The information given in the immediately
following paragraphs was obtained from merchants and manufacturers of
that city.
The transportation charge on the material entering into a pair of
shoes made in a St. Louis factory averages one and one-quarter cents.
The transportation charge required to place that pair of shoes in
the hands of a consumer in any part of the United States averages
between two and three cents. The material entering into an ordinary
bedstead, such as retails in St. Louis for $8, will have paid the
railroad about 40 cents. From ten pounds of nails made in Pittsburg
and retailed in St. Louis the railroad will have obtained a trifle
over two cents, and from ten pounds of wire two and one-half cents.
An axe made in the Pittsburg district that retails in St. Louis for
$1 will have paid the railroads one and one-fourth cents. At Kansas
City that same axe will have paid freight of a fraction over four
cents and at Denver, where the retail price will have advanced to
$1.30, it will have paid 14 cents freight. A padlock retailing in
St. Louis at 50 cents will have paid the railroads a little more
than one-half cent; at Kansas City it will have paid one cent, and
at Denver, where the retail price advances to 75 cents, it will have
paid two cents to the railroads. An eighteen-gallon galvanized iron
tub that retails in St. Louis at 80 cents will have paid the railroad
from place of manufacture two and three-tenths cents; to Kansas City
the freight rate will have been six and one-fourth cents, and to
Denver 15 cents, but here the retail price of that tub is $1. A stove
that weighs two hundred pounds and retails in St. Louis for $18 will,
in carload lots, pay 44 cents to Kansas City or Omaha, and retail
there for $22; $1.48 to Denver, and retail there for $25; $2.50 to
Seattle, and retail there for $30. When a housewife of St. Louis buys
a dozen clothespins she has paid the railroad five ten thousandths of
a cent. If she buys a washboard at 50 cents she has paid the railroad
forty-two one-hundredths of a cent. In Denver she would pay for
that washboard 60 cents, of which the railroad would have received
two cents. The higher rates and prices that have been specified as
applying in Kansas City and Denver may also be taken as applicable to
cities in the interior South and Southwest, such as Oklahoma, Fort
Worth and San Antonio.