For a concise statement of the results accomplished elsewhere under
government ownership I would recommend you to obtain from the Public
Printer, and to read, a short pamphlet entitled "Historical Sketch of
Government Ownership of Railroads in Foreign Countries," presented to
the Joint Committee of Congress on Interstate Commerce by the great
English authority, Mr. W. M. Acworth. It will well repay you the half
hour spent in its perusal. You will learn from it that, prior to the
war, about fifty per cent. of the railways in Europe were state
railways; that in practically every case of the substitution of
government for private operation (with the exception, subject to certain
reservations, of Germany) the service deteriorated, the discipline and
consequently the punctuality and safety of train service diminished,
politics came to be a factor in the administration and the cost of
operations increased vastly. (The net revenue, for example, of The
Western Railway of France in the worst year of private ownership was
$13,750,000, in the fourth year of government operation it fell to
$5,350,000.) He quotes the eminent French economist, Leroy-Beaulieu, as
follows:
"One may readily see how dangerous to the liberty of citizens the
extension of the industrial regime of the State would be, where the
number of functionaries would be indefinitely multiplied.... From
all points of view the experience of State railways in France is
unfavorable as was foreseen by all those who had reflected upon the
bad results given by the other industrial undertakings of the
State.... The State, above all, under an elective government,
cannot be a good commercial manager.... The experience which we
have recently gained has provoked a very lively movement, not only
against acquisition of the railways by the State, but against all
extension of State industry. I hope ... that not only we, but our
neighbors also may profit by the lesson of these facts."
Mr. Acworth mentions as a characteristic indication that after years of
sad experience with governmentally owned and operated railways, the
Italian Government, just before the war, started on the new departure
(or rather returned to the old system) of granting a concession to a
private enterprise which was to take over a portion of the existing
state railway, build an extension with the aid of state subsidies, _and
then work on its own account both sections as one undertaking under
private management_.
I may add, as a fact within my own knowledge, that shortly before the
outbreak of the war the Belgian Government was studying the question of
returning its state railways to private enterprise and management.
Mr. Acworth relates a resolution _unanimously_ passed by the French
Senate a few years after the State had taken over certain lines,
beginning: "The deplorable situation of the State system, the insecurity
and irregularity of its workings." He gives figures demonstrating the
invariably greater efficiency, economy and superiority of service of
private management as compared to State management in countries where
these two systems are in operation side by side. He treats of the effect
of the conflicting interests, sectional and otherwise, which necessarily
come into play under government control when the question arises where
new lines are to be built and what extensions to be made of existing
lines.
He asks: "Can it be expected that they (these questions) will be
decided rightly by a minister responsible to a democratic legislature,
each member of which, naturally and rightly, makes the best case he can
for his own constituents, while he is quite ignorant, even if not
careless, of the interests, not only of his neighbor's constituency, but
of the public at large?" And he replied: "The answer is written large in
railway history.... The facts show that Parliamentary interference has
meant running the railways, not for the benefit of the people at large,
but to satisfy local and sectional or even personal interests." He
maintains that in a country governed on the Prussian principles railroad
operation and planning may be conducted by the Government with a fair
degree of success, as an executive function, but in democratic
countries, he points out that in normal times "it is the legislative
branch of the government which not only decides policy but dictates
always in main outline, often down to the detail of a particular
appointment or a special rate, how the policy shall be carried out."
For corroboration of this latter statement we need only turn to the
array of statutes in our own States, which not only fix certain railroad
rates by legislative enactment, but deal with such details as the repair
of equipment, the minimum movement of freight cars, the kind of
headlights to be used on locomotives, the safety appliances to be
installed, etc.--and all this in the face of the fact that these States
have Public Service Commissions whose function it is to supervise and
regulate the railroads.
The reason why the system of state railways in Germany was largely free
from most, though by no means all, of the unfavorable features and
results produced by government ownership and operation elsewhere, is
inherent in the habits and conditions created in that country by
generations of autocratic and bureaucratic government. But Mr. Acworth
points out very acutely that while German manufacturers, merchants,
financiers, physicians, scientists, etc., "have taught the world a good
deal in the twenty years preceding the war, German railway men have
taught the world nothing." And he asks: "Why is this?" His answer is:
"Because they were state officials, and, as such, bureaucrats and
routiniers, and without incentive to invent and progress themselves or
to encourage or welcome or even accept inventions and progress.
It is the private railways of England and France, and particularly of
America, which have led the world in improvements and new ideas, whilst
it would be difficult to mention a single reform or invention for which
the world is indebted to the state railways of Germany."
The question of the disposition to be made of the railroads after the
war is one of the most important and far-reaching of the post-bellum
questions which will confront us. It will be one of the great test
questions, the answer to which will determine whither we are bound.
V
And, it seems to me, one of the duties of business men is to inform
themselves accurately and carefully on this subject, so as to be ready
to take their due and legitimate part in shaping public opinion, and
indeed to start on that task now, before public opinion, one-sidedly
informed and fed of set purpose with adroitly colored statements of half
truths, crystallizes into definite judgment.
My concern is not for the stock and bond holders. They will, I have no
doubt, be properly and fairly taken care of in case the Government were
definitely to acquire the railroads. Indeed, it may well be, that from
the standpoint of their selfish interests, a reasonable guarantee or
other fixed compensation by the Government would be preferable to the
financial risks and uncertainties under private railroad operation in
the new and untried era which we shall enter after the war. I know,
indeed, that not a few large holders of railroad securities take this
view and therefore have this preference.
Nor do I speak as one who believes that the railroad situation can be
restored just as it was before the war. The function, responsibility and
obligation of the railroads as a whole are primarily to serve the
interests and economic requirements of the nation. The disjointed
operation of the railroads, each one considering merely its own system
(and being under the law practically prevented from doing otherwise)
will, I am sure, not be permitted again.
The relinquishment of certain features of our existing legislation, the
addition of others, a more clearly defined and purposeful relationship
of the nation to the railroads, involving amongst other things possibly
some financial interest of the Government in the results of railroad
operations, are certain to come from our experiences under Government
operation and from a fresh study of the subject, in case the railroads,
as I hope, are returned to private management.
Personally I believe that in its underlying principle, the system
gradually evolved in America but never as yet given a fair chance for
adequate translation into practical execution, is an almost ideal one.
If preserves for the country, in the conduct of its railroads, the
inestimable advantage of private initiative, efficiency, resourcefulness
and financial responsibility, while at the same time through
governmental regulation and supervision it emphasizes the semi-public
character and duties of railroads, protects the community's rights and
just claims and guards against those evils and excesses of unrestrained
individualism which experience has indicated.
It is, I am profoundly convinced, a far better system than government
ownership of railroads, which, wherever tested, has proved its
inferiority except, to an extent, in the Germany on which the Prussian
Junker planted his heel and of which he made a scourge and a horrible
example to the world; and the very reasons which have made state
railways measurably successful in _that_ Germany are the reasons which
would make government ownership and operation in America a menace to our
free institutions, a detriment to our racial characteristics and a grave
economic disservice.
I
_PUNITIVE PATERNALISM IN TAXATION_
I have spoken of the treatment of our railroads in the past ten years as
"punitive paternalism." In some respects this same term may be applied
to our existing and proposed war taxation.
Of course, the burden of meeting the cost of the war must be laid
according to capacity to bear it. It would be crass selfishness to wish
it laid otherwise and fatuous folly to endeavor to have it laid
otherwise.
We all agree that the principal single sources of war revenue must
necessarily be business and accumulated capital, but these sources
should not be used excessively and to the exclusion of others. The
structure of taxation should be harmonious and symmetrical. No part of
it should be so planned as to produce an unscientific and dangerous
strain.
The science of taxation consists in raising the largest obtainable
amount of needed revenue in the most equitable manner, with the least
economic disturbance and, as far as possible, with the effect of
promoting thrift.
The House Bill proposes to raise from income, excess or war profit and
inheritance taxes $5,686,000,000 out of an estimated total of
$8,182,000,000. In other words, almost seventy per cent. of our
stupendous total taxation is to come from these few sources. It seems to
me that the effect and meaning of this is to penalize capital, to fine
business success, as well as thrift and self-denial practised in the
past, thereby tending to discourage saving.
The House Bill fails, on the other hand, to impose certain taxes the
effect of which is to promote saving. Intentionally or not, yet
effectively, it penalizes certain callings and sections of the country
and favors others.
Let me say at the outset that my criticism does not refer to the
principle of an eighty per cent. war profits tax. Indeed, I have from
the very beginning advocated a high tax on war profits. To permit
individuals and corporations to enrich themselves out of the dreadful
calamity of war is repugnant to one's sense of justice and gravely
detrimental to the war morale of the people.
Strictly from the economic point of view, the eighty per cent. war
profits tax is not entirely free from objection. Whether England did
wisely on the whole in fixing the tax at quite so high a rate is a
debatable point, and is being questioned by some economists of high
standing in that country, not from the point of view of tenderness for
the beneficiaries from war profits, but from that of national advantage.
Moreover, conditions in America and England are not quite identical and
I believe it to be a justifiable statement that British industry is
better able to stand so high a tax than American industry, for reasons
inherent in the respective business situations and methods.
However, everything considered, circumstances being what they are, I
believe the enactment of the proposed eighty per cent. war profits tax
to be expedient, provided that, like in England, the standard of
comparison with pre-war profits is fairly fixed and due and fair
allowance made, in determining taxable profits, for such bona fide items
of depreciation and other write-offs as a reasonably conservative
business man would ordinarily take into account before arriving at net
profits.
Amongst the principles of correct and effective taxation, which are
axiomatic, are these:
1. No tax should be so burdensome as to extinguish or seriously
jeopardize the source from which it derives its productivity. In
other words, do not be so eager to secure every possible golden
egg, that you kill the goose which lays them.
2. In war time, when the practice of thrift is of more vital
importance than ever to the nation, one of the most valuable
by-products which taxation should aim to secure is to compel
reduction in individual expenditures.
3. Taxation should be as widely diffused as possible, at however
small a rate the minimum contribution may be fixed, if only to give
the greatest possible number of citizens an interest to watch
governmental expenditure, and an incentive to curb governmental
extravagance.
It may safely be asserted that our war taxation runs counter to every
one of these tested principles.