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THE REVENUE NEEDS OF THE RAILROADS

HOWARD ELLIOTT

President Northern Pacific Railway Company

OU have complimented me by asking me to appear before you, and I wish to take your time for a few moments to discuss one vital part of the railroad question, namely, "The Revenue Needs of the Railroads."

There are so many features of the present railroad situation that a proper discussion of the whole subject would take many days.

As you know, the Congress, through committees, has been discussing railroad legislation all this year and has not yet been able to come to a conclusion. It seems quite clear, however, that these committees reflect the views of the people that they do not wish government ownership or government control any longer than is absolutely necessary. This makes it all the more necessary to treat the furnishing of transportation as a business function and to permit the railroads to become self-supporting as business enterprises.

This great American railroad system of 260,000 miles, serving 105,000,000 people, is to the nation on a large scale what the farmer's oxen are to him and the rural mail carrier's horses are to him. Just as their oxen and horses must be nourished and kept in good condition to do their work, so must the railroads be nourished and kept in a sound condition if the nation is to grow and our wonderful resources be conserved and developed, and our great future wisely and thoroughly protected.

Prior to Government control the railroad executives realized that in the face of a growing volume of business, the increases in wages and other costs, and the complications of the business were such that this great transportation machine was not receiving sufficient nourishment to keep it adequate in all of its parts for the needs of the country.

Earnest efforts were made from time to time to obtain general increases in rates, not simply in the interest of the bondholders and stockholders, but in the interest of the people as a whole so that they would be encouraged to put part of their great annual

savings into the railroad business in order that the transportation machine would be at all times "ready to serve." An application for a 15 per cent increase in freight rates was made by the Eastern roads in 1917, and was not finally disposed of when the President thought the war conditions made it necessary for him to take possession of the roads, which he did on December 28, 1917.

The President said to Congress on January 4, 1918:

While the present authority of the Executive suffices for all purposes of administration, and while, of course, all private interests must for the present give way to public necessity, it is, I am sure you will agree with me, right and necessary that the owners and creditors of the railways, the holders of their stocks and bonds, should receive from the Government an unqualified guarantee that their properties will be maintained throughout the period of federal control in as good repair and as complete equipment as at present, and that the several roads will receive under federal management such compensation as is equitable and just alike to their owners and to the general public. I would suggest the average net railway operating income of the three years ending June 30, 1917. I earnestly recommend that these guarantees be given by appropriate legislation, and given as promptly as circumstances permit.

The fiscal year ended June 30, 1915, was a poor year; that ended June 30, 1916, a medium year; and that ended June 30, 1917, a fairly good year, and the average net operating income for the three years, generally known as the "standard return" was approximately $935,000,000. This was the Government's measure of the net earning power of the railroad system of the country at that time.

The Secretary of the Treasury was made Director General and the United States Railroad Administration began to organize all departments. They found very shortly that the revenues to be received from the existing rates were not sufficient to meet the growing expenses, and this subject received very careful consideration. In other words, the administration took the businesslike attitude of trying to manage the railroads as a whole so that both ends would meet.

The Interstate Commerce Commission had granted to the Eastern railroads in the summer of 1917 about half of the 15 per cent increase asked for, and granted the remainder on March 15, 1918, after the roads had passed under the control of the govern

The amount, however, was entirely insufficient to meet the rising tide of expenses, and on June 10, 1918, the Director General made passenger rates 3c. a mile instead of 2c. and 21⁄2c. that were in effect in many places as the result of state laws, and on June 25, 1918, increased freight rates about 25 per cent.

The administration naturally hoped that these increases in rates, together with economies that it expected would result from unified operation, would take care of the situation and that there would be sufficient earnings to pay expenses, taxes, and the standard return to the owners.

Before the Senate Committee on January 3, 1919, the Director General testified that he felt the results for 1919 would produce a surplus of $100,000,000 to the government over all requirements, as follows:

Senator Cummins: Then, do you propose, in order to meet the situation, that there shall be another increase in rates?

Director General McAdoo: Not at all, Senator. On precisely the same basis as now exists as to rates, wages and costs of materials and operation, I think we should have a surplus of $100,000,000 for 1919.

In other words, the United States Railroad Administration took the very proper view of the situation that there should be earnings enough to meet all obligations. This policy adopted by the government at that time seems a sound one and better for the American people, in the long run, than to turn constantly to the national treasury and ask it to make up any deficiency in revenue. The latter plan tends to check initiative, reduces energy and economy, and encourages waste. It is a policy that, in the long run, will make the total transportation bill of the people made up of such rates as they may pay in the first instance, plus taxes to replenish the treasury, greater than if the rate is adjusted to the service and every incentive to economy and energy is preserved.

The net operating income for the first year of government operation failed to meet the standard return by approximately $235,000,000. This was in spite of the very earnest, sincere and hard work of the Director General and all of his assistants. In that first year the new rates were not effective for the entire period. There was a very serious winter in parts of the country, and war conditions were most onerous and difficult so that the federal administration had unusual conditions to deal with. It is, therefore, fair to say that 1918 should not be taken as a measure of the results under the new rates inaugurated by the government and under the wage scales that it was necessary to pay because of these conditions.

Figures are now ready for part of 1919, and a fair estimate can be made for the balance of the year. The Director General had hoped that income would be sufficient to meet all outgo, but

the results are disappointing. The figures for the nine months, for Class I roads (earning $1,000,000 or over) show that the proportion of the standard return for that period has not been met by $245,000,000. During the months of July, August and September the roads have just about earned the standard return, and possibly in October they may do the same, but there is every indication that the year will end with a substantial deficit, perhaps $350,000,000 for all railroad operations.

We have at our doors in New England an impressive example of the utter inadequacy of revenues. For the five months ended September 30, 1919, which are very good months in New England, as to weather and operating conditions and as to volume of business, because the great summer travel is at its height, the New England roads failed to earn the standard return for that proportion of the year, namely $15,908,320, by $6,630,658, or 41.7 per cent.

This group of roads is in the most serious condition and must receive aid from increased rates and earnings as soon as government control and the standard return cease, if they are to survive and serve the public.

The roads north of the Ohio River and east of the Mississippi are also in a very critical condition. South of the Ohio and west of the Mississippi River the conditions are a little better, but they are not good anywhere.

For the country as a whole, the net operating income is only 62 per cent. of the standard return (for Class I roads) for the nine months ended September 30, 1919.

Senator Cummins, in his report to the Senate, dated November 10, 1919, in commenting upon estimates of deficits, says:

It is the opinion of the Committee, without reflecting in any wise upon the Railroad Administration, that in the end the loss will be found to be much greater than the estimates submitted.

These deficits must be considered in any forecast of future requirements, and, in addition, there are other elements to be taken into account.

Because of the difficulties in obtaining men and material, due to the war, not as much work has been done on the equipment of the roads, especially the freight cars, as is necessary to keep them up to that standard which the needs of American commerce demand.

Nor have there been placed in the tracks of many of the

roads sufficient rails and ties, as is necessary for the best health of the property, and there have been some failures to do work of other kinds because of the conditions as to men and material. The money necessary to bring the condition of the present properties to a higher standard must be spent in the next few years and is an element in considering the revenue needs of the railroads. This amount cannot to-day be stated exactly, but it will be several hundred millions of dollars.

Again, there are some increases in expenses to be met in 1920 which were not effective for the full year 1919, such as the recent change in rates of wages and rules for men working in shops, estimated at about $50,000,000 a year. Other increases in wages may have to be made, and these will be an important element in the problem.

There is also the probability that as a result of the recent coal strike, fuel will cost more in 1920 than it did in 1919. The railroads' coal bill to-day is running at the rate of at least $300,000,000 a year, and prior to the war was about $225,000,000.

Then the world-wide demand for steel, lumber and all materials for reconstruction work and for doing work that has been postponed or suspended since 1914 means that there will probably be no decrease in the prices of these important elements in the railroad expense account, and there may be an increase.

Additional payments must also be made for new capital to be. used for increasing the capacity of the roads to serve the public. For five years prior to the war the expansion of the roads was not rapid enough to meet the needs of the country, and during the war period even less has been accomplished.

It is not too much to say that for new equipment, with the necessary shops and tools to keep it in order, there should be spent within the next few years $3,000,000,000, and, no doubt, an equal amount for tracks, terminals, electrification and other facilities to make the transportation machine equal to the demands of the country, if growth is to continue.

The increased expenses of states, counties and municipalities, because of higher wages, is being reflected in a constantly increased tax rate, and this also must be taken into account when considering "The Revenue Needs of the Railroads."

In 1910 the taxes paid by the railroads of the United States were $103,000,000, and for 1919 the total taxes will be approximately $250,000,000.