The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
i MEMORMDUM ON THE RAILROAD SITUATION *-3078 3 2 2 A YEAR AFTER THE END OF FEDERAL CONTROL. March 2 1 , 1921. I The C o n d i t i o n from t h e S t a n d p o i n t of t h e S e c u r i t y Holders* During the f i r s t s i x months of p r i v a t e c o n t r o l - the g u a r a n t y p e r i o d - t h e d e f i c i t helow the s t a n d a r d r e t u r n of f e d e r a l c o n t r o l t o be p a i d by t h e government i s about $650,000,000. The n e t e a r n i n g s of t h e l a r g e roads a p p l i c a b l e t o c a p i t a l p u r p o s e s dropped from *516,290,090 i n 1919 t o $62,264,420 i n 1920; t h e o p e r a t i n g r a t i o i n c r e a s e d from 85-25^ i n 1919 t o 93*59% i n 1920. F o r t h e f i r s t twelve months of p r i v a t e c o n t r o l ending February 28, 1921, t h e showing i s worse; p r e l i m i n a r y r e t u r n s f o r J a n u a r y i n d i c a t e an a c t u a l o p e r a t i n g d e f i c i t ; February i s n o t l i k e l y t o show much b e t t e r . While g r o s s revenue i n c r e a s e d over $ 1 , 0 0 0 , 0 0 0 , 0 0 0 , expenses and t a x e s i n c r e a s e d n e a r l y $ 1 , 5 0 0 , 0 0 0 , 0 0 0 , a l most w i p i n g out t h e n e t e a r n i n g s shown i n 1919* The r a i l r o a d s a r e owned by the h o l d e r s of about $10,500,000,000 of bonds b e a r i n g an average i n t e r e s t r a t e of a l i t t l e under 5 p e r c e n t ; by t h e h o l d e r s of about $4,000,000,000 of s t o c k r e g u l a r l y d i v i d e n d - p a y i n g f o r many y e a r s , and of about $3,000,000,000 of n o n d i v i d e n d - p a y i n g s t o c k . ' The annual i n t e r e s t requirements on the bonds and c u r r e n t i n d e b t e d n e s s a r e about $500,000,000 and the r e g u l a r d i v i d e n d requirements about $300,000,000. About $800,000,000 i s t h e r e f o r e r e q u i r e d f o r r e g u l a r a n n u a l d i s b u r s e m e n t s i n o r d e r t o p r e s e r v e t h e i n t e g r i t y of the p r e s e n t f i n a n c i a l s t r u c t u r e . This i s more t h a n $100,000,000 l e s s than t h e s t a n d a r d r e t u r n d u r i n g f e d e r a l cont r o l . Few, i f any, of t h e roads h a v e , d u r i n g t h e l a s t s i x months, shown e a r n i n g s w a r r a n t i n g any d i v i d e n d d i s t r i b u t i o n s i n A p r i l o r J u l y n e x t . A s t i l l l a r g e r p r o p o r t i o n a r e n o t e a r n i n g f i x e d charges and i n t e r e s t on b o n d s . Not a few l a r g e r o a d s , i n c l u d i n g t h e New England roads a s an a g g r e g a t e , a r e showing l a r g e o p e r a t i n g d e f i c i t s . The r e s u l t , as a g e n e r a l i z a t i o n , u n l e s s c o n d i t i o n s r a d i c a l l y and s p e e d i l y improve, i s t h a t d i v i d e n d s must s h o r t l y be passed on a l a r g e p a r t of the $4,000,000,000 ( - p l u s ) of s t o c k and i n t e r e s t be d e f a u l t e d on a s u b s t a n t i a l p a r t of the $10,500,000,000 of bonds. Otherwise s t a t e d , a l a r g e p a r t of the approximately $15,000,000,000 of incomeproducing r a i l r o a d s e c u r i t i e s w i l l soon be d i s c r e d i t e d . Apart from the e f f e c t upon the m i l l i o n s of p e r s o n s b e n e f i c i a l l y i n t e r e s t e d t h e r e i n and upon t h e i n s t i t u t i o n s which h o l d t h e s e s e c u r i t i e s , what w i l l be the e f f e c t upon t h e g e n e r a l f i n a n c i a l and b u s i n e s s s i t u a t i o n ? Considering the amount of " f r o z e n c r e d i t " a l r e a d y e x i s t i n g , c a n t h e s a v i n g s banks and t r u s t companies s t a n d a r a i l r o a d smash? Can t h e Reserve Board cont r o l t h e f i n a n c i a l s i t u a t i o n i f the t h r e a t e n e d r a i l r o a d c r a s h i s allowed t o come? SS3 -2- X-3078 Under p r e s e n t o r g a n i z a t i o n and management C a p i t a l i s f a r i n g very "badly. A f t e r t h e e x p e r i e n c e of t h i s y e a r of p r i v a t e management i t seems h o p e l e s s t o look f o r r e s t o r e d p r i v a t e c r e d i t f o r r a i l r o a d s e c u r i t i e s . New money, e i t h e r f o r e x t e n s i o n s or f o r r e f u n d i n g , cannot he o b t a i n e d on any t o l e r a b l e t e r m s . New s t o c k i s s u e s a r e o b v i o u s l y i m p o s s i b l e . I t i s h i g h time the owners of our r a i l r o a d s r e a l i z e d t h e i r dangerous p o s i t i o n . II. From t h e Stand-point of the P u b l i c and the Government. The r a i l r o a d s produce and s e l l t r a n s p o r t a t i o n ; i t s p r i c e , maximum and minimum, i s made b y the I n t e r s t a t e Commerce Commission. F o r y e a r s t h e e x e c u t i v e s have contended t h a t the r a t e s were made too low. The d e c i s i o n of the I n t e r s t a t e Commerce Commission l a s t summer gave t h e e x e c u t i v e s p r a c t i c a l l y e v e r y t h i n g they a s k e d . There i s now g e n e r a l agreement t h a t the r a t e s a r e a t l e a s t as h i g h as t h e t r a f f i c w i l l b e a r . In some s p o t s t h e y a r e too h i g x , - d e s t r u c t i v e of t r a f f i c , of n e t e a r n i n g s and of g e n e r a l B u s i n e s s . Great q u a n t i t i e s of c e r e a l s and o t h e r f o o d p r o d u c t s a r e n o t worth m r k @ t a I S mSL v p r e s e n t P r i c e s and f r e i g h t r a t e s . Broadly s p e a k i n g , Can e x t r a c t e d from the c r e a s e of ^ r a ? e r a i l r o a d - u s i n g p u b l i c by any i n - nuns Moreover, the government i s now a r a i l r o a d c r e d i t o r f o r about i 1 , 5 0 0 , 0 0 0 , 0 0 0 - a p p r o x i m a t e l y 10$ of the g r o s s v a l u a t i o n of a l l the r o a d s . S u b s t a n t i a l p a r t s of t h e s e l o a n s aad c l a i m s would he u n c o l l e c t i b l e i f the f i n a n c i a l c o n d i t i o n i s n o t improved! Merely as c r e d i t o r , t h e United S t a t e s cannot view w i t h unconcern the c o n d i t i o n of i t s d e b t o r s . 324 X-3078 -3III. From t h e Stand-point of Labor. The American r a i l r o a d p l a n t of about 260,000 m i l e s i s o p e r a t e d by a p p r o x i m a t e l y 2 , 0 0 0 , 0 0 0 of employees, who must r e n d e r f a i t h f u l , e f f i c i e n t and j u s t l y , - and o n l y j u s t l y , - compensated s e r v i c e ; o t h e r w i s e t h e r i g h t s of b o t h t h e u s i n g p u b l i c and t h e owning p u b l i c w i l l be i n f r i n g e d . Wages now c o n s t i t u t e 6o t o 65% of t h e p r i c e of the t r a n s p o r t a t i o n p r o d u c t . Under t h e T r a n s p o r t e r t i o n Act, wages a r e p r a c t i c a l l y , i f n o t t e c h n i c a l l y , made by t h e Wage Board i n Chicago* There a r e o u t s t a n d i n g s o - c a l l e d " n a t i o n a l agreements and working p r a c t i c e s " under which the r a i l r o a d managers claim t h a t g r o s s and u n j u s t d i s c r i m i n a t i o n s o b t a i n . Under many c o n d i t i o n s t i m e - a n d - a - h a l f f o r overtime seems t o p u t a premium on d e l a y and i n e f f i c i e n c y . Whether, c o n s i d e r i n g dropping p r i c e s and d e c r e a s e d c o s t of l i v i n g , r a i l r o a d wages a r e o r a r e n o t , i n g e n e r a l , too h i g h , - i t i s contended t h a t a s u b s t a n t i a l p a r t of the wage f u n d i s n o t now p a i d f o r l o y a l and e f f i c i e n t service rendered. But t h e a t t i t u d e of Labor toward p r e s e n t r a i l r o a d management i s one of d i s t r u s t and b i t t e r antagonism. Labor c o n t e n d s , r i g h t l y o r wrongly, t h a t t h e p r e s e n t management does n o t d e s i r e a j u s t and amicable r e a d j u s t m e n t of wage s c h e d u l e s and working c o n d i t i o n s , b u t i s engaged i n a r u t h l e s s campaign t o d e s t r o y "Union Labor" as s u c h . Broadly s p e a k i n g , Labor c o n t e n d s t h a t the p r e s e n t c o n t r o l of r a i l r o a d s i s not i n b e h a l f of s t o c k h o l d e r s , b u t of supply h o u s e s , b a n k e r s and v a r i o u s a d v e r s e and e x p l o i t i n g i n t e r e s t s . No o p i n i o n i s i n t i m a t e d as t o t h e accuracy of t h i s a t t i t u d e ; i t i s r e f e r r e d t o merely a s a f a c t o r in the labor s i t u a t i o n . The g e n e r a l r e s u l t i s : a chaos of b i t t e r - t e m p e r e d c o n f l i c t s between m a n a g e r i a l and l a b o r f o r c e s , p r e c i p i t a t i n g complicated and almost i n s o l u b l e c o n t r o v e r s i e s upon the Labor Board, whose l e g a l powers t o d e a l w i t h them a r e of d o u b t f u l adequacy. Whether the f a u l t i s i n the machinery or i n t h e management, t h e o u t s t a n d i n g f a c t i s t h a t t h e r a i l r o a d p l a n t i s n o t , a f t e r a y e a r of p r i v a t e c o n t r o l , operated e f f i c i e n t l y or economically. R e s p o n s i b i l i t y f o r l a b o r c o n d i t i o n s cannot - a y e a r a f t e r the end of f e d e r a l c o n t r o l - be d i s c l a i m e d by t h e e x e c u t i v e s . The r o a d s a r e now i n g e n e r a l under the same o p e r a t i n g o f f i c i a l s a s d u r i n g and b e f o r e f e d e r a l c o n t r o l . They . were r e t u r n e d u n d e r a law approved by the e x e c u t i v e s as g i v i n g them ample power t o d e a l w i t h Labor and a l l o t h e r o p e r a t i n g f a c t o r s . £ 2 5 -4- x-3078 IV. A Suggested Remedy. 1, As a g e n e r a l i z a t i o n : Out* r a i l r o a d s must "be u n i f i e d , by induced but v o l u n t a r y t f a d e s w i t h t h e i r freai owners - t h e "bondholders and s t o c k h o l d e r s - and t h e i r s e c u r i t i e s s t a b i l i z e d by the use of government c r e d i t . Obviousl y , i f the government f u r n i s h e s the c r e d i t , i t must a l s o have a s t r o n g and perhaps dominating p o s i t i o n i n t h e management. 2 . To e f f e c t t h e s e ends, l e t Congress i n c o r p o r a t e ( s a y ) the United S t a t e s R a i l r o a d Company, w i t h v e r y broad c h a r t e r powers, t o be e x e r c i s e d under t h e c o n t r o l of the I n t e r s t a t e Commerce Commission. Probably the members of the I n t e r s t a t e Commerce Commission should be the o r i g i n a l i n c o r p o r a t o r s - The a c t s h o u l d , i n t e r a l i a , a u t h o r i z e the new company t o ( a ) Assume, p r i n c i p a l and i n t e r e s t , the bonds and o t h e r debt o b l i g a t i o n s ( p r o p e r l y o u t s t a n d i n g ) of the e x i s t i n g r a i l r o a d companies. (b) I s s u e i t s 6$ s t a n d a r d d i v i d e n d s t o c k i n exchange f o r o u t s t a n d i n g d i v i d e n d - p a y i n g r a i l r o a d s t o c k s on t h e b a s i s of g i v i n g a r e t u r n n o t exceeding the r a t e of d i v i d e n d s p a i d on e x i s t i n g r a i l road s t o c k s d u r i n g , s a y , 6 t o 10 y e a r s ending December 31» 1920. Thus, P e n n s y l v a n i a s t o c k h o l d e r s would swap s h a r e f o r s h a r e ; Northern P a c i f i c s t o c k h o l d e r s would r e c e i v e l - l / 6 s h a r e s f o r 1, e t c . , etc. ( c ) Exchange i t s s t o c k f o r the s t o c k s of n o n - d i v i d e n d - p a y i n g r a i l r o a d s f o r an amount a t p a r n o t exceeding t h e v a l u e of the e q u i t y above t h e d e b t s and o b l i g a t i o n s of such r a i l r o a d s a s determined by o r u n d e r t h e d i r e c t i o n of the I n t e r s t a t e Commerce Commission. (d) The a c t should p r o v i d e t h a t the s t o c k c e r t i f i c a t e s of the new company should c o n t a i n a p r o v i s i o n a u t h o r i z i n g t h e government a t any time t o t a k e over t h e s t o c k a t p a r and accrued s t a n d a r d dividends. ( e ) The u s u a l c o n s t i t u t i o n a l l y n e c e s s a r y p r o v i s i o n s f o r t a k i n g c a r e of d i s s e n t i n g s t o c k h o l d e r s s h o u l d , of c o u r s e , be i n c l u d e d . ( f ) P o s s i b l y the a c t should r e q u i r e the c o n t i n g e n t d e p o s i t o f , s a y , t w o - t h i r d s of the s t o c k of t h e l a r g e d i v i d e n d - p a y i n g roads b e f o r e t h e proposed c o n s o l i d a t i o n should be d e c l a r e d e f f e c t i v e . (g) Power t o t a k e s t o c k as wfctl a s p r o p e r t y by eminent domain U/C/O -5- x-3078 should "be i n c l u d e d . (See Q f f i e l d V. New York, New Haven & H a r t f o r d R a i l r o a d Company, 203 U . S . , 3 7 2 ) . (h) Many o t h e r powers o b v i o u s l y n e c e s s a r y need n o t now he s t a t e d . 3- Without now s t a t i n g f u r t h e r l e g a l d e t a i l s of t h i s p l a n , the g e n e r a l r e s u l t would he t o c o n s o l i d a t e , by d i r e c t induced b u t v o l u n t a r y t r a d e with the s e c u r i t y h o l d e r s , the r a i l r o a d s i n t o a s i n g l e f e d e r a l corporation which would assume t h e o u t s t a n d i n g bonds of about $ 1 0 , 5 0 0 , 0 0 0 , 0 0 0 , exchange i t s own s t a n d a r d d i v i d e n d s t o c k t o t h e amount of p e r h a p s $5»000,000,000 f o r the o u t s t a n d i n g s t o c k s of the e x i s t i n g r a i l r o a d s . Power of the government t o e x p r o p r i a t e a l l t h e s t o c k a t any time a t p a r and accrued s t a n d a r d d i v i d e n d s would e l i m i n a t e a l l q u e s t i o n s of v a l u a t i o n a r i s i n g under o r d i n a r y eminent domain p r o c e d u r e . The annual r e q u i r e m e n t s of such a c o r p o r a t i o n f o r r e t u r n on c a p i t a l would be between $750,000,000 and $900,000,000 - somewhat l e s s than t h e s t a n d a r d r e t u r n d u r i n g f e d e r a l c o n t r o l . But the important p o i n t i s t h a t such a s s u r e d r e t u r n ? On c o n s o l i d a t e d r a i l r o a d s e c u r i t i e s would s t a b i l i z e s u b s t a n t i a l l y a l l the bonds and s t o c k s t h a t r e p r e s e n t r e a l and i n t r i n s i c v a l u e s . 4 . General management might w e l l be v e s t e d i n f i f t e e n d i r e c t o r s , p a i d r e a s o n a b l e b u t n o t e x o r b i t a n t s a l a r i e s , l o c a t e d i n Washington, r e q u i r e d t o g i v e p r a c t i c a l l y t h e i r e x c l u s i v e time t o the b u s i n e s s , and a u t h o r i z e d and r e q u i r e d t o d i v i d e t h e r a i l r o a d s i n t o a d e s i r a b l e number of e f f i c t i v e managerial o p e r a t i n g u n i t s . Local c o n t r o l of o p e r a t i o n a s complete a s p r a c t i c a b l e should be s o u g h t . Five of t h e s e d i r e c t o r s might b e e l e c t e d b y t h e s t o c k h o l d e r s f o r , s a y , f i v e - y e a r terms; f i v e b y c l a s s i f i e d Labor; and f i v e a p p o i n t e d b y t h e P r e s i d e n t and confirmed by t h e Senate f r o m b o t h p o l i t i c a l p a r t i e s , r e p r e s e n t i n g p u r e l y p u b l i c i n t e r e s t s and r e q u i r e d t o have no f i n a n c i a l i n t e r e s t i n t h e e n t e r p r i s e . Or, t h e m a j o r i t y might be p u b l i c d i r e c t o r s , - l e a v i n g the m i n o r i t y to be d i v i d e d between Labor and C a p i t a l . Or, t h e m a j o r i t y might be e l e c t e d by the s t o c k h o l d e r s , l e a v i n g a m i n o r i t y t o be d i v i d e d between P u b l i c and Labor d i r e c t o r s - T h e i r terms should be arranged so t h a t o n l y one of each c l a s s should e x p i r e each y e a r . The e s s e n t i a l p o i n t i s t h a t Labor should be given a p o s i t i o n of i n i t i a l r e s p o n s i b i l i t y i n management, t h a t C a p i t a l should a l s o b e g i v e n a l a r g e , i f n o t c o n t r o l l i n g , r e s p o n s i b i l i t y , and t h a t the p u b l i c , which f u r n i s h e s t h e c r e d i t , should b e - g i v e n an e f f e c t i v e , i f n o t d o m i n a t i n g , voice i n management. Reasonable s t a b i l i t y of t e n u r e should be sought as i n the o r g a n i z a t i o n of the I n t e r s t a t e Commerce Commission. P r o b a b l y t h e Wage Board w i t h somewhat modified powers should be r e t a i n e d . 5- S t o c k h o l d e r s 1 r e t u r n s should depend i n p a r t upon t h e e f f i c i e n c y of the management to which t h e y c o n t r i b u t e . The government might w e l l g u a r a n t e e , say, 4< of the S t a n d a r d d i v i d e n d , w i t h a p r o v i s i o n t h a t i n p r o s p e r o u s times and under e f f i c i e n t management t h e d i v i d e n d might be i n c r e a s e d t o p o s s i b l y lf> b u t n o t more* Perhaps any income i n e x c e s s of s t a n d a r d d i v i d e n d s a c c r u i n g i n 327 -6- 1-3078 any year might "be divided i n t o three equal p a r t s , - o n e - t h i r d t o be applied^ as above t o an increased dividend up t o t u t not exceeding 7$i any "balance of t h i s t h i r d to go i n t o a reserve fund t o s t a b i l i z e dividends f o r hard times; the second t h i r d t o go as a dividend t o l a b o r on a c l a s s i f i e d wage schedule; and the remaining t h i r d t o the government to amortize i t s investment and t o provide a reserve fund against p o s s i b l e claims under the guaranty. At any r a t e , t h i s or some other analogous e l i d i n g s c a l e arrangement should be made so that Capital and "Labor should each carry i t s j u s t proportion of the r i s k of the b u s i n e s s and of the r e s u l t s of e f f i c i e n c y or i n e f f i c i e n c y of management. 6 . Rates should probably be i n i t i a t e d by "the United S t a t e s Railroad Company under a s t a t u t e requiring the company (and t h e I n t e r s t a t e Commerce Commission, as now), t o make r a t e s as n e a r l y as p o s s i b l e adequate t o cover operating expenses, i n c l u d i n g , of course, j u s t and adequate - and only j u s t and adequate - wages, annual charges by u n i t s for. maintenance and d e p r e c i a t i o n , f i x e d charges, and a standard dividend. In a word, the mandate should be f o r s e r v i c e - a t c o s t , including as a part of c o s t a f a i r , and only a f a i r , r e turn on the c a p i t a l used. The I n t e r s t a t e Commerce Commission should have f u l l r e v i s i n g power over r a t e s , as c o n f l i c t s between community and community, industry and i n d u s t r y , and shipper and c a r r i e r are always sure t o a r i s e . To the Inters t a t e Commerce Commission the shipping public» as h i t h e r t o , should r e s o r t f o r a l l rate g r i e v a n c e s . Rate supervision by the I n t e r s t a t e Commerce Commission would operate as an e f f e c t i v e check against any p o s s i b l e tendency on the part of the company t o make r a t e s higjh enough , t o cover i n o r d i n a t e wages • Rates e s s e n t i a l l y l o c a l , such as commutation r a t e s around our l a r g e c i t i e s , should be l e f t primarily under the c o n t r o l of the s t a t e u t i l i t y boards, with a caref u l l y guarded power of review by the I n t e r s t a t e Commerce Commission. Federal f u n c t i o n s may be c o n s t i t u t i o n a l l y and l e g a l l y thus delegated to s t a t e o f f i c i a l s . 7 , E x t e n s i o n s , a d d i t i o n s and s e c u r i t y i s s u e s : - up t o a reasonable maximum, the company might w e l l a c t i n i t s uncontrolled d i s c r e t i o n ; but large expenditures should be submitted to the I n t e r s t a t e Commerce Commission f o r app r o v a l , s u b s t a n t i a l l y as under the Transportation Act- Extensions should be authorized somewhat as under the f e d e r a l highway a c t , combining f e d e r a l c a p i t a l w i t h l o c a l c a p i t a l ; but t i t l e t o new roads thus created should be v e s t e d i n the f e d e r a l c o r p o r a t i o n . Refunding i s s u e s should probably be s u b j e c t t o approval by t h e I n t e r s t a t e Commerce Conmission. Other d e t a i l s n e c e s s a r i l y involved need not now be s e t f o r t h . V. Results Reasonably Expected. 1 . U n i f i c a t i o n of p l a n t and of operation would e l i m i n a t e enormous wastes now s u f f e r e d from unnecessary d u p l i c a t i o n and i n administration and 828 -7- x-3oys o p e r a t i o n . In no o t h e r b u s i n e s s , except telephony, a r e u n i f i c a t i o n and coordinat i o n so f r u i t f u l of economy and e f f i c i e n c y . Without such economy t h e r e i s no r e a s o n a b l e p r o s p e c t of any r a t e s the t r a f f i c w i l l b e a r y i e l d i n g a f a i r ' r e t u r n e i t h e r to Labor or t o C a p i t a l . F a i l i n g such economy and i n c r e a s e d e f f i e n c y , r a i l r o a d i n g i s decadent - moribund. The days of endurable waste 'are past. 2 . Given such management, i n which Labor s h a r e s i n i t i a l r e s p o n s i b i l i t y and from which f o r c e s now causing s u s p i c i o n and antagonism a r e l a r g e l y or wholly e l i m i n a t e d , l o y a l t y and g r e a t l y i n c r e a s e d l a b o r e f f i c i e n c y may reasona b l y be e x p e c t e d . R a i l r o a d l a b o r i s h i g h l y i n t e l l i g e n t . F a i r l y t r e a t e d i t w i l l respond t o t h e c a l l of d u t y . Every decent American l i k e s t o do a good job and t o have t h e r e p u t a t i o n of doing a good j o b . Under p r e s e n t o r g a n i z a t i o n , n e i t h e r Labor, Management n o r C a p i t a l i s doing a good j o b .
@FedFRASER