HE 
 
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GIFT OF 
 
TRANSPORTATION 
 
 ADDRESS BY 
 
 HON. CHARLES A. PROU r 
 
 MEMBER INTE 
 
 DELIVERED IN THE P 
 
 1909, BEFORE THE SE 
 
 SHEFFIELD SCIE 
 
 (Reprinted from "I 
 
 Copyright, 1910, by 
 YALE UNIVERSITY PRESS 
 
 NEW HAVEN, CONN. 
 
TRANSPORTATION 
 
 ADDRESS BY 
 
 HON. CHARLES A. PROUTY 
 
 MEMBER INTERSTATE COMMERCE 
 COMMISSION 
 
 DELIVERED IN THE PAGE LECTURE SERIES 
 
 1909, BEFORE THE SENIOR CLASS OF THE 
 
 SHEFFIELD SCIENTIFIC SCHOOL 
 
 YALE UNIVERSITY 
 
 (Reprinted from "E very-day Ethics") 
 
 Copyright, 1910, by 
 YALE UNIVERSITY PRESS 
 
 NEW HAVEN, CONN. 
 
TRANSPORTATION 
 
 CHARLES A. PROUTY 
 
 I AM asked to speak for an hour upon the Ethics 
 of Transportation. Since the only transportation 
 of which I have any special knowledge is by rail- 
 road, I shall confine myself to that. 
 
 The steam locomotive was first developed and 
 steam railroads were first built hi England. The 
 original idea was to provide a way upon which the 
 public might operate its own carriages. The rail- 
 road was to be like the turnpike or the canal, and 
 just as any individual may haul his barges along 
 the canal or drive his wagons over the turnpike 
 upon the payment of an established toll, so members 
 of the public were to be allowed to operate their 
 engines and cars upon the railroad, paying to the 
 owners due compensation therefor. 
 
 It early became apparent, however, that this was 
 not feasible. From the very nature of the service 
 it is necessary that the operation of a railroad shall 
 be exclusive, and from this it has come to pass that 
 the same company is usually the owner and opera- 
 tor. My subject therefore reduces itself to this, 
 The Ethics of Building and Operating a Railroad. 
 
 At the threshold of every discussion of this kind, 
 differentiating this business from most other kinds 
 
 271806 
 
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 of business, lies the fact that the railroad is a public 
 servant. The government gives to the railway 
 company the right to appropriate your land against 
 your will. This is because the public requires the 
 service which the railroad is to perform, and hence 
 your interest and desire must give way to the com- 
 mon necessity. A railroad is a monopoly. You 
 must use it for the purpose of travel and of trans- 
 portation, and you must pay whatever sum is 
 required for that service. The public may, in self- 
 defense, protect itself against this monopoly of 
 universal use. Just as the highway is a necessity 
 to the public, so the railroad, under modern commer- 
 cial and industrial conditions, is equally a necessity. 
 Many countries build and operate their own rail- 
 roads. The United States might do so, but has 
 elected to delegate that duty to private individuals. 
 
 Whatever the reason, of the fact there can be no 
 doubt. The Supreme Court of the United States 
 long ago decided, and has often reaffirmed the 
 doctrine, that the building and operating of a rail- 
 road is a public function, and that the railroad 
 when built, even by private capital, is an agent 
 of the government in discharging its duty to pro- 
 vide this public way. 
 
 At the same time the property employed in this 
 business is private. Next to agriculture the amount 
 invested in railroads exceeds that in any other kind 
 of business. The last statistical report of the Inter- 
 state Commerce Commission shows the capitaliza- 
 
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 tion of our railroads to be over sixteen billions of 
 dollars. Some donations have been made from time 
 to time by individuals and municipalities. The 
 national government has contributed very con- 
 considerable sums mainly in the way of land grants; 
 but still practically all of this enormous amount 
 has come from private sources and has been in- 
 vested in the hope of earning a return from the 
 prosecution of the business. 
 
 This dual relation, the fact that the service is 
 public while the capital is private, makes the so- 
 called railroad problem difficult and even perilous. 
 
 In England the public character of the railway 
 has been recognized from the first. As early as 
 1850 the act permitting the organization of railroad 
 corporations provided that they should treat with- 
 out discrimination all members of the public. In 
 the United States it has been otherwise. The coun- 
 try was new and in process of development. Rail- 
 roads were an absolute necessity. Attempts by 
 the states to build and operate railroads had proved 
 disastrous. Hence, if the railroad was actually built 
 and operated, there was little inquiry at first as to 
 the method or even as to the charge made for the 
 service. 
 
 Olcott v. The Supervisors, 16 Wallace 678, in 
 which the Supreme Court of the United States 
 laid down the doctrine that the railroad was the 
 agent of the government in the performance of 
 this public service, was decided in 1873. In 1876 
 
TRANSPORTATION 
 
 came the Granger Cases, affirming the right of the 
 state to establish the charges which a railroad 
 might exact for its transportation services. Never- 
 theless, this idea continued to be economic and legal 
 rather than practical. Until comparatively recent 
 times our railroads have been not servants, but 
 masters. Only when the abuses became so glaring 
 and their effects so important that they could no 
 longer be overlooked, did the public give practical 
 effect to this principle. To-day both the several 
 states and the United States do in fact exercise a 
 considerable measure of control over the charges 
 and operations of railroads. 
 
 This public character of the railroad must be 
 thoroughly apprehended. There can be no com- 
 prehension of the right and wrong of these matters 
 otherwise. The railroad magnate, potent as he is, 
 must acknowledge in the government of the United 
 States a master. The railroad employee, while his 
 first allegiance is to the company which pays him, 
 should also understand that he owes a certain duty 
 to the public. Even more important is it that the 
 people themselves should realize that these railways 
 are their servants; that as such they should not be 
 impeded and oppressed, but fostered and assisted. 
 
 Keeping, then, always in mind the character of 
 the service, let us consider the building and equip- 
 ping of the railroad, including the getting of the 
 money therefor. 
 
 It is probably true that at no time in the world's 
 
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 history has the mere possession of great wealth 
 given to its possessor the relative distinction which 
 it does to-day. Isaac of York was an individual 
 of great consequence in his generation; but he 
 moved in a different sphere and was accorded a 
 different sort of consideration from that which his 
 lineal descendants in Wall Street to-day receive. 
 If one had undertaken 50 years ago to name our 
 famous men he would have designated the orator, 
 the statesman, the author, the man of science; 
 seldom the man of riches. To-day our millionaires 
 are the notable and influential members of society. 
 It is their movements in which the people take 
 interest and which the newspapers record. 
 
 And for this there is a very substantial reason. 
 The wealthy men of to-day have, as a rule, acquired 
 their riches by various kinds of industrial and com- 
 mercial activity. They have built railroads, con- 
 structed factories, opened mines, given employment 
 to thousands. They have been the active factors 
 in the wonderful material development of this 
 nation in recent years. We are to-day the foremost 
 power in the world because we are the richest and 
 greatest wealth-producing country in the world. 
 It is natural that the masses should deify those 
 men whose operations have made us great. 
 
 There is inborn in most men a desire for fame 
 and power. It is altogether natural that a young 
 man standing as you do upon the threshold of life 
 should inquire in what sphere of action he can 
 
TRANSPORTATION 
 
 exercise the most potent influence, and that, so 
 inquiring, his attention should be turned to those 
 occupations in which great wealth has been accu- 
 mulated. 
 
 In no other business have so many great fortunes 
 been amassed as in the railroad world. In no other 
 sphere have these enormous accumulations come 
 into existence almost by magic as here. Those 
 who have made the beginnings in other fields have 
 multiplied their possessions by their operations in 
 railroads and railroad securities, and by all this the 
 young man is attracted to this sphere of activity. 
 
 Now, I would not by any word of mine discourage 
 young men from embarking in railroad service. 
 There is probably no better field. It is the most 
 important of all commercial industries. The charac- 
 ter of the service is such that a high grade of ability 
 is required, for which a high compensation is paid. 
 The calling is a most honorable one. The very fact 
 that it is quasi-public in its character; that more 
 than any other business it immediately concerns 
 the lives and the property of the whole community, 
 renders it an occupation of the highest grade. But 
 the young man should thoroughly understand that 
 the conditions of yesterday are not the conditions 
 of to-day and will be still less those of to-morrow. 
 He should not enter that service with the idea of 
 duplicating the experiences of the past, if he is to 
 square his conduct with any proper notion of right 
 and wrong. 
 
TRANSPORTATION 
 
 The railroad is a public servant. Its only income 
 is derived from the charges which it imposes for 
 the performance of its public duty, and those 
 charges should be reasonable. If a railroad prop- 
 erty pays an extravagant return, it is usually be- 
 cause its rates are unreasonably high. No young 
 man, certainly, should embark in that occupation 
 with the expectation of imposing upon the public 
 unlawful and unjust charges and of accumulating 
 by that means for himself or his stockholders great 
 profits. He may properly expect a handsome com- 
 pensation for his own services and a sure return 
 upon the investment which he makes; he has not 
 the same right to obtain here as in private business 
 extravagant returns. 
 
 Still more to the point is this thought: Long 
 ago when I was just entering upon the practice of 
 my profession up in Vermont, I inquired of a legal 
 friend whether his brother lawyer who had grown 
 rich in the profession had made his money by his 
 practice. My friend replied, "By his 'practices.'" 
 The great fortunes which have been accumulated 
 by our railroad magnates have generally come, not 
 as the product of railroad building, but from the 
 various practices which have been rife in the past. 
 There has been the construction company, watered 
 stock, consolidation, reorganization, the manipula- 
 tion of the stock market, and so on. It is by such 
 means that these enormous fortunes have been 
 accumulated. 
 
TRANSPORTATION 
 
 Consider those English captains of the sea who 
 roved the main in the days of good Queen Bess. 
 Sturdy men they were. They turned a stream of 
 gold into the coffers of England; they made the name 
 of English seamen respected in all quarters of the 
 world; their own names are embalmed in history as 
 the potent men of that generation. Were these 
 same gentlemen conducting these same operations 
 to-day they would be promptly hung as pirates. 
 
 So with our modern captains of industry. They 
 have been energetic men; their work has been of 
 great benefit to our country. It may be that in no 
 other way, for instance, could our railroads have 
 been built; but none the less many of them have 
 been pirates upon the sea of finance, and the methods 
 which they have practised will not be tolerated 
 in time to come. 
 
 These changed conditions must be fully appre- 
 ciated by the young man who embarks in railroad 
 service of any character. Our railroads have, for 
 the most part, been built. The work of the future 
 lies in the enlarging and perfecting of our present 
 systems. For that a different kind of ability is 
 required. The railroad magnate of the half century 
 to come should be more a railroad operator, less a 
 stock manipulator. Bearing in mind these changed 
 conditions, let me indicate some of the rules which 
 in my opinion should determine the right and wrong 
 of building and financing a railroad. 
 
 1. No railroad should be built which is not neces- 
 
TRANSPORTATION 
 
 sary. In the past railways have been constructed 
 for various purposes besides that of operating at 
 a profit. They have sometimes been built for the 
 profit to some construction company from the build- 
 ing. They have sometimes been built for the sole 
 purpose of invading the territory of a rival, and 
 thereby forcing down the value of the property of 
 that competitor, so as to compel either a consolida- 
 tion, a lease, or a sale upon terms unduly advanta- 
 geous. In my opinion all operations of this sort 
 are morally wrong. 
 
 We are not considering the ethics of competition. 
 If an individual sees fit with his private capital to 
 construct a factory which can be of no benefit to 
 him except in so far as it works injury to his rival, 
 that may be his moral right. Certainly, that pos- 
 sibility was an incident in view of which the invest- 
 ment was made, and, as a rule, only the private 
 capital invested is interested. 
 
 With a railroad this is entirely different. Here 
 is a public institution. The property invested in 
 that enterprise is entitled to a fair return, and this 
 return is derived from the charges which the public 
 must pay. Generally, that particular road alone 
 serves a given community and if the service be 
 inadequate the whole community must suffer. It 
 is a fundamental proposition that whatever tends 
 to enhance the actual cost of performing this trans- 
 portation service is detrimental to the public which 
 is served. 
 
TRANSPORTATION 
 
 Let us assume a railroad serving a certain terri- 
 tory. The business of that territory is sufficient so 
 that this railway can be operated in an efficient 
 manner at reasonable rates and with a suitable 
 return to its owners. A second railroad is con- 
 structed parallel with the first. The advent of 
 this second carrier does not increase the total busi- 
 ness to be done; it simply divides that business 
 between two competitors. Those expenses of opera- 
 tion, which may be termed the fixed expenses of a 
 railroad, the maintenance of its way, payment of 
 a certain part of its employees, have been increased 
 twofold. Broadly stated, twice the capital is now 
 invested in serving this territory which is actually 
 needed. 
 
 One of three things must result. Either the ser- 
 vice will degenerate, or the charges will be increased, 
 or the owners of these properties will receive an 
 inadequate return; generally all three of these things 
 happen in a degree. 
 
 In private business competition with all its harsh 
 features seems necessary. In no other way can 
 the public be protected against the imposition of 
 unreasonable prices; but with the railroad the gov- 
 ernment itself can fix the charge for its service, 
 which is the price of this commodity, and can pre- 
 scribe the character of the service, which is the 
 quality of the commodity. 
 
 In the popular apprehension the more railroads 
 the better. Such is not the fact. Every unneces- 
 
TRANSPORTATION 
 
 sary mile of railroad is a damage to the public. 
 Sound thinkers have long since recognized the 
 truth of this principle, and even the popular mind 
 is beginning to grasp it. In one state at least no 
 railroad can be constructed until public authority 
 after intelligent investigation has determined that 
 the public necessity requires it. The time will 
 come when positive law will generally so provide; 
 but meanwhile, without the inhibition of the statute, 
 the promoter of a railroad should recognize and 
 apply this truth, and wilful failure to do so is, in my 
 judgment, a breach of good faith. 
 
 2. Every railroad should be honestly built. By 
 this I mean that the railroad when completed 
 should not stand the company which owns it at 
 more than the actual cost of its economical con- 
 struction. 
 
 This would seem to be axiomatic, and is only 
 referred to because of the very extensive prevalence 
 of the contrary practice. Numbers of railroads 
 have been built for the sole purpose of enriching 
 a construction company. Even when the work 
 is done by the railroad corporation itself there is 
 too often graft in every direction: commissions to 
 purchasing agents, purchases from concerns owned 
 by railroad officials, numbers of devices all of which 
 go to swell the cost of the property beyond what it 
 should be. 
 
 Similar practices are prevalent in all kinds of 
 private business; but find their fullest expression 
 
TRANSPORTATION 
 
 in railway operations. The capital of a railroad 
 corporation is usually larger, the stockholders are 
 more numerous, there is not the same sense of direct 
 responsibility upon the part of the official, and his 
 act is not subject to the same scrutiny as in case 
 of a strictly private enterprise. 
 
 I believe that we are working steadily to a higher 
 plane in this respect; but even to-day there is 
 altogether too much of this character. These 
 things will cease when the public not only regards 
 them as wrong, but treats as wrong-doers those who 
 have grown rich by these means. When you brand 
 a man as a malefactor in high place in the morning, 
 invite him to luncheon at noon, and call him into 
 counsel upon the state of the nation in the evening, 
 the moral effect of the whole performance is weak- 
 ened. With respect to all these operations to which 
 I refer, when men are not only termed malefactors 
 but treated as malefactors, the thing will stop. 
 
 3. The capital account of a railroad corporation 
 should represent the amount of money actually 
 invested. No dollar of stock or of bonds should 
 be issued which does not stand for a dollar paid 
 into the property. I do not mean that a bond may 
 not be sold for less than its par value; for that may 
 be unavoidable; but so far as possible the character 
 of the security should be such and the rate of 
 interest such that the bond will be handled sub- 
 stantially at par. The object should be to make the 
 capital account of a railroad represent the money 
 
TRANSPORTATION 
 
 which has been actually paid into that concern by 
 outside individuals. All those devices by which rail- 
 road stocks and bonds are issued without a present 
 money consideration are wrong. 
 
 This subject is too broad a one for discussion here; 
 but I may say in a word that the reasons which 
 support this proposition are of two classes. The first 
 concerns the investing public. The capitalization of 
 a corporation does not of course affect the value 
 of the property of that corporation. The market 
 price of the stock usually recognizes the difference 
 between the real value and the capitalization. If 
 the value were accurately known so that buyers 
 and sellers of these securities might understand the 
 relation between that value and the amount of the 
 outstanding stock, there would be no objection from 
 the standpoint of the investor to overcapitalization. 
 
 In fact, the value of a railroad is not known; the 
 cost of constructing it is not known; even the earn- 
 ing power of the property is an uncertain quantity 
 and has been, in the past, subject to much manipu- 
 lation. 
 
 Nothing has contributed more to the improper 
 and iniquitous operations upon the stock market 
 than the ability to issue, ad libitum and without 
 present money consideration, railroad stocks and 
 securities. Nothing would do more to lend cer- 
 tainty to the value of railroad stocks, to take them 
 out of the domain of the speculative security and 
 make them an investment security, which they 
 
TRANSPORTATION 
 
 properly are, than the inability to so manipulate 
 them. 
 
 The second reason arises out of the public charac- 
 ter of the corporation. We have already seen that 
 the private property invested in the performance 
 of this public duty is entitled to a fair return upon 
 its fair value. 
 
 It is often said by railroad representatives that 
 rates cannot be fixed according to the amount of 
 capital stock of a railroad; and this is true. The 
 rates of a particular railway are often determined 
 by conditions which that railway does not control; 
 but, upon the other hand, railway rates as a whole 
 should be largely based upon the fair value of the 
 property used. When, as to-day, there is a general 
 assertion upon the part of railroads as a whole that 
 their rates must be advanced in order to yield a 
 suitable income upon the investment, it becomes 
 material to know what is the fair value of this 
 property. The amount of money actually and hon- 
 estly put into the enterprise does not of necessity fix 
 its value; but the highest judicial authority has 
 declared that this is one of the important elements 
 which should be taken into account. The one thing 
 in this complex problem which can be known with 
 absolute accuracy from now on is the amount which 
 is actually invested in the enterprise; and that thing 
 should be known. 
 
 It is urged that in fixing railway rates the inno- 
 cent holder of these watered stocks must be con- 
 
TRANSPORTATION 
 
 sidered; and the Interstate Commerce Commission 
 has so decided. He has bought in good faith, 
 without notice that his stock represents no actual 
 consideration, and it would be an act of injustice 
 to take from him the value which he has honestly 
 purchased. If a railroad stock sells upon the 
 market for $500 a share, that is in a measure notice 
 to the purchaser that the charges of that corpora- 
 tion are excessive. They may not be. The rail- 
 road may be so situated that upon reasonable rates 
 it can make earnings which justify this value; but, 
 in a way, the man who pays that price does so 
 with notice. The transaction is entirely different 
 when he buys without knowledge a share of stock 
 four parts of which are water and pays $100 for it. 
 In time the origin of these railroad stocks is for- 
 gotten and the stock itself is dealt with as it stands. 
 I have been engaged for a dozen years in con- 
 sidering how railway rates can be fixed so as to do 
 justice between the public and the railroad. If I 
 were to name to-day that thing which in my opinion 
 would be of the most consequence in time to come 
 I should say absolute control over the capital 
 account of this public servant. When no security 
 can be issued by a railway company without govern- 
 ment sanction; when all new stocks and bonds 
 must be sold at the market price; when every 
 dollar received from the sale of securities or from 
 the operation of the property must be used in operat- 
 ing or improving the railroad itself, there has been 
 
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 laid the foundation for a structure in time to 
 come which will afford one reliable indication of 
 the rate which the railway should be allowed to 
 charge. 
 
 Mr. Harriman says, "You may regulate my 
 charges if necessary; but you should let alone my 
 financial operations. " The most conclusive answer 
 to this proposition is the history of some of the finan- 
 cial operations of Mr. Harriman as exhibited in 
 testimony taken before the Interstate Commerce 
 Commission. 
 
 We come now to the operation, and I need not 
 say here, as I did in reference to the building, that 
 the strictest honesty and economy should charac- 
 terize every transaction. In the past the railroad 
 has been the fair mark for any kind of plunder. 
 People who would not be guilty of the slightest 
 dishonesty in their dealings with private individuals 
 will cheat a railroad; and this same notion is more 
 or less prevalent among the officials and employees 
 of the railroad itself. 
 
 That all this is radically dishonest; that the same 
 rule should obtain in the treatment of this public 
 service corporation which obtains in dealings be- 
 tween private individuals, needs no confirmation, 
 and without spending time in commenting upon it 
 I bring to your attention two matters in connec- 
 tion with the operation of the railroad. 
 
 It is, in the first place, the duty of a railroad 
 manager to operate his railroad for transportation 
 
TRANSPORTATION 
 
 purposes and to use his railroad funds and his rail- 
 road employees for no other purpose. 
 
 Owing to the public character of the service, 
 railways are particularly interested in the acts of 
 the government. The legislature may determine 
 the appliances which the railroad shall use. It 
 may fix the hours of service of its employees. It 
 determines the kind and the amount of taxes which 
 shall be imposed. It may even establish the rates 
 which the railroad can charge. Plainly, therefore, 
 it is of great importance that the railroad shall be 
 able to control the action of the legislature. 
 
 For this it has efficient means. Its money re- 
 sources are large. Its employees are numerous. 
 In the past it has been able to afford free transpor- 
 tation, a most potent means of political influence, 
 and by concessions in its rates to confer the most 
 important advantages. 
 
 This combination of inducement and means has 
 led the railroad to take an active interest in politics. 
 It has enacted statutes, appointed judges, elected 
 governors, and even presidents. 
 
 This political activity is justified by the railroad 
 manager upon the theory that in no other way can 
 his property be protected against unjust assaults. 
 The private individual may undoubtedly contribute 
 to legitimate political campaign expenses. It is 
 possible that a private corporation whose property 
 is private in its use and whose will is that of the 
 majority of its stockholders may properly contribute 
 
TRANSPORTATION 
 
 in like manner. It may conceive that its pecuniary 
 interest is so far involved in the success of a political 
 party or a political idea that it is justified in using 
 its funds to assist the party or promote the measure. 
 This is a matter the ethics of which I am not now 
 discussing. The court of final resort in New York 
 has held that it is not a criminal act for the officers 
 of an insurance company to pay out of the funds 
 of that company a contribution to one of the national 
 political parties. 
 
 However that may be with a private corporation, 
 a railroad company has no right to use its funds 
 for such purposes. That corporation by reason of 
 its public nature stands in a way as a trustee for 
 the whole people. The funds themselves come from 
 the people. The function of this public servant 
 is transportation, not government. 
 
 Some time ago in the course of testimony taken 
 before the Interstate Commerce Commission under 
 resolution of Congress, in reference to the proceed- 
 ings of the Standard Oil Company, it turned out 
 that that corporation, among other practices, was 
 accustomed to buy space in newspapers, for which 
 it paid at advertising rates and which it was allowed 
 to fill with news matter. Sometimes this paid 
 matter found its way into the editorial columns. 
 To my mind, among all the devious practices upon 
 the part of that so-called trust which were revealed 
 in that investigation, none was more dangerous 
 than this. To permit a concern like that to fill 
 
TRANSPORTATION 
 
 the columns of the public press with statements of 
 fact and statements of opinion supposed to be from 
 disinterested sources is to poison the very fountains 
 themselves. 
 
 A railroad may properly state its case to the pub- 
 lic, and, under many circumstances, should use its 
 funds for that purpose; but let it be in the open 
 over its own signature. 
 
 In the second place, the railroad manager should 
 operate his property for the convenience of the 
 public and with uniform consideration of the public. 
 
 We come back always to the same proposition: 
 the railway is a public servant, and while it is en- 
 titled to just earnings upon the capital employed, 
 the manner of those earnings must be regulated in 
 view of the public interest. The establishment of 
 its regulations, the arrangement of its schedules, 
 the operation of its trains, should all be in this view. 
 
 A railroad is a monopoly. The passenger must 
 use its train, must pay for the time being the fare 
 required, and must submit to the regulation im- 
 posed. He has no direct voice in determining any 
 of these things. This circumstance leads him to 
 view with suspicion and dissatisfaction the acts of 
 the railway, and furnishes the strongest possible 
 reason why the greatest care should be exercised in 
 the first instance in establishing the rule and the 
 rate, and why any criticism should be carefully 
 considered. 
 
 The politic railway manager will satisfy many 
 
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 unreasonable demands. He will remember that the 
 public is ignorant and must be instructed; that it 
 is unreasonable and must be patiently borne with. 
 The railroad employee should observe uniform 
 courtesy toward the public. Courtesy pays in 
 private business, and is insisted upon by the private 
 employer; in this public service it is a duty. This 
 should be the rule among all railroad employees 
 from the highest to the lowest. The millionaire 
 traveling in his private car is entitled to no greater 
 consideration than the poor woman with her bundles 
 and her babies. 
 
 In the last dozen years my duties have taken me 
 over all the great railway systems of this country 
 and into every state and territory many tunes. I 
 have been interested to observe the attitude of the 
 railway employee to the public, and of the public 
 to the railroad. While I have usually been able 
 to commend the treatment accorded to the public, 
 I have observed many striking examples to the 
 contrary. 
 
 You may think that all this goes to the amenities 
 rather than to the ethics of transportation; that 
 matters of this sort are too trivial to occupy atten- 
 tion in this place. Not so. It can never be of 
 little consequence in any walk of life to fail in that 
 thing which good conduct and good conscience 
 require. But here this relation of the railway to 
 the public is a matter of paramount consequence. 
 
 The passenger upon the train may be for the 
 
TRANSPORTATION 
 
 moment entirely subject to the dictation of the rail- 
 way; but there comes a time when, standing at the 
 polls or in the jury box, he is the master. I am 
 convinced that nothing is more responsible for what 
 injustice has been done railroads by juries and by 
 legislatures than this public-be-damned attitude of 
 too many railroad managers and railroad employees. 
 
 Not long ago the president of one of our great 
 systems said to me that in his judgment railroads 
 would be compelled to look for the protection of 
 their properties to the constitution and the courts; 
 that the people, if they were free to exercise then- 
 will, would virtually confiscate our railroads. Did 
 this gentleman forget that courts and constitutions 
 as well as legislatures are in this land of ours crea- 
 tures of the people? The constitution was made and 
 can be unmade. Courts may stand between the rail- 
 road and any temporary invasion of its right. They 
 cannot defeat a settled purpose upon the part of the 
 voters of this country. 
 
 There are times when the railway must appeal 
 to the court for protection against the acts of the 
 legislature and the commission. When that tune 
 comes the appeal should be made and the court 
 should fearlessly discharge its duty in dealing with 
 that appeal. But, as a matter of policy if not of 
 ethics, this course should be taken only as a last 
 resort. When a court of the United States sets 
 aside a statute enacted by the supreme authority 
 of a state, some temporary benefit may accrue to 
 
TRANSPORTATION 
 
 the railway; but there remains a bitter taste in 
 the mouth of the voter and a rankling in his heart 
 which sooner or later are likely to find expression 
 in ways against which no court can grant protection. 
 
 Railroads have protected themselves in times gone 
 by by controlling courts and legislatures. One 
 method of protection has seldom, if ever, been tried, 
 and that is an honest appeal to the voters them- 
 selves. Some railways are beginning to resort to 
 this expedient. I have in mind one railroad presi- 
 dent operating extensively in a section of the country 
 where legislation has been thought to be the most hos- 
 tile, who loses no opportunity to lay before the com- 
 munities which he serves the necessities of his road. 
 I can but believe that this method if persisted in 
 will win; and that no other method finally can. 
 
 Now in cultivating a proper spirit upon the part 
 of the people toward the railway, nothing can be 
 more important than the uniform consideration of 
 the public in these relatively minor matters. If I 
 were a railroad president I would insist, first of 
 all, upon unvarying courtsey upon the part of my 
 subordinates from the highest to the lowest; for no 
 other failure of duty would I more severely dis- 
 cipline an employee. I would see that every com- 
 plaint was promptly and effectively dealt with. 
 
 We come finally to the charges which may be 
 imposed by the railroad for the service rendered 
 to the public. Are there any ethical limitations 
 upon these charges? 
 
TRANSPORTATION 
 
 Its rates are a most vital thing to the railway. 
 It is for the sole purpose of charging these rates that 
 the railroad is built and operated. Whatever 
 affects the amount of these charges touches in its 
 tenderest point the welfare of the railroad corpora- 
 tion. From the standpoint of the railway itself 
 this matter is of supreme consequence. 
 
 Of equal consequence is it to the public. Except 
 what a man digs in his own garden, almost every 
 article which he puts into his mouth or upon his 
 back, which enters into the necessity or the comfort 
 of his daily life, has been the subject of transporta- 
 tion by rail and has contributed its part of the rail- 
 way charge. 
 
 These charges have sometimes been termed a 
 transportation tax, and while the expression is not 
 strictly accurate, the analogy is close. They are 
 in essence a tax paid by every other species of 
 property to that kind of property which is invested 
 in the rendering of the transportation service. If 
 too high, these charges are a most insidious means 
 for taking unjustly from the masses and transferring 
 to the few. One cent per ton upon the tons of 
 freight handled for the year ending June 30, 1907, 
 would amount to almost $18,000,000. 
 
 Equally important is the relation in rates. The 
 railroad rate determines who shall do business and 
 where it shall be done; where coal shall be mined; 
 where flour shall be ground; where cities shall be 
 built. Had I the time it would be profitable and 
 
TRANSPORTATION 
 
 perhaps more entertaining than my present subject 
 if I were to show you by actual illustration and in 
 greater detail the truth of these statements. I 
 must, however, ask you to accept my statement 
 that in the rate is centered the interest, in the main, 
 both of the public and of the railway. 
 
 Every one who has given even superficial con- 
 sideration to the matter of railway charges knows 
 that they present themselves in two aspects. There 
 is, first, the inquiry whether the rates are too high 
 for the service rendered, without reference to the 
 charges made for other similar services; and there 
 is, in the second place, the question whether the 
 relation between the charges imposed for the per- 
 formance of similar services with respect to different 
 individuals or different commodities is just. We 
 will consider first what may be termed the absolute 
 rate; finally, the relative rate. 
 
 Those of you familiar with the De Officiis of 
 Cicero will recollect that he suggests several in- 
 stances in which the owner of property ought not 
 to exact for its sale the highest price obtainable. 
 Whatever may be your opinion of the cases pro- 
 pounded by this philosopher, certainly the general 
 rule is quite otherwise. The private individual 
 may ask for his property or his services whatever 
 he lists. They belong to him and he may keep them 
 or he may dispose of them, and to whomsoever and 
 for whatever he sees fit. 
 
 Not so with the railroad, which must serve all 
 
TRANSPORTATION 
 
 persons alike, whether it wills or not; and which 
 must make for those services a reasonable charge. 
 Plainly, therefore, it is opposed to good conscience to 
 exact a rate which is unreasonable or discriminatory. 
 
 While this statement is unexceptionable in the 
 abstract, it is extremely difficult of application in 
 the concrete for the reason that it is most difficult 
 to determine what is an unjust and an unreasonable 
 railway rate. The government sometimes fixes the 
 charge, and thus in that instance determines the 
 matter; but formerly in all cases, and to-day with 
 respect to the bulk of railroad transportation, the 
 carrier is free to fix, in the first instance at least, 
 its own rates. By what standard can the justice 
 of those rates be measured? 
 
 If a railroad was constructed for the purpose of 
 transporting a single commodity between two given 
 points and was engaged in no other service, an 
 answer to this question would be comparatively 
 easy. It would be possible to determine the cost 
 of the plant and the expense of the operation and 
 in that way to arrive with reasonable satisfaction 
 at a just rate. In actual practice this is in no wise 
 the case. Railroads generally engage in the trans- 
 portation of both passengers and property, and the 
 property in particular is offered in every variety 
 of form and under all conditions. It is sometimes 
 heavy and other tunes light; sometimes of great 
 and at other times of little value. In some in- 
 stances the cost of transportation is of little conse- 
 
TRANSPORTATION 
 
 quence in comparison with the value of the article, 
 while in other cases the price of carriage may abso- 
 lutely control all dealings in the commodity. The 
 problem, therefore, of figuring out a reasonable 
 rate becomes a well-nigh impossible one. Even 
 were it possible to determine what the total receipts 
 of a railway company ought to be, it would be 
 impossible to distribute that amount among the 
 various commodities actually handled. 
 
 Some years ago, in examining the traffic official 
 of one of the great railroad systems of this country, 
 I asked him to state the basis upon which the rates 
 of his company were fixed. After mentioning one 
 measure of reasonableness after another and finding 
 that none of them would stand the test of an actual 
 application to his various rates, he finally said, in 
 despair: "To be perfectly honest, we get all we can, 
 and even that is too little. " 
 
 I think this gentleman pretty accurately stated, 
 in this sentence, the manner in which the railroad 
 rates of this country have been made in recent 
 years. They are as high as they could be, and most 
 railroad operators have honestly felt that even so 
 they were too low. It was because the competitive 
 conditions which had fixed rates in years gone by 
 were fast disappearing under the influence of com- 
 bination, that the country was aroused to the neces- 
 sity of taking measures to protect itself against an 
 unjust increase when these competitive conditions 
 had disappeared. 
 
TRANSPORTATION 
 
 The thoughtful traffic manager who gave honest 
 expression to his belief would probably state that 
 the rule of most universal application which governs 
 him in the making of his rates is that expressed by 
 the phrase, "what the traffic will bear." So long as 
 business moves freely his rates are just. When the 
 movement stops he begins to examine the propriety 
 of his charges. This is the only ethical obligation 
 which he acknowledges. 
 
 "What the traffic will bear" is an obnoxious 
 phrase. There is about it an odor of extortion. For 
 one who can charge anything he pleases, to take all 
 he can get strikes the ordinary mind as outrageous, 
 I am not certain, however, but that the rule as prop- 
 erly applied and understood is a valuable one, and 
 that the traffic official may apply it without justly 
 subjecting himself to the charge of wrong-doing. 
 Let me illustrate just what the meaning of this 
 phrase is in its general application. 
 
 I am the manager of a railroad extending 250 
 miles, from A to B. At C, a distance of 50 miles 
 from A, is located a coal mine, at which the cost 
 of placing the coal upon the cars is one dollar per 
 ton. Coal of that grade sells in the open market 
 at A for $2.25 per ton. I establish a rate of one 
 dollar per ton for the handling of that coal for a 
 distance of 50 miles. 
 
 This is certainly a liberal rate; but the earnings 
 of my road as a whole are not excessive; nor can 
 the rate itself, five cents per 100 pounds, be regarded 
 
TRANSPORTATION 
 
 as extortionate. The owner of the mine is per- 
 fectly satisfied, for he is making a magnificent 
 profit upon the operation of his property. A is a 
 prosperous community buying its coal cheaper 
 than most communities. 
 
 I resign as manager of this road and become the 
 manager of another road extending in the opposite 
 direction from A, 250 miles to X. The two roads 
 are in all respects identical, the cost of construction, 
 capitalization, business everything is substantially 
 the same. 
 
 At X is located a coal mine precisely similar to 
 that at C. The cost of producing coal upon the 
 cars is one dollar per ton, and the coal will sell in 
 the market at A for $2.25 per ton. I establish a 
 rate for the haul of 250 miles of $1.15 per ton. 
 
 Now, have I in these two cases been guilty of 
 any wrong? In the first instance everybody is satis- 
 fied; everybody is prosperous. In the second case, 
 the mine at X is not as prosperous as the one at 
 C, for the profit of the miner at C is two and one- 
 half times as great; but still the miner at X operates 
 to advantage upon a profit of ten cents per ton. The 
 return to my railroad is not satisfactory under the 
 rate of $1.15; but that figure is better than nothing 
 at all. In other words, the traffic will bear one dol- 
 lar in one case and $1.15 in the other; therefore, I 
 impose one dollar in the first case and $1.15 in the 
 second case. Nor does it seem to me that the 
 traffic manager can be accused either of inconsist- 
 
TRANSPORTATION 
 
 ency or of moral dereliction who establishes rates 
 as suggested in this illustration. 
 
 The case which I have put is an extreme one; 
 but it illustrates the principles under which the rail- 
 road tariffs of this country have been developed. 
 The study of the traffic manager has been to get 
 business, and he has made such rates as were neces- 
 sary to secure that business. The rates actually 
 made in pursuance of this idea have been often in- 
 consistent and have provoked severe criticism. It 
 does not seem to me that the application of the prin- 
 ciple is of necessity wrong. Upon the contrary, its 
 application, within reasonable bounds, is healthy 
 both for the railway and for the community. 
 
 I have said that the capitalization of a railway 
 ought to represent the money actually invested. 
 Ordinarily, the dividends paid upon the capital 
 stock ought not to be extravagant. Mr. Hill said 
 in giving testimony before the Commission that 
 seven per cent was enough. I think he is right. 
 Only in extreme cases would a larger dividend be 
 justified. 
 
 So long as there is no overcapitalization, and so 
 long as the rate of dividend is a reasonable one, I 
 do not feel that there can be much danger of the 
 rate being inherently too high under conditions as 
 they actually exist and have existed in most parts 
 of this country. If the earnings of the railroad 
 are actually invested in the improvement of the 
 property no great injustice has transpired. What- 
 
TRANSPORTATION 
 
 ever has been taken from the public is still subject 
 to the public control, and while a scale of rates 
 which permits of the betterment of the property out 
 of the earnings may impose upon the present gen- 
 eration a tax somewhat higher than is strictly just, 
 still so long as we pay it without inconvenience no 
 great harm is being done. Instances might of 
 course be imagined where rates have been so ex- 
 tortionate as to justify censure of the person who 
 imposed them; few cases of that kind have fallen 
 under my observation; and I imagine them to be 
 extremely rare. 
 
 There are many uncertainties in the manage- 
 ment of a railway. The volume of business and 
 the expense of operation vary. The demands of 
 the public for improvements which do not produce 
 increased business are ever growing. The evolu- 
 tion of new railroad methods renders useless the 
 old. So long as the charges are paid without incon- 
 venience by the public; so long as the traffic moves, 
 there is not much danger that rates will become per- 
 manently too high, provided we can control the 
 capital account and know, therefore, the return which 
 is actually paid in cash upon the cash investment. 
 
 With the relative rate this is entirely different. 
 Let me illustrate my meaning by an example here, 
 taking for that purpose the railroad A B and assum- 
 ing that two mines are located at C. From mine 
 No. 1 coal can be put upon the cars for one dollar 
 per ton, and it sells in A at $2.25 per ton. From 
 
TRANSPORTATION 
 
 mine No. 2 the cost of producing coal is $1.25 upon 
 the cars, and the quality of the coal being poorer 
 it sells in the market for but two dollars per ton. 
 
 What may the railroad do under these circum- 
 stances? May it impose the rate of one dollar 
 upon the coal from mine No. 1 and a rate of fifty 
 cents upon the coal from mine No. 2, thereby 
 equalizing the profits of the two mines? 
 
 I think not. The cost of transporting that coal 
 is the same; the service which the company renders 
 to these two individuals is the same. The value 
 of that service may be somewhat less to the miner 
 whose coal is worth but two dollars than to the miner 
 whose coal is worth $2.25, and possibly this differ- 
 ence in value may properly find expression in some 
 slight difference in the rate; but certainly the rail- 
 way has no right to take up in its tariffs this 
 difference in operating cost of the mine and quality 
 of the coal. 
 
 To admit of any such right upon the part of the 
 railway would be to concede that railways, by the 
 establishment of their rates, may equalize, enhance, 
 or utterly destroy all natural advantages. If the 
 railroad can by its rate make the coal of mine 
 No. 2 equal to the coal of mine No. 1 in the ground, 
 then there is no such thing as a natural value. 
 Everything depends upon the whim of a particular 
 railway; or, if the rates are to be revised, upon the 
 whim of the body which finally decides. 
 
 In my opinion the traffic official has little, if any, 
 
TRANSPORTATION 
 
 latitude in case of the relative rate. It is his abso- 
 lute duty to treat all shippers alike. Voluntary 
 discrimination of any sort between his patrons is 
 wrong. A railroad has a very wide latitude with 
 the absolute rate in the development of its business; 
 it has no such license with the relative rate. 
 
 I am aware that the contrary has been often 
 affirmed in actual practice. I know that there are 
 numbers of rates now in effect which utterly violate 
 this rule, which could not with propriety be dis- 
 turbed. It would be easy to suggest conditions 
 and absurdities which might arise in the application 
 of such a rule, and still I myself believe that there 
 is no more essential principle in the administration 
 of our railroads than this. So far as can be absolute 
 equality must be done between competing individ- 
 uals and competing commodities and localities. 
 
 I should fall short of my duty in presenting this 
 subject if I did not spend a moment in suggesting 
 to you what may be termed the obverse side of this 
 question. None of you may be either railway 
 magnates or railway employees; you will all be 
 citizens of the United States and charged, as such, 
 with the responsibility of dealing with this problem. 
 
 I have endeavored to impress upon you that the 
 railway is a public servant, and that, as a public 
 servant, it owes certain duties to its master; I would 
 impress it upon you with equal force that the public 
 as master owes certain duties to its servant. 
 
 It has already been observed that the railway is 
 
TRANSPORTATION 
 
 apt to be considered a fair mark for plunder; and the 
 same idea finds unconscious expression in the atti- 
 tude of the public toward the railroad in many 
 matters of governmental regulation. The people 
 of this country as a whole have no desire to oppress 
 its railways or to do injustice to that species of 
 property. In the past the railroad has been the 
 aggressor; it has by its own conduct compelled the 
 public to assert itself; but there is to-day the very 
 gravest apprehension that the pendulum may swing 
 too far the other way. 
 
 The money investment in our railroads has been 
 put there for the purpose of earning a return. Just 
 as there is upon the part of the railway itself an 
 implied promise to the people that its services 
 shall be rendered for a reasonable charge, so there 
 is, upon the part of the people, an implied promise 
 that this property shall be allowed to make such 
 charges as will yield to it fair compensation. 
 
 The form of this investment is such that it can- 
 not be withdrawn. Private capital can usually be 
 taken out of private enterprise. The property can 
 be sold or removed to other fields of activity. Not 
 so the railroad. It must be used where it is and for 
 that purpose, or it is worthless. Whatever prevents 
 it in that form from earning a fair return virtually 
 confiscates the property. 
 
 It may be, and is true, that vast fortunes have 
 been accumulated by improper manipulations of 
 railroad properties and railroad securities; but the 
 
TRANSPORTATION 
 
 men who have accumulated those fortunes for the 
 most part no longer own the securities. The owners 
 of our railway stocks to-day are mainly innocent 
 purchasers who hold them for value paid. To 
 impair the value of these stocks would not punish 
 the persons who have improperly profited by these 
 transactions in the past. Justice requires that we 
 deal with this problem mainly as it is and that 
 we do not impose upon railway capital such limita- 
 tions as will prevent it from making a suitable return 
 by reason of what has already happened. 
 
 The government might have built and operated 
 its own railways, but instead of doing so it has 
 invited private capital to discharge for it this public 
 function, upon the assurance that such capital shall 
 be allowed to exact a fair compensation for the ser- 
 vice. Nothing can be more unjust than to deny to 
 this capital that right. 
 
 Not only does a sense of justice require this; 
 self-interest also dictates it. The railroads of this 
 country must, in the immediate future, be very 
 largely extended and improved; additional facilities 
 must be provided to meet the increased demands 
 which will be made. This will require the outlay 
 of vast sums of capital; and this capital must 
 come mainly, not from the earnings of the railroad, 
 but from the investing public. We can provide 
 by legislation the sort of cars which a railroad 
 shall use and the rates which it shall impose; we 
 cannot by legislation force one single dollar of 
 
TRANSPORTATION 
 
 private capital into railroad investment against 
 its will. 
 
 Capital will seek investment in this field for 
 exactly the same reason that it will in any other; 
 namely, upon the expectation of making a profit out 
 of the investment. It is not necessary that the re- 
 turn should be large; but it is necessary that it 
 should be certain; that the people who put their 
 money into this form of investment shall feel con- 
 fident of fair and honest treatment. 
 
 A want of adequate railway facilities would mean 
 industrial paralysis. Unless they are provided when 
 needed, the government will find itself confronted 
 with a demand from all sources from the mer- 
 chant, the manufacturer, the farmer which will 
 force it to meet in some way the necessitites of the 
 occasion; and this can only be by either furnishing 
 the capital or providing the railroad itself. If we 
 are ever brought face to face with the proposition 
 of government ownership, it will not be by the im- 
 position of excessive charges, for we can deal with 
 that situation, but by the impossibility of obtaining 
 adequate facilities. The possibility of such an 
 emergency is by no means fanciful. We were upon 
 the brink of it in the fall of 1906 and the winter of 
 1907, when crops were rotting upon the ground 
 because they could not be carried to market and 
 when people were freezing because coal could not be 
 transported to keep them warm. 
 
 This phase of the matter is too little considered. 
 
TRANSPORTATION 
 
 If this government hopes to continue its present 
 system; if we are to look in the future as in the past 
 to private capital for the providing of our railroad 
 transportation, it is fundamentally necessary that 
 confidence in the fair treatment of that capital shall 
 be established. 
 
 It is often urged that the proper way in which to 
 produce confidence is by stopping the regulation 
 of railroads. It is urged that their attempted regu- 
 lation has only resulted in confusion and disaster 
 and that it never ought to have been undertaken. 
 
 This is nonsense. Whoever controls the highways 
 of a nation controls that nation. Regulation was 
 inevitable, and without it a state of anarchy would 
 have resulted. There must be regulation, and that 
 regulation must be complete and effective; but it 
 should be just and intelligent. The problem is 
 how to secure the right kind of regulation. The 
 naming of a railway rate or a railway rule which 
 shall be followed for the future is a legislative func- 
 tion, but none the less it cannot properly be dis- 
 charged by the legislature itself. In all its essentials 
 the act partakes more of the judicial than of the 
 legislative. The problem presented is a new one, 
 requiring a new kind of machinery. 
 
 The only feasible way seems to be to create a 
 tribunal in the nature possibly of the present com- 
 missions; to make that tribunal as able, as dis- 
 passionate, as honest, as is possible, and to leave 
 with it the solution of these questions. Any such 
 
TRANSPORTATION 
 
 tribunal will make errors on both sides; but in 
 process of time it will become, so to speak, educated 
 to its duties. Just as the courts of England, acting 
 through a series of years, evolved our common law, 
 so in time there will grow up a system of rules 
 applicable to this subject which will be reasonably 
 just to both parties. 
 
 There is grave probability that within the half 
 century the United States must consider the ques- 
 tion of taking over the operation of its railroads. 
 No other complete solution of many questions which 
 present themselves can be suggested. The tendency 
 everywhere is that way. Other governments are 
 continually moving in that direction, and never in 
 the other direction. 
 
 Such an undertaking would, however, be a tre- 
 mendous one. It is not certain that the result 
 would be unfortunate; but the experiment would 
 be hazardous. For one, I would be glad to see 
 regulation fairly tried before ownership is resorted 
 to. To this end there is necessary, upon the part of 
 the public, intelligence honestly directed, upon the 
 part of the railway honest cooperation, upon both 
 sides patient forbearance. 
 
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