WHERE AND WHY PUBLIC OWNERSHIP HAS EAI LED !liillillilltlllllftl!i!ltl!ililiil!lllllti de la Régie Directe). Their leader in France is Edgard '^ Milhaud, occupying the chair of Political Economy at the University of Geneva, where he makes a special ^ point of emphasizing Socialism.^ In a little periodical, -^ entitled Annales de la Régie Directe, he presents the case for all government and municipal undertakings, N^lthough his enthusiasm frequently receives cruel set- backs, as in the suicide of the Mayor of Elbeuf. He sUjas also published several articles for the purpose of "^demonstrating that accidents are much less frequent upon government railways than upon the lines of pri- vate companies. We shall see later (Book 3, Chapter ^ See La Démocratie Socialiste Allemande, Paris, F. Alcan. V 238491) WHERE AND WHY i'UBLIC OWNERSHIP HAS FAILED 2) the value of these attempts to justify his creed, and we may judge from them the importance that is to be attached to his other statements. For the academic year 1911-1912, L'École des Hautes Études Sociales organized a series of confer- ences on the subject of pubHc operation under the direc- tion of M. Milhaud. It was considered advisable that at the close of this series a dissenting voice should be heard — a rôle ultimately assigned to me. In addi- tion to ten preceding lectures, wherein the whole theory and practice of Socialism had been set forth, M. Milhaud was to speak for forty minutes, after which I was to be allotted forty in which to refute the points previously developed by him during 640 minutes. Then we were both to be allowed twenty minutes in order to sum up our arguments. I had at least the satisfaction of knowing that L'Humanité ^ attached sufficient importance to this conference to an- nounce that for several days before it was to take place entrance tickets would be reserved for "comrades" ; under which conditions it was not difficult to foresee that the hall would be converted into a public assembly room. His audience, thus prepared and won over, natur- ally gave M. Milhaud an enthusiastic welcome. How- ever, despite some murmurs, it proved itself not unwilling to allow me to oppose my facts to his state- ments. I borrow from the report of the discussion, as published in L'Humanité, November 14, 1911, the fol- lowing resume of the argument of M. Milhaud : * The organ of the Socialist propaganda. vi PREFACE "Private monopoly, seeking nothing but maximum profit, is far more costly than public monopoly, which is not bound by the same conditions. Money costs public enterprises less, and, therefore, they can amortize their debt and thus reduce general expenses. On the other hand, heavier expenses for labor can be supported by public undertakings. The management of a public enter- prise can even hope for profit, and all this can be accom- plished within less rigid limits than those which neces- sarily confine private monopoly. "Milhaud concluded by outlining the tendency of pub- lic enterprises to become administrative autonomies. In order that they may escape pernicious bureaucratic influ- ences, they are being transformed into separate commer- cial entities. Through increased control by the con- sumer, on the one hand, and by labor on the other, they are being gradually but completely socialized. "Through reduction in prices, these enterprises create larger bodies of consumers, and they also bring about more flexible relations between employers and employed. The representatives of collectivism, individual consumers and producers, may thus unite in behalf of social progress." When we come to examine the assertions of the propagandists of public operation, we perceive that they are of no better quality than any other Socialist theories ; but the assured manner with which these statements are declared succeeds in disturbing and in- timidating many people. Yet, in the elections of 19 lo, Paul Forsans, President of La Société des Intérêts Économiques, was able to organize a vigorous cam- paign against an alcohol and insurance monopoly. French Socialists, unable to appeal to the experience vii WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED of the Western (state) railroad, or the experience of the town of Elbeuf, say: "Very good, but in Prussia the state railways are altogether satisfactory, and, in all the important cities of Great Britain, Municipal So- cialism is enjoying a veritable triumph." Such partisans quote the testimony of public depart- ments, never weary of boasting of their own success- ful administration, and of municipalities which, in- spired by local pride, declare that they have accom- plished miracles. But how can we accept these preju- diced certificates of good conduct until we have been privileged to make a detailed inventory? There is a crying need at the present time for col- lections of precise facts, which shall show the vanity and "bluff" of Socialist programs, and such facts must be placed before the public. My sole object in writ- ing this book has been to present just such a compila- tion of rigidly investigated, authentic facts and figures regarding public ownership and operation. If I have not been able to affirm that government and municipal undertakings are efficient the fault is not mine. I have not found them so. A well-known American, Arthur Hadley, President of Yale University, says, in his book entitled Eco- nomics: "The advantages of intervention on the part of a government are visible and tangible facts : The evil that results from such intervention is much more indirect and can only be appreciated after close and intensive study." I have vainly sought for the benefit arising from public operation by states and municipalities. On the viii PREFACE contrary an unbiassed survey of the whole subject forces me to testify to the resulting harm. Y. G. November, 19 12. For the American edition the facts and figures herein set forth have been brought up to date — June, 1913- IX TRANSLATOR'S NOTE The translation has been read and revised by the Author. Otherwise my hearty thanks for most valu- able assistance given in translation are due to Miss Elise Warren and Mr. William D. Kerr. CONTENTS BOOK I Public and Private Trading Operations PAGE I. Two Precepts i II. The Three Main-Springs of Human Action 2 III. Determining Motives of Private as Against Public Enterprises 5 IV. Government and Municipal Trading Operations 16 BOOK II Financial Results of Government and Municipal Ownership I. Bookkeeping in State and Municipal Trading Enter- prises 35 II. The Belgian State Railroads 46 III. Prussian Railroads 55 IV. State Railways of Austria and Hungary 72 V. Italian Railways 77 VI. The Railways of the Swiss Federation 88 VII. Railways of New Zealand 94 VIII. Government Railroads in France 105 IX. Public vs. Private Operation 118 X. The Holy Cities of Municipal Operation 125 XI. Operation of Gas and Electricity in the United King- dom 127 XII. Tramways in Great Britain 136 XIII. Housing of the Working Classes and Public Ownership in Great Britain 151 XIV. Housing of the Working Classes (Continued) 161 CONTENTS PAGE XV. Government Control of Food Supplies 175 XVI. Victims of Government Ownership 181 XVII. Charges, Debts and Credits 183 XVIII. Fictitious Profits 191 XIX. Fiscal Monopolies 194 XX. The Alcohol Monopoly in Switzerland and Russia . . . 205 XXI. Financial Disorder 216 XXII. The Purchase Price 241 XXIII. Delusions of Profit and the Life Insurance Monopoly in Italy 243 XXIV. The Fiscal Mines of the Saar District 253 XXV. Public vs. Private Enterprises 256 BOOK III Administrative Results I. Administrative Results 271 II. The Safety of Travellers upon State and Private Railway Lines 272 III. Disorders, Delays and Errors 280 IV. Official Conservatism 292 V. Labor 300 VI. The Consumer 348 VII. Programs of Organization and Regulation 369 BOOK IV Political and Social Consequences of Public Operation I. Socialist Programs and the Facts 381 II. Bluff 394 III. Results of Experience 398 IV. The State a Dishonest Man 400 V. Corruption 423 VI. Nationalization of Public Utilities and the Foundation of Great Fortunes 427 VII. Disintegrating Character of Public Operation 429 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED Where and Why PubHc Owner ship Has Failed BOOK I PUBLIC AND PRIVATE TRADING OPERATIONS CHAPTER I TWO PRECEPTS Neither national nor local governments should attempt that which can be done by individuals: says the economist. Labor for personal profit must be replaced by labor for the sake of service: answers the Sociahst. Experiments in the way of nationahzation and mu- nicipalization of pubHc utilities, with the Socialist ideal in view, have been sufficiently numerous. Do they warrant the decision that nations and municipali- ties have reaped the advantages promised by their advocates? This question — primarily a psychologi- cal one — we are going to try and answer in the fol- lowing pages. I CHAPTER II THE THREE MAINSPRINGS OF HUMAN ACTION 1, Compulsion. — Bribery. — Instinct for Personal Gain. — Government and Municipal Ownership Would Substi- tute the First Two Influences for the Third. 2. No Dividends on Capital of Public Undertakings. — Inter- est and Amortization. — The Altruism of Disinterested Managing Boards. — Work for the Sake of Service. I. Down to the present time there have been only three mainsprings of human action — compulsion, bri- bery and instinct for personal gain. Compulsion is the true basis of confiscation and slave labor. Give or I take. Work or I strike. Bribery, in the v^^ay of high office, rewards, deco- rations, rank and homage, helps to blind us to the pres- ence of compulsion. The church, the schools, and the army furnish the best and most familiar examples of the efifect of these two forces, which government and municipal ownership would substitute for the in- centive of personal gain. Neither compulsion nor bribery, however, has proved quite sufficient to induce continuous action on the part of employees and officials entrusted with the operation of national and municipal services, for they are utterly incompatible with any form of contract. The very nature of a contract requires free assent to 2 THE THREE MAINSPRINGS OF HUMAN ACTION its terms on both sides. Therefore, the third force, the instinct for personal gain, is invoked. Personal gain does imply a preliminary agreement — assent on the part of him who offers his services as well as of him who is to pay for them. Every group of employees at the present day is working, not for the sake of service, but for gain. 2. Is the management of a national or municipal undertaking more economical than the management of a private enterprise? "Yes," answers the Socialist, "because no dividend need be paid on capital." But there are interest and amortization to provide for on capital. Consequently the margin of economy is only the difference between interest and amortiza- tion, which public undertakings must provide, and dividends which the capital of private enterprises must have. "The high-salaried employees are paid less by pub- lic than by private enterprises : and there are no boards of financially interested directors," continues the Socialist. This is possible, but the salaries of ministers, burgomasters and mayors are high ; though these high salaries come from the exercise of several different functions. It is probable that high-salaried govern- ment employees are paid less than their colleagues of the same relative rank in the employ of pri- vate industry ; but, in general, the personnel of public undertakings is more numerous and the ex- penses, therefore, amount to more in the long run. The management of the Western (government) 3 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED railway, of France, for example, has established six- teen directorships in place of the three departmental divisions customary in the case of private railways. There are no financially interested boards of directors, but it is a question whether the altruism of the coun- cils which direct and control national or municipal undertakings is of greater advantage to these enter- prises than personal interest would be. In effect the partisans of public operation find economy in the non-remuneration of capital, outside of interest and amortization, and in the meager remu- neration of promoters, directors, councillors, and the chief managers of the enterprise. CHAPTER III DETERMINING MOTIVES OF PRIVATE AS AGAINST PUBLIC ENTERPRISES 1. Why Do Individuals Establish an Undertaking? 2. The Motives of Politicians. — Sacrifice of the Service to Personal Ends. — The Roof of the Louvre. — The De- partment of Fine Arts (Bçaux Arts). 3. The Freycinet Program. 4. Municipal Interests. — Public Officials. 5. Invidia Dcmocratica — Appeal to Party Passions. — Pur- chase of the Railways. — The Purchase of the West- ern Line. — Socialization a Political Necessity. 6. Financial Aims and Hypocritical Excuses. — Pretexts and Realities. — The Alcohol Monopoly in Switzerland and Potatoes. — The Alcohol Monopoly in Russia, Tem- perance and Fiscal Laws. I. When one or more individuals invest their en- ergy, their knowledge, and their capital in an indus- trial enterprise they must be convinced beforehand that in so doing they are responding to a demand on the part of a group of consumers having a sufficient purchasing power to repay them for their services, as well as for the products which will be offered. If the estimates of the founders of such an enter- prise are correct, they will gain; if incorrect, they will lose. In either case they will bear the responsi- bility for their acts. Gain or loss is the inevitable 5 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED and infallible consequence of every such enterprise. And, as every man who is on the point of engaging in business knows that one of them must occur, his energy is spurred on by the hope of the one, while at the same time it is being curbed by the fear of the other. The industrial and commercial progress of all nations far advanced along the pathway of evolution proves that the majority of those individuals or groups of individuals who have engaged in business undertakings have calculated accurately. 2. Statesmen at the head of nations or municipali- ties are not necessarily responsive to the conditions just described. The undertakings in which they in- volve the state or the municipality will not yield them any personal profit in case they succeed, nor will they be called upon to suffer any loss if they fail. The in- evitable and infallible criterion of the business man is lacking in their case. By what test, then, are their motives to be construed? As a rule their action is determined by the amount of personal advantage resulting for themselves; not, it is true, in the form of gain, but in the form of an increase in the duration or extent of their power. They establish such or such an enterprise, because, in looking about for some bait likely to attract the pub- lic, they have found this particular one. Does the enterprise fill a long-felt want? That is a secondary question. The first consideration is what will make the broadest appeal to the popular prejudices and sym- pathies of the moment. I have heard ministers and 6 MOTIVES OF PRIVATE AS AGAINST PUBLIC ENTERPRISES deputies say: "There is nothing to do, but we must do something." Now expenditures which have a certain audacity about them are sure to be accepted with a much better grace than those which do not appeal to the imagina- tion of the public. As an instance in point, let me quote from my own experience. When I became minister of Public Works I speedily discovered that the government buildings under the jurisdiction of my department were being very badly kept up by the department of fine arts (Beaux Arts). Knowing by personal experience the importance of roofs I turned my attention first to them. In the case of the Louvre, to quote but a single example, the water leaking through the roofs was cracking the walls. Moreover, not one of the seventeen lightning rods attached to the building was in working condi- tion, while the majority of them were so insecure that they were liable to fall at any moment on the heads of passers-by. I used the entire appropriation at my disposal to insure an efficient roofing of the buildings entrusted to my care. The rest could wait. But, from the point of view of popularity, I had made, as I had foreseen, a wretched move. That form of flattery which consists in the sacrifice of one's own to public opinion forms part of the very stock in trade of the politician ; and, if he is shrewd, he will not hesitate to make the sacrifice. Again, in 1902 the French Parliament passed a law on public hygiene, under which municipalities are re- quired to furnish drinking water and sewerage sys- 7 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED terns. A number of deputies and senators who had voted for the bill hastened immediately to the minis- ter of the interior to demand that the law should not be applied to the municipalities in their particular dis- tricts. And so it goes. The following illustrates a different but equally dangerous tendency : Certain officials of the Beaux Arts are provided with funds for the purpose of placing orders or for the purchasing of works of art at the salons. These men are beset by recommendations and advice of all sorts. Concentration of their appropriations upon one important work is out of the question; they must fritter them away in small amounts, because there are so many people to satisfy. In all purchases of art works there is, of course, a large proportion of mis- takes, which will be accounted in the future as dead losses ; but it is not necessary to begin by buying fail- ures, as so frequently happens. Nor does this criticism refer solely to contemporary officials. Ministers and under-secretaries of state of other periods than our own were equally human. Side by side with the Thomi Thierry art collection in the Louvre are to be found government purchases of works by the same artists, made at the same time. The degree of taste shown in the choice of the pic- tures included in the Thierry collection is far superior to that shown in the official collection. 3. In 1879 Charles de Freycinet prepared his grand program of public works. There is no more agreeable pastime than to prepare a program of public works. 8 MOTIVES OF PRIVATE AS AGAINST PUBLIC ENTERPRISES Hope is inspired, delusions encouraged, and we can leave to our successors the trouble of realizing them. All succeeding ministers of Public Works have been liquidators of the Freycinet program. The spirit which dictated it struck the public imagination. "The government/' it was said, with the hearty applause of the French Parliament, "must assume charge of the national savings." As if there were any savings except those of individuals, and as if those who had known how to accumulate them would not be more careful to use them to good purpose than those who had had no interest in their acquisition! All the depu- ties and senators demanded a share of the cake for their constituents. M. de Freycinet yielded every- thing, encouraged still further demands, and requested engineers to submit plans for railways, canals, or ports. The government concentrated all its energies on carrying out his program. In 1883, however, and as a result of all this, the nation would have been bankrupt if M. Raynal had not closed certain contracts with the railway com- panies; contracts which Camille Pelletan later de- scribed as infamous. But he has never explained what the government would have done if the contracts had not been signed. 4. A so-called movement of public opinion fre- quently rewards intensive study. Any day you may be suddenly aroused to the consciousness that there is a movement on foot in favor of a certain public under- taking. On the side you are informed that so and so and so and so (local politicians) have made large 9 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED Speculations in view of precisely this project. The municipality, for its part, may placidly obey the hid- den impulse. If not, the parties interested proceed to take a more or less direct part in the struggle. In any event the simple, hoodwinked people become very en- thusiastic for or against the issue. In 1902 the City of Birmingham decided to submit a bill to Parliament which would permit it to take over and operate its urban tramway system. A refer- endum vote was taken. Out of 102,712 registered electors, only 15,742, or 15 per cent, of the total elec- torate, voted. Moreover, according to the Daily News, "high officials of the town led gangs of munici- pal workmen to the polls." ^ Major Leonard Darwin says in this connection : "The more energetic and able they (the officials) are, the more likely will they be to view with favor new projects connected with municipal trade." ^ In the end, perhaps, such an extension of the official functions will mean more work for such enthusiasts. But their influence will probably be greater, and con- ceivably even doubled, through the resulting increase in their financial importance. 5. The promotors and leaders of movements in the direction of government and municipal ownership fre- quently resort to exciting and exploiting the so-called invidia democratica, or democratic jealousy, one of the plagues of the Roman Republic, and always in ' Raymond Boverat, Le Socialisme Municipal en Angleterre et ses Rcsultats Financiers, p. 444. ^Municipal Trade. ÏO MOTIVES OF PRIVATE AS AGAINST PUBLIC ENTERPRISES evidence in an individualistic state. Men who are at the head of private enterprises are denounced as exploiting their fellow-citizens. Their profits — usually exaggerated — are quoted, and the claim is made that such moneys will be restored to the people when governments, local or national, provide every- thing and individuals nothing. Was the object of the purchase of the Western railway in France economy in expenditure and im- provement in transportation facilities? Not one of those who demanded and voted for it dared to make such a claim. With the lines belonging to the state the deputies would have places for their constituents, a certain right of political interference in the adminis- tration, and hence a large degree of electoral influence. Resolutions favoring the purchase of the Western railway had been rife since 1902, but no minister of Public Works had endorsed them. Immediately after the elections of 1906, however, Georges Clemenceau, then Minister of the Interior, started on a hunt for a program which would be Socialist without being col- lectivist. Socialism is the present phase of the move- ment; collectivism is the Socialist's dream. Clemenceau took from his predecessors: i. Noon- day rest. 2. Limitation of working hours and a col- lective labor contract. 3. The income tax. 4. Labor pensions. But he was also anxious, by socializing something, to conciliate the Socialists and the Radical Socialists. He therefore selected the purchase of the Western railway as suited to his purpose. Then, in order to be certain that the afifair would go through, he impli- 11 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED cated Louis Barthou in the affair, in the latter's ca- pacity of minister of Public Works, aUhough Bar- thou's antecedents did not point to him as especially fitted to carry out such a measure. 6. One of the chief incentives to the establishment of a government monopoly is the hope of procuring resources without the stigma of an apparent fiscal object attached. It is one way of making the tax- payers pay taxes without perceiving that they are taxes. As a matter of fact they are simply misrepre- sented taxes. Appeals of their promoters to the moral and hygienic interests of the nation, in order to effect the desired object, are equally disingenuous. For example, the alcohol monopoly in Switzer- land was submitted to the people as designed to com- bat alcoholism, while putting an end to the ohmgeld duties, a sort of internal revenue duty. As for alco- holism, the financial history of the individual cantons, which have been receiving their share of the profits of the monopoly for the purpose of fighting it, proves just how relative has been the attention devoted to the eradication of that particular evil. But there was still another motive, although it has been mentioned only in conversation. In Switzerland every quart of alcohol is produced from potatoes. Growers found that the distillers were buying their potatoes too cheaply. Therefore, at the opportune moment, the Federal government increased the pur- chase price of domestic alcohol, saying to the potato grower : "You see, we have increased the price of alcohol. Whereas, in Austria, alcohol costs 20 or 30 MOTIVES OF PRIVATE AS AGAINST PUBLIC ENTERPRISES francs, we in Switzerland pay more than 80 francs for it ; and we are doing so in order that you can sell your potatoes at a good price. In other words we are granting you a subsidy." When the monopoly of alcohol was established in Russia it was repeated in every key that the object in view was moral and not financial. It was established, in the first place, in order to ensure to the inouj'ik (peasant) absolutely pure alcohol. Emphasis was placed on the characteristic retail shops of the gov- ernment, kept by officials who can have no interest in increasing consumption. There is neither chair, cork- screw, nor glass in the shop; therefore, the moujik, after buying, must go elsewhere to drink. But, in 19 1 2, the receipts from the monopoly on alcohol were estimated at 763,990,000 roubles, out of a total income of 2,896,000,000 roubles, or 26 per cent. It is, therefore, easily surmised that officials charged with the sale of alcohol would be held to a strict ac- count if devotion to the temperance cause should hap- pen to bring a1)out a deficit in the budget. The moral aspect of the monopoly is completely effaced by fiscal interest. M. Augugneur heads a local and national owner- ship party. Why should he advocate public owner- ship? Simply in order to have a platform — a reason for party existence. The future of municipal or gov- ernment undertakings is a secondary matter. What is necessary is an issue which will lead to political action and to immediate power. If any enterprise inaugurated by a mayor or by a 13 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED minister is difficult and useless neither the mayor, the minister, the municipal councillors, the deputies, nor the senators who have brought it into being will be called upon to bear any material responsibility for it. The taxpayers of to-day and to-morrow must assume the entire burden. Sometimes the failure of an un- dertaking involves a decrease in the influence of the politicians who were its promoters. But frequently it increases their importance in the public eye. The risks which the Freycinet program carried with it; the uselessness of a quantity of the work included in it ; the burdens which have accrued from the opera- tion of railroads; an excess of 30 per cent, in the con- struction of navigable ways which are not yet fin- ished, all this has in no way injured the prestige of the author of that program. The advocates of the purchase of the Western line are coping cheerfully with the deceptions it has engendered, and they imag- ine — and rightly — that no one, or almost no one, has ever placed in parallel columns their promises and the actual facts. Again, had M. Barthou conducted a private business after the fashion in which he carried through the pur- chase of the Western road, he would long since have been branded as a defrauding bankrupt. As a public official the state has rewarded him for his efforts in this direction with the premiership of France. Conclusions. I, Any private undertaking has a definite objective point — gain; and a certain test — gain or loss. 14 MOTIVES OF PRIVATE AS AGAINST PUBLIC ENTERPRISES 2. The motive behind municipal and national un- dertakings is usually political or administrative in- fluence for their promoters. 3. The promoters of public undertakings escape all material and — generally — all moral penalty. ÏS CHAPTER IV GOVERNMENT AND MUNICIPAL TRADING OPERA- TIONS 1. The Report of Gustave Schelle to the International Sta- tistical Institute. — List of Public Industrial Operations. — Postal, Telegraph and Telephone Systems. — Mints. 2. Public Trading Enterprises of Denmark, Switzerland, Holland, Italy, France, Belgium, Sweden, Austria, Germany. 3. The United Kingdom and the United States. 4. The London County Council. 5. The Municipal Activity of Russia. 6. New Zealand. — Government Socialism More Fully De- veloped Than in Any Other Country. — Socialist Enter- prises. 7. Nationalization of the Soil in New Zealand. 8. Government and Municipal Trading Operations Re- stricted in Scope. I. When zealots in the cause of "a transference of trading and commercial undertakings to ptiblic bodies" declare that it is a general and irresistible movement, they are mistaking their hopes for an accomplished fact. Public trading enterprises in actual existence are relatively few. During the session of the International Statistical Institute of 1909, at the suggestion of MM. Arthur Rafïalovich and Gustave Schelle, a committee was 16 GOVERNMENT AND MUNICIPAL TRADING OPERATIONS appointed for the purpose of collecting statistics re- garding state and municipal trading undertakings. The members of this committee were: Yves Guyot, chairman ; Gustave Schelle, secretary, and MM. Col- son, Rafïalovich, Fellner, Nicolai and Hennequin. The report of this committee was presented to the session of the International Statistical Institute which met at The Hague in 191 1. The industries monopolized by nations or cities ap- pear in the report as follows : The postal systems in every country and telegraphs and telephones in every country except the United States. All governments coin money, either free, as in England, or for a slight charge. In the following summary we will not speak of these four utilities unless they present some special characteristic peculiar to the country under consid- eration. 2. The report begins with Denmark. It is gener- ally known that this country is very active and very highly developed industrially. Its population, how- ever, is smaller than that of the city of Paris. Denmark operates, in connection with its army, twenty public enterprises, employing altogether 2,335 people. The railway system comprehends 37 enter- prises, employing 4,797 people. In addition to these there are 16 other enterprises, employing 279 people, and including a dressmaking establishment and a work- shop attached to the royal theater. The total number of these enterprises is thus y^^, employing 7,411 people, of whom 7,166 are laborers. But the majority of Danish state undertakings are 17 WHERE AND WHY PUBLIC OWNEKSIIIP HAS FAILED only semi-public in character. The principal object of the factory at Usserod is the manufacture of cloth for the Army and Navy, but it has a retail shop for the benefit of the public. The powder mill of Frederiksvark has a monopoly of the manufacture of powder. The three ports of Helsingor, Frederiks- havn, and Esbjerg are the three great ports of the state. The royal manufacture of porcelain is not counted among government industries. As for the towns the census of 1906 gives 43 water works, I street paving enterprise, 2 embankment en- terprises, I dredging undertaking, 2 construction un- dertakings with 29 workmen, i shipyard, i combined gas and water plant, 2 moulding undertakings, i in- stallation of electrical apparatus, 8 plants for the production and distribution of electricity, 60 gas works, 2 wrecking enterprises, and, finally, i chimney sweep and i machinist, each of whom is considered as a municipal enterprise. The total is 126 enterprises, employing 2,274 people, or an average of 18 persons each. In Switzerland the state alcohol monopoly buys po- tato spirit and sells it again. It does not manufacture it. The state both owns and operates its railways. In Holland the state publishes an official journal and operates the Wilhelmina and Emma pit coal mines. The government railways are operated for the state by a private company. For Italy, Giovanni Giolitti, then minister of the Interior, had already furnished statistics of the 18 GOVERNMENT AND MUNICIPAL TRADING OPERATIONS principal municipal trading undertakings up to 1901, in a report presented to the Chamber of Deputies, March 11, 1902. The report lists 171 slaughter houses, 151 water works and artesian wells, 24 plants for the production of electrical energy, 20 public laundries, 15 gas works, 12 under- taking enterprises, 12 public baths, 4 ice plants, 3 sewage disposal plants, 3 irrigation enterprises, 2 bakeries, 2 pharmacies, and a few other less important services. The railways are state-owned and operated. The law of March 29, 1903, enumerates 19 enter- prises which municipalities may undertake. Outside of the usual services, water, gas, electricity, etc., we might mention pharmacies, mills and bakeries, as "normal regulators" of prices, ice plants, public bill posting, drying rooms and store houses for corn, the sale of grain, seeds, plants, vines and other arboreal and fruit-bearing plants. The same law has determined the manner in which local governments may purchase concessions previously granted to private interests. They must pay to the owners an equitable indemnity, and account must be taken (a) of the market value of the construction and of the movable and immovable equipment; (b) of the advances or subsidies made by the local government ; the registration taxes paid by the concessionaires ; and the tax that the companies were able to pay to the towns on excess business; (c) of the profit lost to the concessionaires through the purchase, based on the legal interest rate for the number of years which the franchises have still to run, with annual sums equal to 19 Where and why public ownership has failed the average profits of the five years last passed (not including interest on capital). The law of April 4, 1912, established a life insur- ance monopoly. The report of the Congress of the Federation of Municipal Enterprises, held at Verona, May 21 and 2.2, 19 10, enumerates 74 special public enterprises, 31 of which were in existence before the law of 1903. This would tend to prove that the law had not aided greatly in their further development. France has: i. Fiscal monopolies, such as matches, tobacco and powder. 2. Postal system. 3. Govern- ment railways, comprising the system bought before the Western line ; the Western railway ; and the rail- way from Saint Georges de Gommiers to La Mure, in the district of Isère, the operation of which constitutes a distinct department aside from that of the other government railways. Little is known concerning this third system. Other enterprises are : the National Printing Office ; the official journal {Journal Officiel) ; the manufac- ture of metals and coins; the manufacture of Sèvres porcelain; the manufacture of Gobelin tapestry; the manufacture of Beauvais tapestry; the water works of Versailles and de Marly; stock farms; and the baths of Aix-les-Bains. The City of Paris has organized several commercial ventures. In 1890 a municipal department of elec- tricity was installed, which was abandoned in 1907. The city has also taken full control, since June i, 1910, 20 GOVERNMENT AND MUNICIPAL TRADING OPERATIONS of the Belleville cable railroad. In 1905 it municipal- ized the undertaking service, and it operates a stone quarry for the benefit of the city streets. These are the only directly managed undertakings of the City of Paris. A mistake was made in becoming a share- holder in a gas company. In the case of water the city has undertaken to construct and maintain pumping stations and also mains, but it has granted to a private company the right to construct branch pipe connec- tions, to receive subscriptions and to collect rents. The Municipal Council of Paris has leased its elec- trical supply down to 1940 and also its transportation facilities, both surface and underground. Belgium owns and operates nearly all its railways. It runs steamers from Ostend to Dover, and on the canal from Anvers to the port of Flanders. In Sweden the state owns and operates the rail- ways. In Austria, according to a work compiled under the supervision of J. G. Griiber, by Doctor Rudolph Riemer, secretary of the Central Bureau of Statistics, outside of the customary monopolies the state controls fiscal monopolies, such as tobacco, salt, powder, lot- teries, railways, a national printing office, an official journal, docks, stock farms, forests, and other public lands and mines. Municipalities which M. Schelle has not listed oper- ate gas and electric plants, undertaking services, baths, pawnshops, horticultural establishments, slaughter 21 WHERE AND WHY PUBLIC OWNERSHIP HAS "FAILED houses, savings banks, theaters, docks, hydro-electric works, race tracks, tramways, and daily newspapers. In regard to Germany M. Schelle had received no information concerning the German railways, nor the fiscal mines of Prussia. The government operates coal mines in upper Silesia, the districts of Deister and Oberkirchen, in Westphalia, and in the district of La Saar. These mines were employing 91,671 work- ers in 1910.^ The Prussian government also produces lignite, amber, iron ore and other ores, both calcareous and gypsum, potash, rock salt and refined salt, and oper- ates blast furnaces and foundries of metals other than iron. These various industries employ 12,759 work- ers, which makes for the two classes enumerated a total of 104,430 persons employed. The state also operates the Prussian bank.^ 3. The report does not take up the public under- takings of the United Kingdom, or of the United States. The results of the investigation made by The National Civic Federation of America, for the pur- pose of discovering whether the attempts at munici- palization made in Great Britain ought to be imitated in the United States, were published in 1907 (3 vol- umes). However, the information given is most in- complete. In Great Britain the telephone was not taken over ^ See Circulaire du Comité des Houillères, February 20, 1913. 'Arthur Raffalovich in Journal des Économistes, October, 1912. 22 GOVERNMENT AND MUNICIPAL TRADING OPERATIONS by the state until 1912. In the United States the telegraph and telephone are still under private man- agement. The Postmaster-General of the United States, in his report of 19 12, recommended the annexation of the telegraph service. But President Taft, in transmitting the recommendation to Congress, declared that he by no means favored the suggestion.^ However the President complimented the Post- master-General with having brought about economy in his department. But, as the Journal of Commerce observed, to bring about economy in a government department, and to ensure an economic administration of a trading enterprise, are two very different things. In the British Isles municipal enterprises have been multiplied, following the Public Health Act of 1875, which act granted to sanitary districts authority to establish water and gas works, and the Municipal Cor- porations Act of 1882, which codified the municipal law. This latter act gives to municipalities the right to spend their income ; but, in order to contract loans and make purchases or sales of land, they must obtain permission through the medium of private acts of Parliament. The industrial undertakings of British towns are much less important than might be supposed from the rhapsodies they inspire in government ownership fanatics. In proof of this statement it is sufficient to enumerate the industrial operations of the London County Council. ' Journal of Commerce, New York, February 24, 1912. 23 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED 4. The London County Council was established in 1888. From 1888 to 1894 and from 1898 to 1906 it called itself progressive. Its progress consisted chiefly in seizing, by right of its own authority, the greatest possible number of public utilities. However, the distribution of the London water supply is not con- trolled by the Council, despite all its efforts to obtain such control. The control of water was given by the law of 1902 to the Metropolitan Water Board, com- posed of 66 representatives of the various local authorities comprised within the area of distribution, which is not less than 537 square miles, or 5 times that of London. The Board has the right to levy taxes, and it has acquired, by private contract and without opposition, the holdings of 8 companies for a total of about £1,900,000 ($9,253,000). It has spent one million and a half pounds sterling ($7,305,000) in public works. In 1904 it furnished 81,823,000,000 gallons of water to 7,000.000 people, or 32 gallons a day per capita, 53 per cent, of which comes from the Thames, 25 per cent, from the river Lea, and 22 per cent, from springs and wells. The London docks were constructed by private companies. In 1907 the government introduced a bill to take over these enterprises from the companies, which received an indemnity of £22,368,916 ($108,936,000) from the Port of London. This lat- ter corporation, presided over by Lord Devonport, who showed himself so energetic in the strike of the dock laborers, is composed of thirty members, ap- pointed by the government, by the municipal authori- ties and by individual merchants. The Port of Lon- 24 GOVERNMENT AND MUNICIPAL TRADING OPERATIONS don is SO independent of the London County Council that the latter refused to guarantee the loans that the former was forced to contract in order to pay the indemnity to the dock companies. Neither does the London County Council furnish gas to the inhabitants of London. The companies manufacturing gas were organized by private capital. In 1855 there were 20 of these, but by i860 the num- ber had been reduced to 13. Subsequently there were several mergers, which necessitated private bills. Thus a way was opened for an intervention which estab- lished a scale of dividends proportioned to the price of gas. The dividend rate was fixed at 4 per cent. If there is a decrease in the price of gas the dividend can be increased is 5d (34 cents) for each penny of the de- crease in price, which was then fixed at 3s 2d (76 cents) for 1,000 cubic feet of gas of 14 candle-power. If there is an increase in the price the dividend is diminished in the same proportion. London is lighted by two gas companies. One company sells its gas at a rate of 2s yd (62 cents). The London County Coun- cil has only the right of fixing the quality. The Electric Lighting Act of 1882 provided that local governments could purchase, at the end of 21 years, any electrical enterprise established within their territories. The law of 1888 extended the purchase period to the end of 42 years. Several local governments of London have estab- lished electrical service in a number of different ways. In 16 out of 29 of the local districts there are municipal plants, but they represent a service over only 553^ square miles, while the elec- 25 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED trical companies supply a surface of 643/^ square miles. In greater London the municipal plants sup- ply 167 square miles, and 19 companies 331 square miles. The London County Council, in 1907, planned U) create an electric central station supplying a district of 451 square miles; but, when the "progressive ma- jority" of the London County Council was replaced by a "moderate majority," the plan was abandoned. Later Parliament passed a bill, demanded by 8 out of the 10 existing companies, permitting them to consoli- date their systems. But the London County Council will still have the right to buy them out, in 193 1, or at the end of any subsequent ten-year period. In fact, the Council has exercised its authority ac- tively only in the direction of operating tramways. In 1870 the Tramway Act authorized a local govern- ment, or any private company which had obtained its consent, to ask for a private bill in order to establish a line. The Metropolitan Board of Works of London granted several companies authority to establish lines. In 1894 the Council demanded the right to purchase these. In 1898 it bought out two companies, one of which possessed 43 miles of tramway lines in the north of London. The Council left to the com- pany the right of operation during 14 years. In 1898 the operation of the other tramway lines was begun. The Council bought up the lease of the other companies in 1906. It has now 136 miles of tramway lines, and its receipts are diminishing. The London County Council likewise attempted to 26 GOVERNMENT AND MUNICIPAL TRADING OPERATIONS operate, beginning with 1906, a line of boats on the Thames. The first two years the undertaking resulted in a deficit of £90,683 ($441,626). The service was abandoned one or two years later. The 30 boats, which had cost, in 1906, £7,000 each, were sold in a lot for £18,204. The Council also took upon itself the demolition and reconstruction of a cer- tain number of cheap lodgings. Therefore, in the way of actual municipal industrial services, it has managed a boat line upon the Thames, demolished and reconstructed cheap lodgings, and is now operat- ing tramways. The partisans of public operation say, none the less, that, "in principle, municipal ownership has been ac- cepted." Only those who are honest add "but public opinion has confined it within very narrow limits.'" Moreover, the elections of 191 2 have kept the progres- sives in the minority.^ 5. According to an article in the Fortnightly Re- view, of January, 1905, it is in Russia that local pubhc ownership and operation have been most widely ex- tended. The sale of agricultural implements, medi- cines, magic lanterns, translations of Molière and Mil- ton, the expurgated novels of Dostoiewski, sewing machines and meat are among Russian public enter- prises. It is said also that it is useless for cities to demand subsidies from the government. The stock answer of the administration to all requests for aid is : Municipalise. This advice is easy and costs nothing. * Claude W. Mullins, L'Activité Municipale de Londres, Revue Économique Internationale, 1910. 27 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED 6. Ownership and operation on a national scale have been most widely developed in New Zealand. The constitution of 1852 gave to legislators of that country all possible authority without other restric- tion than "to do nothing repugnant to the English law." Nor are their powers limited, as in the United States, by a supreme court. New Zealand is isolated. It has no competitors. Jt has large undeveloped resources. It has a territory of 271,300 square kilometers (104,344 square miles), or more than half that of France, and a population of 1,044,000 people, or 4 inhabitants per square kilo- meter ( 10 inhabitants per square mile). Naturally the experiments of a restricted population, distributed over a vast area, have not the same importance as those attempted by a population of several million in- habitants concentrated within narrow boundaries. In a work entitled State Socialism in New Zealand ^ Messrs. Le Rossignol and Stewart give us a complete picture of the Socialist enterprises which have been attempted there. Most of the soil was originally government land. As we shall see further on, the government has not re- tained possession of it for the purpose of exploit- ing it. The real development of governmental activity is chiefly due to the energy of one man. Sir Julius Vo- gel. At his instance a government life insurance sys- tem was established in 1869. In 1870 he outlined a ^ State Socialism in New Zealand, by James Edward Le Rossignol, Professor of Economics in the University of Denver, and William Downie Stewart, Barrister at Law. Dunedin, New Zealand, i volume in i2mo, George C. Harrop & Co., London. 28 GOVERNMENT AND MUNICIPAL TRADING OPERATIONS vast policy of public works, calling for an expenditure, in the course of lo years, of £10,000,000 ($48,700,- 000), a sum which was actually doubled within that period. In 1876 he abolished provincial boundary lines, took over the land and the railways, and bur- dened the state with a fully developed administrative organization, the expenses of which were paid for by taxation, and carried out only with the help of loans and a heavy debt. In 1879 New Zealand went through a crisis which would have ruined her if she had not been saved by the application of refrigeration to the transportation of meat. Even with that help it took her 16 years to recover, I shall not speak here of the social legislation in- troduced by William Pember Reeves, from 1890 to 1895, which has frequently been remodeled. New Zealand has owned the telegraph since 1865; the railways since 1876; the telephone since 1884. National coal mining and accident insurance were taken up in 1901, and fire insurance in 1903, at rates which render any competition impossible. From time to time the government has undertaken the operation of small industries, such as the purchasing of patents for the prussic acid process, a right to which the state leases to miners for a certain fee. The man- agement of the oyster beds of Auckland, the estab- lishment of fish hatcheries, the stocking of the rivers with trout, and the establishment of resorts for tour- ists and invalids are also among New Zealand govern- ment enterprises. But, although New Zealand represents the maxi- 29 WHERE- AND WHY PUBLIC OWNERSHIP HAS FAILED mum of effort in the way of Socialist enterprises, few industries are directly managed by the govern- ment. "Scarcely a month passes," says Mr. Guy H. Schole- field, "witiiout some convention passing a cheerful reso- lution demanding that the government should step in and operate some new industry for the benefit of the public. Now it is banking ; to-morrow bakeries ; over and over again some moderate reformers have called upon the government to become controllers of the liquor traffic ; once upon a time it was importuned to become a whole- sale tobacco-seller ; more than once to purchase steamers to fight the supposed monopoly of existing lines." ^ "But," say Le Rossignol and Stewart, "notwith- standing these demands, the feeling seems to be growing that the government should not move too rapidly in the direction of State Socialism." 7. In nationalization of the soil New Zealand has had an experience, the more interesting in that most of the soil was once government land. Ought the state to have conserved its interest in the land, or was its action wise in transforming it into private prop- erty ? The following facts regarding this question are to be found in that remarkable work, State Socialism in New Zealand, from which I have already quoted. The Hon. William Rolleston, who became minister of Public Lands in 1879, held that one-third of the crown lands ought to be leased in perpetuity for a rent of 5 per cent, of the value of land, with a revalu- * New Zealand and Evolution, page 58. 30 GOVERNMENT AND MUNICIPAL TRADING OPERATIONS ation every 21 years. The resulting resources might be applied to education. The Upper Chamber granted the right of purchase at the value of the prairie land, or £1 per acre, after any prospective property holder should have cultivated one-fifth of his claim. Socialist legislation devel- oped when the Liberal party, having acquired a majority in the elections of December 5, 1890, came into power on the strength of two issues, agitation against the great property holders, and agitation of workmen whose salaries had fallen since 1879 ^"^ who, in the month of November, had organized an unsuccessful strike. John Ballance, head of the Cabinet in 1891, and John McKenzie, minister of Public Lands, were ardent partisans of government and property reform. To- gether they put in force five acts, one after the other, which have since undergone several modifications. Ballance, also a partisan of nationalization of the soil, was anxious that one-third of its lands should remain under the control of the state, to be leased by it, however, with periodic revaluation. His plan fell through. McKenzie granted leases for 999 years at a fixed rental of 4 per cent, on the capital value of the land at the time the lease was taken up, with- out revaluation. The area which could be held by one man was limited to 640 acres for first- class land, and 2,000 acres for second-class land. The system received the name of "the eternal lease." At this rate of lease, the government would lose more by way of land tax than it got by way of rent. But, at the end of 10 years, the perpetual tenants 31 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED began to ask for the right to buy the freehold of their properties. The Labor party was constantly proposing a revaluation of rents. In 1907 the right of purchase was recognized, but under conditions of valuation which provoked the strongest resentment. The ten- ants maintained that the state's interest in the land was only the capitalized rental of 4 per cent, on the original value of the land. The lease in perpetuity was abolished by the Act of 1907. However, under this system of leasing, which had been in force for 15 years, over two million acres of the best land in the colony had been parted with. In the place of the "eternal lease" was enacted the "renewable lease," a lease for 66 years, with provision for valuation and renewal at the end of the term with reappraised rent. But the public lands can always be sold immediately on the occupation-with-right-of -purchase system. It is there- fore a mistake to believe that the government of New Zealand owns all its soil. On March 21, 1906, the total area of 66,861,440 acres was held roughly as follows : Freehold 18,500,000 Leased from Crown 17,000,000 Held by natives 8,250,000 Reserved for educational purposes and national parks 12,250,000 Unfit for use 7,000,000 Not yet dealt with 3,300,000 It is estimated that 63 per cent, of New Zealand families own property of £100 and above; and it is probable that 75 per cent, of the families own some 32 GOVERNMENT AND MUNICIPAL TRADING OPERATIONS kind of property. A number of small properties are exempt from taxation. Those who are without prop- erty are young people earning large salaries who, with health and a fair chance, will achieve a good position in life. The land laws have not only increased the number of proprietors, but, although they have had a Socialist aim, they have actually brought about anti-socialist results, since they serve to encourage the system of private ownership. The Labor party advocates nationalization of the soil ; but the tenants, supported by the freeholders, continue to demand the right of transforming their leases into property holdings. At a crisis they would insist upon a lowering of the rent. One witness, in 1905, made this profound observation before the Land Commission : "I believe in the freehold because, in times of trouble, the freeholder is the man to whom the state will look ; and the leaseholder is the man who, in times of trouble, will look to the state." Messrs. Le Rossignol and Stewart, the authors of State Socialism in New Zealand, conclude: "It is not easy to show that New Zealand has derived any benefit that could not have been obtained from free- hold tenure combined with taxation of land values." Conclusions 8. Except in the United States the telegraph and telephone systems are nationally owned and op- 33 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED erated. The coining of money is also a function of governments. The railways are government owned, either wholly or in part, in France, Germany, Aus- tria-Hungary, Italy, Denmark, Sweden, and Belgium, but the extent of the private systems is greater than that of government lines. Industrial operation by governments and munici- palities is still very limited in scope. Nevertheless, it is already sufficiently widespread to make a con- clusion possible as to whether the dreams of its ad- vocates are being materialized, or their promises ful- filled. 34 BOOK II FINANCIAL RESULTS OF GOVERN- MENT AND MUNICIPAL OWNERSHIP CHAPTER I BOOKKEEPING IN STATE AND MUNICIPAL TRADING ENTERPRISES 1. Report of Gustave Schelle to the International Statisti- cal Institute. — Denmark. 2. Receipts and Expenses of Public Operation in France; Costs of Construction. — Receipts and Expenses Out- side of the Budget. — Special Accounts. — Capital Charges. 3. British Municipalities. — Belgium. — Sweden. — City of Paris. 4. Austria. 5. Conclusions. — Attempts to Organize Special Accounts for Government and Municipal Trading Enterprises Have Failed. They Are Incompatible with a Homo- geneous Budget. Sane Budget Regulations and Public Operation of Trading Enterprises Are Contradictions in terms. I. I have already quoted from the report to the International Statistical Institute, compiled by Gus- tave Schelle, former minister of PubHc Works, where- 35 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED in he discusses the financial situation of the vari- ous state and municipal trading enterprises, from which he has received reports, with all the authority of his official position, and with a mind which has remained both alert and independent throughout his administrative career. The difficulties in the way of estimating and comparing the value of such enter- prises are very great. In Denmark, for example, railway outlays for pen- sions and general administration and inspection costs are borne by the railroads themselves. For other enterprises such costs are met by the general budget. Before 1904 and 1905 the postoffice and the tele- graph yielded no net proceeds. In 1908- 1909 this was also true of the mint. No report is made regarding the interest charges upon loans for the establishment of such enterprises. In 1908-1909 the results of municipal operation of gas, electricity and water were as follows : Copenhagen Plants Capital, Net Proceeds, Crowns Crowns Gas 4 30,636,000 3,247,000 Electricity 5 14,451,000 3,490,000 Water 6 12,392,000 632,000 Provincial Cities Gas 57 13,144,000 1,640,000 Electricity 17 4,727,000 450,000 Water 50 10,873,000 839,000 In Holland, according to information furnished by M. Methorst, director-in-chief of the Central Bureau of Statistics, the cost of constructing the postoffice, telegraph and telephone systems amounted, on Janu- 36 BOOKKEEPING IN STATE AND MUNICIPAL ENTERPRISES ary ii, 1909, to 24,854,000 florins ($9,941,000). This capital bears an interest charge in favor of the public treasury of y/2 per cent., for the systems were established by means of public funds. Repayments are made periodically at a rate varying from i to 123/2 per cent. The enterprise has a special double entry system, and no account is taken, in reckoning up receipts, of either free railroad transportation or official correspondence. The funds for the operation of the Wilhelmina and Emma mines are supplied by the budget. No information is given in the report concerning the financial results of municipal enterprises in Italy. 2. I quote literally the observations of M. Schelle concerning France: A. Receipts and Expenses of Operation: "In the case of the mints, the National Printing Office and the state railroads, the receipts and expenses of op- eration are placed opposite each other in budgets an- nexed to the general budget, and the difference in gain or loss is indicated only in this latter budget. The rec- ords of expenditures, however, as well as of receipts, are incomplete. "In the case of the fiscal monopolies, the postal service and the official journal, the receipts of operation are in- cluded in the general receipts of the general budget, while the expenses are charged to the department under whose jurisdiction the enterprise may happen to be, without any comparison being made between receipts and expen- ditures. 37 238499 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED "As for the other and less important industrial enter- prises, the provisions of the general budget furnish no in- dication whatever of their condition. Tentative receipts are mixed with the receipts of other enterprises under different headings. "Sometimes the expenses are deducted from the gross receipts, and the net proceeds alone figure in the budget ; sometimes they are included in the expenditures of the department concerned, now and then without being in evidence. Information on the subject of these enter- prises is impossible except in the final accounts." B. Costs of Construction : "The costs of construction, in the case of certain enter- prises, are so mixed in the accounts with other expenses as to make it utterly impossible to disentangle them. Even where enterprises have been made the subject mat- ter of the budgets called annexes, the budget documents and the final accounts for each year indicate only the increase in the expenses to be incurred during the year under consideration, without regard to the expenses of former years. In order to get at the amount of capital employed, it is necessary to examine the final accounts of all the years. The resulting labor sometimes recalls that of the Benedictines, and, moreover, is far from always yielding satisfactory results, whether by reason of the antiquity of the expenses or the impossibility of disen- tangling them." C. Receipts and Expenses Outside of the Budget: "Government undertakings keep no daily record of the requisitions made on them by other departments, so that important financial transactions do not appear. "Certain utilities profit gratuitously from services ren- 38 BOOKKEEPING IN STATE AND MUNICIPAL ENTERPRISES dered them by other public or quasi-public enterprises; thus the postal and telegraph departments pay the rail- roads for but a small share of the services which they receive from them. "Public enterprises do not pay rent for the use of government property, for the real estate they occupy, nor are they charged with the materials they use. On the other hand, the National Printing Office includes among its receipts, at a rate which is generally considered high, the amount of work which it does for other depart- ments. It does riot include among its expenses, however, the interest on the capital sunk in the buildings in which it is installed. "The postal and telegraph facilities granted to minis- ters and various public departments do not figure among the receipts of the postal enterprises. "Finally, among the annual expenses of the post and telegraph offices are included the subsidies paid to packet boats prompted, at least in part, by considerations alto- gether foreign to the mail service." D. Special Accounts: "When an enterprise possesses a technical equipment or a stock of merchandise, no document ever shows the true value of such equipment. "Exceptions to the above are the special accounts published at the close of each fiscal year: ist, in the match and tobacco monopolies ; 2d, in the case of the state railroads. However the value assigned in these spe- cial accounts to stock and equipment is not a commercial value. It is a simple difference between the expenses of purchase and manufacture and the proceeds of actual sales. "Moreover, the fixed capital, buildings, real estate, etc., 39 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED of the enterprises enter into these accounts in the same manner as the stock of manufactured products, so that it is impossible to get at the capital really involved. "Finally, the amount realized from sales of real es- tate, when there are any, is not deducted from the capi- tal, such sales being made by the Government Lands De- partment. "The accounts of the Government Railroad Depart- ment published each year are no more satisfying. State- ments as to the costs of construction are to be found among them, but these include only those expenses con- tracted directly by the department, and no mention is made of the very considerable expenditures which are covered by the budget of the ministry of Public Works. "The Statistique des Chemins de Fer is the only docu- ment which gives an approximate idea of the actual costs of construction of the state railroads and that of the small line of Saint Georges de Gommiers à La Mure." E. Capital Charges : "It is not sufficient to know the amount of actual capi- tal invested in an industrial enterprise in order to be able to form a correct judgment as to its management. It is also necessary to be informed as to the capital charges. Exact computation is impossible unless the expenses relative to each enterprise have been covered by special loans. We must be content, therefore, with an approximation difficult to make at this late day, because no care has been taken to make such an estimate each year since the enterprises were established. In order to make any progress, it would be necessary to estimate the applicable rates based on the price of government bonds or of bonds guaranteed by the government at the time when the various construction expenses were in- 40 BOOKKEEPING IN STATE AND MUNICIPAL ENTERPRISES curred. Expenses for building materials, etc., and for the installation and equipment of the various government enterprises have been a burden upon the Treasury since that date. This is evident in the case of the costs of con- struction defrayed with funds from loans not yet paid off. But it is true also of expenses paid for in this or that year out of the ordinary resources of the budget. These expenses may not be considered as paid off while a perpetual public debt exists, even though resources are at hand which might have been employed toward their extinction." 3. The municipalization of public utilities has con- siderably increased the expenses and debts of British local governments. M. Schelle declares, however, that he has been unable to obtain the data necessary to a compilation of statistics as accurate in character as the purposes of the International Institute would naturally require. A portion of his report is devoted to the financial condition of the Belgian state railroad, of which we will speak later in detail. In Sweden the principal state operations are the postal, telegraph and telephone services and the gov- ernment railways. The receipts from the railways represent 1.30 per cent, of the average annual capital. The City of Paris municipalized the service of burying the dead in 1905. In 1906 the receipts were 5,242,000 francs ($995,980), while the labor and equipment expenses were respectively 2,500,000 francs ($475,000) and 2,135,000 francs ($405,650), or a total of 4,635,000 francs ($880,650). In 1910 the receipts were 4,660,000 francs ($885,- 41 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED 400). The labor expenses had risen to 2,760,000 francs ($524,400) while those for equipment had been reduced to 1,765,000 francs ($335,350). At the same time there was an outstanding loan of 348,000 francs ($66,120) — a total expense of 4,873,000 francs ($925,870). In the case of the quarry operated by the City of Paris the results are still more unsatisfactory, accord- ing to a report to the Municipal Council in 1908. The labor expenses are very much higher than in neigh- boring quarries. 4. An important part of the report is devoted to Austria, and is based upon a previous report drawn up under the direction of J. G. Griiber, by Dr. Rudolph Riemer. secretary of the Central Bureau of Statistics. Outside the usual monopolies the Austrian govern- ment owns docks and mines and operates lotteries. In most of these enterprises the costs of construc- tion and of equipment are indicated separately in the final accounting, but only those expenditures made during any one year are to be found there, regardless of those of the preceding years. The items for deter- mining how much of the original debt has been paid ofif are lacking. Interest and sinking fund charges on loans contracted in view of government operation do not figure in the final accounting in the chapter especially devoted to the particular industry con- cerned, but in a chapter issued by the ministry of Finance under the heading, Public Debt and Adminis- tration of the Public Debt. Special information in regard to the auditing of the public debt may be 42 BOOKKEEPING IN STATE AND MUNICIPAL ENTERPRISES found in the annual report of the special committee (Commission de Contrôle) managing the debt. But in this report the information touching interest and sinking fund charges does not inform us as to the actual application of the loan. The same conditions prevail in the case of the pub- lic debt contracted for the benefit of the railroads. Our information covers only interest and sinking fund charges on the amortizable debt. But even that portion of the debt does not represent all the loans contracted for the benefit of the railroads. According to the Statistique des Finances de la H ante- Autriche et de Salzburg (8th annual report) the expenses of all the towns of Upper Austria aris- ing from the operation of their utilities amount to 4.44 per cent, of all their expenses. The costs of con- struction are quoted en bloc in a special chapter. The result of M. Schelle's investigation proves that almost everywhere the data necessary in order to de- termine exactly the profits or losses upon state or municipal industrial operations are insufficient. "Whatever be the end in view when states or munici- palities organize industrial enterprises — whether the ob- ject be fiscal or economic, for the sake of the consumer or even in the exclusive interest of employees — it is indis- pensable to know whether these enterprises are actually resulting in profits or losses, and the amount of each. "As far as the essential functions of the state are con- cerned, such as providing for public safety, public high- ways, etc., the establishment of special accounts would be impossible and without much value, inasmuch as these 43 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED services provide no opportunity for direct payment on the part of consumers. Such services derive no re- ceipts, properly so-called, nor can they be abolished. When it is expedient to know whether the management of these activities is not too extravagant, it is necessary to proceed by contrasting one year with another, or by comparing certain items of expense with similar items in other countries, or in other localities. "Public industrial enterprises are almost never essen- tial, since they may be intrusted to private operation. They resemble private enterprises and provide oppor- tunity for special receipts. It should, therefore, be pos- sible to furnish to the taxpayers, in whatever concerns them, means of knowing the amount of income, just as opportunities for such information are afforded to the stockholders or creditors of any private concern. To pre- tend that the financial side of state or municipal enter- prises should be neglected because such undertakings are created for the public interest is only an effort to side- track possible criticism. Public management, like any other, can be good or bad. If it is directed toward se- curing advantages, justly or unjustly, to this or that class of people, whether consumers or employees, it is at least necessary that those who are to foot the bills, that is to say, taxpayers, should know, personally or through their representatives, whether the contributions demanded are not exorbitant. Such a requirement should not be ques- tioned in any country. "From another point of view, how can the preten- tion be sustained that, in certain cases, the state or munic- ipality can serve the public to better advantage than private companies when such states or municipalities do not furnish the public with adequate information con- cerning their administration. 44 bookkeeping in state and municipal enterprises Conclusions 5. "In fact," concludes M. Schelle, ''the efforts made to organize special accounts for state and mu- nicipal industrial enterprises have failed. Public documents sometimes furnish precise enough infor- mation as to receipts or expenses of operation, but it is nearly always difficult to discover the amount of the costs of construction, and it is impossible to get any adequate idea of capital charges, interest and amor- tization." His observations, in regard to Denmark, Holland, France, and Austria, prove that in no respect do the accounts ever bring out the real gains or losses of state enterprises. The difficulties encountered arise from the fact that a state or a municipality cannot have more than one budget. Moreover all the receipts should be entered on one side, all the expenses on the other. In this re- spect at least public organizations should be managed like private corporations. If these latter fail their creditors demand the amount of their claims at so many cents on the dollar. A well-organized state should have only one purse, nor shoidd any distinction be made between its various loans. All should be secured upon one single guaranty — its credit. Without a unified budget sound finance is out of the question. A special account for a state or munici- pal industrial enterprise can have only a fictitious value. In other words, sane budget regulations and public management of trading enterprises are contradictions in terms. 45 CHAPTER II THE BELGIAN STATE RAILROADS 1. Accounts. — Capital Charges. — Rates of Issue. — Review of Receipts and Expenditures. — Final Profits Do Not Contribute toward Balancing the Budget. — The Budget Has Obtained No Advantage from State Operation of Railroads. 2. Passengers and Shippers. — Increase of the Rate on Pit Coal. — Resolution of November 29, 191 1. — Plan of M. Hubert. I. Railroads are the most important industrial en- terprises undertaken by a state. What, then, are the financial results of their public operation? The Belgian state railway was established by the organic law of June i, 1834. By reason of the length of time it has been in operation it has a right of precedence. Marcel Peschaud has published in the May and June numbers of the Revue Politique et Parlementaire a remarkable study of the Belgian railways, but his analysis would lead us too far astray. I must con- fine myself, therefore, to a résumé of what M. Schelle has to say on the subject in his report to the Inter- national Statistical Institute. The law of 1834 provided that a complete account of the operations of the railways be presented to the 46 THE BELGIAN STATE RAILROADS Chambers annually, by which account are understood the receipts and expenditures, together with the use of the funds for the construction of lines placed at the disposal of the new department. The accounts thus rendered soon proved to be altogether inadequate. In 1845 estimates of interest and sinking fund charges were added to the previous requirements. Controversies arose over these estimates, and it be- came necessary to change the system several times in order to settle the rate question. At the close of 1878 it was decided that the management of the railroads should make up a balance sheet in the form of com- mercial balance sheets. This was done, but capital charges were computed at a uniform rate based on a period of retirement of ninety years. Moreover, according to M. Nicolai (Government Railways of Belgium, 1885) the cost of replacements and reconstructions was charged to the construction accounts without deductions for renewals and repairs. On the other hand, the annual payments for the pur- chase of lines which should have been charged to construction were charged to operation. "Never," says the minister of Public Works (Report for the year ipoj), "have the railway accounts, that is to say, the accounts prescribed by law, been found other than defective. On the contrary, the statements of con- ditions, the statistics, the estimates and reports, relating in part to such items as interest, sinking funds, pensions, etc. (which are not within the legal powers of the rail- road department to pass upon), have never ceased to be the subject of the most lively discussions. Charges have been made in turn, or sometimes simultaneously, that 47 WHERE AND WHY PUCLIC OWNERSHIP HAS FAILED the profits were swelled and concealed, that there was too much red tape, even to the point of disregarding the es- sential rules of a business enterprise, or that there was not enough control, because the accounts were separate from those of the Treasury. The subject has furnished an inexhaustible theme of argument." Of late years it has been decided that the data con- tained in the annual reports ought to be kept with the Treasury accounts, and that the balance sheets should be made up between the department of Public Works and that of Finance. The accounts for 1905 and the years following have been established upon this new basis. As for capital charges met by enlarging the public debt, a rate of issue was adopted, which varied from 4.90 per cent, to 3. 11 per cent. Then the gov- ernment proceeded to publish, under the title of "annexes" to the financial report: i". A general balance sheet for the year ending December 31, showing on the credit side construction costs since the beginning of the undertaking and the gross operating receipts and on the debit side the cap- ital already retired and remaining to be retired, the amount of charges upon this capital, the dues and rents paid by the state railway system to other rail- road enterprises, operating expenses and the profit and loss balance. 2". A separate account of operating receipts and expenditures for the preceding year. 3", A provisional account of operations for the cur- rent year, and of profit and loss, comprising, on the one hand, operating expenses, pensions charged to the 48 THE BELGIAN STATE RAILROADS general budget, fixed charges, including yearly in- stallments, and the portion of receipts due to com- panies whose lines are operated by the government ; and, on the other hand, the profits of operation, prop- erly so-called, together with various other profits. 4". A table recapitulating the financial results since the establishment of the system (1835) setting forth the annual balances in profits or in losses. 5". A table of interest and sinking fund charges from the be- ginning. Finally, tables of operating statistics. As a result of the new system adopted the profit shown in a large number of the previous reports was transformed into a deficit. The report for the year 1909 gives the following results, computed in francs : Installation Costs Francs Lines constructed by the state 675,655,000 Lines constructed by contract 176,317,000 Lines purchased and completed 978,017,000 Completion of lines operated under rentals 10,293,000 Station structures 72,928,000 Surveys 18,547,000 Equipment 719,188,000 Total 2,650,945,000 Of which amount there has been retired by sinking fund charges 350,105,000 Difference 2,300,840,000 The difference was made up : By the funded debt 1,959,917,000 By annual appropriations for purchase 340,024,000 Total 2,299,941,000 49 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED Interest and sinking fund charges were computed, for 1908, at 94,015,000 francs and, for 1909, at 97,- 020,000 francs. 1908 1909 Total receipts 269,362,000 281,532,000 Total expenses 182,391,000 190,540,000 86,971,000 90,992,000 Deduct interest and sinking fund charges 94,015,000 97,020,000 Deficit 7,044,000 6,028,000 "To sum up," concludes M. Schelle, "if, from the very beginning, we compare the positive with the nega- tive balance of each year, and add the sum, we find in 1908 a final net profit of 30,966,000 francs and in 1909 one of 24,938,000 francs." The maximum net gains were 44,975,000 francs in 1910, and the maximum net losses 73,998,000 francs in 1886. During many years the summaries which now show deficits would have shown profits in the years previous to 1885. The fancy that the state budget can ever be repaid for its outlay through the profits of the railroads no longer exists in Belgium. M. Helleputte, minister of Railways, says in his preliminary note to the operating report of 1908: "The operation of Belgian railways has undergone various fortunes. Since 1835 — 74 years — the balance has shown a deficit 36 times and 38 times a profit. Since the beginning of these operations the total profits exceed the total deficits only by the small sum of 31,274,000 50 THE BELGIAN STATE RAILROADS francs, or an annual average of 422,600 francs for an average active capital of 778,733,000 francs, or .05 per cent., all of which amounts to saying that, up to the present day, the railroad has operated at cost." The report goes on : "If we take into consideration the accumulated inter- est upon the deficits, the amount of which had to be bor- rowed from the Treasury, and, if we deduct the debit balances, the apparent surplus gives place to a deficit of 86,836,000 francs, or an average annual loss of 1,173,000 francs — o.ii per cent, of the average working capital."^ During the great convention of Belgian manufac- turers and merchants, on November 29, 19 11, M. Cannon-Legrand said : - "The Belgian government acknowledged a loss of 6,- 965,000 francs in 1907, more than 7 millions in 1908, and 6 millions in 1909. In 1910 we were promised a profit of 4,500,000 francs, which has now dropped to 2,790,000 francs. "On the other hand, the capital investment has reached 2,731,000,000 francs, showing an average in- crease for the last three years of 50,000 francs per kilometer for the whole system (4,329 kilometers — 2,706 miles). "Thus, during the year 1910, the capital invested by the government in its railways realized exactly o.io per cent. This was an absolutely exceptional year, both in ^ Revue Générale des Chemins de Fer, November, 191 1, page 352. ^ Bulletin du Comité Central du Travail Industriel, December 15, 1911- SI WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED volume of traffic and in freight and passenger receipts. It brought into the coffers of the railroads 27,725,000 francs more than in 1909, in which year the system had earned approximately 12,230,000 francs more than in 1908." We are thus justified in concluding that the budget of the Belgian government has derived no advantage from the operation of railways. 2. But does not such operation redound greatly to the advantage oi travelers and shippers? The partisans of ownership and operation of rail- roads by the state are constantly harping upon the cheap rates of state railways, as opposed to the high rates established by private companies. By an order issued on the 25th of October, 191 1, the minister of the Belgian Railway department raised the rates on pit coal on the strength of a law of 19 10, which, in its turn, found support in another law, passed April 12, 1835, which says: "Temporarily, and while waiting for experience to guide to a final adjustment of the rates to be levied by the aforesaid road, in conformity with Article 5 of the law of May i, 1834, these rates shall be regulated by a royal decree." Now, Article 5, of the law of May i, 1834, under which the Belgian system was established, reads : "The profits of the road accrue from the rates which are to be regulated annually by law." Thus, the law of 1835 is only a temporary expedient, which must be 52 THE BELGIAN STATE RAILROADS renewed at certain dates. Although this experiment has lasted since 1835, the ministry considered that it needed a new lease of life. Freight rates for pit coal were increased from i to 2 centimes per ton kilometer by tariff No. 61, which replaced tariff No. 31. The convention of Belgian manufacturers, on November 29, 191 1, entered a pro- test against this increase in a series of resolutions from which we quote the following: "The state is managing its railway lines from the sole point of view of making them serve as purveyors to its insufificient resources. It is operating in defiance of rules essential to the prosperity of all commercial enterprise, without any rational accounts of such a nature as will tend to keep it fully informed as to net cost." In view of this resolution, toward the close of 191 1, the conclusions in the 1907 report of M. Hubert, com- mittee reporter of the railway budget for the third time, are evidently as true to-day as they were then : "The management of the Belgian state railways has committed itself to a policy of political expediency which is sacrificing the general interest to interests purely local and electoral." "The personnel is too large, ill paid, unwisely selected, and works overtime." "Passenger service is both lacking in comfort and very slow." "From the standpoint of rates, passenger service is favored at the expense of the shippers. The department repudiates all responsibility for the acts of its employees or the failure of its equipment." 53 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED "Far from trying to meet its patrons half way, the Railroad department maintains rates which are purely arbitrary, and shows itself violently opposed to any pos- sible competition." Finally, as spokesman of the Central Railway Division, M. Hubert concludes : "It will become necessary to do what has been done in Holland, — viz., lease the railways, with conditions at- tached to the lease safeguarding the rights of employees and the interests of passengers. And it is certain that private enterprise would derive far better results from our immense railway resources than the government has been able to do. It is advisable that this outcome be seri- ously considered, since future possibilities indicate that such a course is unavoidable, if expenses continue to increase at the same rate." Yet French engineers are unanimous in praise of the skill with which the Belgian lines are managed by the minister of Railroads and his distinguished co- workers. 54 CHAPTER III PRUSSIAN RAILROADS 1. Governmental Distrust of the Railroads. — Obstacle En- countered by Bismarck in His Attempt to Organize an Imperial System. — Government Railroads. — The Real- ity of Prussian Railroad Profits. 2. Railways and Waterways. — Diverting Traffic. — Prussian Railways. — Discrimination Against the Rhine and Rot- terdam. — Contradictions. 3. Prussian Railway Rates. — Political Methods of Concilia- tion. — Berlin's Milk Supply. — The Ticket Tax. — Rate Increase. — Baggage Rates. — German and British Rail- ways. — Express Train Delays. — Rate Discrimination the Rule. — Comparison of Rates. — Lack of Responsi- bility. — Insurance. — Arguments in Favor of Prussian Railways. — Complaints and the Ministerial Reply. — Claims for Damages. — Operating Ratio. — Employees of Prussian Railroads. I. In Germany, as everywhere else, the railroads inspired mistrust in the various state governments. There, also as everywhere else, the credit for their initial construction belongs to individuals. Up to 1843 the railroads received no subsidy whatever from any of the federal states. General state aid was withheld until about 1845, when a policy of government rail- ways was introduced. In 1850 a number of states took over certain lines which were struggling under pecuniary embarrassment. 55 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED In 1874, amid an utter confusion of state and pri- vate roads, Bismarck conceived the idea of organizing an imperial system, of which the hues of Alsace-Lor- raine, which had been already declared imperial, were to form the point of departure. In the desire, how- ever, to prevent such a system of national railway lines, the southern states hastened to buy up the inde- pendent lines within their borders. Bismarck then proceeded to concentrate all his efforts upon nationalizing the Prussian railways, trampling the private companies, which at that time possessed 44.5 per cent, of the system, unscrupulously under foot. As a result, there are to-day in Germany independent railways, state lines and lines belonging jointly to two or more states. The only imperial lines are those of Alsace-Lorraine. Private companies now possess only lines of secondary importance. Bismarck had all sorts of reasons for acquiring the railways of Prussia. For example, he hoped to render himself more independent of the Prussian Diet it he had the railroad receipts at his disposal. The government had already begun a military line, but was encountering political difficulties in complet- ing it. Bismarck's proposed state system was one way of putting an end to opposition of precisely this char- acter. Finally, railway rates are an excellent protec- tionist instrument, actually serving the German gov- ernment in that capacity. Rates are raised on impor- tations and lowered on exportations. It has been asserted frequently that the orofits on Prussian railroads have been as follows : 56 PRUSSIAN RAILROADS 1882 S.22% 1885 4.88% 1890 9.26% 1891 6.75% 1900 6.87% 1905 713% 1908 4.78% 1909 5-94% The lowest percentage was 4.68 per cent, in 1883, but the operating expenses included no capital charges on the railway debt. If interest at 3 per cent, were included, and, if a small sum for a sinking fund were added, the profits would fall, for the period 1881-1895, to 2 per cent., and for 1897-1906 to 3.75 per cent. German government railways are exempt from all general taxation and are taxed locally only to the amount of 1,100 francs per mile, whereas, in Great Britain, the local taxation is more than 5,250 francs per mile. The cost of construction of German railways has not been very heavy. The north of Germany is en- tirely flat. Not a single tunnel is to be found there. The cost per mile in 1907 was about 277,121 marks, while the average cost in Europe was 336,000 marks. 2. It is customary to speak very glibly in France of the harmony existing in Germany between railways and waterways. An article which appeared in the Reviic des Deux Mondes, in 1902, entitled Les Voies Navigables de l'Allemagne, by Alfred Mange, and two articles en- titled Le Rhin Allemand, published by Paul Léon, in the Revue de Paris, on the first and fifteenth of Feb- 5^ WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED riiary, 1903, show that the facts completely contradict these assertions. In the first place, in Germany, even more than in France, both the railway lines and the waterways follow a north and south course. It is not alone from this point of view, however, that traffic disputes may arise. Nearly every one of these rivers crosses several states whose interests are frequently diametrically opposed. The lower Rhine competes with the Prus- sian railways; l)ut the railways of Baden, of the Palatinate, and of Alsace, says M. Mange, favor navi- gation on the upper Rhine by greatly reduced rates of transshipment and transit, in order that shipping may be diverted from th^i Prussian lines. The same condi- tion of affairs exists in the case of the Elbe. In its lower course it competes with the Prussian lines, and in its upper course it is favored by the railways of Bohemia. When railways thus favor ports of transshipment, they are not moved by an altruistic sympathy for the ship companies, but entirely by their conception of their own interests. The government railways of Prussia have established rates to fight such private companies as still manige to exist. When the Rhine was navigable only as far as Mannheim, the Baden government established there a port of transshipment, opened in 1875, ^^^ the purpose of diverting, in its own interest, Prussian and Alsatian traffic toward Switzerland. The Bavarian government made use of the Main to bring its railroads into connection with the ports of the North Sea, and to avoid making use of Prussian railways. The ports of Riesa and Dres- 58 PRUSSIAN RAILROADS den were established at the expense of the railroads of Saxony, that of Aussig at the expense of the rail- road from Aussig to Teplitz; that of Tetschen and Lauda at the expense of the Austrian North West railroad; in each and every case to divert traffic from Prussian railroads. M. Léon has outlined the complicated struggle of the Prussian railroads against the navigation of the Rhine. The differential tariffs established in 1863 are still employed by the state, and not tacitly, but openly. A circular, on the 30th of October, 1884, established the theory. The end in view, it says, is to "facilitate the importation of first-class material and the expor- tation of the products of national industry, as well as to protect the commerce of German ports against the ports of Holland." In order to divert from Rotter- dam products of the iron and steel industry the gov- ernment does not hesitate even to be incoherent. "The Prussian railway," says M. Léon, has not contented itself with opening the Westphalian mar- kets to its maritime ports by rate reductions, but it has closed them to Rhenish ports by raising the trans- shipment rates upon those lines which lead to them. In order to divert from Rotterdam to Bremen the cottons destined for Derendorf, 6 kilometers from Dusseldorf, the railway charges 10 marks 50, or 17 pfennigs per ton kilometer. To divert the iron of Westphalia from Rotterdam a ten-ton load pays from Hagen to Hamburg, a distance of 388 kilometers, 72 marks, or 1.8 pfennigs per ton kilometer. From Hagen to Dusseldorf, or 59 kilometers, the railway 59 tVHERE AND WHY PUBLIC OWNERSHIP HAS FAILED charge is 31 marks 50, or 5,3 pfennigs, per ton kilo- meter. Is patriotism the sole motive which drives the Prus- sian railroads to struggle in this way against the navi- gation of the Rhine? Then why do they weaken the effect of such an argument by favoring importation into Holland if use is made of their cars? From Rotterdam to Bochum, 23 kilometers, a car of 10 tons pays 35 marks, or 1.5 pfennigs, per ton kilometer. By way of the Rhine only 13 marks is paid as far as Ruhrort, or .8 pfenning per ton kilometer, but for the 35 kilometers from Ruhrort to Bochum the rail- road charges 16 marks 50, or 4.7 pfennigs, per ton kilometer. The Prussian railways favor navigation on the Holland canals for the transportation of the coal that they deliver to the frontier. At the same time, in order to put obstacles in the way of mixed transporta- tion, partly by rail and partly by water, as well as for the purpose of deflecting traffic from Baden railways, they grant to Mainz and to Frankfort transshipping rates that they refuse to Ruhrort or to Dusseldorf. Then there are mineral rates for Bavaria, iron and steel rates for Switzerland, petroleum rates for Wiirt- temberg, sulphur rates for NiAremburg, etc. The exceptional tariffs of the Prussian system af- fect 63 per cent, of the total kilometric tonnage and 46 per cent, of the total receipts of the Prussian state. Their average rate is 2.6 pfennigs, instead of 5. 11 pfennigs, the regular tariff figure. The chambers of commerce of the Rhenish cities protested against such discrimination, and the cham- 60 PRUSSIAN RAILROADS ber of commerce of Duisburg scored the policy of the I'russian railways in the following terms : "We admit that every group pursues with energy the defense of its own interests ; we do not admit that such a policy may hide behind the fig-leaf of national in- terest." Such, when examined in detail, are the facts which utterly contradict the legend of harmony between the Prussian state railways and the waterways. 3. In the Journal of Political Economy, of Chi- cago, Hugo Meyer has cited a fact which shows how accommodating it is possible for a government rail- road to be. The rate upon milk had been so estab- lished as to prevent any shipment of milk to Berlin from a distance greater than 75 miles. As a result of this tariff the milk supply for the capital was con- centrated within an average radius of 50 miles. This rate was established in the interest of the Berliner Milch Central, founded by members of the Associa- tion of Farmers (Bund der Landwirte), one of the most powerful political leagues of Germany. In order to conciliate this organization, the government re- mained deaf to the complaints of the retail merchants. A plan was formed to bring milk to Berlin from Den- mark by tank cars. The government declared, how- ever, that milk was not among those articles for which transportation in tank cars had been provided ; and it imposed such conditions and such formalities that the originators of the scheme were compelled to give up the attempt. 61 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED The Prussian government acts upon the principle that it is not necessary to obviate "the natural disad- vantages of the distant producers." According to this rule, in the interest of the market gardeners of Paris and its suburbs, Parisians should be forbidden to con- sume, or at least should be made to pay exorbitantly for, the fruits and vegetables coming from the south or from Algeria. The Prussian railways have a fourth class, lacking in almost every comfort ; although the average length of travel in the third and fourth class is from 20 to 24 kilometers (13 to 15 miles). In 1907, during a tem- porary embarrassment of the budget, the government laid a duty upon railway tickets and abolished return tickets on all German roads. In the discussion over the budget of 1911-1912 the minister of Finance described the effect of these inno- vations on the Prussian railroads. They had pro- duced a reduction in the amount of first-class travel, the total receipts having fallen from 23.250,000 francs, in 1905, to 20,125.000 francs, in 1909, while, in the way of normal development of traffic, an in- crease equal to this reduction of 3,125,000 francs might have been looked for. There was also a reduc- tion in the amount of second and third class travel, and a drop from the third class into the fourth class, which is exempt from taxation. Third-class passengers were paying a rate 50 per cent, higher than the fourth class, while first-class passengers were paying 300 times more. In Belgium and Germany, since 1907, the railways have not carried any free baggage. During a journey 62 PRUSSIAN RAILROADS in Germany my traveling companion and myself had each to pay in round numbers i8o francs for our tickets; but to this sum must be added nearly 60 francs for the 40 kilos (88 lbs.) of baggage of my traveling companion, and more than 72 francs for my 50 kilos (no lbs.). This additional charge raised the cost of transportation in my friend's case 33 per cent., and in mine 40 per cent. When the price of tickets upon German lines is compared with those upon French lines it is necessary to take into account the 30 kilograrris (66 lbs.) of exempt baggage allowed the traveler on the latter. The charge on all checked baggage has another in- convenient aspect. It drives the traveler to carry by hand as much baggage as possible. Such a practice, of course, crowds the carriages and incommodes the passengers. This condition has made necessary a new rule, applied with rigor in Switzerland, forbid- ding a passenger to bring into railway carriages bag- gage exceeding specified weights and dimensions. Ed- win Pratt ^ quotes a letter, which appeared in the Daily Telegraph, of February 22, 1908, signed by an Englishman, Mr. W. A. Briggs, who had lived in Germany : "The service is only half as frequent as ours and the fares only a trifle lower. They have been raised twice during the last few years. If anyone thinks that a gov- ernment runs railways for the benefit of the public he is much mistaken. Goods (freight) trains are both in- frequent and notoriously slow. Urgent goods are not ^Railways and Nationalisation. 63 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED recognized unless one pays double freight. Cheap excur- sions are unknown. "Finally, the red tape is atrocious. Any unfortunate wight who rides past his station is mulcted in the differ- ence and fined 6 shillings on the spot. No excuses are available. If you overload a goods wagon you are fined pounds for a few hundredweight put in on a dark winter evening to empty a rulley. Demurrage is relentlessly en- forced and you are made to feel that you are dealing with permanent government officials who do not give a straw for your convenience. I once had a parcel of i cwt. sent from Strassfurt to Hamburg and when it ar- rived the note was stamped and countersigned by no fewer than 22 different persons." On February 23, 19 12, the Prussian railway admin- istration decided to refuse all parcels during several days. The administration has relieved itself of all de- tails of commerce. Goods must be delivered in bulk and removed as such. There is no interval of grace allowed either at departure or at arrival.^ By express the transportation of merchandise re- quires one day for shipping formalities, and one day to transport it 300 kilometers (187^ miles), or any part thereof, however small the fraction. That is to say, it would take three days to transport a package from Paris to Laval, a distance of 301 kilometers (188 miles). ^Report on Railways in Germany, by C. H. Pearson and Nicholas Reyntiens, for the Board of Trade Conference, June 7, 1909 (Cd. 4677)- See for the series of discussions concerning the Prussian rail- ways the collection of Marche Financier, by Arthur Raffalovich, and the Revue Générale des Chemins de Fer, among others, the number for November, 191 1. 64 PRUSSIAN RAILROADS Special tariffs are the rule in Germany. They form a collection of 915 volumes, which cost from 5 pfennigs to 6 marks each. Seven hundred and eight are devoted to merchandise, 120 to live stock, 367 to coal. This great variety of rates drives the shipper to commission houses and insurance agents for informa- tion and protection. Ordinary merchandise is not considered as wrapped unless it is contained in strong wooden boxes, or very solid hampers. Unless he complies with these condi- tions the German shipper is forced to sign a decla- ration that his packages are either not wrapped, or are insufficiently wrapped, in order to relieve the rail- roads from all responsibility. Although by slow freight the ton kilometer of mer- chandise pays to the Prussian state railways an aver- age rate of 4.59 centimes, while in France it is 4.57 centimes, do not be deceived by the .02 centime dif- ference, which is due in part to the bulk and long hauls of heavy and cheap commodities; and also to a custom of grouping which brings together merchan- dise of various sorts and ships it in full cars, thus saving the railroad department expenses of handling. The department disclaims any responsibility whatever, the shipper having to insure himself with some com- pany. Moreover, in order to discourage future claims, the department imposes a tax of i mark on each com- plaint. When British and German railway rates are com- pared it is usual to forget the short distances covered by the British rate, an average of 35 to 40 miles. Edwin Pratt is my authority for the following 65 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED typical example of the tactics employed by the parti- sans of railway nationalization in Great Britain. Mr. William Field, a member of the Railway Na- tionalization Society, founded in 1907 in the United Kingdom, published, during the same year, a pam- phlet entitled, The Nationalization of Irish Railways; Defects of the Present System. In it he has repro- duced a little table previously published in a tract of the Fabian Society in 1899, ^^^ borrowed originally from a work by Sir Bernard Samuelson, published in 1886. Yet the fallacies on which Sir Bernard Sam- uelson's report was mainly based had already been thoroughly exposed in the same year in which it was issued by the late Mr. J. Grierson, general manager of the Great Western Railway, in the appendix of his book, Railway Rates, English and Foreign. Grierson says: "Sir B. Samuelson's report contains many errors of detail. Comparisons throughout have been made without due regard to the conditions attaching to the rates, or to the different circumstances under which the traffic is carried .... In almost every instance Sir B. Samuel- son has taken the lowest rates in Germany, Belgium, and Holland, which are applicable only to full truck loads of 5 and 10 tons, and, in some cases, viz., Belgium, to a minimum weight of 8 cwt. These he has used for the purposes of comparison with English rates for any quan- tities over 500 lbs. ... In some instances Sir B. Sam- uelson has not included in the foreign rates the charge for loading and unloading. . . . Such are some examples of the errors vitiating the comparison." 66 PRUSSIAN RAILROADS Now, even though accurate, 22-year-old rates would have no value. When they are applied to trans- portation operated under conditions altogether differ- ent they are used either in ignorance or bad faith. Lord Avebury, in his book, On Municipal and Na- tional Trading, says of the German railroads: "It is a mania to harp on the cheapness of German rates. Dr. Benmer, editor of Stahl und Risen, has cal- culated that the transportation charges in England are 10 per cent, of the total cost of producing iron, as against 23 per cent, in Germany." M. Kaufman, in his remarkable work upon the Politique Français en Matière de Chemins de Fer, op- posed to the refusal of the Prussian government to lower the rates of transportation, "because of the financial situation of Prussia," the reduction upon express rates accomplished in France in 1892.^ In 1909 the German Centralverhand, numbering representatives of the largest industries of Germany, expressed its discontent with the fact that, while pri- vate companies were reducing rates, the Prussian gov- ernment lines were raising them. In the discussion over the budget of 1911-1912 Deputy Mano said: "For forty years I have followed the fluctuations in the rates on merchandise. During prosperous years, when industry and the railroads are thriving, the depart- ment says: 'Your business is all right, therefore you have no need of rate reductions.' In times of depression ' See Yves Guyot, Trois Ans au Ministère des Travaux Publics. 67 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED it answers : 'Business is as bad for the railroads as for you ; tiierefore we cannot reduce the rates.' " To the above criticism the minister of Railroads contented himself with the reply that, as the increase in the capacity of the cars introduced within late years had sensibly diminished the net cost of trans- portation, the time had not yet come to consider a general reduction of freight rates. In any case, "Rate reductions ought not to be based upon financial results favorable to operation. Rate reductions can be con- sidered only when the annual revenues shall have reached such a sound basis as to ofïer a sufficient guaranty against unfavorable years." Let us see what this sound basis of annual revenues is: The profits of the railways were formerly used to pay the interest on the government debt, of which 88.4 per cent, in 1899, 82.38 per cent, in 1905, 74.72 per cent, in 1909 was caused by the railroads. Up to 1 9 10 the Prussian general budget received nearly the entire net earnings of the railways, with insecurity, instability, and trouble in the whole budget situation as a result. In 1907 the net earnings fell below the preliminary budget estimate by 96,000,000 francs and in 1908, 190,000,000 francs. For 1909 on the contrary, following a pressure of freight traf- fic, the receipts improved by 130,000.000 francs. This improvement was due, in part, to an actual saving of 25,000,000 francs. According to a report for the preceding year the increase of traffic during the period between the first of April and the end of November, 1910, was 5.97 68 PRUSSIAN RAILROADS per cent, for passenger traffic, and 7.34 per cent, for freight, or an average for all traffic of 6.66 per cent. Railway receipts are dependent upon the economic activity of the country. As a compensation for this contingent and disturbing element in the Prussian budget it was decided, at the beginning of 1910, that out of the profits available after paying for interest and the amortization of the railroad debt there should be devoted : first, to the special budget of the rail- roads, 1. 1 5 per cent, at least upon the reported capital of the system, or actually 150,000,000 francs ($28,- 500,000) ; second, to the general state budget, in order to make up its deficits, 2.10 per cent, of this same capital, or 275,000,000 francs ($52,250,000). The surplus was to be devoted to a regulation (or compensation) fund destined to complete the pay- ments to the general budget in the bad years, when the net income would not be sufficient to meet fully the above-mentioned payment of 2.10 per cent, to the general state budget. M. Friedberg (a National Liberal), before the Chamber of Deputies, and M. de Gwinner, director of the German Bank, criticized this reform before the upper chamber. Looking at the situation from the point of view of a state budget with a deficit, obliged to have recourse to a loan, probably to a tax, they de- manded why so important a special railroad budget should be constituted at all. The Minister of Finance, M. Lentze, observed that every year the railroads demand reconstruction, improvements, additions, roll- ing stock, transformation of secondary lines, etc. 69 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED Either the railways must live on their resources or they must have recourse to a loan. The state budget will be protected from excessive fluctuations in receiv- ing 2.IO per cent, of the capital in support of the general budget. For 19 lo it was due to receive 35,000,000 francs ($6,650,000). The ministerial plan was adopted. The operating ratio was 61 per cent, in 1900; it rose to 74.62 per cent, in 1908. M. Lentze considered it a triumph when it fell to 68.99 per cent, in 1909, to 68.50 per cent, in 19 10. It was computed at 68.63 per cent, for 1911. The Minister of Railways asserted that, in face of growing demands on the part of em- ployees and of traffic, another rise must be antici- pated. Despite the high operating ratio certain economies have been criticized. Naturally the department has been reproached with not having treated its employees fairly. Its answer has been that 60 per cent, of the total expenditures of the railroad are absorbed by employees. Thirty-seven thousand employees, or 12.3 per cent, of the total number, are earning from 1,875 francs to 2,250 francs a year, and 86,000, or 29.2 per cent., are earning from 1,500 francs to 1,875 francs. Six thousand new positions were created in 1912. In Prussia the administration is strong and Parlia- ment is weak. Therefore it is the minister who says: "Our action will continue to be energetic with regard to those groups trying to foment agitation." The De- partment of Railways jealously guards its employees 70 PRUSSIAN RAILROADS from any spirit of disorder capable of bringing about a strike. As for the employees they are bound by the clauses in their contracts, which each man reads and signs, to hold themselves aloof from all agitation hostile to order. n CHAPTER IV STATE RAILWAYS OF AUSTRIA AND HUNGARY 1. Variations in the Government Railway Policy of Aus- tria. — State Operation a Sorry Affair. — Superiority of Private Enterprise. 2. The Railv^'ays of the Hungarian State. — The Zone Sys- tem. — Political Aim. — Increasing Rates. — Insufficient Equipment. — Increasing Expenses. I. The policy of Austria in regard to the railways has undergone many variations. In 1850 the govern- ment owned 61.38 per cent, of the railway lines. In 1855, however, imitating the example of France, which came to terms with the important companies, and, having need of resources, it sold its railways. Hence in i860 it owned not more than 0.44 per cent., and in 1870 only 0.21 per cent. The economic devel- opment of Austria was slow ; the railroads not very prosperous. The crisis of 1873 drove the government to constructing railroads. In 1880 it owned 17.23 per cent, of the lines; in 1890, 43.51 per cent.; and, in 1906, 67.95 P^r cent., or 21,600 kilometers (13,500 miles). The operation of railways has been a serious drain on the state. In 1906 they yielded 2.85 per cent., and, in 1907, 3.01 per cent. But this sum includes neither interest nor sinking fund charges. In fact, operation 72 STATE RAILWAYS OF AUSTRIA AND HUNGARY of the state railways has not paid expenses, and has been a burden upon the Treasury. The lack of receipts is chiefly due to low freight rates. Charles Lee Raper says : "They (the freight rates) have been much higher than in the United States, though the character of the traffic of the two countries has had much in common. Both have had a large volume of the low grade commodities. It would, therefore, seem to be fair to say that the Austrian state service has not been notably successful in its cheap- ness." The superiority of private enterprises in Austria has been established by an investigation conducted by the British Board of Trade. Four private companies have never had to resort to a guaranteed reserve fund. During the period 1902-1906 one of them did not earn dividends on its capital ; the second earned from 4 per cent, to 5.25 per cent., the third from 5.4 per cent, to 6.6 per cent, while the fourth earned from II per cent, to 12 per cent. And all these companies pay taxes to the state. 2. In 1889 Minister Baross established the zone system in Hungary. Bitter adversaries of the mileage (paliers) system were enthusiastic over the idea of introducing the zone system. The zones are only more extended units of distance than the 10 kilo- meter (6 miles) section of the Paris-Lyons-Mediter- ranean railway line of France — a privately owned line. The introduction of the system was simply a political move, for the real object was to attract to 73 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED Budapest those Hungarians who lived in the far cor- ners of the land, in order to make them admire the capital, and thus give them an exalted idea of the greatness of their country. In 1896, at the time of the Millennial Exposition, the railroads carried for noth- ing, and, I understand, lodged and fed entire families at Budapest. However, as a species of compensation for its complaisance in thus accommodating the coun- try-folk, the railroad had increased the price of tickets for short distance traffic during the preceding year. In 1903 other changes took place. As it has failed to yield the anticipated results, Hungary recently, in large measure at least, has abandoned the system introduced by Baross. The average receipts per passenger per kilometer in six European states have been: (One heller equals $0,002.) Hellers Hungarian railways 2.9 Austrian railways 2.8 Prussian railways 2.8 Bavarian railways 3.0 Holland railways 3.4 Roumanian railways 4.4 Financial returns upon the Hungarian state railroads were as follows (in 1,000 crowns; i crown equals 20 cents) : Interest Net Capital Surplus at 4% Surplus 1888 984,785 37,074 39,391 -2,317 1898 2,042.613 83,850 81,704 2,146 1906 2,402,77s 115,543 96,111 19,432 1908 2,527,863 91,493 101,114 -9,621 74 STATE RAILWAYS OF AUSTRIA AND HUNGARY The service upon the state lines of Hungary during late years has given rise to numberless complaints : lack of comfort, insufficient rolling stock, too frequent delays, and numerous accidents.^ The former secretary of the ministry of Commerce, Joseph Szterenyi, in an address delivered before the Chamber of Deputies in 191 2, stated that from 1890 to 1909 the number of passengers on the railways had in- creased about 300 per cent. During this period there have been years in which the increase of traffic has corresponded to the increase in the number of cars in the following ratios: 9.5 per cent., as against 2.5 per cent.; 8 per cent., as against 4 per cent.; 10.6 per cent., against 0.5 per cent. ; 9 per cent., against 0.5 per cent., and even 11 per cent, against o.i per cent. The available number of locomotives is even less satisfying. While the volume of traffic has increased about 51 per cent, the number of locomotives has in- creased only about 21 per cent. In 1909 it was esti- mated that 606 more locomotives would be necessary, in order to take care of the normal traffic. A number of locomotives then in use were over 35 years old. Al- though passenger traffic has increased in Budapest, at the eastern terminal about 550 per cent, and at the western terminal about 900 per cent., and although freight traffic has grown approximately 100 per cent., it is only recently that any particular effort has been made to improve the conditions mentioned. From 1865 to 1907 the operating ratio increased ^ Der Zonentarif der Ungarisclien Staatsbahnen, by Rudolph Remengi, 1912. published by J. Benko, Budapest. Discussed in the Journal des Économistes, July, 1912. 75 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED from 55 to yy per cent., and amounted to 80.6 per cent, in 1908. Beginning with 1893 the cost of labor has increased by leaps and bounds. In 1904 the employees went on strike and stopped the trains, asserting that the in- crease of salary voted by the Chamber of Deputies was too small. Two separate awards of an increase in salary, the one in 1904 the other in 1908, have brought the total amount to 22,000,000 crowns. Following changes in the locomotive service in 1906 there has been an increase in the consumption of coal of about 13 per cent., representing 4,000,000 crowns, and equaling a work increase of 30 per cent. Maintenance expenses of locomotives and cars give the following figures : per locomotive, in 1905, 3,003 crowns, and, in 1909, 4,530 crowns; per passenger coach, from 640 to 820 crowns ; per freight car, from 96 to 134 crowns. The working efficiency of the average car has fallen from 48 per cent, to 37 per cent. In 1909 the excess of receipts over expenditures was less by 43,000,000 crowns than the sum neces- sary for interest and sinking fund charges. The zone system has recently been altered, in the hope of realiz- ing more than 15,260,000 crowns.^ ^Journal des Transports, September 28, 1912. 76 CHAPTER V ITALIAN RAILWAYS I. Purchase of Italian Railways. — Operation by Private Companies. — Government Interference. — The Law of June 22, 1905. — Extent of the Italian System — Efforts of M. Bianchi. — Railroad Accounts. — Furnishing Em- ployment. — Waste. — Labor. — Operating Ratio. — Rates. — Special Tariffs and Commodity Tariffs. — Favors. — Par- liamentary Control, and the Position of the Minister. At the outset Italy was induced by political motives to become a railroad proprietor. Before i860 the lines were only local. After the adoption of the con- stitution of the kingdom, the state bought up the stock which was owned by Austria in the northern railways, and took over the issue of the pre- ferred stock to continue the construction of them. But the government had no capital at its disposal, and had pressing financial needs. In 1865, therefore, a law directed the sale of the state lines to private companies. Two hundred million lire ($38,000,000) was realized by the state from the sale. The existing system was distributed among four companies, known respectively as the West, the East, the North and the South, but the division of territory between them was ill defined, and they were at WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED odds and enemies. Moreover, the railways of upper Italy proved to have been handed over to two com- panies with neither resources nor credit. These lines were therefore repurchased by the state in 1875-1876 for political reasons, and the state took possession in 1878. The proprietors of the southern lines became known as the Adriatic Company in 1885. For a time these lines were not interfered with. In 1878 3,000 kilometers of the 5,100 kilometers of railroad in Italy belonged to the state. The minis- ters (Minghetti and Spaventa) who had negotiated the purchase, had intended that the state railways should be operated by private companies acting as government agents. In 1878 a new ministry appointed an investi- gating commission which, at the end of three years of work, submitted a monumental report (1881) con- taining the recommendation that the state railways be leased to private companies for a fixed period. The commission declared most emphatically that the state ought not to operate them itself : i.° Because the state performs very few functions with greater efficiency or at a lower cost than private enterprise is able to do. 2.° Operation of railways by a state is more difficult than by private companies, a conclusion clearly estab- lished by the investigations made by the commission. 3.° The state is far more apt than are private com- panies to force changes in industry rather than to foster natural development by offering more efficient service. 4° The danger of political interference in the ad- ministration of the railroads is very great. 78 ITALIAN RAILWAYS The secretary of the commission above referred to, who became Minister of Public Works in 1884, leased the state lines to three companies, the Mediterranean, the Adriatic, and the Sicilian, for twenty years, with a possible extension of the lease. Of the 10,066 kilo- meters of railways in Italy at that time, 9,364 kilo- meters were thus allotted. In 1905 the system covered 12,827 kilometers (8,017 miles). The companies had paid the state 275,000,000 lire ($52,250,000) for their equipment, but on condition that at the expiration of the lease this equipment should be repurchased from them. They guaranteed to devote the 5 per cent, which the state had been paying on the original loan toward the upkeep of the equipment. The ordinary expenses were to be borne by the state, the extraordinary expenses by the com- pany. This distinction provoked numberless discus- sions. A division of profits between the companies and the state was arranged for, and a reserve fund estab- lished as a provision for extraordinary works. But, after 1884, in place of an increase in receipts, there was a deficit. Hence the government, instead of tak- ing in, was obliged to pay out. In doubt as to the future action of the state re- garding them the companies were working under the worst possible conditions in a country deficient in ag- ricultural and industrial products. The taxes were heavy and the returns small. Then among other causes for the decreasing receipts was the rate reduc- tion imposed by the state upon the companies, although theoretically it had no legal right to propose such a 79 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED Step. In the end it was required to make up the dif- ference which resulted. Transportation had been thus ruined and at the expense of the taxpayers. Moreover, by continuing its intervention in the fear of a strike among the railroad employees, the government pro- ceeded to impose new burdens upon the companies, and incidentally introduced a spirit of insubordination among the men. Conditions were now ripe for the Socialists in Par- liament, and they passed without much discussion the law of the 22nd of April, 1905, ordering the immedi- ate return of the railroads to direct operation by the state. This law had been prepared by a commission appointed in 1898, whose report, in nine volumes, had appeared in 1904-1905. A law of 1907 now provided for the purchase of 2,300 kilometers (1,438 miles) of the southern system. The total cost of the railroads in Italy had reached, in 1907, more than 6,000.000,000 lire. In order to rehabilitate the system thoroughly. Parliament voted a further sum of 910,000,000 lire, which had to be spent in Italy before 191 1. This made a total of 6,910,000,000 lire ($1,312,900,000). These Italian lines, for each 100,000 square miles of territory, had a length of 4.19 miles in 1875; 5.8 in 1885; 8.8 in 1900, and 9.3 in 1907-08, when Great Britain had 19.06. For every 10,000 inhabitants there were 1.7 miles of Italian railway in 1875, 2.17 in 1885, 2.9 in 1895, and 3.16 in 1907, in which year, in the United Kingdom, the figure was 5.58. From the very outset the disadvantages of state operation made themselves felt. The roads were 80 ITALIAN RAILWAYS never free from unwarrantable political influence and the equipment was woefully defective for lack of proper supervision.^ It had been expressly declared at the time of pur- chase that the state system should have a manage- ment entirely free from governmental and parlia- mentary interference. L'ltalia, on the 28th of May of the same year, observed that Bianchi, general man- ager of the state railways, manifested the utmost skepticism regarding the possibility of organizing state railway operation in any effective and positive manner in Italy. His fears proved well grounded. Among other re- forms the department was anxious to introduce a code of discipline among the workmen in its shops. The deputies, however, murmured. They took their griev- ance to the Minister of the Interior, who referred it to his colleague, the Minister of Public Works. Ultimately M. Bianchi was informed that it would be necessary to revoke such measures as he had already taken. Naturally, feeling themselves thus supported, the workmen redoubled their insubordina- tion, which spread also among the mechanics and the other employees. At the end of a year M. Bianchi stated that the afifairs of the railroad were worse than they had been in the beginning. Instead of being held to account for the good of the service, he was completely under the thumb of all those whose interests were opposed to the real interests of the railroad, provided they had sufficient influence in Parliament. * See The Economist, November 4, 1911. 81 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED The net returns of the state railways, passing over the year 1905- 1906, when conditions were abnormal, are as follows: Fiscal Lîre 1906-1907 43,000,000 I907-1908 37,000,000 1908-1909 20,000,000 I909-191O 37,000,000 The increase from 1908-1909 to 1909-1910 is to be credited to bookkeeping artifices designed to con- ceal the real condition of afifairs. Have the improvements been proportionate to the expenditures since the passage of the law authorizing the purchase? The purchase was coincident with several years of economic activity. Operating receipts increased 29 per cent, in 1905-1906 over 1 900-1 90 1 ; 11 per cent, in 1906-1907 over 1905-1906; 11.5 per cent, in 1907- 1908 over 1906-1907. But this increase in receipts was completely absorbed by the increase in expendi- tures. Before 1905, when a reduction was made in the rate of taxation, the companies were paying to the government 65,000,000 lire. To-day they would be paying 80,000,000. The law of 1909 exempted the state railways from certain expenses, which, according to Engineer An- cona, who is also a deputy, amounted to a relief of 24,000,000 lire. This makes it necessary to reduce the 37,000,000 lire — the last figure in the above table — to 13,000,000 lire. A further lessening of the ex- penses for 1909-1910 comes from a reduction in the 82 ITALIAN RAILWAYS charges for renewal of equipment of from 4 per cent, of the gross receipts to 2^ per cent. This makes another reduction of from 8,000,000 to 10,000,000 hre, which, added to the 24,000,000 mentioned above, amounts to a reduction of from 32,000,000 to 34,000,- 000 lire. There were similar reductions in the ex- penses during 1910-1911. The state has received no revenue from its capital of 6,000,000,000 lire expended for construction, pur- chase, and restocking the railroads. To this sum must be added, also, 1,000,000,000 advanced by the Treasury for their benefit. The railroads have been paying interest and sinking fund charges on the loan, but the department intends to be relieved from this responsibility. It has recently demanded 30,000,000 lire a year for the purpose of doubling its lines. The law governing the operation of Italian rail- roads recognizes very distinctly that the fundamental duty of state operation is to furnish work for the national foundries and lumber yards. Naturally, the Railway department must fulfill this duty rather than consult the real needs and resources of the railways. Contractors brrng all possible influence to bear upon the deputies, who care for nothing but public opinion. If there are no orders there is no work for the employees for whom the state is bound to furnish work. Moreover, shutting down shops means ruin for the manufacturers. Therefore, the minister orders rolling stock without troubling himself to provide sid- ings. Whereas, in 1899, the companies possessed an average of 62 meters of siding per empty car, the 83 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED state, in 1909-1910, lowered the proportion to 25.1 meters, although 50 meters had been considered indispensable for each of the 9,000 cars forming the reserve. Quantities of cars were falling to pieces on the tracks for lack of use; nevertheless, the depart- ment contracted for an annual delivery of 5,000 cars. The manufacturers persuaded Minister Luz- zatti to raise this order to 8,000 cars. The gen- eral budget committee, however, had the courage to reduce it to 4,000 cars, costing 29,000,000 lire ($5,510,000). Experts have estimated that all this expense might have been spared by a more rational use and better care of the existing cars; 15 per cent, of the freight cars are constantly under repair, and 33 per cent, of the passenger cars. The Italian taxpayers pay a full third more for their rolling stock than if they bought it abroad. Moreover, there is no redress for delays in construc- tion and other errors on the part of the contractors, because political influence returns all the fines pro- vided for in the contract. The law says that orders are to be divided as equitably as possible among the various manufacturers of the same product. As a consequence of this provision we find a legally or- ganized trust, although such coalitions are forbidden. Naturally, this trust is not interested in insuring an economical expenditure of the state finances. Here are some facts which have never been denied in parliamentary debates : Old locomotives repainted are bought for new. Concrete ties, which break at the passing of trains, and soft spruce ties, the objects 84 ITALIAN RAILWAYS of useless attempts at reën forcement with the aid of injections of creosote, are bought by the tens of thou- sands. Orders of 15,000 kilograms (33,000 lbs.) of gum arabic, 200 kilometers (218,733 yards) of red velvet, a million straps, etc., are recorded, and so on.^ Of course, labor plays an important rôle in the in- crease of expenses, and in Italy, as in France, the Rail- way department congratulates itself upon this state of affairs, an excuse being thus presented for ever new demands on its part. The report for the fiscal year 1910-1911 says: "During the period 1902-3-4 there was an average of 104,833 employees, both regular and special, earning an average of 1,360 lire a year, while in 1910-1911 we have had, on an average, 143,295 employees, includ- ing those engaged in repair work but excluding those on the navigation service lines in operation on the i6th of July, 1910, with an average outlay for each of 1,622 lire. If the employees in 1910-11 had been paid at the same rate as in 1902-4 the expenditures would have been lessened by 37,700,000 lire ($7,163,000)." This might be a regrettable state of affairs, from the point of view of the railroad employees, but less so from the point of view of the taxpayers. The operating ratio has fluctuated as follows : 1885, 67 per cent.; 1890, 68 per cent.; 1895, 75 P^^ cent.; 1903, 68 per cent.; 1906-1907, y-}^ per cent.; 1908-09, 78 per cent. For distances up to 150 kilometers (94 * The Economist. 85 Second Class Third Class 8.93 5.80 8.12 5-22 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED miles) passenger rates, per kilometer, according to the revision of 1906, are (in lire) : First Class Express trains 12.76 Local and other trains. . 11.60 Over 1 50 kilometers the rate is established by zones. In the case of slow freight the rate has undergone few changes since 1885, and rather in the way of an in- crease.^ Italian railways make all sorts of rebates to ship- pers, according to the amount of political influence which the latter can bring to bear. Seven hundred and seventy-six special tariffs have been promulgated, and 1,509 regulating clauses in favor of special firms.^ As for deputies and senators they have a right to free transportation for themselves, plus eighteen compli- mentary tickets a year, twelve of which are sent them without their even having to take the trouble to ask for them. There are free tickets of every kind and every color, destined for functionaries, great and small, civil and military. Still others, of a special color, are reserved for journalists and for people who find it convenient to claim that title when traveling. The law of 1905 established an independent staflf for the ministry of Public Works, composed of a gen- eral manager and a council, consisting at first of six members, but later increased to eight. Five of these ^ Raihvay Transportation, by Charles Lee Raper, 1912, G. P. Putnam's Sons, New York. ' The Economist. 86 ITALIAN RAILWAYS latter are attached to the department and three repre- sent the citizens. Members of Parliament are not permitted to be members of this council. The Minis- ter of Public Works can annul the decisions and acts of the council, but he cannot substitute his own initia- tive. According to the nationalizing party it had "placed the government railways outside of politics." But a subsequent law of 1907 provided for a superior com- mittee of control, composed of six senators and six deputies, active members of the two chambers of Par- liament, a proceeding which places the minister in a singular political situation. In 1907 M. Giolitti nominated a committee of vigi- lance, which was perhaps vigilant, but which did not accelerate the speed of either passenger or freight trains. In a response to a Parliamentary interpellation he assumed entire responsibility for the unsatisfactory condition of the railway system. Parliament did not want him to resign; therefore, the majority endorsed his administration. Hence, we have the following peculiar state of afifairs : If a minister is so satisfactory to the majority in Parliament that it desires to keep him in office it must endorse all the shortcomings of his administra- tion. If, on the other hand, it has a mind to over- throw a minister, it may cause his downfall for a delay of five minutes. 87 CHAPTER VI THE RAILWAYS OF THE SWISS FEDERATION.* Purchase Price Exceeded Expectation. — Profit and Loss Account. — Debt of the Confederation. — Receipts and Expenses. — Operating Ratio. — Labor. — Economy at the Expense of Passengers and Shippers. — Prophecy of Numa Droz, The promoters of the existing Swiss railroad mo- nopoly declared most emphatically that the new régime was not expected, primarily at least, to yield financial results, but rather advantages for passengers and shippers. The actual purchase, however, was limited to the four great systems, the government passing over the lines of secondary importance, which were less productive. Thus two classes of rail- way service were established : a first class, consisting of patrons of the more important roads and a second class, composed of users of the small roads, which could be safely neglected. The purchase price of the four great systems was estimated at 964,000,000 francs ($183,160,000). The Confederation has ac- tually paid 1,195,000,000 francs, or 231,000,000 francs more than the figure first quoted. On December 31, 19 12, the general construction ' See Journal des Économistes, Dec. 15, 1910, article by M. Fa- varger, Nov., 1912. The Latest Accounts of the Federal Rail- ways, July, 1913. The Revised Accounts of 1912. 88 THE RAILWAYS OF THE SWISS FEDERATION account amounted to 1,472,000,000 francs, to which must be added 45,824,000 francs representing divers expenses, reduced by sinking funds to 28,177,000 francs. The total amount of capital sunk is therefore 1,500,469,000 francs ($285,089,000). This does not include, however, the cost of the St. Gothard line. Excluding the St. Gothard line, the profit and loss accounts are shown in the following table : Francs 1903 Profit 1,030,682 1904 " 60,735 1905 " 651,733 1906 " 4,828,523 1907 " 2,854,206 1908 Deficit 2,854,074 1909 " 6,630,301 1910 " 1,535.000 191 1 Profit 5,575,000 1912 " 9,226,000 The cost of the St. Gothard line has exceeded hj 34,000,000 francs ($6,460,000) the provisions of the estimate of 1897. The expenses for completed works and new acquisitions, which on December 31, 1909, already amounted to 218,000,000 francs, had jumped in 1912 to 292,000,000 francs, or 74,000,000 francs more, and at that time there still remained unfin- ished works to the extent of 69,000,000 francs, while expenses in the near future for other lines are in sight, amounting to almost 100,000,000 francs. In their report to the budget of 19 12 the board of managers of the Federal railroads stated that they were anxious to reduce the yearly expenses by 24,000,000 francs, but such a reduction is out of the question. 89 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED The capital stock of the four old companies was 280,000,000 francs ($53,000,000). The dividends paid to stockholders had been reduced, or altogether discontinued, during the losing years, in order that the interest upon the outstanding debt might be paid. In the case of the state railways there is only one stockholder, the state; and, if its railways lose, it is the state, that is to say, the taxpayers as a whole, who must make up the deficit. In 1903 the consolidated debt was 1,075,152,000 francs. In 1909 it had risen to 1,344,221,000 francs. On December 31, 19 12, it had again increased 399,- 000,000 francs, or -^^y per cent. The interest on the debt, which was 36,000,000 francs in 1903, amounted to 54,000,000 francs in 19 12. Sinking fund charges on the capital invested in the enterprise rose from 4,300,000 francs in 1903 to 7,840.000 francs in 19 12. The surplus should have been transferred, at least in part, to a surplus fund. But the department, con- sidering the unreliability of future operations, has re- fused to put in force the provisions of the law gov- erning the purchase, and has simply carried it over. Some special expenses, represented by no actual value, such as abandoned installations, etc., were still car- ried on December 31, 1912, to the amount of 28,000,- 000 francs ($5,320,000). As long as this balance is not disposed of, it is out of the question to talk about surplus of receipts. The annual appropriation of special funds, to de- fray the expenses of maintenance and renewals not already covered by operation in 1906, was 7,084,000 francs. In 1912 it was 9,325,000 francs. 90 THE RAILWAYS OF THE SWISS FEDERATION There has been no miscalculation in regard to re- ceipts. They were estimated on the basis of an aver- age annual increase of 3 per cent. The increase has been 4.8 per cent, for passengers and 4.5 per cent, for freight. During the last three years the gross earnings have jumped from 174,000,000 francs, in 1909. to 206,- 000,000 francs, in 19 12, or 18 per cent. But these earnings will be reduced after the opening of the Loetschberg line, and as a result of the St. Gothard agreement, which has just been accepted. Moreover, the expenses of operation have increased on an average of 6.2 per cent., consequently at a pro- portion greater than the receipts, up to 1908. Since 1909 this proportion has decreased. The operating ratio appears as follows : 1903 65.53% 1904 67.68% 1905 66.42% 1906 67.49% 1907 69.22% 1908 72.82% 1909 70.32% 1910 65.28% 191 1 64.26% 1912 66.76% During the same period the highest operating ratio of the Paris-Lyon-Mediterranean line of France (op- erated by a private company) was 53.5 per cent. In 1909 the secretary of the department observed that, taking into account the increase of interest, extensions, and all those charges which, at the beginning of 191 2, bore so heavily upon the railway, 91 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED the annual increase in expenditures would ultimately reach 20,000,000 francs. This year (1913) it has been 11,270,000 francs. After 1906, following an average rise in wages, to- gether with an increase in the number of employees, the ordinary labor expenses of the railroad exceeded by 4,280.000 francs the figure of the preceding year. Beginning with April i, 1912, a new law concern- ing salaries went into effect, which has brought about an annual increase of 8,200,000 francs in the ex- penses, without counting supplementary payments to be made in the way of pensions and sick and other benefits established on the basis of full pay. Nor does it include the increase in the salaries of laborers paid by the day. The total increase is esti- mated at 10,000,000 francs. From 1904 to 19 10 the increase in labor expenses was 14,370,000 francs, or 51 per cent. For all other expenses the increase was only 36 per cent. In 1902 there were 23,030 employees; in 1907 the number had risen to 31,300. On the ist of April the tri-yearly rise in salary took effect, as provided for by a law fixing higher maximums. This law has increased the annual expenses by 10,000,000 francs. With the object of balancing the expenses in favor of the employees, certain economies were ef- fected at the expense of passengers and shippers, such as withdrawal of reduced fares on holidays, decreased inspection of the road, fewer trains, speed of freight trains lessened, a certain number of improvements postponed, and resistance to demands for improve- ments which were not too urgent. Finally the de- 92 THE RAILWAYS OF THE SWISS FEDERATION partment determined to increase the rates when the industry and commerce of Switzerland are already paying internal transportation taxes double those in force in neighboring countries. The nationalizing of the Swiss railways has cer- tainly proved of advantage to the employees. But, are state operations carried on for the benefit of em- ployees or for the public? Present conditions justify the following prophecy of Numa Droz: "Through this purchase our railroad policy is in course of stiffening into a set of rigid regulations prescribed by a poverty stricken department incapable of solving the great problems of the future for lack of resources." 93 CHAPTER VII RAILWAYS OF NEW ZEALAND Capital Charges. — Receipts and Expenditures. — Net Op- erating Profits. — Deficits. — Interest on the Debt. — Pre- dominance of Political over Economic Considerations. Causes of the Deficit. — Advancement According to Seniority. — "The Government Strike." — Theory of Operation at a Loss. — Profits from State Mines At- tained Only at the Expense of the Railroads. In i860 the first railway of New Zealand was con- structed by the provincial government of Canterbury, to connect the town of Christchurch with the port of Lyttelton, separated from it by a chain of high hills. In 1863 the provincial council of Auckland and Drury conceived the idea of extending the line to Wellington. The capital then and subsequently sunk in the rail- ways of New Zealand, amounting, according to the accounts, to £27,762,592 ($135,203,823), on the first of March, 1909, is far from representing the whole expense of the project. £1,289,840 ($6,281,520), the cost of lines not yet opened on the 31st of March, 1909, should have been added to this sum. The total amount would thus reach £29,052,432 ($141,485,343). Moreover, no account was taken of the interest paid on the capital sunk in lines not operated during the thirty-nine previous years. 94 RAILWAYS OF NEW ZEALAND Before 1882 the amount of the deficits can only be surmised ; since that date they have aggregated £4,500,000 ($21,915,000). The total capital invested from 1870 to 1909 has been about £40,000,000 ($194,- 800,000), of which £23,305,009 ($113,495,000) was paid out of borrowed money. The rest has been raised by the sale of public land, and, above all, by the aid of taxes — direct or indirect. Since 1895 the capital cost per mile of open line has risen from £7,703 to £10,351. This increase is due in part to improvements upon the roadbeds. In order to explain further such an increase in cost it is said that the country of New Zealand presents unusual difficulties — that it is situated far from the industrial centers of the world, and that construction is on a small scale. We might add that railway construction is considered as a species of national workshop, de- signed to give employment to laborers out of work; that none of the modern mechanical methods are em- ployed ; and, finally, that "the work is done by the government and not by private contractors," ^ The gross earnings of the railways increased from £1,150,851 in 1895 to £2,929,526 in 1908-1909. But the expenses rose in even greater proportion. They increased from £732,160 in 1894-1895 to £2,114,815 in 1 908- 1 909. And, if there had not been a reduc- tion of the rate of interest on government loans, the deficit of 1909, based on the "capital cost" of the open lines, would have been £323,555, instead of £212,468. The railway statement, presented annually to Par- liament by the Minister of Railways, always shows a * State Socialism in New Zealand, page 72. 95 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED "net working profit," without any indication that this profit is always insufficient to pay the interest upon the cost of construction at the average rate of interest paid by the government upon the public debt. During the year ending March 31, 1909, the rail- ways earned a "net profit" of 2.93 per cent, on a capi- tal of £27,762,592 ($135,203,823), the cost of con- struction of the open lines. But, since the average rate of interest paid on the public debt was 3.7 per cent., the "net profit" is absorbed in interest payments, and a deficit amounting to £212,468 ($1,034,719) emerges, if interest is reckoned on the cost of the open lines only. But real cost of construction includes the cost of the unopened lines, making a total of £29,- 052,432 ($141,485,343), reducing the "net profit" to 2.80 per cent., and increasing the deficit by £262,760 ($1,279,641). If the interest upon the open lines only is considered the total deficit from 1882 to 1909, in round numbers, is £4,500,000 ($21,915,000). But as a matter of fact, according to the conditions of its investment, interest at the rate of 4 per cent, should have been paid on the railway debt. In such case the deficit in 1908- 1909 would have been for both classes of lines £347,386 ($1,691,769) ; while the total deficit since 1 881 -1882 would probably amount to at least £8,000,000 ($35,160,000), and perhaps £10,000,- 000 ($48,700,000). The deficit is due, above all, to the principal line of the South Island, 1,299 miles long. The political in- fluence of this part of New Zealand, formerly much greater than it is to-day, contributed to the unprofit- able railway construction in that territory. Sir Joseph 96 RAILWAYS OF NEW ZEALAND Ward, however, in explaining in Parliament the defi- cit on the lines of the southern province, announced that the lines of the northern province would pres- ently need repairs, and that these lines would present in time to come the same deficiencies as the others.^ Such accounts as these show the necessity of reck- oning on large sums for repairs. Moreover, as the Minister of Railways, Hon. J. A. Millar, said, in 1909: "The enhanced price of materials, increased rates of wages, and expenditures incurred on the works enumer- ated (track renewals) have had a marked effect on the maintenance expenditure, which has steadily increased during the past 10 years." Further, the public is exacting, and the government must sacrifice economic considerations to those of a political nature. Since 1895, according to Sir Joseph Ward, rate reductions have reached £850,000, while the value of increased train service has risen to £883,- 000. This reckoning takes no account of the conces- sions in pay given to the railway staff, which amounted to another £375,000. Although from 1895 to 1907 the salaries of railway employees were increased £375,000 ($1,826,250) the Amalgamated Society of Railway Servants com- plained that they were receiving lower salaries than those paid by private companies, while their hours were often much longer than would be tolerated in any private business subject to the juris- diction of the Arbitration Court. 'July 26, 1907. State Socialism in New Zealand, p. 74. 97 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED The causes of the deficit on the railways are: 1. The construction of lines in advance of require- ments. 2. The high cost of all lines. 3. Delays in construction, principally due to lack of funds. 4. Unprofitable concessions in service, fares, and freight. 5. Rigid system of rates. 6. High cost of operation and maintenance, owing, in part, to a certain lack of discipline, initiative, and efficiency in the railway service. One of the most serious causes of inefficiency is the system of promotion, which is based principally on seniority in point of service, in the hope of abolishing favoritism and other abuses. Government employees have often been accused of making use of the so-called "government strike." The general manager of railways wrote a letter in 1909 to the chief mechanical engineer at the Addington work- shops, making serious charges of inefficiency. But, when the investigating committee assembled at Christchurch on March 11, 1909, that same general manager made a pitiful recantation. Yet the inves- tigation had clearly demonstrated, among other things, the difficulty of discharging useless men; of finding capable men to replace them when discharged ; the lack of encouragement of skilled labor because of the ab- sence of all opportunity for advancement or increase in salary; the utter absence of initiative shown by the superintendent of the workshops and the lack 98 RAILWAYS OF NEW ZEALAND of Up-to-date appliances in certain lines of work. The board of inquiry, the chairman of which was a distin- guished engineer, Professor R. J. Scott, of Canter- bury College, arrived at the conclusion that the cost of production was greater at Addington than in private workshops, and that the amount of production was relatively much less in proportion to the number of hands employed. The Evening Post, of Wellington, said on June 17, 1909: "Here, in miniature, we have the evils depicted which are rampant more or less in every branch of the public service ; and, if the result is that at Addington we are paying from 30 to 60 or 70 per cent, more for the work done than it would cost us elsewhere, it is natural to in- fer that the public service, as a whole, is also costing far beyond its value." For the reasons given above and a number of others the railways of New Zealand have never earned the full amount of interest on the capital cost. However, the state has frequently declared that it does not wish to make the railways pay. That far and above such a consideration should be placed the service rendered to the country in providing cheap transportation of agricultural products to the markets. This theory gives rise to two questions: I. Why consent to recover 3 per cent, interest, in- stead of 3.72 per cent, (the rate on state funds), and why not, if this theory be just, consent to recover only 2 per cent., or even less? 99 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED 2. Is the system rendering all the service that it ought to render considering its cost? Moreover, arguments based on such a theory have the prime defect of lacking a just standard of measurement. They are marked by that vagueness which so often envelops political conceptions and fos- ters the worst abuses. They serve to enable makers of electoral platforms and members of the most influen- tial groups to instigate expenditures which weigh heavily upon all their fellow-citizens, in order to in- crease the value of their own property. Thus they make their own political strength increase the "un- earned increment" so violently denounced by the par- tisans of nationalization of the soil and of state opera- tion of railways. Messrs. J. S. Le Rossignol and W. D. Stewart have demonstrated very clearly the disadvantage of railway operation at a loss. A railway line is opened in a country which cannot support it. It is therefore a parasitic line, which serves only to injure other lines, or to be a drain on the whole body of the taxpayers of the country. Be- cause of its cost it stands in the way of rate reduc- tions and improvement in the service of other lines. It operates at the expense of either passengers and shippers or of the taxpayers of other regions. How about the development of the country? But railroads cannot be constructed everywhere. When the fundamental rule is lost sight of, that a region ought to pay and to pay enough to compensate for losses during the first years of operation, there can be no further limit to extravagant expenditures. In- lOO RAILWAYS OF NEW ZEALAND deed, the financial failure of the railways has been one of the chief causes of the arrested development of the whole system. It took twenty-three years to construct a section 200 miles long on the principal line between Auckland and Wellington ; and this line is self-supporting. Then apart from the fact that this dilatory method of construction has added enormously to the cost, it is appalling to think of the huge sum which the country has paid in interest during the con- struction, to say nothing of the returns which might have been gathered in and the settlement which would have been promoted had the work been completed with reasonable dispatch. The resulting interest charges on the whole line may be readily conceived. Instead of concentrat- ing the funds upon one line, and completing it, they have been frittered away in various parts of the country, in order to conciliate political groups. The government, unable to borrow more than a certain sum annually, was at a standstill. If, on the contrary, it had been given an opportunity to finish the profitable lines, it might have been able, with the resources that these latter would have yielded, to pay the interest on the capital already borrowed; its credit would have been improved, and, possibly, the resources thus at hand might have permitted it to provide for interest on sums to be borrowed for the further development of the system. Such a wasteful policy, far from aiding in the devel- opment of the country, has actually retarded it. The districts deprived of a railway have paid for those in other places, while the slow rate at which these ICI WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED railroads have been constructed, together with the ex- cessive amounts which have been paid out to build unproductive lines, have deprived other districts of any hope of a railroad of their own. New Zealand has at last begun to comprehend that the construction of lines which do not pay is "bad policy." The government has recently adopted a system of forcing the railroads to earn their own interest on the capital invested. Sir Joseph Ward, at Winton, on the 5th of May, 1910, even mentioned the necessity for amortization. "The time for continued borrowing is coming to an end, and that of repayment is approach- mg. Unfortunately the government finds itself between districts which are demanding railways, districts which have them, and which are demanding rate re- duction, improvements of transportation and other favors, and employees demanding increase of salaries and shorter hours. The department of labor insists that railways be constructed in order to give work to the unemployed; while finance critics demand that the railways be compelled to provide for the interest on the capital invested in them, and that they earn enough to pay for the new lines. Yet, despite all the disadvantages connected with government operation of railways, no one dares sug- gest that the lines may be leased to a private company, although a provision for such lease exists in the act of 1900 (section 34), and such a proceeding would undoubtedly be the best means of putting the finances of New Zealand on a sound basis. It has been sug- gested that the administration of the railways should 102 RAILWAYS OF NEW ZEALAND be confided to a commission of experts who would be independent of the influences to which pubHc officials are exposed. Even this system, however, would not completely insure freedom from political interference, were it only by reason of its origin and the necessity for its renewal. Such a commission is also practically certain to fall into all the errors of a bureaucracy. The system has been employed in the Australian states, notably Victoria, and in New South Wales. The government of New Zealand is anxious to make use of the railways to carry out a certain policy relating to the distribution of population. The "stage system" of railway rates worked out by Samuel Vaile, and discussed with much approval in 1882, was espe- cially designed to prevent the concentration of popula- tion in cities and to keep it distributed over a vast territory, by establishing very low rates in rural dis- tricts and high rates in the urban districts. The ex- periment, however, was never made. New Zealand is developing. Little by little the profitable lines have been completed, and some abuses have been more or less checked. In fact, the govern- ment has gone so far as to ask, as a condition of com- pleting the Lawrence-Roxburgh railway, that the people of the district guarantee at least 3 per cent, interest on the capital cost. But although the re- sults of railway operation are improving, and will probably continue to improve, and although partisans of state operation have been untiring in their at- tempts to draw conclusions favorable to their argu- ment, an unbiassed history of the railways in New Zealand only condemns it. 103 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED Government property in New Zealand is exempt from taxation. At each extension of its activity the amount of property subject to taxation diminishes, and, if these enterprises fail, the burden of the tax- payers is increased. The principles of sound private and public finance are the same everywhere, and profit from public enterprises is indispensable in order to establish the fact that they are an advantage as public investments. It is not so many years since the state of New Zealand undertook the operation of two coal mines, known respectively as the Seddonville and Port Eliza- beth mines. In 1905, 1906, and 1908 the first was losing money. In 1911 it lost £3,219. In 1910 it made a profit of £194, and in 1912, of £863. The mine of Port Elizabeth brought in profits as high as £21,313 in 1906. But its profits have greatly dimin- ished during the last few years, and in 19 12 were only £3,964. The explanation of these profits is simple. Up to 1908 the government had bought 166,000 tons out of a total production of 237,300 tons for the railroads. But it apparently found its own coal too expensive. It began to buy coal from private dealers. In 19 12 it bought only 58,000 tons, out of a total production of 244,500. Its mining profits, therefore, have been mainly derived from its own railroad. 104 CHAPTER VIII GOVERNMENT RAILROADS IN FRANCE 1. A Good Turn to the Socialists. — The Impromptu Pur- chase of the Western Railway. — Extravagance. — In Aid of the Old State System. — Charges Against the Western Railroad Company. — Advantage to the Stock- holders. — The Operation Blanche. — The Purchase Price. 2. Net Profits of Operation by the State and by the Com- pany. — Provisions and Rectifications Serve Only to Aggravate the Situation. — Supplemental Credits. — Share of Labor. 3. Attacks Upon State Credit. — 4 Per Cent. Bonds. 4. Conclusions. I. In Book I, Chapter 2, I referred to the political motives underlying the purchase of the Western Rail- way of France. In order to do a good turn to the So- cialists, Georges Clemenceau socialized this system. The Minister of Public Works, Louis Barthou, saw- in the purchase a double advantage. It would be a sop to the Radicals and Radical Socialists, for one thing, and, in addition, it might serve to cover the deficits of the so-called old government system, that is to say the lines already under public management. The deficits were not to be hidden, however. There- fore, Minister Barthou, who had at first repudiated the charge that such deficits existed, openly demanded that 10$ WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED the sum of 26,600,000 francs be set aside for the benefit of the old system from the special treasury account established by the law of December 18, 1908. In November, 1906, the government introduced a bill for the purchase of the Western Railway, although it confessed "that no papers relating to such a project were on file in the office of the Minister of Public Works," a provision required by law. Nevertheless, the government demanded that a law authorizing the transaction be passed by the Senate and the Chamber of Deputies, before the end of the year, in order to prevent the Western company, which had had a profit- able year, from increasing its net profit. The Senate, however, refused to be intimidated by threats. Its committee, through the secretary, M. Pre\4et, who assigned the strongest possible reasons for such action, rejected the purchase bill, although it had already passed the Chamber of Deputies, by 364 votes against 187, 76 out of the 80 deputies from the districts touched by the Western road having voted against the purchase. Out of 46 senators, 44 were emphatically against the bill. Nearly all the chambers of commerce in France were also opposed. The argument advanced in favor of the purchase was that the Western company would never be able to repay the advances that had been made it under the name of guaranty of interest, that thus it was running on government money, and hence it was neither more nor less than a state department engaged in an un- profitable operation. Yet the results of its operation indicated that the company was making the greatest possible effort to 106 GOVERNMENT RAILROADS IN FRANCE extricate itself from the crisis of 1901. The receipts, net profits and interest guaranties for 1901, 1904 and 1906 were as follows (in francs) : Guaranty of Receipts Net Profit Interest 19OI 182,910,000 65,236,000 25,740,000 1904 192,636,000 84,775,000 9,911,000 1906 207,958,000 89,625,000 5,964,000 But the charge was made that the company had ob- tained its reduction in expenses only at the cost of its employees. I give below the number of employees and the increase in their salaries : Number of Average Employees Total Wages Wage Dec. 31, 1900 19,849 24,435,000 fr. 1,230 fr. Dec. 31, 1905 21,272 27,208,000 fr. 1,279 fr. Thus we see that the number of employees had increased, as well as the individual salaries, in spite of the difficulties facing the company. Moreover, during this same period, the sick and other bene- fits, bounties and allowances of various kinds had grown from 2,188,000 francs to 3,580,000 francs, or an increase of 1,392,000 francs. The other argument, harped on ad nauseam by par- tisans of the purchase, was that on December 31, 1905, the Western railway's debt to the state amounted to 302,569,000 francs, and the interest on it to 117,300,000 francs, a total of 419,869,000 francs. But the Western company had equipment estimated at 350,000,000 francs. By forcing it to submit to a deduction of 30 per cent, the price the government 107 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED would then have to pay for the road would be 245,- 000,000 francs. The difiference between 419,869,000 and 245,000,000 — or 174,000,000 francs — was the clinching argument on the part of the advocates of the purchase to hasten action in order to safeguard the interest of the state. And how did this purchase safeguard the interests of the state? The government took over the road at once; but it increased its investment in the Western company. The guaranty of interest to the stockhold- ers would come to an end in 1935 if the company con- tinued to operate the road, while, in case of purchase by the state, it would continue to the end of the fran- chise, in 1956. As a result the chief beneficiaries by the purchase of the Western road were the stock- holders. On the day when the road changed hands its stock was quoted at 830 francs. It subsequently fell to 810 francs, but the Cote de la Bourse et de la Banque, the Moniteur des Intérêts Matériels, and I myself immediately pointed out that the advan- tages resulting from the purchase would raise the value of the stock to more than 1,100 francs. At the present time, June 17, 1913, it is quoted at 870 francs. What did the purchase cost the state? The official in charge of the financial end of the purchase (Direc- teur Général du Mouvement des Fonds) declared that *'it was not possible to determine it even approxi- mately." Yet the Minister of Public Works declared that the whole transaction could be called an "opéra- tion blanche." That is to say, it would cost the state nothing. We have already referred to the fact that the Senate Io8 GOVERNMENT RAILROADS IN FRANCE rejected the bill authorizing the purchase of the West- ern line. But the Clemenceau ministry brought so much pressure to bear upon the senators that the pur- chase was finally voted by a majority of three. Thus the state found itself charged with the duty of furnish- ing service on a system of 9,000 kilometers (5,625 miles). In the drafts and reports of the committee in charge of the purchase, various settlements of the points at issue between the government and the com- pany were discussed, but these were all summarily eliminated by the law of July 13, 1908, which ratified an agreement with the Western company. The guar- anty of interest, which was to expire in 1935, was ex- tended to 195 1. The remainder of the sums due from the company upon bonds, certificates and guaranties of interest was fixed by law at the sum of 7,122,000 francs ($1,353,- 180). There was no discussion of the 419,869,000 francs, nor even the 174,000,000 francs. The real amount of the sums due the company is determined by annual estimates. The sum total amounts to 4,972,- 334,000 francs ($944,743,000). 2, What are the expenses resulting from the oper- ation of the system by the state? The state took over the Western Railway January I, 1909. During the five years of its operation by the company, from 1904 through 1908, the average annual net profit was 78,540,000 francs. In 1909, the first year of state operation, this net profit fell to 69,970,600 francs; in 19 10 to 57,169,200 francs; in 191 1, to 30,180,900 francs; in 1912, to 21,932,900 109 WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED francs. From this last figure a forecast may be made of what the profit of 1913 will be. Therefore, and taking into consideration the probabilities of 19 1 3, we have an annual average of 41,071,000 francs for the net profit from state operation, instead of the 78,540,000 francs from operation by the company. In a statement outlining the special features of the budget of 1912, M. Klotz estimated that the deficit on the operation of the Western Railroad would not exceed 24,000,000 francs ($4,560,000). On the other hand M. Chéron's report upon the application for supplemental credits in favor of state railways, submitted March 29, 1912, declares: "The demand for supplemental credits, which we are about to examine, constitutes a confirmation of the esti- mates of the budget of 1912. It was, as we see now, anticipated. The figures are none the less very disturb- ing." It was not anticipated in the explanatory state- ment of the budget of 1912. Some lines further on M. Chéron adds: "Progress has already been made in bringing order into this department. It only remains now to control the conduct of the enterprise with such vigilance and severity as will reduce the truly exorbitant deficit in the profits of operation. "The Honorable Secretary states that the supplemental credits granted in 19 12 have decreased the net profits of the old system by 3,813,400 francs and increased the deficit of the Western line to 23,389,900 francs. "Following the reduction effected by the commission no GOVERNMENT RAILROADS IN FRANCE in the ordinary expenses of the Western hne, the in- crease in the deficiency of the profits of the system af- fecting the budget of the ministry of Public Works is discovered to be 22,389,900 francs instead of 24,529,900 francs. The total deficit in the profits from the operation of the system will thus be found to be for 1912, and, including the original provisions, 81,535,900 francs, in- stead of 83,675,900 francs allowed by the government. If the deficit on partial operation be added, or 739,000 francs, we have a total deficiency for 1912 of 82,874,900 francs." M. Chéron is basing his comparison on the year 1908, the last year of the company, with the present condition of the state railway. But the purchase had been voted by the Chamber of Deputies in December, 1906. The company had no more authority over its employees, and its condition was altogether abnormal. Moreover, during the fiscal year 1908 expenses had to be met which, if the purchase had not been made, would normally have been carried over into the year 1909. The unfortunate situation of the Western company serves rather to bring out more clearly the serious- ness of the increase in the expenses of the system after its purchase by the state. It should be noted further that the actual deficit of the company in 1908 was only 28,522,675 francs 68, to which M. Chéron adds 3,300,000 francs, represent- ing additional charges resulting from the agreement regulating the sums due annually on the purchase. As far as the old government railway system is concerned, we can speak only of the receipts and ex- III WHERE AND WHY PUBLIC OWNERSHIP HAS FAILED h3 vo CO . c^ Vh o J2 "rt o i2 U-( O (A o C C/) V n W o. " m X C V 'u qj u a. o ■o X ^ >