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 THE DRIFT TOWARD GOVERNMENT OWNERSHIP 
 
 OF RAILWAYS 
 
 BY 
 
 B. L. WINCHELL 
 
 [Reprinted from the Atlantic Monthly for December, 1912.] 
 
 THE ATLANTIC MONTHLY COMPANY, PUBLISHERS 
 4 Pabk Street?, Boston. MASsACHUsims 
 

 THE DRIFT TOWARD GOVERNMENT OWNERSHIP 
 
 OF RAILWAYS 
 
 BY B. L. WINCHELL 
 
 There is an unmistakable drift 
 toward government ownership of rail- 
 ways in the United States. This ten- 
 dency is probably most apparent to 
 those closely identified with railway 
 affairs; but it is also evident to many 
 who are interested in the railway busi- 
 ness chiefly, or only, as observers and 
 students of economic, industrial, and 
 political problems. 
 
 In the first place, there has been for 
 some years a rather unsteady but cer- 
 tain increase in the number of socialists 
 in the country; and those who thus fa- 
 vor public ownership and management 
 of all of the means of both production 
 and distribution must be counted in 
 with those others who favor public 
 acquisition of the principal means of 
 distribution. There has also been an 
 increase in the number of those who 
 advocate public ownership of all public 
 utilities, of which steam railways are 
 the largest. Finally, there has been a 
 mighty growth in the number who favor 
 very stringent regulation of railways, 
 and who have succeeded in getting this 
 policy adopted. The last-named class, 
 which is much the largest, may finally 
 turn the scale for public ownership. 
 For its members now expect much from 
 regulation — lower rates, better service, 
 smaller railway dividends, complete 
 elimination of traffic discriminations, 
 shorter hours and higher wages for 
 
 746 
 
 labor, higher railway taxes, fewer acci- 
 dents, and all the rest. 
 
 There is, however, a limit to the 
 amount along these lines that any rail- 
 way policy, whether that of unreg- 
 ulated private management, regulated 
 private management, or public man- 
 agement, can accomplish. It is to be 
 feared that public regulation, however 
 submissive to it the railways may be, 
 will accomplish less than many expect; 
 and that, disappointed, these will join 
 the ranks of those who believe in gov- 
 ernment ownership. 
 
 Furthermore, the opposition to pub- 
 lic ownership from the men who, in past 
 years, have had the strongest incent- 
 ive to oppose it, namely, the officers 
 and stockholders of railways, may de- 
 crease — nay, is decreasing — just when 
 the tendency toward it becomes strong- 
 est. Whether rightly or wrongly, many 
 railway officers and stockholders feel 
 that unless present tendencies of regu- 
 lation are checked, the time will soon 
 come when, regardless of what their 
 attitude as citizens may or should be, 
 they will have no good reason, as 
 railway officers and stockholders, for 
 opposing public ownership. 
 
 The main thing about any employ- 
 ment that makes it attractive to strong 
 men is the opportunity, under condi- 
 tions affbrding much freedom of action, 
 to exercise their best initiative, put 
 forth their best energy, and thereby 
 achieve the best results of which they 
 
GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 747 
 
 are capable; and many railway officers 
 feel that the ever-increasing restrictions 
 that regulation is putting on railway 
 management are depriving them of this 
 opportunity. The public has small con- 
 ception how the hundreds of federal 
 and state laws regulating railways, 
 passed in recent years, and the innum- 
 erable orders that are constantly being 
 issued by the Interstate Commerce 
 Commission and the forty-two state 
 commissions, tie the hands of railway 
 officers. Doubtless much of the regu- 
 lation is needed; perhaps all of it is 
 well intended: but the public has un- 
 fortunately tried to adopt a policy of 
 regulation that will prevent railway 
 officers from doing anything that they 
 ought not to do, and has overlooked 
 the fact that to hedge men about with 
 restrictions of this sort may, at the 
 same time, so narrow their freedom of 
 action as to make it impossible for 
 them to do many things that they 
 ought to do. 
 
 Those who have bought railway 
 stock — as distinguished from those 
 who have really loaned their money to 
 the roads by buying their bonds — 
 have done so in order that, while incur- 
 ring the risk of business loss if the ven- 
 ture did not pay, they might get a 
 business profit if it did pay; and the 
 tendency of regulation to limit and 
 reduce railway profits is making many 
 investors wonder if they would not be 
 better off financially if government ^ 
 ownership should be adopted. With an 
 outstanding capitalization of less than 
 $63,000 a mile, or lower than that of 
 the railways of any other first-rate 
 country in the world, the railways of 
 the United States have never been able 
 in any year to pay as much as 4 per 
 cent on both their bonds and their 
 stock. In 1910 their average interest 
 was 3.79 per cent and their average 
 dividends 3.64 per cent. It is in the 
 face of this fact that the state and 
 
 national governments are pursuing a 
 policy under which net earnings are 
 declining instead of increasing. In the 
 calendar year 1907, net earnings per 
 mile were $3,359; in 1908, following 
 the panic of 1907, they were $2,869; 
 in 1909, $3,441; in 1910, $3,344; in 
 1911, $3,152. Now, railway stockhold- 
 ers know that no government has 
 ever, in acquiring railways, paid an im- 
 properly low price for them; they feel 
 confident that the government of the 
 United States will not be the first to set 
 the example of railway confiscation; 
 and if they could get their money out 
 of railways they could invest it else- 
 where with more chance of large profits. 
 
 In these circumstances, the time 
 may soon come when the only persons 
 who will oppose public ownership will 
 be those who will do so solely from a 
 disinterested belief that it would be a 
 bad thing for the republic, and we all 
 know that disinterested zeal is seldom 
 active, strenuous, and effective. 
 
 A change to government ownership 
 in the United States, whether the re- 
 sults were bad or good, would be a 
 revolution of stupendous proportions. 
 The mileage of the railways of this 
 country, amounting to more than 
 240,000 miles, is greater than the com- 
 bined mileages of all the railways now 
 owned by governments in the world. 
 The net capitalization of our railways 
 is about fourteen and a half billions of 
 dollars; they certainly could not be 
 acquired for less than this; the purchase 
 price, very likely, would be nearer 
 twenty billions; and all this immense 
 sum would be added to the national 
 debt. The 1,700,000 employees would 
 all become government employees, with 
 what political consequences no one can 
 foretell. We should arouse ourselves 
 to a clear recognition of present tend- 
 encies, cease drifting, and determine 
 by investigation, thought, and discus- 
 sion whether government ownership 
 
 257171 
 
748 
 
 GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 will or will not be the best policy for 
 us as a people; and then, having de- 
 cided this, we should deliberately and 
 carefully either prepare for the change, 
 or work out and adopt a railway policy 
 that will steer us clear of it. 
 
 n 
 
 The first question to be squarely 
 faced and settled is: Is government 
 ownership desirable or not? To discuss 
 that question adequately within the 
 limits of a magazine article would be 
 impossible. Some of the most import- 
 ant points may, however, be touched 
 upon. 
 
 The largest state-owned railway sys- 
 tem in the world is that of Germany, 
 and its results are those most frequent- 
 ly cited by advocates of government 
 ownership as arguments for^that policy. 
 It is said that the German state system 
 yields large profits to the government, 
 that its rates are reasonable and non- 
 discriminatory, and that its service is 
 good. There is no question that, on 
 the whole, the German state lines are 
 quite well-managed. But there is one 
 vital difference between Germany and 
 the United States that must be taken 
 into account. Germany is a monarchy; 
 the United States is a democracy; and 
 Charles Francis Adams, long chairman 
 of the Railroad Commission of Massa- 
 chusetts, thirty years ago forcibly ex- 
 pressed the reasons why the results 
 gained by public management of rail- 
 ways under one form of government 
 cannot, without much qualification 
 and many reservations, be used as an 
 argument for the adoption of the same 
 policy in a country having a different 
 form of governitient. 
 
 ' In applying results drawn from the 
 experience of one country to problems 
 which present themselves in another,' 
 said Mr. Adams, 'the difference of 
 social and political habit and educa- 
 
 tion should ever be borne in mind. 
 Because in the countries of continental 
 Europe the state can and does hold 
 close relations, amounting even to 
 ownership, with the railroads, it does 
 not follow that the same course could 
 be successfully pursued in England or 
 in America. The former nations are 
 by political habit administrative, the 
 latter are parliamentary. In other 
 words, France and Germany are essen- 
 tially executive in their governmental 
 systems, while England and America 
 are legislative. Now, the executive 
 may design, construct, or operate a 
 railroad; the legislative never can. A 
 country, therefore, with a weak or 
 unstable executive, or a crude and im- 
 perfect civil service, should accept 
 with caution results achieved under a 
 government of bureaus.' 
 
 As W. M. Acworth, the English 
 railway economist, has said, 'Prussia 
 is Prussia, with a government in effect 
 autocratic, with a civil service with a 
 strong esprit de corps, and permeated 
 with old traditions, leading them to 
 regard themselves as servants of the 
 king, rather than as candidates for 
 popular favor. I am inclined to think,' 
 Mr. Acworth adds, 'that the effect of 
 the evidence is that the further a gov- 
 ernment departs from autocracy and 
 develops in the direction of democracy 
 the less successful it is likely to be in 
 the direct management of railroads.' 
 
 Most of the employees of the Ger- 
 man lines are ex-soldiers who not only 
 have the soldier's training and tradi- 
 tions, but might at any time be called 
 into military service. Suppose that 
 they should strike. They might at 
 once be ordered into the army and then 
 detailed, as soldiers, to return to their 
 posts on the railways; and if they 
 refused they might be tried by court- 
 martial and shot. The employees of 
 the German state lines are not allowed 
 to organize labor-unions such as the 
 
GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 749 
 
 employees of the privately-owned rail- 
 ways of Great Britain and the United 
 States have. They may form local as- 
 sociations to carry on discussion and 
 formulate complaints and petitions as 
 to wages and conditions of employ- 
 ment; but a superior officer is always 
 present at these meetings. They can 
 present their complaints or demands 
 to Parliament only through their offi- 
 cers, and political activity on their part 
 to secure anything the railway admin- 
 istration does not want to grant, is un- 
 known, and would not be tolerated. 
 
 These facts illustrate the differences 
 between the conditions under which 
 government management is carried 
 on in such a country as Germany, with 
 a monarchical government, and those 
 under which it would be carried on 
 under a democratic government such 
 as ours. Can any one believe that if 
 government ownership were adopted 
 here the powerful railway brotherhoods 
 would be abolished, and political activ- 
 ity by employees to secure such wages 
 and conditions of employment as they 
 wanted would be prohibited? If we 
 could expect this to be done, it would 
 be, to the minds of railway employees, 
 a powerful argument against govern- 
 ment ownership; and if it were not 
 done, experience indicates that the re- 
 sult would be the bidding, by our poli- 
 ticians, for the votes of the great army 
 of railway employees, by means which 
 would be ruinous to the railway serv- 
 ice, and bad for government, for the 
 public, and in the long run for the em- 
 ployees, '^o American citizen doubts 
 that democratic government is the 
 best form of government for protect- 
 ing the personal and property rights 
 of the citizen; but one may be a very 
 patriotic citizen and yet be sure that 
 democratic government is a very bad 
 form for managing large industrial con- 
 cerns. 
 
 However, while all must concede 
 
 that, in many ways, the German lines 
 are well managed, this is far from con- 
 ceding that they are managed better, 
 from the standpoint of the interests of 
 the public, than are those of the United 
 States under private ownership. It is 
 true that their net earnings, amounting 
 in 1910 to $229,368,256, are paid into 
 the government treasury; but after 
 deducting from this amount interest 
 at 3^ per cent on the cost of construc- 
 tion there is left only $86,607,000. 
 Professor H. G. Moulton, of the Uni- 
 versity of Chicago, in his recent book, 
 Waterways versus Railways, places the 
 clear profit from the Prussian railways 
 at only about $57,000,000. But these 
 figures are less than the annual taxes 
 paid by the railways of the United 
 States, amounting in 1911 to about 
 $110,000,000; and, of course, the clear 
 profits, after interest, earned by state 
 railways are no less and no more a 
 contribution to the support of the gov- 
 ernment than are the taxes paid by 
 privately-owned railways. 
 
 Furthermore, if the charges to oper- 
 ating expenses for maintenance on the 
 German railways were as generous in 
 proportion as are the similar charges 
 of American railways, their apparent 
 net earnings would be less. It is a 
 general practice of state railways, of 
 which those of Germany have not been 
 innocent, to present as good a show- 
 ing as possible by making inadequate 
 charges to maintenance, and then to 
 charge to capital account new equip- 
 ment really acquired to maintain the 
 property, thereby swelling the capital 
 account and the amount of interest 
 that has to be paid on it. While this 
 makes an apparently good showing for 
 the management, it is the opposite of 
 good for the public in the long run, and 
 was largely responsible for an increase 
 of $14,000 per mile in the capital cost 
 of the German lines between 1900 and 
 1910. 
 
750 
 
 GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 The freight rates charged by the 
 German railways in order to make as 
 good a financial showing as they do, are 
 higher than those of the railways of the 
 United States, averaging 14 mills per 
 ton per mile, as compared with 7.5 
 mills in this country. Their average 
 passenger rate is lower, being only 9 
 mills, as compared with 19.3 mills in 
 the United States, but the lower aver- 
 age in Germany is due to the fact that 
 a large proportion of passengers there 
 take the poor and low-priced third- 
 class service. For the first- and second- 
 class services, which are comparable 
 with the service in this country, the 
 rates are, first-class, 3.45 cents per 
 mile; second-class, ^.55 cents. It must 
 also be remembered that these rates 
 are charged on railways in a country 
 where the wages of labor, which deter- 
 mine both the cost of labor to the rail- 
 ways, and the amount that the people 
 who work for wages can afford to pay 
 for transportation, are much less than 
 in the United States. For example, the 
 average annual wage of railway em- 
 ployees in the United States is $673, 
 while in Germany it is but $388. There- 
 fore, on the average, a day's labor will 
 buy almost as much passenger trans- 
 portation in the United States as it will 
 in Germany — although the density of 
 passenger traffic is about four times as 
 great there as it is here — and it will 
 buy three-and-a-half times as much 
 freight transportation here as in Ger- 
 many. This is probably the best test of 
 whether the railway rates of a country 
 are high or low, for in the long run the 
 wage-earner, as consumer, pays freight 
 as well as passenger rates, and it shows 
 that the rates of the German lines are 
 relatively much higher than those of 
 the railways of the United States. 
 
 To summarize, then: the privately- 
 owned railways of the United States, 
 while paying their interest and very 
 moderate dividends, pay wages to their 
 
 employees much higher than those of 
 the German lines, charge rates much 
 lower, and at the same time turn into 
 the public treasury in the way of taxes 
 an annual sum greatly exceeding the 
 profit derived by the German public 
 from its railways. 
 
 Ill 
 
 Hardly of less interest than the rail- 
 ways of Germany to the student of 
 state management are the railways of 
 Australia. In Australia government is 
 as near pure democracy as anywhere 
 in the world; and here the troubles 
 that characterize public management 
 of industry under democratic govern- 
 ment were long experienced. The loca- 
 tion of new lines was often determined 
 by log-rolling in the provincial parlia- 
 ments rather than by consideration of 
 the public needs. The wages of em- 
 ployees were determined rather by the 
 relative importance of the men as voters 
 than according to economic considera- 
 tions. In consequence of these things 
 most of the lines were long unprofitable. 
 
 In 1903 the labor situation came to 
 an extraordinary crisis in Victoria. 
 Parliament at last refusing to yield to 
 their demands, the employees struck. 
 The government won. The question 
 of completely disfranchising the rail- 
 way employees was considered. There 
 was at last passed a law forbidding 
 employees of the state, including those 
 on railways, under heavy penalties, 
 from taking any part whatever in 
 politics except to vote for members of 
 Parliament. Their unions were prac- 
 tically broken up. To free the railway 
 management from political interfer- 
 ence, legislation also has been passed 
 in all the provinces placing the con- 
 trol of operation completely in the 
 hands of permanent non-political rail- 
 way commissioners, instead of political 
 ministers. 
 
GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 751 
 
 There is still a good deal of politics 
 in the railways, however. For example, 
 the lower house of the New South Wales 
 parliament recently, just after the chief 
 commissioner had started on a long 
 inspection trip, suddenly passed a bill 
 to create a special board to supervise 
 the work of double-tracking some of the 
 main lines. The chief commissioner, 
 as soon as he heard of this, entered vig- 
 orous protest against it on the ground 
 that it violated the principle of inde- 
 pendent management. As a result of 
 the adoption of the system of inde- 
 pendent management, — which, how- 
 ever, is temporary, because it is in con- 
 stant danger of political attack, — the 
 financial results of the railways have 
 been better in recent years than for- 
 merly, when they commonly did not 
 earn enough net money to pay the 
 interest on the investment. In all 
 Australia the net profit, after the pay- 
 ment of interest, averaged during the 
 last six years $244 per mile per year; 
 while the railways of the United States 
 during the same period have paid $386 
 per mile per year in taxes, or almost 
 60 per cent more. In 1911, the most 
 prosperous year in the history of the 
 Australian lines, their net profits, after 
 payment of interest, — in other words, 
 the net money which actually could be 
 used for the public benefit, — amounted 
 to the unprecedented sum of $7,000,000. 
 This was $446 per mile, which, by an 
 odd coincidence, is exactly the amount 
 per mile which the railways of the 
 United States paid in taxes in the same 
 year. 
 
 In other words, the governments 
 and public of the United States de- 
 rived just as much direct financial 
 benefit per mile from the railways of 
 this country under private ownership, 
 as did the Australian public from its 
 railways, under public ownership, in 
 the most prosperous year in the Aus- 
 tralian railways' history. 
 
 What, now, of the result to shippers, 
 travelers and wage-earners? In New 
 South Wales, which, next to Queens- 
 land, has the largest mileage in Aus- 
 tralia, and where very full figures re- 
 garding rates and wages are published, 
 the average rate per passenger per 
 mile in 1911 was 1.17 cents, as com- 
 pared with 1.93 cents in the United 
 States, and the average rate per ton 
 per mile was 18.2 mills, as compxared 
 with 7.53 mills in the United States. 
 The average railway wages per year 
 paid in New South Wales were $558, 
 as compared with $673 in the United 
 States. In other words, on the average, 
 a day's railway wages in the United 
 States will buy three fourths as much 
 passenger transportation, and three 
 times as much freight transportation, 
 as a day's railway wages in New South 
 Wales. 
 
 IV 
 
 The French government for thirty- 
 five years has owned and operated a 
 railway having 1860 miles of line. A 
 few years ago it acquired also the 
 Western Railway, having about 3700 
 miles of line, one of the large systems 
 that had been operated by private 
 companies. The results are remarkable 
 and instructive. In the last year of 
 operation by the company (1908) the 
 gross earnings of the Western were 
 $43,520,000, and its operating expenses 
 $29,700,000, its net earnings being 
 $13,820,000, and the ratio of its oper- 
 ating expenses to its gross earnings 68 
 per cent. After two years of public 
 management its gross earnings had 
 increased (in 1910) to $45,920,000, and 
 its operating expenses to $41,180,000 
 — a rise of 38 per cent in the latter; 
 its net earnings had decreased to 
 $4,740,000 — a decline of almost 66 
 per cent — and its operating ratio had 
 risen to 89 per cent. Complete figures 
 for 1911 are not available at this writ- 
 
752 
 
 GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 ing, but it is expected that, when they 
 are made up, they will show a still fur- 
 ther heavy increase in expenses, in- 
 crease in the operating ratio, and re- 
 duction of net earnings. 
 
 The reduction in the net earnings and 
 increase in the operating ratio were in 
 no degree due to changes in the freight 
 and passenger rates charged. The gov- 
 ernment made no reduction in them. 
 Some of the defenders of the govern- 
 ment's management have sought to 
 show that the lines were in bad shape 
 when turned over to it by the company, 
 and that the enormous increase in op- 
 erating expenses has been caused by 
 expenditures to put the lines in suit- 
 able condition. M. Colson, director of 
 roads and bridges in France, — a gov- 
 ernment officer, — who knows more 
 about railway transportation in France 
 than any other man, has shown in an 
 article in the Bulletin of the Interna- 
 tional Railway Congress that this con- 
 tention is fictitious. Nor is the change 
 due to improvements in the service. 
 No additions to the number of trains 
 have been made, irregularities in their 
 running have increased, and the gov- 
 ernment has in many cases lengthened 
 their schedules. There has been an 
 increase in the number of bad accidents, 
 and a very large advance in the claims 
 for damages presented and paid. 
 
 The main causes of the heavy aug- 
 / mentation of expenses have been that 
 the government dismissed the experi- 
 enced officers who had been employed 
 by the company and filled their places 
 with men both less experienced and less 
 capable; that, following a severe strike, 
 J it raised the wages of the employees 
 without, however, getting any more 
 loyal and efficient work from them; 
 and that it has also largely increased 
 the number of employees. The last- 
 named has been the principal influence. 
 The increase in the number of employ- 
 ees has added three times as much to 
 
 expenses as has the increase in their 
 wages. Under the management of the 
 company there were, for example, only 
 1526 employees at the central admin- 
 istration and at the central motive 
 power and traffic departments. This 
 number has been increased by the gov- 
 ernment to 2587. There have been 
 large additions not only to the number 
 of employees, but also to the personnel 
 of the official class. 
 
 However, the causes of the increases 
 in expenses mentioned are secondary. 
 They are all themselves effects of a 
 single primary cause, and that cause 
 is the influence of politics. France, 
 formerly a monarchical and adminis- 
 trative country, has now become a 
 legislative country; and the govern- 
 ment, in the management of the West- 
 ern Railway, has been influenced less 
 by a desire to get good results on the 
 railway than by a desire to get sup- 
 port in the Chamber of Deputies and 
 at the polls. Meantime, the net earn- 
 ings are insufficient to meet the in- 
 terest on the capital cost of the rail- 
 way, and the taxpayers of France must 
 make good the deficit which is growing 
 greater every year. 
 
 If things go on as they have been 
 going, the Western Railway will soon 
 be in the same plight as another good- 
 sized railway which is owned and oper- 
 ated by the government of a virtually 
 democratic country. The Intercolonial, 
 owned by the Dominion of Canada, 
 seldom earns enough to pay its oper- 
 ating expenses, to say nothing of in- 
 terest on the large investment in it. In 
 1909 its expenses exceeded its earnings 
 by $449,535. Interest on the total in- 
 vestment at 3^ per cent was $3,080,244, 
 which, added to the deficit from opera- 
 tion, made a total loss of $3,529,779, 
 which the tax- payers had to make good. 
 In 1910 it earned $281,877 more than 
 its operating expenses, but as interest 
 at 3j per cent on its capital cost was 
 
GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 753 
 
 $3,252,814, it really incurred a net loss been profitable, and the rates charged 
 
 of $2,970,937, w;hich the taxpayers are still much higher, and the wages 
 
 suffered. paid still much lower, than those on the 
 
 Each political party, when it is out railways of the United States. How- 
 
 of office, charges that these poor re- ycver, results gained in a compact coun- 
 sults are largely due to the use of th^ try having only 3034 miles of railway, 
 
 railway for political purposes by the can hardly yield any very strong argu- 
 
 party in office; and the charge, whether 
 made against one party or the other, 
 seems to be true. It has been repeated- 
 ly alleged that the administration, 
 whether of one political complexion or 
 the other, usually largely increases the 
 number on the pay-roll when an elec- 
 tion is approaching. While the state- 
 owned railways of France and of 
 Canada have been getting such poor 
 results the privately-managed railways 
 of both countries — while confronted, 
 like the railways of all other countries 
 of the world, with increasing wages and 
 costs of materials — have been keep- 
 ing their expenses within reasonable 
 bounds and fairly maintaining their 
 net earnings. 
 
 ments either for or against the adop- 
 tion of government ownership in the 
 United States. 
 
 In Austria, where the state operates 
 about 8500 miles of line, the wages paid 
 are somewhat lower, and the rates 
 charged somewhat higher, than in 
 Germany, while the government has 
 to make good from taxes a deficit of 
 about $25,000,000 a year. Before the 
 government a few years ago took it 
 over, the Northern Railway of Aus- 
 tria was paying 6 per cent dividends. 
 M. Pattai, president of the Austrian 
 Chamber of Deputies, and a friend of 
 government ownership, in a public ad- 
 dress, said in the summer of 1910: — 
 
 * We are still in favor of the principle, ^/^^ 
 but it does seem to us that our gov- 
 
 It may be hardly fair to cite the rail 
 ways of Italy as an example of the 
 results of government ownership, for 
 they have been an operating and finan- 
 cial failure under both private and 
 public management. Certainly, how- 
 ever, the most enthusiastic advocate 
 of government ownership would not 
 cite their results as an argument for his 
 cause. Within three years after the 
 government in 1905 assumed the oper- 
 ation of the Italian lines the number 
 of employees was increased fron 97,000 
 to 137,000, and this was not accom- 
 panied by any increase in efficiency. 
 The opposite seemed to be the case. 
 
 Under government management in 
 Switzerland, rates have been reduced, 
 wages have been increased, and the 
 service given has been more or less 
 good. It is a disputed point. However, 
 whether financially the roads have 
 VOL. no - NO. 6 
 
 /ernment has performed a remarkable 
 __ 
 
 feat when it has succeeded in creating a 
 deficit on the Northern Railway. The 
 government has enlisted an army of 
 new employees. They have gone much 
 too far in the reduction of hours of 
 labor. Instead of commercial manage- 
 ment, they have appointed lawyers to 
 posts that required business men or 
 experts. They have established an en- 
 tirely impracticable bureaucracy.' 
 
 VI 
 
 We can get some data regarding the 
 results of public ownership and opera- 
 tion without going abroad. The gov- 
 ernment of the United States about 
 six years ago acquired the Panama 
 Railroad and the steamship line owned 
 by it, and has since operated them. 
 During the last ten years of private 
 ownership the ratio of the operating 
 
754 
 
 GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 expenses to the gross earnings of the 
 company was never more than 66 per 
 cent, and during the last year of private 
 management, 1904, it was less than 63 
 per cent; I include the figures for the 
 steamship lines as well as for the rail- 
 way. Immediately after government 
 acquisition the operating ratio began 
 to increase. In 1905 it was 77.4; in 
 1906, 79.54; in 1908, 74.49; in 1910, 
 71.4; and in 1911, 71 per cent. If this 
 bad showing had been made when 
 gross earnings were declining, it would 
 have been understandable, but, while 
 the gross earnings meantime had in- 
 creased from $3,267,859 to $6,009,555, 
 or 84 per cent, operating expenses in- 
 creased from $2,024, 181 to $4,257,038, 
 or 110 per cent. 
 
 The gross earnings of the Panama 
 Railroad under government manage- 
 ment were, in 1911, over $80,000 per 
 mile, while the gross earnings of the 
 railways of the United States were but 
 $11,553 per mile. The operating ex- 
 penses of the Panama Railroad were 
 almost $50,000 per mile while those of 
 the railways of the United States were 
 less than $7700. In other words, the 
 earnings and operating expenses per 
 mile of the Panama Railroad under 
 government management were each 
 about seven times as much as those 
 of the railways of the United States 
 under private management, although 
 the freight traffic handled by the 
 Panama Railroad per mile was only 
 slightly greater than that handled per 
 mile by the railways of the United 
 States. Its passenger traffic, however, 
 was about four times as great per mile 
 as was that of the railways of the 
 United States. Its net earnings were 
 almost $31,000 a mile, while the net 
 earnings of the railways of the United 
 States in the fiscal year 1910 were less 
 than $3900 a mile. 
 
 The explanation of the large gross 
 and net earnings of the Panama Rail- 
 
 road is to be found in the high freight 
 rates that it charges. Its average rate 
 per ton per mile on commercial freight 
 is seven cents, or nearly ten times the 
 average ton-mile rate that the railways 
 of the United States are permitted to 
 charge; while the rate it charges the 
 Isthmian Canal Commission is only 
 about two cents per ton per mile. Its 
 average rate on all freight is 4.14 cents, 
 or about five and one half times as 
 much as the average rate of 7.53 mills 
 on the railways of the United States. 
 Despite these facts, the Panama Rail- 
 road actually made some advances in 
 its freight rates in the autumn of 1911. 
 The government has been recon- 
 structing the Panama Railroad, and it 
 is interesting to compare the cost of this 
 work with some things that have been 
 said about the cost of construction and 
 the capitalization of the railways of the 
 United States. Very recently a promi- 
 nent business man made the statement 
 in a magazine article that the upset 
 cost of railway construction under 
 modern conditions is $50,000 per mile, 
 denounced the capitalization of the 
 railways of the United States (amount- 
 ing to less than $63,000 a mile) as 
 exorbitant, and advocated government 
 ownership as a remedy for alleged evils 
 growing out of over-capitalization. 
 Now, the official figures introduced at 
 hearings on the Canal Zone in Decem- 
 ber, 1911, before the committee of the 
 House of Representatives on Inter- 
 state and Foreign Commerce, show 
 that up to that time the cost of recon- 
 structing the government-owned Pan- 
 ama Railroad had been $167,000 per 
 mile, and it was officially estimated 
 that the total cost of reconstruction 
 of this fine would amount to $226,190 
 per mile. It is true that the work was 
 done under peculiar conditions which 
 necessarily made it very expensive, 
 but, on the other hand, the figures 
 given include no outlay for right of 
 
 { 
 
GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 755 
 
 way, which is often one of the largest 
 items in the cost of railways in the 
 United States, and nothing for large 
 terminals in great cities, for land for 
 which the railways of the United 
 States sometimes have to pay as much 
 as $1,000,000 per acre. 
 
 VII 
 
 The adoption of public ownership 
 would be a political and economic 
 change of the greatest magnitude and 
 importance, and the burden of demon- 
 strating, by a clear preponderance of 
 the evidence and convincing logic, that 
 the result would be of public benefit 
 rests on those who favor the new policy. 
 They have not shown this, nor do I 
 believe they can. They claim that 
 under government ownership wages 
 would be higher, rates would be lower, 
 service would be better, and the profits 
 
 theoretical argument can be mads to 
 show that considerable economies 
 could be effected under government 
 management; but the inherent and 
 apparently, to a large extent, incurable 
 shortcomings of public management 
 cause actual wastes, wherever govern- 
 ment ownership obtjains, that greatly 
 exceed these theoretical economies, and 
 it is chiefly due to this that most state- 
 owned railway systems, instead of yield- 
 ing a profit to the public, usually earn 
 less than the interest on the investment 
 in them, and the difference has to be 
 paid from taxes, — public ownership 
 thus increasing instead of diminishing 
 the burden of taxation. 
 
 One argument advanced is that the 
 rates fixed under private ownership 
 are unfairly discriminatory, and that 
 we must change to public ownership 
 to correct this evil. But there are now 
 stringent laws in the United States for- 
 
 from the railways could be applied in ^^^idding unfair discriminations, and the 
 
 mitigation of public taxation, but the 
 evidence shows that under private 
 ownership the wages paid by the rail- 
 ways of the United States are the 
 highest in the world, that the rates 
 charged by them are the lowest in the 
 world, that the service rendered by 
 them is as good as any rendered in the 
 world, and that the taxes paid by them 
 into the public treasury exceed the net 
 profits, after interest, paid into the 
 public treasury by any state-owned 
 railway system in the world. This 
 
 Interstate Commerce Commission is so 
 enforcing these laws as to correct these 
 discriminations as fast as they could 
 be corrected under government owner- 
 ship. 
 
 Again, it is said that the government 
 ought to require the railways to remove 
 the influence now exerted on political 
 and governmental affairs by railway 
 corporations. The fact is, however, that 
 developments of recent years have 
 practically annihilated the political 
 influence of railways in this country. 
 
 combination of facts seems to demon-,,^^hile under government ownership the 
 
 strate that our railways, under private 
 ownership, are the most efficiently 
 managed, in the interest of the public, in 
 the world. What good reason is there 
 for believing that public management 
 here would be more efficient than pri- 
 vate management, when the latter is, 
 in this country, more efficient from a 
 public standpoint than public manage- 
 ment is anywhere in the world? 
 
 I am aware that a very plausible 
 
 efforts of political parties to win votes 
 often cause them to make and to carry 
 out promises for the fixing of rates, the 
 building of extensions, and, especially, 
 for the increase of the wages and of 
 the numbers of railway employees, in 
 practical disregard of the interests of 
 the general public, which alone should 
 have any weight in the administration 
 of state railways. The country where 
 the influence of politics on state rail- 
 
756 
 
 GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 way management seems to be the small- 
 est is Germany, and the reasons for 
 this have already been shown. Never- 
 theless, Professor Hugo R. Meyer, in 
 his book entitled Government Regula- 
 tion of Railway Rates, published some 
 years ago, demonstrated with the great- 
 est copiousness of illustration that while 
 partisan politics does not affect railway 
 management in Germany, the adjust- 
 ments of rates are largely determined 
 by sectional struggles and, as a result, 
 are ill-adapted to commercial and in- 
 dustrial needs. 
 
 On the whole, it seems to me — 
 looking at the matter as an American 
 citizen rather than as an American 
 railway man — that the argument 
 against government ownership of rail- 
 ways in this country is overwhelming- 
 ly conclusive. The evidence that I 
 have cited (and much more of the same 
 kind could be introduced) indicates 
 that public ownership would tend to 
 increase rather than to reduce the cost 
 of operation; that it would tend to 
 make rates more inelastic and thereby 
 injure commerce; that it would lead to 
 efforts by the political parties to use 
 the railways and their employees for 
 political purposes, which would result 
 in the railways and politics mutually 
 corrupting each other. 
 
 But I realize that political action is 
 often not determined by the statement 
 and analysis of facts, and that our 
 future railway policy may not be so 
 determined. It is unfortunately true 
 that the managements of our railways, 
 by various mistakes of both omission 
 and commission, have lost the con- ^i 
 fidence of the public; that many lead- 
 ers of public thought, from motives 
 sometimes good and sometimes other- 
 wise, have fanned the popular feeling 
 against them; that in consequence a 
 system of regulation which unduly in- 
 terferes with management and limits 
 profits has been adopted; and that this 
 
 combination of circumstances may 
 hurry us into government ownership 
 unless some alternative plan be adopted 
 to prevent it. 
 
 Some acute observers who have de- 
 tected the drift of things have advo- 
 cated different plans to secure satisfac- 
 tory results under private ownership 
 for both stockholders and public, and 
 at the same time save us from govern- 
 ment ownership. One scheme that has 
 been suggested is that the railways be 
 allowed so to adjust their rates that 
 each can earn a fair return, say 6 or 
 7 per cent, on a fair valuation, and 
 that all earnings in excess of this be 
 divided between the railway company 
 and the public, the public's share being 
 paid into the government treasuries as 
 taxes. 
 
 This plan has marked advantages 
 over that of limiting all railways to 
 the same maximum return. If every 
 railway, whether well or ill managed, 
 were restricted to the same return, 
 there would be no incentive to good 
 management, while allowing the bet- 
 ter conducted roads to earn and pay 
 dividends substantially exceeding the 
 average would give an incentive to 
 good management of all railways. The 
 adoption of this scheme might tend to 
 keep up rates, because each reduction 
 in them would reduce the public's, as 
 well as the railway's, share of the net 
 earnings, but I cannot agree that ship- 
 pers and travelers are entitled to receive 
 in the form of reductions in rates all 
 the benefit of increases in the efficiency 
 of railway operation. 
 
 Another plan that has been outlined 
 and advocated with ability by W. W. 
 Cook, the eminent authority on the 
 law of corporations, is that there shall 
 be organized by the federal govern- 
 ment a great holding company, on 
 whose stock the government would 
 guarantee a return of three per cent, 
 and which would acquire a controlling 
 
GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 757 
 
 part, or all, of the securities of all the 
 railways. The first board of directors 
 would be appointed by the President 
 and confirmed by the Senate of the 
 United States, and its members would 
 appoint their own successors. Mr. Cook 
 contends that this scheme would have 
 many advantages over either the pre- 
 sent policy of private ownership and 
 government regulation, or government 
 ownership. It would, he says, remove 
 the railways from the influence of Wall 
 Street without subjecting them to such 
 political influences as probably would 
 dominate them under government 
 ownership. He assumes that the direc- 
 tors of the holding company would 
 retain the present officers of the various 
 lines, who have been chosen because 
 of their experience and skill in railway 
 affairs, and that, therefore, the roads 
 would be as efficiently managed as 
 they are now, and would be more effi- 
 ciently managed than if government 
 ownership were adopted and they were 
 turned over to political appointees. 
 
 It seems probable that the first, and 
 almost certain that the succeeding, di- 
 rectors of the proposed holding com- 
 pany would be chosen for political 
 reasons, and that they would be influ- 
 enced by like considerations in appoint- 
 ing the officers of the railways. Further- 
 more, the concentration of the control 
 of all of the railways in the United 
 States in the hands of a single holding 
 company would cause a concentration 
 upon it of the demands of all interests 
 and sections for readjustments of pas- 
 senger rates, freight rates, and wages, 
 and for the provision of additional 
 facilities and the construction of new 
 lines, which the holding company would 
 be unable to meet; and the resulting 
 public dissatisfaction probably would 
 soon lead to the substitution of govern- 
 ment ownership. 
 
 A short time ago I suggested that it 
 might be desirable for the government 
 
 to acquire from twenty-five to .forty 
 per cent of the stock of the railways, 
 with proper representation on each 
 board of directors, so that it would 
 become the partner of the present 
 owners, sharing in their profits, and 
 also in their losses, if any. This plan 
 would have the advantage of causing 
 government officials to look at the 
 railway business from the standjx)int 
 of the owner as well as from that of 
 the traveler, the shipper, and the 
 wage-earner. 
 
 Under present conditions there is a 
 strong tendency for public officials to 
 regard themselves as the champions of 
 all other classes, against the owners; 
 and therefore, in spite of all the rail- 
 way managers can do, wages and the 
 other expenses of operation increase 
 faster than gross earnings; net earnings 
 are so small as to offer insufficient 
 attraction to investors; the new facili- 
 ties provided in recent years have 
 been inadequate; and it is certain that 
 any large and sudden increase of traffic 
 will find the railways unable to cope 
 with it. If the government were a 
 stockholder and had representatives 
 on the boards of directors, whatever 
 affected net earnings would affect the 
 stock of the government as well as that 
 of private individuals, and the public, 
 and public authorities, would be better 
 able to appreciate the railways' finan- 
 cial needs than they are now. 
 
 Undoubtedly the best course will be \>^ 
 to leave the ownership of the rail- 
 ways entirely in private hands and 
 follow a policy of firm but vnse regula- 
 tion. We have not succeeded yet in 
 working out and adopting such a 
 policy. Most of the legislation for the 
 regulation of railways has been con- 
 ceived in prejudice, or drafted in igno- 
 rance. It used to be contended that 
 certain forms of government regulation 
 must be adopted as alternatives to 
 government ownership. It is to be 
 
758 
 
 GOVERNMENT OWNERSHIP OF RAILWAYS 
 
 feared that they may prove to be pre- 
 cursors and causes of, rather than alter- 
 natives to, government ownership. But 
 if the public and public men will but 
 give the subject the intelligent, fair, 
 serious consideration it demands, the 
 fatal plunge into public ownership may 
 be avoided. 
 
 Fair and intelligent consideration 
 would result in the concentration of 
 authority over the railways in the hands 
 of the Interstate Commerce Commis- 
 sion and the abolition or subordina- 
 tion to the Interstate Commission of 
 the numerous state commissions, with 
 their multitudinous, conflicting, vex- 
 atious, and costly requirements. It 
 would result in the appointment of 
 well-paid experts and scientists, both 
 to membership on the commissions, 
 and to the various important and re- 
 sponsible positions under them. It 
 would result in public authorities 
 ceasing to try to substitute themselves 
 for the managers of the railways, and 
 becoming content to perform their 
 proper duty of holding the managers 
 responsible for the effects of their 
 management on the public interests. 
 It would result in no diminution of the 
 efforts, growing everyday more success- 
 ful, to suppress all forms of unfair dis- 
 
 crimination by railways; but it would 
 result in a diminution of the incessant 
 and successful efforts to hold down 
 railway profits — efforts which are re- 
 pelling capital from the railway busi- 
 ness, and, by preventing adequate 
 increases of facilities, imperiling the 
 welfare of every manufacturer, every 
 merchant, every farmer, every wage- 
 earner, in the country. One thing is 
 certain, and that is that we cannot 
 long continue to muddle along as we are 
 doing now. W. M. Acworth, the emi- 
 nent English authority on railway 
 affairs, after a visit to this country, 
 said in an article published last autumn 
 in the Bulletin of the International Rail- 
 way Congress: — 
 
 *If I have an individual belief it is 
 that the United States will get much 
 nearer to the brink of nationalization 
 than they have come at present, and 
 will then start back on the edge of the 
 precipice, and escape by some road not 
 yet discernible.' 
 
 The best road by which we may es- 
 cape is a conservative, wise, just policy 
 of regulation; and the most vital ques- 
 tion of our time is whether the people 
 of the United States will be just, wise, 
 and conservative enough to take that 
 road. 
 

 SEP 17 1915 
 
 *-^fi 6 J9I6 
 
 iW/lfi 
 
 28 1931