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AMERICAN RAILROAD ECONOMICS 
 
THE MACMILLAN COMPANY 
 
 NEW YORK • BOSTON • CHICAGO • DALLAS 
 ATLANTA • SAN FRANCISCO 
 
 MACMILLAN & CO., Limited 
 
 LONDON • BOMBAY • CALCUTTA 
 MELBOURNE 
 
 THE MACMILLAN CO. OF CANADA. Ltd. 
 
 TORONTO 
 
AMERICAN RAILROAD 
 ECONOMICS 
 
 A TEXT-BOOK FOR INVESTORS AND STUDENTS 
 
 BY 
 A. M. SAKOLSKI, Ph.D. 
 
 STAFF LECTUEEB IN NEW YOBK UNIVERSITY SCHOOL 
 OF COMMERCE, ACCOUNTS AND FINANCE 
 
 Nnti fork 
 
 THE MACMILLAN COMPANY 
 
 1913 
 
 All right* rttened 
 
^^ 
 
 ^^ 
 
 COPTBIOBT, 1913 
 
 bt the macmillan company 
 
 Set up and electrotyped. Published October, 191S 
 
 C>'<Ui 
 
 
 • •••••••• t ••• • • •.• 
 
 FERRIS PRINTING COMPANY 
 NEW yonK. N. Y., U. 8. A. 
 
 f l-v^-y? f^ 'y^ 
 
PREFACE 
 
 This book is the product of the author's activi- 
 ties as an investment analyst in New York and as 
 an instructor in Railroad Finance at the New York 
 University School of Commerce, Accounts and Finance, 
 The subject, hitherto, has not been given the atten- 
 tion and the critical analysis commensurate with its 
 importance. The large amount of statistical data 
 and other information contained in the annual re- 
 ports of the railroads are generally accepted without 
 much inquiry. The work that has been done thus 
 far by professional analysts and railroad statisti- 
 cians aims to gauge railroad activities by the use of 
 rigid standards and definite mathematical formulae. 
 In these pages no attempt is made to lay down rules 
 or maxims. No tables of "averages" are presented 
 as final evidence of railroad status or progress. The 
 purpose throughout is a critical examination of facts 
 and figures derived from railroad reports and other 
 publications with a view to assisting in the correct 
 judgment of railroad activities and operating results. 
 
 'x b i xiy i 
 
INTRODUCTORY 
 
 In no other country and at no previous time have 
 railroad operations received as much attention as 
 at present in the United States, and it is doubtful 
 whether these matters have ever been more fla- 
 grantly misinterpreted. The economic importance 
 of American railroads and the participation of the 
 people as individual investors in their rapid growth 
 and development creates a demand for the proper 
 understanding of railroad activities and operating 
 results. Government regulation under the Inter- 
 state Commerce Act has promoted and assisted this 
 demand. The publications of the Federal and State 
 commissions are now as important sources of 
 statistical information as the reports issued by the 
 individual railroad companies. These published sta- 
 tistical returns are in many ways useful to the rail- 
 road manager, to the investor and to the public. 
 The expensiveness of compilation and the liabiHty 
 to abuse and misinterpretation render necessary the 
 utmost wariness and care in analyzing such data. 
 
 It is b ecause of the difficulty of arriving at satis- 
 factory standards that railroad statistics are ex- 
 tremely troublesome to formulate. There are many 
 factors to be CQnsidered outside of the bare figures 
 
 and the relative values of these factors are con- 
 
 vii 
 
viii INTRODUCTORY 
 
 stantly changing. All modern countries desire a 
 satisfactory stable unit by which operating results 
 as between different railroads and at different periods 
 of time may be unmistakably presented to the pub- 
 lic. Uniformity of statistics, however, does not 
 admit of an actual and final comparison of one rail- 
 way with another, or of the operations of one period 
 with another period, nor do "averages" covering 
 an endless variety of lines and systems form a wholly 
 reliable basis for judging results. The Pennsylvania 
 and the Philadelphia & Reading Railroads, for ex- 
 ample, are ordinarily held to be competing roads 
 of the same standard of financial soundness and 
 operating eflSciency. The Pennsylvania, however, 
 has a traflSc amounting to many times that of the 
 Philadelphia & Reading. Moreover, the charac- 
 teristics of the two lines are in many respects differ- 
 ent. The Reading is practically a terminal road, 
 while the Pennsylvania branches out in all direc- 
 tions and extends over almost half of the Continent, 
 carrying a great volume of through traffic. It is 
 necessary, therefore, in any comparisons between 
 these two systems, to take into account the relative 
 proportions of termj nal work, the nature of the 
 traffic and the length of the haul and other similar 
 factors. Unless this is done, a comparison of the 
 operating results based entirely on statistics would 
 be quite misleading. 
 
 Another cause of the defects in the use of railroad 
 statistics is the misunderstanding of the real signifi- 
 eance of each statistical item. Too little or too 
 
INTRODUCTORY ix 
 
 much emphasis may be placed on the material used. 
 The soundness of statistical logic in general requires 
 that the intrinsic worth of the figures presented be 
 fully recognized. Lack of appreciation of this fact 
 frequently leads to erroneous analyses and improper 
 comparisons. Moreover, unless a statistical analysis 
 is of some distinct value to the railroad executive or 
 manager, to the investor, or to the statesman and 
 the public at large, work of this character cannot 
 be economically justified. In other words, each 
 class of railroad data should have an underlying 
 purpose and should be compiled, classified and in- 
 terpreted to accord with this purpose. 
 
 Having in mind these considerations the ma- 
 terials forming the basis of this book are classified 
 as follows: 
 
 (1) Data relating to the character of the transporta- 
 tion facilities. Hereunder are analyzed the physical 
 features of railroads in so far as they influence rail- 
 road operations and indicate the adjustment of 
 transportation facilities to traflSc demands. 
 
 (2) Data measuring efficiency and economy of oper- 
 ation. These are the so-called traflSc or "mileage" 
 statistics, indicating the nature and volume of the 
 traflSc, and the cost in transporting and in handhng 
 the same, expressed under proper terms and in stan- 
 dard units. 
 
 (3) Data measuring revenues, expenses and net 
 earnings. Herein is comprised the study of the 
 Income Account and Profit & Loss Account. 
 
 (4) Data measuring the capital investment in rela- 
 
X INTRODUCTORY 
 
 Hon to the corporate resources and liabilities. Analyses 
 of the General Balance Sheet and, more particularly, 
 Capitalization are afforded by this class of material. 
 In order that these topics may be more clearly 
 understood preliminary chapters are inserted, treat- 
 ing of railroad rates and railroad securities and 
 describing the important railroad systems of the 
 United States. 
 
TABLE OF CONTENTS 
 
 PAGE 
 
 Pbbpace vii 
 
 Inteoductobt ix 
 
 Chapter I. Railroad Rates 1-16 
 
 Economic Theory of Rates — Railroad Rate Regulation — Inter- 
 state and Intrastate Rates — Sectional Competition and Rate 
 Adjustments — "Long and Short Haul" Rates — Rates and 
 Changes in Economic Conditions. 
 
 Chapter II. Railroad Securities 17-44 
 
 Capital Stock — Preferred Stocks — Common Stock — Railroad 
 Funded Indebtedness — Railroad Mortgage Bonds — Collateral 
 Trust Bonds — Convertible Bonds — ^Income Bonds — Railroad 
 Short Term Securities. 
 
 Chapter III. Railroad Systems op the United States 44-84 
 
 Development of Railroad Systems — Geographical Location of 
 Railroad Systems — New England Systems — Eastern Trunk 
 Line Systems — Anthracite Systems — Southern Systems — Mis- 
 sissippi Valley Systems — Middle Western Systems in the North 
 — The Northwestern Trunk Line Systems — The Southwestern 
 Systems — Traffic Interchange Agreements. 
 
 Chapter IV. Economics op Railroad Construction 85-101 
 
 Investment Basis of Railroad Construction — The Nature of the 
 Prospectus — The Estimated Volume of Traffic — The Rates to 
 be Charged — Selection of the Route — The Estimate of Con- 
 struction Cost — The Fundamental Economic Principle of Eco- 
 nomic Railroad Construction. 
 
 Chapter V. Physical Factobs in Economic Operation: Way 
 
 AND Structures 102-123 
 
 Railway Location — Distance — Grades — Curves — Roadbed and 
 Superstructure — Track Facilities — Rails — Ballast — Ties — 
 Bridges and Trestles — Tunnels — Railroad Terminals. 
 
 Chapter VI. Physical Factors in Economic Operation: Raii/- 
 
 ROAD Rolling Equipment 124-134 
 
 Locomotives — Cars. 
 
 zi 
 
rii CONTENTS 
 
 PAGE 
 
 Chapter VII. Traffic Statistics 135-168 
 
 Passenger and Freight TralBSc — Classification of TraflSc Sta- 
 tistics — The Ton-Mile Averages — Classification of Commodity 
 TraflBc — Diversification of Traffic — Traffic Density — Average 
 Length of Haul — Statistics for Measuring Operating Economy 
 and Efficiency — Train-mile — The Locomotive-mile — ^The Aver- 
 age Car-mile — Average Train-load — Average Car-load — Train- 
 frequency and Speed — Conclusion. 
 
 Chapter VIII. Interstate Commerce Commission's System of 
 
 Railroad Accounts 169-186 
 
 Classification of Railroad Financial Data — The Underlying Mo- 
 tives of the Interstate Commerce Commission's Accounting 
 System — Principal Accounting Regulations — Joint Facilities 
 Accounts — Enforced Maintenance of Depreciation Accounts — 
 Classification of Additions and Betterments — Commissions 
 and Discounts Paid or Premiums Received from Sale of 
 Securities — Losses on Account of Abandonment of Property. 
 
 Chapter IX. The Income Account — Operating Accounts. .186-220 
 The Form of the Income Account — Details of Operating Ac- 
 counts — Standard Units of Operating Receipts — Operating Ex- 
 penses — Classification of Operating Expenses — The Measure- 
 ment of Maintenance — Equipment Maintenance — Conducting 
 Transportation Costs — Locomotive Fuel Expense — Wages — 
 The Operating Ratio — Net Operating Revenue — Taxes. 
 
 Chapter X. Net Income and its Distribution 221-240 
 
 Operating Income — Deductions from Corporate Income — Net 
 Corporate Income and the Margin of Safety — Distribution of 
 Net Corporate Income — The Profit and Loss Account. 
 
 Chapter XL The General Balance Sheet 241-264 
 
 General Survey of the Balance Sheet — Property Accounts — 
 Working Assets and Liabilities — Surplus. 
 
 Chapter XII. Railroad Capitalization 265-285 
 
 Nature of Railroad Capitalization — Gross Capitalization — Cap- 
 italization and Leased Mileage — Errors in Capitalization Sta- 
 tistics — Relative Interest Burden — Style of Capitalization — 
 Trend of Railroad Capitalization. 
 
 Index 287 
 
AMERICAN RAILROAD ECONOMICS 
 
AMERICAN RAILROAD 
 ECONOMICS 
 
 CHAPTER I 
 
 RAILROAD RATES 
 
 Economic Theory of Rates. The economic basis 
 of railroad rate making is that the charge for the 
 service shall permit a profit both to the shipper (or 
 passenger) and to the carrierp If the rate is such as 
 not to afford the shipper a profit through the trans- 
 portation of his goods, he will dispose of them at 
 home and the railroad will lose the business. On 
 the other hand, if the rate is so low that the carrier 
 directly or indirectly obtains no profit, the service 
 is no longer a field for business enterprise. This 
 principle applies to individual rates as well as to the 
 general level of charges. It is somewhat obscured by 
 the heterogeneous character of railroad traffic and 
 the wide disparities and the complexities in existing 
 rate structures. There are undoubtedly many 
 instances when goods and persons are accepted for 
 transportation at rates which yield revenue less than 
 the direct cost of performing the service. Usually, 
 however, such rates are fixed with a view to assisting 
 or promoting other and more remunerative traffic. 
 The service in this case is preliminary or auxiliary 
 
 1 
 
 [ 
 
, I ,^^; ...AMERICAN RAILROAD ECONOMICS 
 
 to a further service. Thus, raw materials are fre- 
 quently hauled at a loss because in this way the rail- 
 road company is enabled to obtain the traffic arising 
 from the movement of the finished product. Sim- 
 ilarly, very low commutation rates are granted to 
 passengers travelling between cities and suburban 
 districts so as to promote the growth of these locali- 
 ties and thus furnish a local movement of merchan- 
 dise to supply the needs of increasing suburban 
 population. Under these conditions, rates are ad- 
 justed so as to give the railroad a maximum net 
 return on its operations. 
 
 The margin of the charge within which a railroad 
 company can profitably conduct business and the 
 public can furnish business varies with each class of 
 traffic and with each journey or shipment. It is 
 exceedingly difficuH: to determine even approxi- 
 mately without actual tests. Fluctuations in the 
 price of commodities and in wages, changes in eco- 
 nomic and industrial conditions and in the supply of 
 available traffic are continually altering the price 
 margin beyond which the seller or the purchaser of 
 the service, or both, may suffer an economic disad- 
 vantage. The nature of some commodities, in re- 
 spect to value, bulky and relative ease or difficulty in 
 handling, may permit a wide range between the 
 lowest and the highest rate at which they may be- 
 come a part of railroad traffic. There are a number 
 of commodities, on the other hand, for which the 
 range is exceedingly narrow. A slight change in the 
 rate may cause an economic burden on the shipper. 
 
RAILROAD RATES S 
 
 or on the railroad. Let us assume that manure ob- 
 tained in a city somewhat distant from farm lands 
 is offered for transportation. The value of this 
 article in proportion to bulk is very small. Unless 
 the transportation rate is low, it will not pay to have 
 it shipped to the farms where it has a value. The 
 railroad company, on the other hand, cannot make 
 a direct profit from the transportation, unless the 
 rate is high enough to cover the expense in furnishing 
 the service. It can be readily seen in this case that 
 the adjustment of the rate must come within a very 
 narrow margin, otherwise the commodity will not 
 become an article of railroad traffic. But the ship- 
 ment of manufactured silk from one locality to 
 another, or even from one continent to another, 
 would be very little affected by a slight increase or 
 decrease in the freight rate. In almost any region, 
 the transportation cost of silk would be but a very 
 small fraction of its market price. On commodities 
 of this nature the range of adjustment of freight 
 charges permits a wide choice of rates. 
 
 The necessity of distinguishing in rate making 
 between the kinds of commodities and the sources 
 of traffic has engendered the principle known as 
 "charging what the traffic will bear." This expres- 
 sion, as pointed out by Mr. Acworth,^ has acquired 
 an ill repute. It is commonly defined as veiled ex- 
 tortion. Yet, it represents the only economic 
 principle of developing commerce and industry with 
 modern transportation facilities. 
 
 * Elements of Railroad Economics, p. 75. 
 
4 AMERICAN RAILROAD ECONOMICS 
 
 Of recent years, in the discussion of rate questions 
 there have been endeavors to distinguish between 
 charges based on the value of the service and charges 
 based on the cost of the service. By "value of the 
 service" is meant what the pubhc can afford to pay 
 for the service, whereas the "cost of the service" is 
 all the expenses of the carrier in performing the 
 service. Taken alone, as an explanation of rates, 
 these two theories "do little more than to base rates 
 for the most part on themselves and on each other." 
 As pointed out by Prof. John M. Clark, "The value 
 of a transportation service is sometimes defined as 
 the difference between the price of the commodity 
 in question at the point of shipment and the price at 
 the destination. . . . The suggestion is altogether 
 deceptive, for the difference in price itself depends 
 on the transportation charges." ^ 
 
 The cost of service theory is likewise unsatisfactory 
 for by no manner of means can railroad costs be 
 measured or applied directly to particular railroad 
 services. The transportation cost of each class or 
 kind of commodity not only differs, but each item of 
 traflSc at any given time and at each haul has a 
 different cost. Cost is the resultant of all conditions 
 under which the transportation business is done. As 
 is pointed out on page 145, one of the chief elements 
 affecting cost in railroad operations is traffic density 
 (i. e^yolume of traffic). The more business done, the 
 lower the cost of performing each unit or item of 
 
 ^ "Standards of Reasonableness in Local Freight Discriminations," by 
 John Maurice Clark, Ph.D., pp. 52-53. 
 
RAILROAD RATES 5 
 
 business. The rates themselves, however, influence 
 the volume of business. Accordingly, to base rates 
 entirely on cost would be attempting to find one 
 unknown quantity by using another. 
 
 Railroad Rate Regulation. Notwithstanding the 
 impracticability of establishing definite and concrete 
 standards of rate making or in determining criteria 
 for rate reasonableness, transportation charges have 
 become matters of government regulation and super- 
 vision. A railroad, even though privately owned 
 and operated, is an instrument of public service. Its 
 rates and charges affect closely the public welfare. 
 The self-interest of the railroad company in the fixing 
 of rates is not to be permitted to have full play. In 
 other words, private gain, though a motive for , 
 railroad operation, is controlled by a higher motive, 
 namely, public welfare. This does not mean that 
 private gain and public welfare are opposing forces. 
 In fact, no system of transportation charges will long 
 prevail, where either force is neglected. 
 
 The fundamental importance of reasonable freight , 
 rates as affecting the general welfare in the United 
 States can hardly be exaggerated. Probably in no 
 other civilized country do railroads play as important 
 a part in economic and industrial development as 
 they do in the United States. The long distances 
 separating leading industrial centers, the varying 
 character of geographical divisions, the diversity of 
 natural resources and the broad expanses of un- 
 developed and partially developed territory, all com- 
 bine to make the great transportation agencies fore- 
 
6 AMERICAN RAILROAD ECONOMICS 
 
 most factors in industrial affairs. Railroad progress, 
 both physical and financial, is therefore, a matter 
 of grave public concern. 
 
 The close dependence of public welfare on the 
 railroads in the United States led to the creation 
 of a governmental regulating body, the Interstate 
 Commerce Commission. Since the passage of the 
 Act of 1887 creating this commission, Federal con- 
 trol over railroads has been broadened and intensi- 
 fied. Each amendatory act or supplementary stat- 
 ute has augmented the powers and duties of the 
 Interstate Commerce Commission, until no other 
 tribunal of the Government has, at present, such 
 extensive functions or is burdened with such onerous 
 duties. Primarily established to detect rate dis- 
 criminations and abuses, the Interstate Commerce 
 Commission has developed an organization for de- 
 termining and controlling both the rate making and 
 the operating activities of the railroads. 
 
 The original Interstate Commerce Act of Feb- 
 ruary 4, 1887, furnished no definite theory for de- 
 termining reasonable rates or rate discriminations; 
 none could be adopted without the sanction and 
 approval of the courts. The lack of definiteness in 
 the wording of the organic law, resulted in a series 
 of conflicting legal opinions which greatly hindered 
 the Commission in its activities. At the beginning 
 the Commission refrained from claiming the right 
 to prescribe "reasonable" rates, though the fact 
 soon became apparent, that as an effective rate 
 regulative tribunal it must "make" as well as 
 
RAILROAD RATES 7 
 
 "break" rates. The Commission endeavored as 
 far as possible to enlarge its usefulness by assuming 
 the power of prescribing specific rates in lieu of those 
 condemned as unreasonable. The legality of this 
 process, however, was disputed, and when sub- 
 mitted to the courts, failed to receive judicial ap- 
 proval.^ 
 
 Legal decisions and legislative enactments during 
 the first twenty years hampered the activities of 
 the Interstate Commerce Commission. Inasmuch 
 as appeals from the decisions of the Commission 
 necessitated an entire review of evidence, nothing 
 was gained from its labors, either in the expedition 
 or final adjudication of rate controversies. During 
 this period the Interstate Commerce Commission, 
 moreover, was not concerned with the reasonable- 
 ness of the general scale of freight charges, chiefly 
 because of the absence of serious complaints on this 
 score. Modifications in freight classifications in 
 1900, combined with the public dissatisfaction over 
 the ineflScacy of the Interstate Commerce Act, made 
 the question of freight rates prominent. About 
 this time, also, traflSc congestion on the railroads 
 produced unsatisfactory transportation service, the 
 outcome of which was a clamor for additional legis- 
 lation, culminating in the Hepburn Act of June, 1906. 
 
 The Hepburn Act as finally passed, though it 
 granted the Commission power to prescribe a rail- 
 
 ^ New Orleans and Texas Pacific Railway vs. Interstate Commerce 
 Commission, 162 U. S. 184; also "Maximum Freight Rate" Decision, 
 167 U. S. 479. 
 
8 AMERICAN RAILROAD ECONOMICS 
 
 road rate in lieu of one declared unreasonable, was 
 merely a stepping-stone to complete rate control. ) 
 Further legislation regulating freight rates was en- 
 acted by Congress in 1910, when the Commission 
 was given full power to suspend all changes in freight 
 rates for a maximum period of six months pending 
 an investigation of the reasonableness of the changed 
 rates. Thus, the Interstate Commerce Commission 
 has full rate fixing powers. Through its decisions 
 it can seriously affect both the earning power of 
 the railroads and the welfare of the public. 
 
 The ultimate outcome of the rate determining 
 power of the Interstate Commerce Commission is 
 indeed problematical. The elements of permanency 
 and rigidity in rates, which are incompatible with 
 changing economic conditions, is not obviated even 
 in the absence of Government rate control. Rate 
 making of itself is such a delicate and complicated 
 task that when a scale of charges is once established, 
 railroad managers, in spite of competitive forces, 
 are loath to make adjustments warranted by eco- 
 nomic conditions. It is from the stereotyped rates 
 of the last generation that the railroads find it very 
 difficult to free themselves by establishing new rate 
 schedules. 
 
 Interstate and Intrastate Rates. One of the 
 principal obstacles to efficient Federal rate regula- 
 tion is the power held by each State to control 
 rates on traffic within its borders. These intrastate 
 rates have become exceedingly burdensome to the 
 railroads. In order to escape them, the claim was 
 
RAILROAD RATES 9 
 
 made in a number of cases that these rates were 
 an interference of interstate commerce and, there- 
 fore, unconstitutional. The result of this litigation 
 was made known in the Minnesota Rate Cases de- 
 cided by the Supreme Court on June 9, 1913. The 
 Court held: 
 
 (1) That the Constitution gives Congress an au- 
 thority at all times adequate to secure the freedom 
 of interstate commercial intercourse from State con- 
 trol and to provide effective regulation of that inter- 
 course as the national interest may demand. 
 
 (2) That control of commerce confined within 
 one State and not affecting other States is reserved 
 to that State. 
 
 (3) That even without action by Congress the ^ 
 commerce clause of the Constitution necessarily ex- 
 cludes States from direct control of subjects which 
 should be prescribed by a single authority. 
 
 (4) That there remains to the States the exercise 
 of the power appropriate to their territorial juris- 
 diction in making suitable provision for local needs. 
 
 The effect of the decision is to sustain the power 
 of the State railroad commissions and State legis- 
 latures to fix two-cent passenger or other rates on 
 business exclusively within the States, 'provided al- 
 ways that the rates are not confiscatory. The Supreme 
 Court holds further, however, that Congress has 
 the power to override State authorities as regards 
 the fixing of rates which will affect interstate busi- 
 ness whenever it shall seek to exercise such authority. 
 It is not through a lack of power, but because Con- 
 
10 AMERICAN RAILROAD ECONOMICS 
 
 gress has failed to exercise that power, that the Su- 
 preme Court decided against the railroads. 
 
 A problem arising from the intrastate rate regula- 
 tion is whether a State authority can fix a rate which 
 in effect constitutes a discrimination against locali- 
 ties in other States. This is the interesting conten- 
 tion in the Shreveport Case ^ in which the Interstate 
 Commerce Commission set aside rates fixed by the 
 laws of Texas. The fight against the Texas rates 
 was begun by the Louisiana Railroad Commission 
 before the Interstate Commerce Commission. The 
 Louisiana authorities set forth that the low rates 
 forced upon the railroads on intrastate traffic within 
 the State of Texas gave a very pronounced advantage 
 to shippers from Houston and Dallas, to other points 
 in Texas, as against shippers from Shreveport, La., 
 to Texas points about equally distant between the 
 Texas and the Louisiana shipping centers. In mak- 
 ing its order the Interstate Commerce Commis- 
 sion expressly declared that rates fixed by State law 
 within the limits of Texas constituted a discrimina- 
 tion against points outside the State, and several 
 railroads were directed to disregard the low rates 
 imposed on traffic within the Texas limits. The 
 Commerce Court has sustained the order of the 
 Interstate Commerce Commission. 
 
 Sectional Competition and Rate Adjustments. 
 
 Along with the Government's responsibility, in freight 
 
 rate adjustments, for national progress and railroad 
 
 weKare, the problem of sectional competition and 
 
 1 gee 23 1. C. C, p. 31, 
 
RAILROAD RATES 11 
 
 traffic distribution must be considered. Probably 
 the most influential factor in causing rate discrimina- 
 tions is the profound dissatisfaction of many com- 
 munities with their status in competing for the 
 distribution of their products with other communi- 
 ties better situated geographically. These com- 
 munities are far less concerned about obtaining low / 
 rates than about securing such rates as may place 
 them in a favorable competitive position with other 
 sections. The Interstate Commerce Commission, 
 in dealing with proposed rate changes, finds itself 
 much more hampered by the conflicting claims of 
 competing localities than by the troubles of deter- 
 mining whether given rates are in themselves reason- 
 able. The Commission can completely alter or 
 destroy traffic relationships by merely reducing 
 some rates and not reducing others. That it has 
 this right has been tentatively upheld by the Su- 
 preme Court in the Missouri River Rate Cases. ^ 
 The question in these cases was the validity of the 
 Commission's order reducing certain rates charged 
 on through freight from the Atlantic seaboard to 
 Missouri River cities. These rates had been made 
 up by adding to the rate from the Atlantic seaboard 
 to the Mississippi River the full local rate from the 
 Mississippi River crossings to the cities on the Mis- 
 souri River. Thus a general class rate per hundred 
 pounds from the seaboard to the Mississippi River 
 was 87 cents, and the rate thence to the Missouri 
 
 ^ Interstate Commerce Commission vs. the Chicago, Rock Island 8i 
 Pacific R. R., et al., U. S. 218 p. 88, 
 
12 AMERICAN RAILROAD ECONOMICS 
 
 River points was 60 cents, making $1.47 the joint 
 rate. The Commission ordered a reduction to $1.38, 
 a difference of 9 cents. The Circuit Court in re- 
 straining this order of the Commission, held that the 
 reduction gave undue advantages to the Atlantic 
 seaboard manufacturers and jobbers against the com- 
 petition of manufacturers and jobbers in both the 
 Missouri River and intervening territory; and that 
 this rearrangement of competitive traffic conditions 
 was not within the powers granted to the Interstate 
 Commerce Commission. The Supreme Court (by 
 a decision of four judges against three) reversed this 
 judgment. 
 
 "Long and Short Haul" Rates. The problem of 
 traffic distribution on an equitable basis involves 
 consideration of "long and short haul" charges and 
 water competition. The Interstate Commerce Act 
 provides that the railroads shall not charge more 
 for a short haul than a longer one over the same line 
 in the same direction except with the express authori- 
 zation of the Interstate Commerce Commission upon 
 application by the carrier and after investigation. 
 The principal justification for higher shorter haul 
 rates than are granted for longer hauls on the same 
 line is competition both of paralleling rail lines and 
 of water transportation. Through rail rates from 
 the Atlantic to the Pacific seaboard, for example, 
 (whenever it was deemed profitable for the railroads 
 to hold the traffic), were made low enough to meet 
 the water rates between these points. The rates 
 to important inland points, even at considerable 
 
RAILROAD RATES 13 
 
 distance from the coast terminals, were frequently 
 a good deal higher. As a general rule in transcon- 
 tinental traffic, the rates to "inter-mountain" points, 
 such as Spokane, Salt Lake, Denver and Reno, were 
 made to approximate the charge to the Pacific coast 
 points, plus an additional "back-haul" rate. This 
 made the coast terminal cities' the distributmg points 
 inland and prevented the growth of interior traffic 
 centers as rivals to those on the coast. Thus, the 
 system of "long and short haul" rates arising from 
 water competition determined to a large extent the 
 location of industries and the geographical develop- 
 ment of trade. 
 
 A recent decision of the Commission which at- 
 tracts the most attention with reference to water 
 competition is the verdict in the Spokane Rate case.^ 
 In this controversy the most important contention 
 of the railroads was the existence of water compe- 
 tition centering about Spokane. Traffic from the 
 Atlantic seaboard to any destination like Spokane 
 could be moved by water to the coast and thence 
 by rail to the interior point. A competitive rail rate 
 to the interior point, therefore, would be the sum of 
 the water rate plus the rail rate from the coast. As 
 a result of a previous decision, however, the rate to 
 Spokane from the East had been reduced to 75 per 
 cent, of the rate to the coast cities, plus 16 /s per 
 cent, of the local back-haul rate. The coast cities 
 complained that this adjustment gave a competitive 
 
 ^ City of Spokane, et al. vs. Northern Pacific, et at. Interstate Com- 
 merce Commission, Opinion No. 1383. 
 
14 AMERICAN RAILROAD ECONOMICS 
 
 advantage to Spokane as a distributing center. 
 The Commission, however, did not accept the con- 
 tention of the coast cities, but expressed a doubt 
 whether the railroads should be permitted to con- 
 struct a tariff for the express purpose of compelling 
 the manufacture or the merchandizing of a given 
 commodity at Chicago, or upon the Missouri River, 
 or at any other place. The Commission, moreover, 
 denied that the railroads were at liberty to meet 
 water competition "in whatever way or to whatever 
 extent they see fit." In other words, the railroads 
 are not allowed to consult merely their own interests 
 or the desire of the communities which they serve. 
 
 A further problem involved in the equalization of 
 traffic distribution by means of freight rates is the 
 competition of home- with foreign-made products. 
 The position taken by the Commission with respect 
 to the relation between railroad rates and foreign 
 competition in similar goods is indicated in the 
 California citrus fruit cases, ^ in connection with the 
 rates charged on lemons. The world's supply of 
 lemons is chiefly produced in two localities — Sicily 
 and Southern California. The cost of producing 
 lemons in Sicily is much less than in California, as 
 labor enters largely into the cost of production. In 
 spite of a protective duty of $1 per hundred pounds 
 (increased by the Payne Tariff Act to $1.50 per 
 hundred pounds) the low water transportation charges 
 available to the Sicily lemon prohibited the sale of 
 the California product in territory east of the Missis- 
 
 1 19 Interstate Commerce Commission Report, p. 148. 
 
RAILROAD RATES 15 
 
 sippi River. The Commission decided that an in- 
 crease in the rate from $1.00 to $1.15 per hundred 
 pounds on Cahfornia lemons to the Eastern sea- 
 board, established since the passage of the Payne 
 Tariff Act, was exorbitant, and that the old rate of 
 $1.00 per hundred pounds should be restored, in 
 order to permit the sale of "home grown" lemons 
 in Eastern territory. If the principle inferred from 
 this decision is applied generally, its economic im- 
 portance cannot be ignored, since it may be made 
 to apply in every instance where the tariff is in- 
 adequate to protect against foreign competition. 
 
 Rates and Changes in Economic Conditions. Aside 
 from the problems of rate adjustment required by 
 the immediate exigencies of trade and traffic distri- 
 bution, modifications in systems of rates are con- 
 stantly necessary in a rapidly growing country to 
 keep pace with changing economic conditions.^ 
 This point is well brought out in the complaint of 
 the Lincoln (Nebraska) Commercial Club, decided 
 April 6, 1908.2 Concerning this case, Professor Rip- 
 ley writes: 
 
 Lincoln, Nebraska, lies about 55 miles southwest of Omaha. Originally 
 all its supplies came from the East, as both cities were for a time outposts 
 of civilization. The coal supplies came from Iowa and Illinois and the 
 salt from Michigan. On these and most other commodities the rates to 
 Lincoln were made up of a through rate from the East to the Missouri 
 River, plus the local rate on to destination. The city of Lincoln thus paid 
 considerably more than Omaha for all of its supplies. Gradually condi- 
 
 ^ For an excellent discussion of this question see Professor Ripley's 
 "Rate Making in Practice," Railroad Age Gazette, June 4, 1909. 
 * Interstate Commerce Commission, Opinion No. 1102. 
 
16 AMERICAN RAILROAD ECONOMICS 
 
 tions have changed, until in 1907 it appeared that over half the soft coal 
 consumed in Lincoln was brought from Kansas and Missouri; four-fifths 
 of the lumber from the South and nearly all the rest from the Pacific 
 coast; gas and salt from the gas belt and salt beds of Kansas and a great 
 deal of beet sugar from the western fields. For a large proportion of these 
 and other supplies, Lincoln was actually as near or nearer the point of 
 production than Omaha, and yet the difficulties of effecting an adjust- 
 ment between rival carriers had prevented any modification of rates 
 corresponding to these changes in economic conditions.^ 
 
 Adaptation to business changes is an essential 
 element of successful railway operation and develop- 
 ment. American railroad managers, urged by com- 
 petitive railroad building, must be active and alert 
 in seeking new territory and new traffic. A strong 
 contrast between Europe and the United States 
 lies in the fact that the European railroads generally 
 take business as they find it; whereas, the American 
 railroads are forced to make business. 
 
 ^ " Railroad Rate Making in Practice," Railroad Age Gazette, June 4, 
 1909, p. 1167. 
 
CHAPTER II 
 
 RAILROAD SECURITIES 
 
 Railroad securities are of two general kinds: 
 (1) Capital Stock, representing certificates of proprie- 
 torship and (2) Funded Obligations^ representing cer- 
 tificates of indebtedness. The owner of shares of 
 stock is theoretically a partner in the enterprise, 
 whereas the holder of certificates of indebtedness 
 (whether bonds, notes or warrants) is a creditor. 
 The entire capital stock and funded indebtedness 
 of a railroad company constitutes its capitalization. 
 
 Capital Stock. Capital stock is the primary form 
 of capitalization. Legally, it represents the fund 
 subscribed by owners of a corporation for the pur- 
 pose of enabling it to conduct business and to obtain 
 credit as a corporate entity. The form of the cer- 
 tificates are in shares usually of $100 each. Some 
 of the leading railroad companies, notably the Penn- 
 sylvania, the Lehigh Valley and the Reading have 
 $50 shares. This unit of value of the shares is known 
 as the par value or face value. 
 
 Shares of capital stock usually represent perma- 
 nent and negotiable interest in the corporation issu- 
 ing them. If this interest is terminable, it is only 
 so at the option of the corporation. Though the 
 corporation is theoretically liable to shareholders and 
 
 17 
 
18 AMERICAN RAILROAD ECONOMICS 
 
 creditors for the money value represented by the 
 stock certificates, this liability cannot be enforced 
 by the shareholders on any maturity date or as long 
 as the corporation is an active, "going concern." 
 Shares of stock, however, are sometimes issued under 
 contracts whereby the issuing corporation reserves 
 to itself the right to retire them at its option. This 
 right may be absolute or subject to conditions ex- 
 pressed in the contracts whereunder the shares were 
 issued. Moreover, the whole or a part of the body 
 of stockholders may agree to an alteration of the 
 terms under which the stock has been issued. All 
 these matters are subject to legal restrictions and 
 to the charter provisions which are binding upon the 
 corporation. 
 
 The fact that the stockholder is theoretically a 
 "proprietor" and not a "creditor" settles upon 
 him certain of the rights and duties of proprietor- 
 ship. These, however, are only "equitable" rights 
 and duties. They can be exercised only in respect 
 to the same rights and duties of the other share- 
 holders. The stockholder, therefore, cannot exercise 
 the common rights of individual proprietorship as 
 against the property or the business of the corpora- 
 tion. He cannot, in an individual or private capacity, 
 sequester all or any part of the property or assets. 
 He, personally, is not permitted to examine the 
 books of account or to interfere with the corpora- 
 tion's affairs unless as an authorized agent or officer 
 of the corporation acting in accordance with its by- 
 laws. On the other hand, the stockholder, in a 
 
RAILROAD SECURITIES 19 
 
 private capacity is not personally liable for claims 
 against the corporation and is not responsible for 
 its acts. This arises from the legal principle of 
 "limited liability," on which corporate business 
 enterprise is based. The full import of this ancient 
 principle, however, may be altered by State and 
 Federal legislation. Railroad companies, like all 
 other business corporations, are creatures of legis- 
 lative enactment. They draw their powers from a 
 charter with which they are legally bound to comply 
 in their relations to the public, to their creditors and 
 to their stockholders. 
 
 One of the principal rights usually pertaining to 
 stock ownership in a corporation is the privilege of 
 a pro rata vote in determining certain questions 
 relative to its affairs. The stockholders generally 
 have the right of participating in the election of the 
 officers or directors. They also share in proportion/ 
 to their holdings in the distribution of surplus profits. 
 These matters, however, are specifically determined 
 by the provisions of the railroad charter or by the 
 terms of the contract under which the shares of stock 
 are issued. 
 
 The voting privilege attached to shares of capital 
 stock may be surrendered by the stockholder through 
 a voting trust agreement. This means that the actual 
 certificates of capital stock are lodged with several 
 trustees, who hold the same in the interests of the 
 owners, and who issue in return voting trust certifi- 
 cates representing the actual shares. Thus, a majority 
 of stock of the Southern Railway is deposited with 
 
20 AMERICAN RAILROAD ECONOMICS 
 
 three voting trustees under a voting trust agree- 
 ment which shall remain in force until terminated 
 by a majority vote or as long as the trustees shall 
 so elect. {The purpose of the voting trust agreement 
 is to assure a permanent managerial policy for the 
 corporation, y Since each person or group of persons 
 owning stock to which voting right is attached has 
 as many votes as the number of such shares held, 
 managerial policy is determined by the majority 
 of the number of votes cast. The control of the 
 corporation's affairs, therefore, is technically in the 
 hands of the majority of shares exercising the voting 
 privilege. In order that one or a group of persons 
 may obtain the administrative control of a railroad 
 company it is merely required that they own or 
 control the voting privilege possessed by a majority 
 of voting shares. 
 
 As a rule, railroad stockholders, unless they hold a 
 substantial interest in the voting capital stock, 
 do not exercise their voting privilege in person. The 
 voting can only be done by attendance at stock- 
 holders' meetings. The wide distribution of rail- 
 road stockholders throughout the world prevents 
 many from attending these meetings. Moreover, 
 the expense in many instances is too great. The 
 stockholders' meetings of American railroads there- 
 fore are usually perfunctory affairs. They are at- 
 tended mainly by the directors who constitute the 
 controlling group of stockholders. In fact, no lead- 
 ing American railroad company could accommodate 
 in one building at one time the total number of its 
 
RAILROAD SECURITIES 21 
 
 shareholders. The Pennsylvania Railroad Company, 
 on June 30, 1912, had over 80,000 separate stock- 
 holders; the Union Pacific, New York Central and 
 other leading companies also have their shares in 
 a large number of hands. 
 
 Most of the railroad stockholders that exercise 
 the voting privilege do so through proxy. It is the 
 practice of the directors of each corporation con- 
 jointly to request these proxies. Proxy blanks by 
 which the voting privilege is transferred are usually 
 inserted with the notices of stockholders' meetings. 
 It occasionally happens that interests opposed to 
 the controlling management of the railrodd also 
 request proxies. In this way stockholders can have 
 a voice in the selection of the management and the 
 policy of the company. 
 
 The contest for the managerial control of the 
 Illinois Central Railroad illustrates an appeal for 
 proxies by opposing interests. The late E. H. Har- 
 riman, through the purchase by the Union Pacific 
 Railroad of approximately $33,000,000 of Illinois 
 Central Railroad stock, acquired a predominant 
 influence in the affairs of the company. He was 
 opposed to the policy of its president, Mr. Stuyvesant 
 Fish, and succeeded in removing him from this 
 oflSce. Mr. Fish, also a large owner of Illinois Central 
 stock, in order to regain his position sent out a gen- 
 eral request for proxies to be used at the next stock- 
 holders' meeting convened for the purpose of electing 
 directors. Contests of this kind are frequently 
 avoided by one of the contestants obtaining by 
 
22 AMERICAN RAILROAD ECONOMICS 
 
 purchase or otherwise enough shares to control the 
 election. 
 
 The certificates of capital stock of railroad and 
 other corporations are negotiable. Thus, the right 
 of proprietorship can be disposed of at any time. 
 The transfer of the ownership, however, • must be 
 known to the corporation. In other words, the legal 
 transfer can take place only by a record on the books 
 of the corporation and through an authorized transfer 
 agent. Hence, each corporation has a register of 
 stockholders. This is known as the "Stock Book." 
 In most States it is the only book of account to which 
 the stockholder of a corporation has legal access. 
 The stockholder may thus know who are the other 
 participants in the proprietorship of the company 
 and the amount of the holdings of each. 
 
 Classes of Capital Stock: The capital stock of 
 American railroads are of two general classes; 
 (a) Preferred Stock and (b) Common Stock. In 
 Canada and Great Britain there is a third class 
 known as Debenture Stock, This consists of shares 
 which are issued with the agreement to pay abso- 
 lutely at specified intervals a fixed rate of return. 
 It is therefore a form of irredeemable indebtedness 
 bearing a stipulated rate of interest. The holder is 
 usually entitled to a voting privilege. 
 
 Preferred Stocks. Preferred Stocks may be First 
 Preferred, Second Preferred, Third Preferred and 
 the like. They are so called because in their order 
 they have prior claims upon earnings. Thus, 
 the first preferred has the first claim up to a 
 
RAILROAD SECURITIES 23 
 
 specified rate of dividend, then the second pre- 
 ferred's claim is to be met. If there are no other 
 classes of preferred stock the common stock par- 
 ticipates as a claimant. Preferred stocks may be 
 cumulative or non-cumulative, participating or non- 
 participating. If cumulative, the amount by which 
 the dividend at any dividend period fails to reach 
 the stipulated rate is carried forward to continue 
 as a claim upon earnings until satisfied; if non- 
 cumulative, the unpaid amount of the dividend lapses. 
 If a preferred stock is participating, it is not limit ed 
 to a sti^ ulated^maximum ^te of^ dividend, but is 
 entitled to participate in further dividends, in ac- 
 cordance with the terms under which the stock 
 is issued; if non-participating, it is limited to the 
 stipulated rate. 
 
 Only a few American railroad corporations have 
 more than one kind of preferred stock. The Erie and 
 the Reading Company, for example, have both 
 First and Second Preferred shares, all of which 
 participate in earnings in their order up to 4 per 
 cent, of their par value. This division of preferred 
 shares into classes is the result of corporate reorgani- 
 zation and readjustment of capitalization. Its 
 purpose is to meet the demands of preference claims 
 against the bankrupt corporation by giving in return 
 a preference claim up to a fixed rate on the surplus 
 earnings of the newly created concern. 
 
 Railroad preferred stocks, with but few exceptions, 
 are non-cumulative. If dividends are not earned or 
 paid in any year, they lapse and the deficiency is 
 
U AMERICAN RAILROAD ECONOMICS 
 
 never made up. Thus, the Southern Railroad Com- 
 pany did not pay dividends on its preferred shares 
 from October, 1907, to April, 1911, though during 
 the greater part of that period the money required 
 for this purpose had been earned. The Erie Railroad, 
 likewise, for several years has not paid any dividends 
 on its two classes of preferred stock. Thus, the 
 payment of preferred dividends is largely a matter 
 for the discretion of the directors. The only restric- 
 tion on the directors is that they are not permitted 
 to pay in any period a dividend to common share- 
 holders until the maximum rate on the preferred 
 stock has been paid in that period. The Rutland 
 Railroad is the only railroad of any importance 
 which has preferred stock on which the unpaid 
 dividends are cumulative. In fact, owing to privilege 
 given the common stockholders to exchange their 
 shares into the preferred, almost all of the capital 
 stock of this company ($9,057,600 of $9,257,000) 
 consists of 7 per cent, cumulative preferred stock on 
 which about 200 per cent, unpaid dividends have 
 accumulated. The Pere Marquette has also a cumu- 
 lative first preferred stock. A reorganization of the 
 Company because of bankruptcy will probably 
 eliminate this feature. 
 
 The preferred stocks of several leading railroad 
 companies belong to the participating class. They 
 participate under certain restrictions in profits 
 beyond the fixed preference rate attached to the 
 shares. The Chicago, Milwaukee & St. Paul Pre- 
 ferred Stock is entitled to a prior dividend of 7 per 
 
RAILROAD SECURITIES 25 
 
 cent, annually before any return can be paid on 
 common shares. After the common stock has re- 
 ceived 7 per cent, per annum both classes of stock 
 share alike in further distributions from current 
 income. In the case of the Chicago & North Western 
 Railroad, after both shares have received dividends 
 at the rate of 7 per cent, per annum, the preferred 
 stock is entitled to 3 per cent, additional before any 
 further return can be made on the common shares. 
 The preferred shares of Chicago & North Western, 
 however, do not participate beyond a maximum of 
 10 per cent. The Seaboard Air Line has a similar 
 arrangement in the distribution of possible dividends 
 to shareholders. Its preferred stock is entitled to 
 4 per cent, in dividends annually, after which the 
 common stock is to get 4 per cent. Then the pre- 
 ferred is entitled to a further distribution of 2 per 
 cent, before additional returns can be made to com- 
 mon stockholders. 
 
 The preferred stocks of many railroads are issued 
 with the agreement that the company at its option 
 has the privilege of redeeming these shares at a 
 stipulated price. This retirement privilege was 
 exercised by the Southern Pacific Company in 1909 
 when, approximately, $75,000,000 of 7 per cent. Pre- 
 ferred Stock was replaced by other securities. The 
 stipulated redemption price was $115. The Hocking 
 Valley Railroad, likewise, called in $15,000,000 of 
 preferred stock, for which par value was paid the 
 holders. The Erie, and the Reading, both reserve 
 the right to redeem either or both classes of their 
 
26 AMERICAN RAILROAD ECONOMICS 
 
 preferred shares at par. The Reading also has the 
 option of converting its second preferred stock at 
 any time, one-half into first preferred stock and 
 one-half into common stock. The chief motive back 
 of the redemption of preferred stock is the dislike 
 of complications arising out of the respective provi- 
 sions regarding the rights and privileges of the 
 different classes of capital stock. Preferred shares, 
 in many cases, have preference in the distribution of 
 assets as well as of earnings. Although a railroad 
 property is rarely liquidated, it occasionally happens 
 that a part of the assets can be segregated and a 
 distribution made for the benefit of shareholders. 
 Complications arise when a basis of distribution 
 equitable to both classes of stock is sought. The 
 directors of the Union Pacific Railroad, for example, 
 may experience some difficulty in any scheme to 
 separate from the railroad property the large invest- 
 ment holdings of the Company in other enterprises. 
 Some preferred shareholders have claimed a right to 
 participate in such distribution. A similar difficulty 
 may occur in case the Reading Company is compelled 
 to dispose of its coal properties. In this instance, 
 however, the Reading can exercise the redemption 
 privilege. 
 
 A further complication may arise because of the 
 division of voting control. Not all preferred shares 
 have a voting right. When the voting power is 
 given, in some instances it has been threatened with 
 nullification by the exercise of the redemption priv- 
 ilege. When the preferred stock has equal voting 
 
RAILROAD SECURITIES 27 
 
 rights with the common and cannot be retired, the 
 administrative control will rest with the class of 
 stock having the largest number of shares outstand- 
 ing. This naturally leads the controlling class to 
 favor a policy which adds to the intrinsic value of its 
 own shares rather than to the capital stock as a 
 whole. An instance of this kind is the controversy 
 among the St. Joseph & Grand Island stockholders. 
 The Union Pacific Railroad, having obtained a 
 majority of common shares, acquired administrative 
 control. One result of this was the cutting of the 
 dividends that had previously been paid on the St. 
 Joseph & Grand Island Preferred Stock. Surplus 
 earnings of the company were applied to new rail- 
 road construction. Some of the preferred stock- 
 holders naturally felt aggrieved and brought suit to 
 enjoin the Union Pacific from voting its shares at 
 the stockholders' meetings. A way out of the con- 
 troversy is sought through an offer of the Union 
 Pacific to buy up at a stipulated price the stock of 
 dissatisfied shareholders. 
 
 Significant provisions, designed to prevent possi- 
 ble neglect of preferred stockholders' interests, are 
 attached to some issues of preferred stock. The 
 Rock Island Company's preferred stockholders, for 
 example, are entitled to elect a majority of the 
 directors. The Wisconsin Central's preferred stock- 
 holders have a similar right whenever the company 
 has failed for a period of two successive years to 
 pay the prescribed maximum preferred dividend. 
 A more common provision is the requirement of 
 
28 AMERICAN RAILROAD ECONOMICS 
 
 the consent of two-thirds or more of the preferred 
 stockholders to an authorized increase in the amount 
 of preferred shares. In some instances, consent is 
 also required for the authorization of an increase 
 in funded indebtedness. Increased capitahzation, 
 through the issue of securities having prior or equal 
 claim upon earnings and assets, naturally ajffects the 
 securities already outstanding. Consequently, it is 
 only proper that provisions should be made to safe- 
 guard the interests of each class of security holder. 
 
 It would be interesting, if space permitted, to give 
 further examples of the rights and priorities of 
 different issues of railroad preferred stocks. Sufficient 
 has been told, however, to show that the general 
 principle is the same in most cases. In brief, the 
 holders have preference as to assets or to profits 
 or both, and they also may have a veto upon the 
 creation of mortgages or additional preferred shares. 
 
 Common Stock. Common shares comprise by far 
 the largest part of railroad capital stock. American 
 railroad companies when first organized had only 
 common shares, whereas, at the present time but one 
 railroad, viz., the Great Northern, has issued only 
 preferred shares.^ The Pennsylvania Railroad, the 
 New York Central & Hudson River, the Illinois 
 Central, the Lehigh Valley and the Delaware, 
 Lackawanna & Western, the Louisville & Nashville, 
 
 * Because the charter of the Great Northern Railroad authorized an 
 issue of as much preferred stock as the Company deemed proper, the 
 Company in 1898 surrendered all right to issue common stock. The 
 Great Northern stock is now "of a single class with uniform rights 
 and privileges." 
 
RAILROAD SECURITIES 29 
 
 and a host of other standard American railroad 
 organizations with an unbroken and successful 
 history have but one class of capital stock outstand- 
 ing. Thus, the shareholders of these companies 
 all have the same rights and privileges; they receive 
 profits or other distributions in accordance with the 
 number of shares held by each. 
 
 The common shareholders are the "residual 
 claimants" to surplus earnings. Having no claim to 
 a stipulated return, they share in profits only after 
 all other charges have been met. Except when 
 limited by law, there are no restrictions on the 
 possible dividend rate on the common stock shares. 
 For this reason common stock frequently has what 
 is termed a speculative value. This means that the 
 par value as measured by market price is not based on 
 the actual rate of dividend received, but on the 
 probability of increase or decrease in this rate. Thus, 
 when New York Central shares, paying 5 per cent, 
 dividends sell at a price giving 4.4 per cent, on the 
 investment, Chesapeake & Ohio paying the same 
 rate gives 6.3 per cent. Baltimore & Ohio and 
 Pennsylvania both distribute 6 per cent, annually 
 to shareholders, but on the same day according to 
 stock market quotations, the investment yield on 
 Pennsylvania is 4.8 per cent, and on Baltimore & 
 Ohio 5.6 per cent. Louisville & Nashville stock 
 paying 7 per cent, dividends offers investors 4.4 per 
 cent, when the Northern Pacific, which also pays 
 7 per cent, offers 5.6 per cent. When one stock offers 
 a great deal more to investors than others, all other 
 
so AMERICAN RAILROAD ECONOMICS 
 
 circumstances being equal, it means either a larger 
 dividend rate or larger actual or probable surplus 
 earnings available for dividends. 
 
 The rights of common shareholders do not imply 
 a full pro rata distribution of each year's surplus 
 profits available for these shares. As in the case of 
 non-cumulative preferred stock, the payment and 
 the rate of dividend is dependent on the action of 
 the company's directors. Acting as the adminis- 
 trative body, directors may decide to withhold the 
 surplus earnings in whole or in part from the stock- 
 holders. 
 
 The investment value of railroad shares is not alone 
 dependent on the annual dividend return received. 
 Occasionally stockholders receive extra dividends, 
 or bonuses. They may also receive the "right" to 
 subscribe for new issues of stock below the prevailing 
 market price. These "rights" are negotiable. If the 
 shareholder does not wish to purchase the new stock 
 alloted to him he can transfer the "right" to another 
 party. The "rights," therefore, generally have a 
 market value and can be converted into cash. Ac- 
 cordingly they do not differ materially from extra 
 cash dividends. Preferred shareholders, and in 
 rare instances, certain classes of bondholders, may 
 be granted participation in "rights." 
 
 Extra dividend distributions or bonuses, whether 
 in cash or in new stock are familiarly referred to as 
 "melon cutting." Stock bonuses theoretically repre- 
 sent a reward to common stockholders for the with- 
 holding from them of the surplus earnings available 
 
RAILROAD SECURITIES 31 
 
 for dividend distribution. In other words, the 
 company, by granting a stock dividend, may simply 
 be returning a loan "forced" from shareholders. 
 This is known as the "capitalization of surplus." 
 This method of obtaining capital is good financial 
 policy as long as it is less expensive to the railroad 
 company than borrowing from the public.^ 
 
 Railroad Funded Indebtedness. Funded Indebted- 
 ness, as defined in railroad finance, comprises all 
 negotiable instruments of credit having a maturity 
 period of one year or more. These form a part of 
 railroad capitalization, whereas, indebtedness in the 
 form of certificates without fixed maturity dates or of 
 a maturity period of less than one year, is Current 
 Indebtedness and is not included in the aggregate of 
 railroad capitalization. This distinction between 
 Funded or Capital Indebtedness and Current Indebted- 
 ness is theoretical and arbitrary. It is, nevertheless, 
 useful in comparative analyses of railroad capitaliza- 
 tion and in the compilation of capitalization statis- 
 tics. 
 
 The holders of railroad obligations, in their capac- 
 ity as creditors, generally have no voice in the ad- 
 ministration of their debtor companies. There are a 
 few exceptions, however. The holders of two classes 
 of Erie Railroad bonds — (the Prior Lien and the 
 General Lien Bonds) — aggregating approximately 
 $84,000,000, have proportionately equal voting 
 rights with the $176,271,300 par value of stock. 
 The Consolidated Sinking Fund Bonds of the Chi- 
 
 * This subject is considered further in Chapter XII. 
 
32 AMERICAN RAILROAD ECONOMICS 
 
 cago and North Western Railroad, due February 1st, 
 1915, also carry the voting privilege. 
 
 Classes of Fxrnded Indebtedness. Bonds: Rail- 
 road funded indebtedness is usually classed under 
 two general headings. Bonds and Notes. These, how- 
 ever, are only distinguished by period of maturity. 
 Bonds, as a rule, have a maturity period of ten years 
 or more, whereas, Notes mature in from one to ten 
 years. 
 
 Railroad bonds are of various kinds. In general 
 they may be classified as : 
 
 (1) Mortgage Bonds 
 
 (2) Collateral Trust Bonds 
 
 (3) Convertible Bonds 
 
 (4) Plain Bonds or Debentures 
 
 (5) Income Bonds. 
 
 This classification is not intended to mean that each 
 railroad bond may be definitely assigned to one class 
 and excluded from the others. Some issues have the 
 attributes of two or more classes. Thus, a mortgage 
 bond may also be a collateral trust bond, and a 
 convertible bond may be either a mortgage bond or a 
 plain bond (debenture). A mortgage bond, or a 
 collateral bond, however, cannot be a plain bond. 
 This will be made clear in the description of each of 
 the groups in the classification. 
 
 Railroad Mortgage Bonds. This class of railroad 
 bonds, as the name implies, is an obligation secured 
 by a mortgage or lien on the whole or some part of the 
 debtor company's property. They thus resemble a 
 negotiable real estate loan for which the real estate is 
 
RAILROAD SECURITIES 33 
 
 pledged as security. In the case of bonds, however, 
 the loan is generally distributed among a large 
 number of holders, who cannot assert their claim 
 against the debtor corporation individually and 
 independently. They must act jointly for the 
 equitable interests of all and through the medium of 
 a trustee. 
 
 The rights and equities of the mortgage bondholder 
 are contained in a written instrument known as the 
 Deed of Trust, Indenture, or Mortgage. Every holder 
 of any class of bond, if he wishes to know the exact 
 nature of his security must consult the deed of trust. 
 This legal document is a contract between the rail- 
 road issuing the bonds and a trustee acting for and 
 in the name of the bondholders. The trustee is 
 generally a trust company or a banking house. 
 Individuals may also act in this capacity. 
 
 Under the terms of the deed of trust the railroad 
 company conveys and assigns unto the trustee all of 
 the property, franchises and other possessions upon 
 which the bonds are to be a mortgage. The deed also 
 specifies the amount of bonds, and the conditions 
 under which they may be issued. It contains, 
 moreover, a description of the property to be mort- 
 gaged so that it may be readily identified. There are 
 also provisions that the property is to be kept insured 
 and in repair, and there may be also other important 
 stipulations designed to protect the bondholders. 
 It is usually specified that if default is made in the 
 performance of any agreement contained in the deed 
 of trust, such as the failure to pay interest upon the 
 
34 AMERICAN RAILROAD ECONOMICS 
 
 outstanding bonds, the whole amount of the princi- 
 pal then becomes due and payable. The consent of 
 the holders of a specijfied majority of the bonds is 
 usually required to determine whether the mortgaged 
 property is to be sold or disposed of for their benefit 
 as creditors. 
 
 Railroad mortgage bonds usually bear a fixed rate 
 of interest and mature after a definite period. The 
 company, however, may have the option of retiring a 
 part or all of the bonds of an issue at a stipulated 
 price before maturity date. Usually the railroad 
 property upon which the bond is a lien consists of a 
 certain portion of roadbed and track. In this way the 
 bondholder may determine the relation of the face 
 value of the bonds to the length of mortgaged mileage. 
 For example, if $10,000,000 of the bond issue is 
 outstanding and the length of the railroad property 
 mortgaged is 250 miles, the issue is at the rate of 
 $40,000 per mile, provided there are no prior liens. 
 Whether this rate is high or low depends, among 
 other things, on the actual cost of the property, its 
 permanency and its earning capacity. Of course, the 
 mortgage may cover other and more costly property 
 than the roadbed and track. This factor, along with 
 many others, should be determined in estimating 
 the value of mortgage bonds. 
 
 The mortgage bonds are variously named as Prior 
 Lien, First Mortgage, Second Mortgage, General 
 Mortgage, Refunding Mortgage, etc. A single issue 
 may have a combination of two or more of these 
 adjectives. The theoretical distinction between a 
 
RAILROAD SECURITIES 35 
 
 first and second mortgage is readily understood. The 
 public, however, may be misled through the names 
 of some bond issues. Thus, the Toledo, St. Louis 
 & Western Railroad has a 3J^ per cent. Prior 
 Lien Bond issue of $9,500,000 and a 4 per cent. 
 First Mortgage Bond issue of $6,500,000. The latter, 
 however, constitutes an inferior mortgage on the 
 property securing the Prior Lien Bonds. A similar 
 deception may arise from the name "First and 
 Refunding Mortgage." In this instance the issue 
 may constitute a first mortgage on a very small part 
 of the property and a secondary or inferior lien on 
 the remainder. Thus, the Denver & Rio Grande 
 Railroad authorized an issue of $150,000,000 of First 
 and Refunding 5 per cent. Gold Bonds. On June 30, 
 1912, there were $33,944,000 of these outstanding. 
 They then constituted a first mortgage on but 129 
 miles of railroad and an inferior lien (subject to 
 prior liens of $82,500,000) on 2,400 miles. Evidently, 
 there was very little basis for the term "First Mort- 
 gage" at the time of issue. 
 
 On many of the large railroads a distinction exists 
 between General Mortgages and Divisional Mortgages. 
 The lien of the divisional mortgage is localized, 
 covering the property of a branch line or division, 
 whereas, the general mortgage usually covers, sub- 
 ject to prior liens if any, the property as a whole. 
 For various reasons, a divisional mortgage, other 
 things being equal, has not the intrinsic merits of a 
 mortgage covering the main property of a railroad 
 company. This arises chiefly from the fact that a 
 
36 AMERICAN RAILROAD ECONOMICS 
 
 division or branch of a large railroad system is not an 
 independent transportation unit. Its value and its 
 earning power are dependent on the aflSliation with 
 the main lines of the railroad. 
 
 Collateral Trust Bonds. These differ in one essen- 
 tial particular from mortgage bonds. In place of 
 physical property they are secured by a pledge of 
 securities deposited with a trustee. Collateral trust 
 bonds, therefore, may be an indirect first lien on 
 property through the pledging of first mortgage bonds 
 as security. When stocks are pledged as collateral, 
 there is a lien upon the equities represented by this 
 class of securities. Frequently two or more classes 
 of securities are pledged for one issue of collateral 
 trust bonds. In addition, a direct lien may be 
 granted on physical property as further security. 
 Thus a collateral trust bond may be partly a mort- 
 gage bond, just as a mortgage bond may be partly 
 secured by pledge of securities as collateral. Col- 
 lateral trust bonds are issued under a deed of trust 
 similar to that of mortgage bonds. The pledged 
 securities are conveyed "in trust" to a trustee, with 
 whom they are generally deposited. As long as there 
 is no default in the interest or principal on any of the 
 collateral bonds, the railroad owning the pledged 
 securities is entitled to all the income accruing from 
 such ownership. The railroad company may also 
 be given the privilege, subject to the sanction of the 
 trustee, to substitute other securities for any or all 
 of those pledged. These and other rights and 
 privileges are usually defined in the deed of trust. 
 
RAILROAD SECURITIES 37 
 
 In every case the terms of the contract should be! 
 known and understood by those who wish to invest 
 in collateral trust bonds. 
 
 The investment value of collateral trust bonds 
 depends, first, upon the character and intrinsic value 
 of the pledged securities and, secondly, upon the 
 general credit and financial standing of the company 
 pledging the security. As a rule, the terms under 
 which collateral trust bonds are issued require a 
 guarantee on the part of the issuing company to pay 
 both interest and principal, regardless of whether or 
 not the pledged securities can be sold or otherwise 
 disposed of at the stipulated redemption price of the 
 collateral bonds. Every precaution, however, is 
 desirable to maintain the intrinsic value of the 
 collateral. An example of how this can be done is 
 furnished by clauses in the deed of trust of the 
 Atlantic Coast Line Collateral Trust 4 per cent. 
 Gold Bonds. This issue was originally secured by 
 $35,000,000 of Louisville & Nashville Railroad 
 stock. Since the collateral constitutes a majority 
 stock ownership and controlling interest in the 
 Louisville & Nashville Railroad, precautions are 
 taken that this controlling interest shall not be 
 impaired. The Atlantic Coast Line, therefore, 
 covenants that whenever the Louisville & Nash- 
 ville issues additional stock the same proportion 
 of the new stock as of the Louisville & Nash- 
 ville's old stock already held shall be deposited 
 as further collateral for the bond issue. Moreover, 
 the Atlantic Coast Line in the exercise of its ad- 
 
38 AMERICAN RAILROAD ECONOMICS 
 
 ministrative control over the Louisville & Nashville 
 agrees 
 
 "that it will cause all repairs, renewals and replacements, necessary to 
 maintain the railroads, structures, locomotives, cars and other equip- 
 ment, tools and other property of the Louisville & Nashville Company 
 in their present good order and condition, to be made out of the earnings 
 of said railroads and other property." 
 
 There are additional clauses in collateral trust in- 
 dentures having the purpose of preserving the equity 
 and value of the stock or other securities pledged as 
 collateral. 
 
 Convertible Bonds. This class of bonds existed in 
 the early days of railroad construction, but has come 
 into prominence only in the past few years. Similar 
 to other railroad bonds they are a direct obligation 
 of the issuing company, maturing in a certain period 
 of time, and bearing a fixed rate of interest. In 
 addition, however, they carry the privilege to the 
 holders of exchanging them for a class of capital 
 stock of the debtor company under prescribed terms 
 and conditions. This convertibility gives the bonds a 
 speculative value, which causes their market price to 
 fluctuate within certain limits in accordance with the 
 market price of the stock into which they may be 
 converted. The conversion is arranged at a fixed 
 rate. It may be $100 par value bonds for one $100 
 share of stock, or it may be $125 of bonds for one 
 share of stock. Since railroads are not generally 
 permitted to issue stock under par value the conver- 
 sion figure is rarely at less than one $100 share of 
 stock for $100 of bonds. The Erie Railroad, however. 
 
RAILROAD SECURITIES 39 
 
 has a bond issue which is convertible into the com- 
 mon stock of the company at $100 in stock for $60 in 
 bonds. 
 
 The holder of a convertible bond, in addition to 
 an assured rate of return on the bond, has an oppor- 
 tunity to benefit in the railroad's financial progress. 
 The value of the bond tends to appreciate with the 
 value of the stock. If the bonds sell above the con- 
 version figure but below the price of the stock an 
 intending purchaser of the stock will save by buying 
 the bonds and converting them into stock. If, how- 
 ever, the stock is selling below the conversion figure 
 price fluctuations in the stock up to this point do 
 not necessarily affect the price of the bond. The 
 bonds may then retain a higher market value than 
 the stock since this market value will be based on 
 the rate of interest and the security attached to the 
 bond. 
 
 As a rule convertible bonds are not a direct lien 
 on any property. There are exceptions, however. 
 In 1909, the Missouri Pacific issued $29,800,000 of 
 Convertible First & Refunding Mortgage 5 per cent. 
 Bonds, Series A, which are convertible dollar for 
 dollar into stock, at option of holder, from Septem- 
 ber 1, 1912, to September 1, 1932. 
 
 In a number of convertible issues the equity of 
 the holders is safeguarded by a provision which 
 requires that in the event of the company creating 
 a new mortgage on its property, except for refund- 
 ing purposes, the convertible bonds are to be equally 
 secured thereby. In 1910, stockholders of the 
 
40 AMERICAN RAILROAD ECONOMICS 
 
 Chesapeake & Ohio authorized an issue of $37,000,000 
 of ^}/2 per cent, convertible bonds with a provision 
 of this kind. The next year, a new mortgage was 
 authorized to secure an issue of not exceeding 
 $125,000,000 of 5 per cent. 20 year gold bonds. 
 Accordingly, under the terms of this mortgage the 
 4/^ per cent. Convertible Bonds are on a parity with 
 the new mortgage bonds in respect to all liens on 
 property owned by the railroad company April 28, 
 1910, the date of the issue of the convertible bonds. 
 Plain Bonds, or Debentures, as they are called, 
 are without the mortgage feature. They are obliga- 
 tions issued on the faith and credit of the company. 
 Nonspecific property or franchises are pledged for 
 their security. Because of the absence of a definite 
 pledge of property, debentures are issued and sold 
 mainly by the richest and strongest of the railroad 
 companies. American investors appear to demand 
 the assurance of a lien or some countervailing fea- 
 ture, which in case of default or bankruptcy will 
 give them a preference among general creditors. 
 This demand is fostered by State laws which prohibit 
 insurance companies, savings banks and similar 
 institutions from investing in any other railroad 
 bonds than mortgage bonds. Debenture bonds may 
 occasionally become mortgage bonds because of 
 an agreement of the issuing company not to place 
 a new mortgage upon its lines unless the deben- 
 tures are also secured thereunder. Thus, the New 
 York Central & Hudson River Railroad authorized 
 $50,000,000 of 4 per cent, debentures which are 
 
RAILROAD SECURITIES 41 
 
 issued with the agreement that so long as any of 
 these bonds remain outstanding the Company will 
 not place any new mortgage upon its property with- 
 out also including therein all outstanding deben- 
 tures of this issue. This agreement, however, does 
 not prevent renewal or extension of any existing 
 mortgage. Similarly, the several issues of deben- 
 tures of the Atchison, Topeka & Santa Fe Railroad 
 (including those convertible into stock) must be 
 secured by any future mortgage covering the lines 
 owned by the railroad at the time the debenture issue 
 was made. Provisions of this kind tend to safeguard 
 the equities of plain bonds. 
 
 Income Bonds. This class of bonds form but a 
 very small portion of railroad funded obligations. 
 They are usually known as "adjustment" Konds, 
 from the fact that they are generally created at re- 
 organizations in which a financial adjustment is 
 accomplished by reduction in fixed charges. Holders 
 of second or junior lien bonds may then be permitted 
 to exchange their holdings for income bonds. Unlike 
 other classes of bonds, "incomes" do not have a 
 claim to an interest return from the issuing com- , 
 pany unless earnings are available for this purpose. 
 These bonds, therefore, as a claimant of profits are 
 in much the same position as preferred stock. There 
 is one essential difference, however. When the 
 interest on income bonds is earned by the issuing » 
 company it must be paid. The directors have no 
 discretion in the matter. This is not the case with 
 preferred stock dividends. Even when earned by 
 
42 AMERICAN RAILROAD ECONOMICS 
 
 the company, the directors have the privilege of 
 withholding payments. Income bonds may have 
 the cumulative feature. This prohibits the payment 
 of any dividends on capital stock until all arrearages 
 in interest on the income bonds have been made 
 up. The Seaboard Air Line Adjustment Mortgage 
 Bonds, for example, are entitled to cumulative in- 
 terest at 5 per cent, to be payable as earned in install- 
 ments of 13^ per cent, or multiples thereof. No divi- 
 dends are to be paid on Seaboard Air Line stock 
 until all overdue interest on these bonds is paid in 
 full. The Central of Georgia Railroad Income Bonds 
 have not this cumulative feature. This resulted in 
 the loss to the holders of the full 5 per cent, interest 
 for a number of years. Dissatisfaction on the part 
 of the holders, claiming that the full interest on the 
 bonds was earned but withheld, led to litigation. The 
 final outcome was an offer by the Illinois Central Rail- 
 road (the owner of the Central of Georgia's capital 
 stock) to purchase the income bonds at a fixed price. 
 Railroad Short Term Securities. Notes: Railroad 
 notes do not differ essentially from bonds. They 
 are secured in the same way and may be mortgage 
 notes, collateral trust notes or debenture notes. Their 
 denomination is, with few exceptions, the same as 
 bonds, i, e,, in $500, $1,000 or multiples thereof. 
 The only distinction between notes and bonds, as 
 already pointed out, lies in the period of maturity. 
 In railroad finance a short term obligation or "note" 
 may run from one to ten years. Obligations issued 
 to mature in a longer period are generally designated 
 
RAILROAD SECURITIES 43 
 
 as bonds. Frequently notes are issued to mature 
 serially. This means that a certain proportion is 
 to be "called" {i. e., redeemed), at specified intervals, 
 and each note of a total issue bears its maturity date. 
 
 A popular kind of railroad serial note is the Equip- 
 ment Trust Certificate, This is secured by a lien on 
 certain railroad rolling equipment, either locomo- 
 tives or cars, or both. Since the equipment, through 
 use, gradually depreciates and is finally "scrapped," 
 the aim is to maintain the equity value of the certif- 
 icates by having a portion of them mature each year. 
 The longest maturity does not exceed the estimated 
 period of usefulness of the equipment. According 
 to Interstate Commerce Commission statistics, there 
 were outstanding June 30, 1912, $318,182,259 of 
 railroad equipment obligations. Among these are 
 the obligations of railroads enjoying the highest 
 reputation for financial soundness. 
 
 Railroad notes are generally regarded as temporary 
 means of financing. As a rule they are replaced at 
 or before maturity by long term obligations. It is 
 frequently the practice to deposit with a trustee the 
 securities which are to replace the notes so that these 
 may serve as collateral. When the credit of the 
 issuing company, or the general condition of the 
 money market warrants, the pledged bonds may 
 be sold and the notes paid off with the proceeds. 
 Thus, a railroad company generally reserves the 
 privilege of "calling in" the notes before maturity. 
 The redemption price is stipulated in the indenture 
 under which the notes are issued. 
 
CHAPTER III 
 
 RAILROAD SYSTEMS OF THE UNITED STATES 
 
 Development of Railroad Systems. The individual 
 lines comprising the vast net work of American rail- 
 roads for the most part can be conveniently grouped 
 in accordance with system organization and geo- 
 graphical location. This arises from the fact that 
 railroad expansion followed along the important 
 channels of trade between great centers of traffic. 
 A number of ill-defined geographical zones were 
 gradually established, each comprising a region of 
 large traffic interchange. These regions marked the 
 territorial limits of many of the great railroads and 
 became the basis of regional freight rate structures.* 
 Thus, in the early years of American rail transporta- 
 tion, the aim was to connect the Atlantic ports with 
 the Great Lakes and with the Ohio and Mississippi 
 River settlements. The pioneer American railroad 
 enterprise. The Baltimore iSc Ohio Railroad, as its 
 name implies was built to handle the traffic inter- 
 change which had formerly passed by turnpike be- 
 tween the tide-water sections of the East to the fer- 
 tile region beyond the Alleghenies. The proposed 
 construction of the Erie Railroad by the State of 
 New York in the early thirties had the paramount 
 
 ^ See McPherson, " Railroad Freight Rates," etc.. Chapter VII. 
 
 44 
 
RAILROAD SYSTEMS OF THE U. S. 45 
 
 object of facilitating and promoting the intercourse 
 between the metropolis of the State and the Lake 
 Erie ports. 
 
 In course of time, railroad development advanced 
 sufficiently to permit through shipments from one 
 extreme of the natural geographical divisions to 
 another. The railroad companies whose lines af- 
 forded this continuous transportation came to be 
 known as trunk lines. This distinguishes them from ^ 
 local lines which serve only intermediate sections 
 and which must interchange their long haul ship- 
 ments with other lines. Thus, a trunk line may be 
 defined as a railroad whose principal tonnage origi- 
 nates and moves on its own lines between two great 
 points of traffic interchange. As regards traffic 
 movement, therefore, a trunk line is, relatively speak- 
 ing, an independent organic unit. It is not de- 
 pendent on other companies either to receive or to 
 furnish the bulk of its "through" shipments. Of 
 course, these distinctions are relative and are in- 
 fluenced by traffic conditions. There are railroads 
 which are neither trunk lines nor local lines. Chief 
 among these are the roads which haul some important 
 commodity, such as coal or ore, from the point of 
 origin to a primary market. The Philadelphia & 
 Reading, the Lehigh Valley and other leading 
 "coalers" are certainly not local lines. 
 
 The application of the term trunk line naturally 
 varies as the distance between principal centers of 
 traffic interchange increases. Originally, the in- 
 dividual trunk lines of the East had their termini 
 
46 AMERICAN RAILROAD ECONOMICS 
 
 in the principal Atlantic ports at one end and in 
 Pittsburgh, Buffalo or other points just beyond the 
 Alleghenies, at the other end. The development 
 of the region beyond the Ohio and the Mississippi, 
 and the growth of traffic centers such as Cincinnati, 
 St. Louis and Chicago, increased the traffic inter- 
 change between tide- water and these points. The 
 leading railroads extended their lines in conformity 
 with this trend. This was not generally accomplished 
 by the actual construction of new extensions. Local 
 and connecting roads had already been built to the 
 more distinct localities. Consequently, the old es- 
 tablished companies, in order to expand their lines 
 so as to retain the through traffic, acquired by merger, 
 by purchase or by other means the lines already 
 furnishing connections with the desired localities. 
 In this way, railroad systems developed. An in- 
 dividual railroad company is no longer the type 
 of a definite or complete transportation unit. A 
 combination or series of lines, affording, together, 
 through routes between distant centers of commer- 
 cial intercourse is the present enlarged type of a 
 railroad organization. This development has taken 
 place in all geographical divisions of the United 
 States. The progress of territorial unification of 
 transportation companies is constantly reducing the 
 number of different railroad company securities 
 dealt in currently on the public stock exchanges. 
 Investment interest centers largely in the '' parent'' 
 companies that have acquired a "system" of lines to 
 the exclusion of the subsidiary companies that have 
 
RAILROAD SYSTEMS OF THE U. S. 47 
 
 been brought under the "systenj" control. The 
 latter are merely "subsidiaries,^^ whose welfare is 
 bound up with the affairs of the parent corporation. 
 Why have the railroads expanded in order to 
 obtain as large a share of through traffic as possible? 
 The answer is that the whole profit remains with a 
 railroad when a shipment is made over its own lines 
 from point of origin to place of destination. Other 
 railroads participate in the profits when the through 
 service is performed in conjunction with independent 
 and outside lines. The Lehigh Valley Railroad, for 
 example, begins at New York and ends at Buffalo. 
 It receives freight at New York consigned to Chicago 
 and other points west of Buffalo. At Buffalo, it 
 must^turn over these shipments to some other rail- 
 road system. In this instance, let us assume, the 
 connecting line is the Grand Trunk Railway. The 
 latter conveys the freight as far as Detroit, whence the 
 shipments destined further west are forwarded by a 
 third company. This is an example of "through 
 routing" involving the participation of two or more 
 independent railroad organizations. The apportion- 
 ment among them of the revenue received from each 
 shipment is the result^of "prorating." To "prorate" 
 is to join with another railroad in making a through 
 rate for a haul which covers parts of both lines. This 
 rate is almost invariably less than the sum of the 
 local rates between the same points. Now, it is very 
 probable, because of the lower proportionate rate 
 for "through" or "long haul" traffic that the Lehigh 
 Valley,^ as its share of the revenue, does not receive 
 
48 AMERICAN RAILROAD ECONOMICS 
 
 as large an amount as it would have received if all 
 shipments were consigned to its western terminus. 
 The service performed, however, is the same in 
 either case. It is, therefore, to the interest of rail- 
 road companies desiring to gain the full benefit of 
 "through" or "long haul" business to acquire a 
 system of lines which, in combination, will cover 
 the points of origin and destination of the bulk of its 
 traffic. This factor should be fully considered in 
 estimating the traffic features of individual railroad 
 companies. 
 
 It is thus evident, from what has been said in the 
 foregoing pages, that the railroad systems of the 
 United States have developed both through extension 
 of corporate lines and through annexation and affilia- 
 tion of independent connecting roads., As the result 
 of this unification more than two-thirds of the steam 
 railroad mileage in the United States can be grouped 
 under less than twenty-five systems, each with a 
 centralized administrative control. The systems 
 in the order of their mileage, according to Interstate 
 Commerce Commission classification at present writing 
 are as follows : 
 
 System Miles 
 
 New York Central 13.342 
 
 Chicago, Burlington & 
 
 Quincy 11,779 
 
 Atlantic Coast Line ^ 11,560 
 
 Pennsylvania 11,198 
 
 Atchison,Topeka & Sante Fe 10,601 
 Southern Pacific 10,255 
 
 System Miles 
 
 Chicago & North Western. . 9,845 
 
 Southern Railway 9,836 
 
 Chicago, Milwaukee & 
 
 St. Paul 9,737 
 
 Illinois Central 8,248 
 
 Rock Island 8,158 
 
 St. Louis & San Francisco. . . 7,525 
 
 ^ Includes the Louisville & Nashville System. 
 
RAILROAD SYSTEMS OF THE U. S. 
 
 49 
 
 System Miles 
 
 Union Pacific 7,383 
 
 Missouri Pacific 7,279 
 
 Great Northern 7,113 
 
 New York, N. H. & Hartford 6,667 
 
 Northern Pacific 6,306 
 
 Baltimore & Ohio 5,569 
 
 Canadian Pacific (in U. S.) . . .4.768 
 
 System Miles 
 
 Denver & Rio Grande 3,719 
 
 Missouri, Kansas & Texas. . .3,665 
 
 Seaboard Air Line 3,091 
 
 Wabash 3,085 
 
 Erie 2,567 
 
 Chesapeake and Ohio 2,579 
 
 Reading 2,171 
 
 The foregoing list of the leading railroad systems 
 does not imply that each is operated independently 
 without affiliation or relationship with other systems. 
 There is a unity of administrative control among 
 several of the systems. The Union Pacific through 
 part ownership of the Southern Pacific Company 
 until 1913 controlled the financial policy and the 
 operations of the Southern Pacific System. The 
 Great Northern and the Northern Pacific Systems, 
 besides being affiliated through personal control of 
 the same financial interests have a joint control of 
 the Chicago, Burlington & Quincy System. The 
 Missouri Pacific, the Denver and Rio Grande, and 
 the Wabash systems are also affiliated largely through 
 the personal influence of the same financial interests. 
 Together, from an administrative viewpoint, they 
 may be defined as a railroad system. 
 
 Thus, the system of grouping of railroads in the 
 United States may be on the basis of administrative 
 rather than traffic control. This administrative 
 control may be lodged with individuals or with 
 corporations, or with both jointly, as shown in the 
 following list: 
 
50 AMERICAN RAILROAD ECONOMICS 
 
 Systems 
 J. J. Hill Group 
 Great Northern 
 Northern Pacific 
 Chicago, Burlington & Quincy 
 
 E. W. Harriman Group 
 Union Pacific 
 Southern Pacific * 
 Illinois Central 
 Central of Georgia 
 
 Pennsylvania Group 
 Pennsylvania Lines 
 Norfolk & Western 
 
 Vanderbilt Group 
 
 New York Central Lines 
 
 Reading (jointly with Baltimore & Ohio) 
 
 Chicago & North Western System 
 
 Atlantic Coast Line (Walters) Group 
 Atlantic Coast Line 
 Louisville & Nashville 
 
 Missouri Pacific (Gould) Group 
 Missouri Pacific 
 Wabash 
 
 Denver & Rio Grande 
 Texas & Pacific 
 International & Great Northern 
 
 E. H. Hawlet Group 
 
 Toledo, St. Louis & Western 
 Minneapolis & St. Louis 
 Chesapeake & Ohio 
 Missouri, Kansas & Texas 
 
 *The segregation of Union Pacific Railroad's holdings of Southern 
 Pacific stock, in accordance with Supreme Court decree, may result in 
 the separation of the latter system from this group. 
 
RAILROAD SYSTEMS OF THE U. S. 51 
 
 J. P. Morgan Group 
 
 New York, New Haven and Hartford 
 
 Erie 
 
 Southern Railway 
 
 Chicago Great Western 
 
 Pere Marquette 
 
 The Moore-Reed Group 
 Rock Island 
 Lehigh Valley 
 
 The progress of unification in railroad control is 
 well indicated in the above grouping. In fact, of the 
 entire steam railroad mileage of the United States, 
 less than one-fourth may be termed independent. 
 This situation is of particular significance to shippers 
 and to investors. The character and resources of 
 the administrative control of any business enterprise 
 are fundamental elements of its investment value. 
 Profitable and satisfactory railroad operation re- 
 quires sound financial policy and eflficient manage- 
 ment. Satisfactory facilities for obtaining credit 
 must also be at hand. This means that strong bank- 
 ing interests capable of procuring necessary capital 
 funds are to be represented in the management. 
 One of the conditions assisting in the absorption 
 of many local lines by large railroad systems has been 
 the inability of the independent companies to obtain ^ 
 with their own resources proper banking support.* 
 Methods of System Unification. The means of 
 uniting separate railroad corporations into a system 
 
 ^ See "Railroad Changes and their Relation to Credit," by Charles F. 
 Speare» in Moody's Magazine, April, 1909. 
 
52 AMERICAN RAILROAD ECONOMICS 
 
 are various. The original method was through cor- 
 porate merger. This was the plan followed by the 
 New York Central when it consolidated some six- 
 teen local lines operating between Albany and Buf- 
 falo. Legal restrictions and failure to satisfy dis- 
 senting shareholders have now rendered corporate 
 consolidations exceedingly diflScult. An example is 
 afforded in the New York Central & Hudson River 
 Railroad's endeavor to merge the New York & 
 Harlem River Railroad with its own corporate lines. 
 Though the shareholders of the latter have been 
 offered $175, for each share ($50 par value) of stock, 
 a substantial minority at this writing is holding 
 out for better terms. A further practical diflBculty 
 against mergers is the heavy capital outlay involved. 
 When administrative control can be obtained through 
 the acquisition of a substantial part (usually 51 per 
 cent.) of the capital stock, the purpose of unification 
 in most cases is gained as well as through complete 
 merger. The investment outlay of the purchasing 
 company, however, is very much less. Herein lies 
 one of the chief reasons why railroad unification 
 in the United States has taken the form of majority 
 stock ownership. It has led to the creation of two 
 distinct railroad administrative activities; one, con- 
 sisting of the transportation operations of lines 
 directly operated, the other relating to investments 
 represented by stockholdings in subsidiary and 
 afl51iated companies. Thus, there are railroads which 
 are in part ^'holding companies*' and in part, ''operat- 
 ing companies," The importance of distinguishing 
 
RAILROAD SYSTEMS OF THE U. S. 53 
 
 between these activities of railroad organizations 
 cannot be too highly emphasized. 
 
 There are a few instances where the administrative 
 control is lodged with a ^^ holding company'' operating 
 no railroad mileage under its corporate name. The 
 Reading Company is a type. This Company was 
 organized in 1896 for the purposes of acquiring the 
 Philadelphia & Reading Railroad Company and 
 the Philadelphia Coal & Iron Company. Later, 
 it acquired 53 per cent, of the capital stock of the 
 Central Railroad of New Jersey. In addition to 
 these large holdings, the Reading Company has 
 miscellaneous holdings in street railways, naviga- 
 tion and mining companies. But the Reading Com- 
 pany, itself, is controlled jointly by the New York 
 Central and the Baltimore & Ohio Systems, each 
 of which owns 21.7 per cent, of its $140,000,000 capi- 
 tal stock. 
 
 The Rock Island Company, whose shares are 
 dealt in on the stock exchanges, is another railroad 
 "holding company." It owns the entire capital 
 stock ($145,000,000) of the Chicago & Rock Island 
 Railroad Company which, in turn, owns 93 per cent, 
 of the capital stock of the Chicago, Rock Island 
 Pacific Railway Company. The Southern Pacific 
 Company is a holding company of very much broader 
 scope than the Rock Island and Reading companies. 
 Organized under the laws of Kentucky, the Southern 
 Pacific Company has acquired the capital stock of 
 a whole group of separate railroad organizations, 
 chief among which are the Southern Pacific Railroad 
 
54 AMERICAN RAILROAD ECONOMICS 
 
 and the Central Pacific Railroad. The totally owned 
 roads are called the Proprietary Companies, Others 
 whose capital stock is only partially held, are desig- 
 nated Affiliated Companies. The different organiza- 
 tions in the Southern Pacific System June 30, 1912, 
 comprise the following: 
 
 Southern Pacific Company 
 
 (1) Controlled; also leased Miles 
 
 Central Pacific Ry 2,079 
 
 South Pacific Coast Ry 97 
 
 Southern Pacific R. R 3,501 
 
 Oregon & California R. R 685 
 
 New Mexico & Arizona R. R 88 
 
 Sonora Ry 264 
 
 (2) Controlled by Southern Pacific Company — Operated by Com- 
 panies owning them 
 
 Galveston, Harrisburg & San Antonio Ry 1,338 
 
 Houston & Texas Central R. R 789 
 
 Louisiana Western R. R 207 
 
 Morgan's Louisiana & Texas R. R. & S. S 404 
 
 Texas & New Orleans R. R 452 
 
 Houston & Shreveport R. R 40 
 
 Houston E. & W. Texas Ry 191 
 
 Southern Pacific Co 27 
 
 (3) Controlled by Morgan^ s Louisiana & Texas R. R. & S. Co. 
 Iberia & Vermillion R. R 16 
 
 Total .10.114 
 
 Steamship Lines 4,810 
 
 Other Proprietary Companies — 
 
 Arizona Eastern 364 
 
 Southern Pacific R. R. of Mexico 949 
 
 Coos Bay, Roseburg & Eastern 27 
 
 Corvallis & Eastern 146 
 
 Grand total of owned, leased and affiliated lines June 30, 1912 . 11.600 
 
RAILROAD SYSTEMS OF THE U. S. 55 
 
 The Pennsylvania Company is another example of 
 unification of a group of separately incorporated lines 
 through a "holding company." This corporation 
 was chartered as far back as 1870 with a capital 
 stock of $70,000,000 all owned by the Pennsylvania 
 Railroad Company. Although holding no mileage 
 in fee, the Pennsylvania company operated or con- 
 trolled, on January 1, 1913, railroad lines aggregat- 
 ing 5,105 miles of road, constituting the Pennsyl- 
 vania Railroad System west of Pittsburgh. 
 
 In addition to unification acquired through con- 
 solidation and stock control, railroad system ex- 
 pansion has been accomplished through lease of 
 separately incorporated properties. In many in- 
 stances, the companies having leasehold also have a 
 controlling interest in the capital stock of the leased 
 corporation. Under whatever arrangement the 
 leased lines are held they are in every case a part of 
 directly operated mileage of the lessee and are in- 
 cluded under the reports of the lessee's operating 
 results. When the leasehold covers a very long or 
 indefinite period, as 99 years or more, the leased line 
 is to all intents and purposes a part of the lessee's 
 corporate property. One important distinction, 
 however, requires consideration. A leasehold or- 
 dinarily involves no capital outlay or readjustment 
 of capitalization. There is no value representing the 
 lease among assets or liabilities. Hence, the leasing 
 of independent lines is the simplest method of extend- 
 ing railroad system mileage. For this reason it has 
 been followed extensively from early railroad times. 
 
56 AMERICAN RAILROAD ECONOMICS 
 
 The New York Central & Hudson River Railroad 
 offers one of the best examples of the expansion of 
 mileage through lease of connecting lines. On 
 January 1st, 1913, it owned in fee 806 miles, whereas, 
 its mileage operated under lease and trackage rights 
 aggregated 2,985. This does not include the con- 
 trolled mileage operated by subsidiary companies. 
 The Pennsylvania Railroad Company likewise oper- 
 ates a large mileage under lease or contract. Of a 
 total of 4,025 miles directly operated, on January 1st, 
 1913, 2,128 miles were owned in fee, and the remain- 
 ing 1,897 miles were operated under lease and under 
 trackage rights.^ 
 
 Geographical Location of Railroad Systems. The 
 preceding paragraphs have shown the development 
 of railroad unification and system organization and 
 control. It is our purpose now to classify and briefly 
 describe the principal systems in accordance with 
 their geographical zones. Although the terminal 
 demarcations of railroad system development have 
 corresponded with the familiar geographical divi- 
 sions of the country, extensions and overlappings 
 into sections beyond the zones of the main lines 
 render a classification based on territorial bound- 
 aries exceedingly difficult. However, the following 
 system classification will be found of service in 
 studying railroads with respect to location and 
 to traffic characteristics: 
 
 ^ Trackage Rights constitute the privilege obtained through contract 
 to run trains over the tracks of another company. 
 
RAILROAD SYSTEMS OF THE U. S. 51 
 
 Group I. New England Systems 
 
 The New York, New Haven & Hartford Lines 
 
 Group II. Eastern Trunk Line Systems 
 
 The New York Central System 
 Pennsylvania Railroad System 
 Erie System 
 
 Baltimore & Ohio System 
 Chesapeake & Ohio System 
 
 Group III. Anthracite Systems 
 
 Reading System 
 
 Delaware, Lackawanna & Western R. R. 
 
 Lehigh Valley Railroad 
 
 Delaware & Hudson Company 
 
 New York, Ontario & Western R. R. 
 
 Group. IV Southern Systems 
 
 Southern Railway System 
 Atlantic Coast Line System 
 Seaboard Air Line System 
 
 Group V. Mississippi Valley Systems 
 
 Illinois Central System 
 Louisville & Nashville System 
 St. Louis & San Francisco System 
 Missouri, Kansas & Texas R. R. 
 Kansas City Southern Railway 
 
 Group VI. Middle Western Systems in the Nobth 
 
 Wabash System 
 
 Toledo, St. Louis & Western 
 
 Pere Mtarquette R. R. 
 
 Group VII. Northwestern Systems 
 
 Chicago & North Western System 
 Chicago, Milwaukee & St. Paul System 
 
58 AMERICAN RAILROAD ECONOMICS 
 
 Group VII. Northwestern Systems. — Continued 
 Chicago, Burlington & Quincy System 
 Union Pacific Lines 
 Northern Pacific Lines 
 Great Northern Railway 
 Minneapolis, St. Paul & Sault Ste Marie 
 (Canadian Pacific in U. S.) 
 
 Group VIII. Southwestern Systems 
 
 Southern Pacific System 
 Atchison System 
 Missouri Pacific System 
 Rock Island System 
 
 The foregoing list comprises only the important 
 railroad systems in the United States. There is no 
 claim of completeness. A number of independent 
 railroad companies whose securities are actively 
 dealt in are operated without a "system" adminis- 
 trative control. In view of the unification movement, 
 however, these continuously tend to be reduced 
 in importance. One of the causes retarding the merg- 
 ing of independent lines with existing systems is 
 the Sherman Anti-Trust Act. This law is applied 
 to railroads as prohibiting identical control of parallel 
 and competing lines. Thus, the Pennsylvania Rail- 
 road Company, after the Supreme Court's Northern 
 Securities Decision, relinquished its control over 
 the Baltimore & Ohio Railroad by disposing of one- 
 half of its holdings in that company. More recently 
 the Union Pacific was compelled to segregate its 
 holdings of Southern Pacific stock on the ground 
 that this ownership constituted a restraint of 
 trade. 
 
RAILROAD SYSTELIS OF THE U. S. 59 
 
 I. New England Systems: The New York.^New 
 Haven & Hartford is the only great railroad system 
 that has its principal situs in New England. In its 
 control over New England rail transportation it is 
 far ahead of other interests. The leading lines em- 
 braced within its system organization (exclusive 
 of electric railways and steamship companies) on 
 June 30, 1912, was as follows: 
 
 Road Location Miles 
 
 New York, New Haven & Hartford . . . Southern New England. . 2,042 
 
 Boston & Maine ^ Central & Northern New 
 
 England 2,290 
 
 Maine Central (Controlled by Boston 
 
 & Maine) Maine 1,164 
 
 New York, Ontario & Western New York City to Os- 
 wego on Lake Ontario . 566 
 
 In addition to the above controlled lines and other 
 smaller connecting companies, the New York, New 
 Haven & Hartford has trackage rights, terminable 
 at one year's notice, over the Boston & Albany, a 
 leased line of the New York Central System. It 
 also controls, jointly with the New York Central, 
 the Rutland Railroad (468 miles) traversing Ver- 
 mont and Northeastern New York. 
 
 II. The Eastern Trunk Line Systems. These lines 
 form the rail connections between the Eastern sea- 
 board ports and the Western traffic centers, St. 
 Louis and Chicago. Their long haul business is very 
 competitive. The large traffic handled, however, 
 gives them a high average earning power. More- 
 
 * Controlled through majority stock control of the Boston Holding 
 Company. 
 
60 AMERICAN RAILROAD ECONOMICS 
 
 over, because of heavy business, their Hues from an 
 engineering standpoint, are required to be of the 
 most modern and expensive kind. The large in- 
 dustrial and densely populated sections traversed 
 have fostered the development of numerous branches. 
 These are traffic "feeders," augmenting both the 
 long and the short haul business. 
 
 The Pennsylvania System, The growth of the 
 Pennsylvania System began about 1850. A quarter 
 of century later when lines had been extended beyond 
 the Alleghenies its mileage was approximately 4,000 
 miles. The Pennsylvania System lines now extend 
 from New York, Philadelphia and Baltimore, in 
 the East, to Buffalo and the Lake Erie ports in the 
 North, and to Cincinnati, St. Louis and Chicago in 
 the West. Numerous branches and feeders connect 
 with almost all intermediate centers of industry 
 in this region. The total mileage of the system on 
 January 1, 1912, is represented as follows: 
 
 Pennsylvania Railroad System 
 
 East of Pittsburgh & Erie Miles 
 
 Owned in fee 2,128 
 
 Operated by Lease or 
 
 Contract 1,749 
 
 Trackage 234 
 
 Operated by Separate 
 
 Organizations 2,219 
 
 Total 6,330 
 
 West of Pittsburgh & Erie Miles 
 
 Pennsylvania Co. Lines 1,680 
 
 Pittsburgh, Cincinnati, 
 
 Chicago & St. Louis 1,418 
 
 Other Controlled Companies .2,079 
 
 Total 5,177 
 
 Grand Total, January 1, 1912, 11,504 miles. 
 
 In addition to the foregoing, the Pennsylvania 
 Railroad Company owns a substantial interest in 
 
RAILROAD SYSTEMS OF THE U. S. 61 
 
 the Norfolk & Western (2,004 mile§) operating from 
 Norfolk, Va., to Cincinnati, 0., and traversing an 
 important section of the West Virginia bituminous 
 coal fields. 
 
 New York Central System. The nucleus of the New 
 York Central Lines was the consolidation, in 1853, 
 of some sixteen independent connecting companies 
 forming a continuous route between Albany and 
 Buffalo. Branch lines were subsequently built or 
 acquired. The desire to control the through traffic 
 over its lines to and from the West led to the de- 
 velopment of the New York Central System. The 
 tidewater terminals are at New York and Boston 
 and western terminals at Cincinnati, St. Louis and 
 Chicago. By means of the Pittsburgh and Lake 
 Erie, the New York Central enters the Pittsburgh 
 industrial district. The leased Rome, Watertown & 
 Ogdensburg Railroad, and the Rutland (jointly 
 controlled with the New York, New Haven & Hart- 
 ford), affords connection with Northern New York, 
 Vermont and the Canadian cities. The total mileage 
 of the system is approximately as follows : 
 
 New York Central System 
 
 MUes 
 
 New York Central & Hudson River Railroad — owned 809 
 
 —Leased & Trackage 2,981 
 
 Total 3.790 
 
 Controlled Lines (directly and indirectly) 10,266 
 
 Total January 1, 1912 14.056» 
 
 ^ Includes the Rutland and the Kanawha & Michigan Railroads con- 
 trolled jointly with other systems. 
 
62 AMERICAN RAILROAD ECONOMICS 
 
 Some of the companies in the New York Central 
 system are not controlled directly by the parent 
 company but indirectly through other subsidiary 
 companies. The Lake Shore & Michigan Central 
 Railroad, for example, controls the Pittsburgh & 
 Lake Erie and also the New York, Chicago & St. 
 Louis Railroad. It owns besides, the stock of the 
 Toledo & Ohio Central Railroad, which furnishes 
 connection with the West Virginia and Ohio coal 
 fields. Jointly with the Baltimore & Ohio Railroad, 
 the Lake Shore & Michigan Southern owns nearly 
 one-half of the stock of the Reading Company but 
 this mileage is not included in the New York Central 
 System. 
 
 The Erie Railroad possesses the shortest route 
 between New York and Chicago. Unlike the New 
 York Central and Pennsylvania systems, however, 
 it does not reach directly the largest intermediate 
 centers of population and industry. Its local traffic, 
 therefore, is proportionally less important. Orig- 
 inally constructed to connect tidewater with Lake 
 Erie, the main line has been extended direct to 
 Chicago with branches to Cleveland and Cincinnati. 
 A branch diverging from the main line at Laka waxen, 
 N. Y., runs south westwardly to Scran ton, Pa., and 
 a subsidiary railroad, the New York, Susquehanna & 
 Western, has a line direct from New York to Wilkes- 
 Barre, Pa. These lines furnish the Erie with its 
 large coal traffic. The Erie's system mileage on 
 June 30, 1913, (including the New York, Susque- 
 hanna & Western) was 2,680 miles of road. 
 
RAILROAD SYSTEMS OF THE U. S. 63 
 
 The Baltimore & Ohio differs froiji its rival trunk 
 line systems in that its chief tide-water terminal is 
 Baltimore and not New York City. By using the 
 tracks of the Philadelphia & Reading and the Cen- 
 tral Railroad of New Jersey, however, it runs trains 
 from its own tracks into Philadelphia and New 
 York. The Baltimore & Ohio's main line runs west 
 to Pittsburgh and thence to Chicago, with branches 
 along the route tapping the Lake Erie ports. An- 
 other main division runs directly west from Cumber- 
 land, Md., passing over the lines of the Baltimore & 
 Ohio Southwestern, through Cincinnati to St. Louis. 
 This is the originally proposed route across the 
 Allegheny Mountains to the Ohio Valley. Pitts- 
 burgh has a direct connection with the Baltimore & 
 Ohio's Cincinnati division through a branch running 
 westerly and intersecting Columbus, Ohio. There 
 are also branches and feeders reaching into the 
 bituminous coal i&elds and the industrial regions of 
 West Virginia and Ohio. In August, 1909, the Bal- 
 timore & Ohio acquired virtual control of the Cin- 
 cinnati, Hamilton and Dayton Railroad, which is 
 now a part of its system. With this addition the 
 aggregate system mileage exceeds 5,500 miles (not 
 including the Reading mileage). 
 
 The Chesapeake & Ohio has only recently become 
 a trunk line. It is more familiarly known as a "soft 
 coaler" running from Portsmouth, Va., through a 
 route intersecting the Alleghenies in the West Vir- 
 ginia and Ohio coal fields, and passing westward to 
 Cincinnati. In 1910 it acquired a Chicago connection 
 
64 AMERICAN RAILROAD ECONOMICS 
 
 through purchase of the Chicago, Cincinnati & Louis- 
 ville Railroad (renamed the Chesapeake & Ohio 
 Railroad of Indiana) . It also has an outlet to Lake 
 Erie through control of the Hocking Valley Railroad 
 and the Kanawha & Michigan (the latter controlled 
 jointly with the New York Central) . Its total system 
 mileage is about 2,600 miles. 
 
 III. Anthracite Systems. The anthracite roads 
 radiate in all directions from the anthracite coal 
 fields in Eastern Pennsylvania. The Reading System 
 (comprising the Philadelphia & Reading and the 
 Central of New Jersey Railroads) runs easterly to 
 Philadelphia and New York. The Lehigh Valley 
 and the Delaware, Lackawanna & Western Systems 
 each have terminals at New York and at Buffalo. 
 The New York, Ontario & Western has terminals 
 at New York and at Oswego on Lake Ontario. The 
 only one of these systems that has no direct connec- 
 tion with New York City is the Delaware & Hudson 
 Company (the pioneer anthracite railroad), the 
 lines of which run from the coal fields in a north- 
 easterly direction through Albany to the Canadian 
 boundary. Here junction is had with Canadian 
 lines. The anthracite roads without exception are 
 interested, through direct or indirect ownership, in 
 anthracite coal mines. These properties are im- 
 portant assets to their transportation lines. 
 
 IV. Southern Systems. The Southern systems 
 have their principal lines in the South Atlantic states 
 east of the Allegheny Mountains. They accordingly 
 traverse a region largely devoted to agriculture. 
 
RAILROAD SYSTEMS OF THE U. S. 65 
 
 The main routes, as a rule, run north and south, 
 though each system has important intersecting lines 
 connecting the Atlantic coast and the terminal points 
 of the Mississippi Valley. The large railroad systems 
 of the South similar to the Eastern trunk lines have 
 been built up through the consolidation and pur- 
 chase of connecting short lines. 
 
 The Southern Railway as a type of a railroad sys- 
 tem is in some respects peculiar. It is not the result 
 of direct extensions for the purpose of obtaining a 
 through route between two large distributing points. 
 By consolidating and acquiring numerous small and 
 intersecting railroads, the Southern has come to 
 consist of a network of lines scattered through the 
 Southern states from the Atlantic seaboard to the 
 Mississippi River. A main line, however, can be 
 distinguished. This has a northern terminus at 
 Washington, D. C, and extends all the way to At- 
 lanta, Ga. Diverging from Atlanta there is a line 
 running southeasterly to Brunswick and another 
 running southwesterly through Birmingham to Mo- 
 bile, Ala. An important main division, forming a 
 route from Charleston, S. C, to Nashville, Tenn., 
 bisects the main artery of the System. Another 
 division starts at Knoxville, Tenn., and reaches 
 westerly to the Mississippi River at Memphis. In 
 addition to its own corporate lines, the Southern 
 Railway System has been extended through control 
 of subsidiaries. It is part owner of the Queen & 
 Crescent Route running south from Cincinnati through 
 Birmingham to Meridian and Shreveport. An- 
 
66 AMERICAN RAILROAD ECONOMICS 
 
 other trunk line (the Mobile & Ohio Railroad) fur- 
 nishes a direct route between Mobile, Ala., and St. 
 Louis. From St. Louis, the "Monon" (controlled 
 jointly with the Louisville & Nashville System) 
 continues the line to Chicago. The following is a 
 summary of the Southern Railway System mileage, 
 June 30, 1912: ^ 
 
 Southern Railway System 
 
 Miles 
 
 Owned in fee 4,289 
 
 Leased and Trackage rights 2,325 
 
 Controlled by Stock Ownership 475 
 
 Total Operated Directly 7,089 
 
 Controlled Companies — Operated separately 
 
 Mobile & Ohio .926 
 
 Other Companies 733 
 
 1,659 
 
 Affiliated Companies 
 
 Alabama Great Southern 357 
 
 Cincinnati, New Orleans & Texas Pacific 336 
 
 Georgia Southern & Florida 397 
 
 Other Companies 117 
 
 1,207 
 
 Grand Total 9,955 
 
 The Atlantic Coast Line's main stem and branches 
 are mostly east of the Southern Railway lines. The 
 terminal divisions from Richmond and from Nor- 
 folk, Va., converge at Rocky Mount, Va., thus form- 
 ing a main line running south to Charleston, S. C, 
 and thence to Savannah, Ga. and to Jacksonville 
 and Tampa, Fla. From Savannah there is a division 
 which forms junctions with the Louisville & Nash- 
 
RAILROAD SYSTEMS OF THE U. S. 67 
 
 ville — (a controlled but independently operated rail- 
 road system) — at Chattahoochee, Fla., and Mont- 
 gomery, Ala. The branches and "feeders" along 
 the main stem of the Atlantic Coast Line are generally 
 short and do not reach beyond the tidewat^ region. 
 This contrasts with the mountainous character of 
 Southern Railway's territory. Exclusive of the 
 Louisville & Nashville's lines (described separately 
 on page 69) the Atlantic Coast Line's system road 
 mileage on June 30, 1913, was approximately, 5,000 
 miles. 
 
 The Seaboard Air Line covers almost the identical 
 territory of the Atlantic Coast Line. Its main stem, 
 also extends from Richmond and from Norfolk, Va., 
 to Tampa, Fla. An important division running 
 west from Wilmington, N. C, bisects the main line 
 and passes beyond, through Atlanta, to Birming- 
 ham, Ala. Another division extends from the main 
 line at Savannah to Montgomery, Ala. The Sea- 
 board has less branch mileage than the Atlantic 
 Coast Line or the Southern Railway. Its physical 
 and traffic characteristics are therefore not entirely 
 similar. The system mileage on June 30, 1913, ex- 
 ceeded 3,000 miles. In addition to its rail lines, 
 the Seaboard Air Line controls the Baltimore Steam 
 Packet Co., plying between Norfolk & Baltimore. 
 It also has a substantial interest in the Old Dominion 
 Steamship Company, plying between Norfolk and 
 New York. 
 
 V. Mississippi Valley Systems like the Southern 
 seaboard systems have their main lines running 
 
68 AMERICAN RAILROAD ECONOMICS 
 
 north and south with important branches passing 
 east and west. The chief purpose of these systems 
 is to connect the large centers of population along 
 the Great Lakes with the Gulf ports. In view of 
 the alluvial nature of the territory traversed, railroad 
 transportation in the Mississippi Valley is subject 
 to different operating conditions than prevail among 
 the systems east of the Alleghenies or in the Rocky 
 Mountain and Pacific regions. 
 
 The Illinois Central is the oldest of the Mississippi 
 Valley systems. Its main artery is a direct route 
 between Chicago and New Orleans. An important 
 division that runs from Chicago directly west to 
 Sioux City (where there is connection with the 
 Union Pacific) is outside of the territory of the main 
 lines. Numerous branches and intersecting lines 
 bring the system into communication with the im- 
 portant intermediate centers of traffic, notably 
 Springfield, 111., Indianapolis, St. Louis, Louisville, 
 Memphis, Birmingham and Vicksburg. The con- 
 trol of the Central of Georgia Railroad acquired in 
 1910 gives a connection (from Birmingham, Ala.) 
 with the Atlantic tidewater at Savannah, Ga. The 
 lower Mississippi River points from Memphis to 
 New Orleans are reached by the Yazoo & Mississippi 
 Valley Railroad, a separately operated but integral 
 part of the Illinois Central System. The approxi- 
 mate mileage of the companies owned and controlled 
 are substantially as follows: 
 
RAILROAD SYSTEMS OF THE U. S. 69 
 
 Miles 
 
 'iilinois Central R. R. Co .' 4,755.25 
 
 Louisville & Wadley R. R. Co 10.00 
 
 Wadley Southern Ry. Co 90.00 
 
 Wrightsville & Tennille R. R. Co 105. 17 
 
 Yazoo & Mississippi Valley R. R. Co 1.371 .98 
 
 Central of Georgia Ry. Co 1,915.4 2 
 
 Total 8,247.82 
 
 The Louisville & Nashville System is under the 
 administrative control of the Atlantic Coast line, 
 the owner of 51 per cent, of its capital stock. It is, 
 however, an independent system in itself. The main 
 stem of the Louisville & Nashville extends from Cin- 
 cinnati, O., to Pensacola (Fla.), on the GuK of Mexico. 
 Its main mileage, therefore, is east of the Illinois 
 Central lines. Two divisions in the northern part 
 of the System connect the two important centers, 
 St. Louis and Memphis, and a branch near the south- 
 ern terminus brings the lines into direct connection 
 with New Orleans. These are important arteries 
 for supplying traffic. Another division, separate 
 from the main stem, runs directly south from the 
 Cincinnati terminus to Atlanta, Ga., passing through 
 a large coal mining district. Here it connects with 
 the leased Georgia Railroad and Banking Company 
 lines which furnish connection with Augusta and 
 other Georgia junction points. On June 30, 1912, 
 the system was constituted as follows: „.^^ 
 
 Lines owned entirely 4,071 
 
 Leased Lines 669 
 
 Total directly operated 4,740 
 
 Lines controlled or operated separately 3,208 
 
 Total System 7,948 
 
70 AMERICAN RAILROAD ECONOMICS 
 
 The lines of the *S^. Louis <Sc Sa7i Francisco Sys- 
 tem for the most part he at considerable distance 
 from the Mississippi River. An important eastern 
 artery, however, furnishes a route from Chicago to 
 New Orleans. Entrance to New Orleans was ac- 
 quired in 1911 through a joint control (with the 
 Louisville & Nashville) of the New Orleans, Mobile 
 & Chicago Railroad. Although the 'Frisco's cor- 
 porate lines have their northern terminal points at 
 Kansas City and St. Louis, the ownership of the 
 Chicago & Eastern Illinois Railroad furnishes a route 
 north to Chicago. Thus, the St. Louis & San Fran- 
 cisco system has lines connecting Chicago and the 
 Gulf points. These lines, however, have not the 
 directness of the other Mississippi Valley systems. 
 Because of its numerous intersecting and zig-zag 
 branches the main arteries of the 'Frisco System are 
 difficult to distinguish. This is a disadvantage in 
 the competition for through traffic. The 'Frisco, 
 in 1910, acquired a substantial hold on the traffic 
 moving along the Gulf Coast by purchasing the 
 St. Louis, Brownsville & Mexico Railroad (line from 
 Brownsville at the mouth of the Rio Grande River 
 to Galveston) and combining it with the New Or- 
 leans, Texas & Mexico Railroad, connecting Gal- 
 veston with New Orleans. The following are the 
 principal constituent companies of the 'Frisco Sys- 
 tem: 
 
RAILROAD SYSTEMS OF THE U. S. 71 
 
 St. Louis & San Francisco System 
 
 Mileage 
 
 St. Louis & San Francisco R. R. Co 4,731 .88 
 
 Chicago & Eastern Illinois R. R. Co 1.275.38 
 
 Fort Worth & Rio Grande Ry. Co 235.22 
 
 New Orleans, Texas & Mexico R. R. Co 264.48 
 
 St. Louis, Brownsville & Mexico Ry. Co 509.85 
 
 St. Louis. San Francisco & Texas Ry. Co 243.33 
 
 Other Lines 265.53 
 
 Total 7,524.67 
 
 The Missouri, Kansas & Texas, and the Kansas 
 City Southern cover nearly identical territory. The 
 main stem of each runs from Kansas City to the 
 Gulf. The Missouri, Kansas & Texas has its south- 
 ern terminus at Galveston, and the Kansas City 
 Southern at Port Arthur. The unique feature of the 
 Kansas City Southern is that it has no branch mile- 
 age other than two spurs; one connecting with Ft. 
 Smith, Ark., and the other running from De Quincy 
 to Lake Charles, La. These together represent but 
 40 miles of a total system of 834 miles. Unlike its 
 rival system, the "Katy," as the Missouri, Kansas 
 & Texas is familiarly known, has a fairly large pro- 
 portion of branch mileage. This gives it an advan- 
 tage in reaching a greater number of traflSc centers. 
 Thus, as northern terminals, in addition to Kansas 
 City, it has Alton, 111., St. Louis, Hannibal, Mo., 
 and Junction City, Kansas. Branches and divisions 
 supplementary to the main line reach important 
 intermediate towns in Oklahoma, in Louisiana and 
 in Texas. In all, the "Katy" system comprises in 
 the neighborhood of 4,000 miles. 
 
72 AMERICAN RAILROAD ECONOMICS 
 
 VI. Middle Western Systems in the North. The 
 independent lines operating in the geographical 
 division bordering along the Great Lakes west of 
 Buffalo and east of Chicago and St. Louis are a 
 relatively unimportant group. Most of the lines 
 in this territory are subsidiaries of the Eastern 
 Trunk Lines or other leading railroad systems. 
 Even the Wabash Railroad System, which has its 
 main divisions in this region, was intended as an 
 eastern extension of the * Missouri Pacific System. 
 The receivership of the Wabash Railroad and of its 
 Pittsburgh connections, (the Wheeling & Lake Erie 
 and the Wabash Pittsburgh Terminal Company), 
 establishes its independence as a railroad organiza- 
 tion. The western terminals of the Wabash are at 
 Council Bluffs, Omaha and Kansas City, and the 
 eastern terminals are Detroit, Buffalo and Pitts- 
 burgh. It is very probable that in a reorganization, 
 the Pittsburgh connections will be lost. Buffalo is 
 reached from Detroit over the tracks of the Grand 
 Trunk Railway in Canada. An important division 
 of the Wabash is the Chicago-Toledo Line, one of 
 the shortest routes from Chicago to Toledo. The 
 total mileage of the Wabash System (exclusive of its 
 Pittsburgh subsidiaries) is approximately, 2,500 
 miles. 
 
 The Toledo, St Louis Sc Western System comprises 
 the Toledo, St. Louis & Western Railroad and the 
 Chicago & Alton Railroad, The latter was acquired 
 in 1907 through purchase of a majority of capital 
 stock. St. Louis is the only point of convergence of 
 
RAILROAD SYSTEMS OF THE U. S. 73 
 
 the lines of the two companies. A main stem of the 
 Chicago & Alton is a direct route north into Chicago 
 and another runs westerly into Kansas City. The 
 Toledo, St. Louis & Western furnishes a short north- 
 east route from St. Louis to Toledo and Detroit. 
 Together, the lines of the two companies comprise 
 approximately 1,500 miles. 
 
 VII. The Northwestern Trunk Line Systems. 
 These systems include the principal railroads operat- 
 ing throughout the region west and northwest of Chi- 
 cago. Not all have direct entrance to Chicago. The 
 Union Pacific, one of the important systems in the 
 group, has its eastern termini at Omaha and Kansas 
 City. By means of junctions and traffic interchange 
 arrangements with other systems it suffers no great 
 loss of through business.^ The Great Northern and 
 Northern Pacific likewise do not enter Chicago. 
 Both, however, are assured favorable traffic inter- 
 change conditions with the western metropolis 
 through their joint control of the Chicago, Burling- 
 ton & Quincy Railroad, which, aside from its numer- 
 ous branches and feeders, has a direct line into 
 Chicago. 
 
 Several of the important systems which originate 
 in Chicago and reach out toward the West, do not as 
 yet possess Pacific terminals. Important among 
 these are the Chicago & North Western and the 
 Burlington; but the " Burlington " has connection with 
 
 1 The late E. H. Hamman, referring to the Union Pacific's isolated 
 location at the time he became its active administrator, described it as 
 a railroad "beginning nowhere and ending nowhere." 
 
74 AMERICAN RAILROAD ECONOMICS 
 
 the Hill lines, and the "Northwestern" exchanges 
 Coast traffic with the Union Pacific. 
 
 The varying topographical characteristics and 
 the sparsity of population west of Chicago causes 
 the northwestern systems to differ from the eastern 
 trunk lines in both physical and traffic features. 
 The length of their mileage in relation to the business 
 done is much greater, and commodities are hauled 
 longer distances. The agricultural character of the 
 territory served requires numerous branches of 
 light traffic. The physical facilities and traffic 
 conditions, therefore, are not comparable with rail- 
 roads traversing densely populated sections. 
 
 The Union Pacific System, as already mentioned 
 on page 73, has no line into Chicago. From each 
 of its eastern termini, Kansas City and Omaha, a 
 line runs parallel directly west. The line from Kansas 
 City is a short route to Denver, Colo. The line from 
 Omaha is the shortest route to Ogden, Utah, and 
 constitutes the main stem of the system. It is con- 
 nected with the Denver division by a branch running 
 north from the city of Denver. Three arteries 
 extend from Ogden to the Coast. One, running 
 northwesterly via Oregon Short Line, reaches the 
 ports of Puget Sound. The central artery (the Cen- 
 tral Pacific, a subsidiary of the Southern Pacific) 
 runs through the Sierra Mountains direct to San 
 Francisco. The third line (the San Pedro, Los 
 Angeles & Salt Lake Railroad) is a short route to 
 Los Angeles and Southern California. The strategic 
 value of these arteries, from a business standpoint, is 
 
RAILROAD SYSTEMS OF THE U. S. 75 
 
 of the highest importance to the Union Pacific. 
 Their possession gives the system participation in 
 the long haul traffic to and from the Pacific Coast. 
 The branches of the Southern Pacific Company (un- 
 til recently controlled by stock ownership), through 
 junction with the Union Pacific lines, afford a means 
 for collecting and distributing this traffic. Several 
 minor divisions of the Union Pacific bring the system 
 into direct communication with leading intermediate 
 business centers such as Butte, Mont., and Spokane, 
 Wash. There are also a number of small "feeders" 
 in the grain growing region. These together with 
 the main lines and the proprietary mileage, aggre- 
 gated on June 30, 1912, approximately 7,500 miles of 
 road. 
 
 The Great Northern and Northern Pacific systems 
 although under one personal administrative control 
 are operated entirely independently. They are in 
 many respects parallel and competing lines covering 
 almost identical territory. Their eastern termini 
 are at Duluth, Wis., and St. Paul, Minn., and the 
 Western termini at points along Puget Sound. The 
 Northern Pacific lines, however, run mainly di- 
 rectly west, whereas, the Great Northern's principal 
 lines run northwesterly along the Canadian border. 
 The Northern Pacific, however, has a branch directly 
 north from Winnipeg Junction, Minn., to Winnipeg, 
 Canada. Thus, both systems participate in the 
 grain movement from the Canadian wheat fields 
 to Chicago. The branch lines and "feeders" of the 
 Great Northern lie mainly in the wheat growing 
 
76 AMERICAN RAILROAD ECONOMICS 
 
 section of North Dakota and in the iron ore lands of 
 Minnesota. The movement of these commodities is 
 an important element in this company's traffic. 
 Both systems have developed branch lines in the 
 State of Washington. By means of the jointly 
 controlled Spokane, Portland and Seattle Railway 
 connection is afforded with a newly developed coun- 
 try rich in agricultural and commercial possibilities. 
 Exclusive of this subsidiary (of approximately 600 
 miles) the mileage of the Great Northern on June 30, 
 1912, was about 7,400 miles and that of the Northern 
 Pacific 6,700 miles. 
 
 The Chicago & North Western System is the prod- 
 uct of more than fifty years of continuous develop- 
 ment. Its net work of lines unites Chicago with all 
 the important traffic centers in the states of Wiscon- 
 sin, Minnesota, South Dakota and Nebraska. With 
 its main subsidiary, the Chicago, St. Paul, Minneap- 
 olis & Omaha Railroad, (the "Omaha") it comprises 
 in all approximately 9,000 miles of which only a 
 very small portion represents leased lines or trackage 
 rights. 
 
 The Chicago, Milwaukee & St. Paul System, 
 familiarly known as the St. Paul, covers practically 
 the same territory as the "Northwestern." Many 
 of their lines are parallel and competing. The St. 
 Paul, besides having a line to Kansas City not 
 duplicated by its rival, completed in 1911 a Pacific 
 Coast extension, the Chicago, Milwaukee & Puget 
 Sound Railroad. This extension, built to preserve 
 St. Paul's "through" business from competing 
 
RAILROAD SYSTEMS OF THE U. S. 77 
 
 systems, comprises 1,400 miles of road. The develop- 
 ment of branch lines and "feeders" will undoubtedly 
 add to the mileage. With the Coast extension, the 
 "St. Paul" aggregates approximately 9,000 miles of 
 road. All but a very small part is owned in fee. 
 
 The Minneapolis, St, Paul & Sault Ste. Marie 
 System, (the "Soo"), constitutes the main mileage of 
 the Canadian Pacific lines in the United States. By 
 means of the "Soo," the Canadian Pacific partici- 
 pates in the through traffic between Chicago and 
 Vancouver, its main Pacific Coast terminal. The 
 Canadian Pacific, therefore, is an active competitor 
 of the Northwestern Trunk Lines in the United 
 States. The "Soo" System, beginning at Chicago 
 (with the main line of the Wisconsin Central) con- 
 nects with the Canadian Pacific at Duluth and along 
 the international boundary line of North Dakota. 
 Duluth is reached through affiliation with the Duluth, 
 South Shore & Atlantic Railroad. Although passing 
 through a large grain section the "Soo" is not as 
 well provided with branches and "feeders" as its 
 rival systems. Its aggregate mileage, therefore, is 
 considerably less. 
 
 The Chicago, Burlington & Quincy System, "the 
 Burlington", like the "Northwestern" and the 
 "St. Paul," has its base stem in Chicago, with main 
 lines running directly west and with numerous inter- 
 secting branches and "feeders." The principal 
 western termini are Denver, Colo., Cheyenne and 
 Billings, Mont. From Denver and Cheyenne, junc- 
 tions are formed with the Colorado & Southern 
 
78 AMERICAN RAILROAD ECONOMICS 
 
 (controlled through stock ownership). This sub- 
 sidiary affords the Burlington a Gulf outlet. At 
 Billings and also at Fromberg, Mont., traflfic is 
 interchanged with the Great Northern and Northern 
 Pacific Systems. Because of its extensive main lines 
 and its many branches and "feeders," the Burlington 
 System (including the Colorado & Southern lines) 
 comprises in all about 11,800 miles of road. This is 
 the largest mileage of any of the western trunk line 
 systems. 
 
 VIII. The Southwestern Systems. The expansion 
 of the southwestern trunk lines has the same goal 
 as the northwestern systems. The aim is a through, 
 unbroken track between Chicago and the Pacific 
 Coast. A secondary objective point is the Mexican 
 GuK ports. These systems, accordingly, compete 
 partially for "through" business with the north- 
 western as well as with the Mississippi Valley sys- 
 tems. Like the northwestern lines, the mileage of 
 the southwestern group is quite extensive. The 
 region traversed is vast and, for the most part, 
 thinly populated. The companies with lines passing 
 over the Rockies have difficult grades to contend 
 with. All these factors influence the physical and 
 traffic characteristics of the southwestern railroads, 
 marking them apart from railroads in other geo- 
 graphical divisions. 
 
 The Southern Pacific System has one great point 
 of difference from the other systems in the "South- 
 western group." The direction of its longest trans- 
 continental line has no relationship with tlie traffic 
 
RAILROAD SYSTEMS OF THE U. S. 79 
 
 between Chicago and the Pacific or the Gulf. Its 
 Central Pacific line, extending from San Francisco 
 to Ogden, Utah, is more properly an integral part 
 of the Union Pacific System, and constituted the 
 latter 's most important asset in its former control 
 of the Southern Pacific Company. 
 
 The main artery of the Southern Pacific extends 
 from the mouth of the Mississippi River (where 
 trafiSc is exchanged with controlled steamship sys- 
 tems plying between New York and the Gulf) 
 through Louisiana and lower Texas, and along the 
 Mexican border to Los Angeles, San Francisco and 
 as far north as Portland, Ore. Here a junction is 
 formed with the Union Pacific lines. The branch 
 lines and "feeders" of the Southern Pacific are 
 mostly in eastern Texas and in central California. 
 Mexican connections are being developed by the 
 construction of a line from the main stem in Arizona 
 along the western coast of Mexico. The aggregate 
 mileage of the Southern Pacific System (including 
 the Central Pacific) on June 30, 1912, was 11,600 
 miles. 
 
 The Atchison, Topeka & Santa Fe is the only rail- 
 road which has a direct route over its corporate lines 
 from Chicago to San Francisco. Its base stem from 
 Chicago runs southwesterly through Kansas, Okla- 
 homa and the Panhandle of Texas. Thence, parallel- 
 ing the Southern Pacific's main line, it passes through 
 New Mexico, Arizona, and Central California. A 
 branch running north reaches Denver, and two 
 others from the main line converge at Galveston. 
 
80 AMERICAN RAILROAD ECONOMICS 
 
 The Atchison, therefore, competes with the Southern 
 Pacific for through business exchanged between 
 California and the Gulf of Mexico. A net work of 
 small branch lines and "feeders" is confined prin- 
 cipally to the grain growing section of Kansas and 
 Oklahoma. The Atchison lines as a whole comprise 
 about 10,500 miles of road. 
 
 The Missouri Pacific System, including the Den- 
 ver & Rio Grande lines, though lately having com- 
 pleted a Pacific Coast connection, has no extension 
 into Chicago unless the Wabash is still to be con- 
 sidered an integral part of its lines. St. Louis, Mo., 
 is the base stem from which the Missouri Pacific 
 lines originate and spread out over the important 
 traffic centers of the Great West. The most north- 
 erly point reached is Omaha through a branch 
 running from Kansas City. New Orleans, Galves- 
 ton, Laredo and El Paso on the Mexican border 
 are southern termini, but none of these points are 
 reached by "short cuts." Thus, the Missouri Pacific 
 lines in competing for the through business from 
 St. Louis to the Gulf and Mexican points are at a dis- 
 advantage as compared with other lines having 
 more direct routes. The junction with the Denver 
 & Rio Grande System is at Pueblo, Colorado. At 
 this point a series of lines in all directions covers 
 the central region of the Rocky Mountains. Denver 
 lies more than 100 miles north of Pueblo and is 
 therefore off the direct transcontinental route which 
 passes from Pueblo over the mountains to Salt Lake 
 City and Ogden, Utah. The eastern terminus of 
 
RAILROAD SYSTEMS OF THE U. S. 81 
 
 the Western Pacific, (the newly completed Coast 
 extension of the Denver & Rio Grande Railroad), 
 is at Salt Lake City. This line runs directly west to 
 San Francisco, paralleling a large part of the Central 
 Pacific Railroad. Notwithstanding the recent ex- 
 tensions and the vast net work of lines (all of which 
 give the Missouri Pacific and Denver & Rio Grande 
 systems together more than 13,000 miles of road) 
 these "Gould Lines" do not, as yet, command a 
 traffic interchange commensurate with their location 
 and mileage. 
 
 The Rock Island System in proportion to its mile- 
 age covers a wider territory than any of the other 
 western systems. Its lines traverse almost all the 
 states between the Mississippi River and the Rocky 
 Mountains. The main stem rising at Chicago, ex- 
 tends directly west through Omaha to Denver. 
 Diverging north from this line are two divisions, 
 with intersecting branches. One terminates at 
 Watertown, S. D., and the other at St. Paul. An- 
 other important division extends from Rock Island, 
 111., all the way to the Mexican border at El Paso. 
 From this line there are two parallel branches, one 
 reaching to Memphis and the other to Kansas City 
 and St. Louis. Thus, the Rock Island is well pro- 
 vided with facilities for through traffic to and from 
 Mexico. It has not yet developed sufficient branches 
 to furnish a large local business, especially in the 
 grain and cotton growing sections. Because of ex- 
 tensive main lines, however, the Rock Island System 
 comprises about 8,000 miles of road. 
 
82 AMERICAN RAILROAD ECONOMICS 
 
 TRAFFIC INTERCHANGE AGREEMENTS 
 
 The foregoing concise description of the leading 
 railroad systems in the United States is largely for 
 the purpose of pointing out the influence of geo- 
 graphical location on railroad operations, and the 
 strategic advantage in competition acquired by the 
 railroad systems having favorable routes for through 
 business. An additional factor influencing operating 
 results are the contracts or arrangements for inter- 
 change of traffic with connecting and independent 
 lines. The terms of these agreements, if favorable, 
 may afford to a railroad company all the advantages 
 of system extension. In fact the difficulties in ob- 
 taining favorable terms as against competing rail- 
 roads frequently led to the actual purchase or ad- 
 ministrative control of connecting lines forming a 
 complete "through traffic" route. By favoring the 
 shipments of one connecting line over those of an- 
 other or by interchanging freight exclusively with 
 one of several competing lines, a small intermediate 
 railroad might be used as the means of crushing a 
 rival railroad system. An analogous situation was 
 the motive for the St. Paul's Pacific Coast extension. 
 Up to 1906, St. Paul was creating a large volume of 
 business on its lines and turning it over to connect- 
 ing roads. Because competing systems employed the 
 Burlington as a Chicago extension, and because of 
 the traffic alliance of the Union Pacific and the 
 Chicago & North Western, the St. Paul did not re- 
 ceive its proper share of interchanged tonnage. Nat- 
 
RAILROAD SYSTEMS OF THE U. S. 83 
 
 urally, the St. Paul wanted to get as much business 
 as possible. So the Pacific Coast extension was 
 built (the Chicago, Milwaukee & Puget Sound Rail- 
 road) ; a venture which cost more than $150,000,000. 
 
 A good illustration of a mutually favorable traffic 
 interchange agreement is that in force between the 
 Kansas City Southern, on the one hand, and the 
 Union Pacific and Southern Pacific lines, on the 
 other. This agreement was made in January, 1909. 
 The Kansas City Southern is a trunk line forming a 
 junction with the Union Pacific at Kansas City 
 and running directly south to a junction with the 
 Southern Pacific at Shreveport, La., and Beaumont, 
 Texas. It is thus a natural link in the Harriman 
 lines. By the terms of the traffic agreement, the 
 Kansas City Southern becomes a through line for 
 the transportation of freight interchanged by the 
 parties between (1) points on or west of the Missis- 
 sippi River and (2) points in what is commonly 
 known as "Seaboard Territory." A substantial in- 
 crease in Kansas City Southern's business is the 
 natural outcome of this arrangement.^ 
 
 A more recent and noteworthy traffic alliance is 
 that between the New York Central Lines and the 
 Western Maryland Railroad for the movement of 
 freight between Pittsburgh and Baltimore. This 
 agreement permits coal from the Pittsburgh district 
 to be laid down in Baltimore and other eastern tide- 
 water destinations in competition with coal from 
 
 ^ This agreement may cease because of the segregation of the Union 
 Pacific and Southern Pacific systems. 
 
84 AMERICAN RAILROAD ECONOMICS 
 
 Virginia, West Virginia, Kentucky and Tennessee 
 coal fields. This means an influx of coal to eastern 
 tidewater from a new source. Unless a freight rate 
 war with competing systems causes the new business 
 to be carried at a loss, both contracting companies 
 will benefit through the additional revenue furnished 
 by the traffic interchange. 
 
 Other instances of advantageous traffic interchange 
 arrangements could be pointed out. The purpose 
 here, however, is merely to call attention to the in- 
 fluence of these alliances on railroad earning power. 
 New developments of this kind are worthy of close 
 study and analysis by all who are interested in rail- 
 road values or railroad operating results. 
 
CHAPTER IV 
 
 ECONOMICS OF RAILROAD CONSTRUCTION 
 
 Railroad activities can be broadly divided into 
 construction and operation. The investor and the 
 student of transportation are concerned equally with 
 both branches. Successful railroad operation from a 
 financial viewpoint is largely dependent upon the 
 character and cost of the physical construction. 
 Therefore, a proper understanding and interpreta- 
 tion of operating statistics and accounts demands 
 at least an elementary knowledge of the underlying 
 economic principles of railroad construction. 
 
 Investment Basis of Railroad Construction. From 
 a strictly business viewpoint there is but one domi- 
 nant motive for railroad construction, viz., the proba- 
 bility of a profit on the money thus invested. It 
 must be assumed, therefore, throughout this work, 
 that a railroad project is undertaken primarily as 
 an investment to those supplying the capital. The 
 fact that the greater part of railroad . construction 
 in the United States has not successfully fulfilled 
 this purpose for the original security holders does not 
 invalidate this assumption. Unlike industrial enter- 
 prises, American railroads have not been built with 
 funds furnished exclusively by the promoters. From 
 their inception, large capital expenditures required 
 
 85 
 
86 AMERICAN RAILROAD ECONOMICS 
 
 the financial participation of the public as investors. 
 This renders all the more important a proper inter- 
 pretation of the fundamental principles of railroad 
 promotion and construction.^ 
 
 When a project for a new railroad is proposed, the 
 first problem considered by promoters is whether 
 the need for the line justifies the construction ex- 
 pense. The size and character of the places to be 
 connected and the resources of the sm^rounding 
 territory, considered in connection with existing 
 transportation facilities, are factors influencing the 
 solution of this problem. As pointed out by Mr. W. 
 L. Webb,2 "The economic considerations underlying 
 the building of railroads in the United States are 
 now fundamentally different from those existing 
 fifty and sixty years ago." At that time the greater 
 part of the United States was sparsely settled. It 
 
 ^ Comparatively little comprehensive study has been undertaken on 
 the subject of economics of railroad construction since that conducted by 
 the late A. M. Wellington and included in his book on "Economics of 
 Railway Location," which was first published in 1887 and revised two 
 years later. In spite of the fact that a great many changes have taken 
 place in both track and locomotive design and operation in the past 
 twenty-five years, this book is still standard today, although the figures 
 given in it are out of date. There is opportunity and demand for similar 
 studies of operating conditions at the present time, in order to put out a 
 standard authority for use under present day operating conditions. The 
 most thorough contribution in this line made in recent years was that by 
 J. B. Berry on Grade Revision on the Union Pacific, published as a 
 bulletin of the American Railway Engineering Association in 1904. A 
 similar paper was prepared by John D. Isaacs outlining the study made 
 before grade revision was undertaken on the main line of the Southern 
 Pacific. 
 
 2 "Economics of Railroad Construction/' p. 66. 
 
ECONOMICS OF R. R. CONSTRUCTION 87 
 
 was then more a question of creating traffic through 
 aiding economic development than of insufficient or 
 of oversupply of transportation facihties. In these 
 days of restricted national expansion, however, 
 railroad construction is frequently undertaken on a 
 different basis than in earlier years. In fact, having 
 in most cases acquired the best available routes and 
 the most advantageous territorial connections, fu- 
 ture development of American railroads (with the 
 exception of the extreme western lines) will be largely 
 a duplication of transportation facilities by the con- 
 struction of competing lines. Moreover, the growth 
 in traffic of all kinds, besides developing rival rail- 
 road systems, necessitates improvements in the form 
 of branches and feeders, additional main tracks, 
 revision of grades and the like. 
 
 The records of early railroad building prove that 
 capital is not likely to be risked in new enterprises 
 without the speculative possibility of a larger return 
 than can be obtained from a more secure investment. 
 The encouragement given by the State and Federal 
 Governments through land grants and other subsidies 
 to the early railroads was a matter of necessity rather 
 than choice. Much traffic is necessary for profit in 
 railroad operation; consequently, unless a line is built 
 in a well settled territory insufficiently supplied 
 with railroad facilities, the profits are purely specu- 
 lative. 
 
 The Nature of the Prospectus. In view of the 
 speculative character of new railroad enterprises, when 
 undertaken on a purely business basis without State 
 
88 AMERICAN RAILROAD ECONOMICS 
 
 subsidy or guaranty, successful railroad promotion 
 requires careful analysis of underlying conditions. 
 Ordinarily, when an independent line is planned 
 and public participation is invited by the promoters, 
 a "prospectus" regarding the enterprise is prepared. 
 This document usually gives details of the proposed 
 character and the route of the contemplated line; 
 the resources of the country traversed, and the com- 
 municating transportation facilities for traffic inter- 
 change. It also generally includes the reports and 
 opinions of engineers, financiers and other experts. 
 These are naturally favorable to the venture. 
 
 The Estimated Volume of Traffic. Assuming as 
 feasible the construction of a new railroad, the first 
 problem in the prospectus is the probable volume oj 
 traffic. Various methods are followed in estimating 
 this item. The earnings of other lines in the same 
 territory are sometimes taken as a basis. The trib- 
 utary population and the natural resources are 
 elements of importance; and also the character of 
 the existing industries or those capable of develop- 
 ment. The opportunities of traffic interchange with 
 other transportation systems, on the one hand, and 
 the probable or potential competition of rival car- 
 riers on the other, are additional factors. That no 
 one of these criteria, singly, offers a safe and satis- 
 factory basis for sound railway promotion is readily 
 apparent. They all require proper weighing. Modi- 
 fications should be made to accord with the pro- 
 posed physical character of the line and the territory 
 to be served. Even after the most cautious analysis 
 
ECONOMICS OF R. R. CONSTRUCTION 89 
 
 there is no certainty of safety of investment, — un- 
 less obtained from an extraneous source, such as a 
 State warranty. Whoever advances funds for the 
 building of a railroad, though possibly a public 
 benefactor, is nevertheless a speculator. Some 
 speculation is absolutely necessary in modern rail- 
 road promotion, even when supported by wealthy 
 and prominent financiers or by the credit of an exist- 
 ing railroad system. 
 
 As an illustration of the methods actually em- 
 ployed in estimating probable traffic on a proposed 
 new railroad line, the following extract from the 
 report of J. G. White & Co., on the Delaware & 
 Eastern Railway, (when under construction from 
 East Branch, N. Y., to Schenectady, N. Y.), is given: 
 
 The greater part of your revenue from local traffic must accrue from 
 the carriage of freight and milk. The local passenger business must be 
 relatively small. Outside of the City of Schenectady, the population 
 centers on the Delaware & Eastern aggregate about 8,000 people. The 
 intermediate sections have a farming population. . . . The commodities 
 that will make up the bulk of your local freight traffic, are principally 
 lumber, blue stone, agricultural implements, hardware and general 
 supplies, coal, cement, paints, etc. The tendency on your present rail- 
 road has been to introduce wood working factories, acid factories, etc., 
 so that a considerable portion of the various local products are manu- 
 factured into articles that pay a high rate of freight. . . . 
 
 In the study of the probable freight traffic on this line it may be use- 
 ful to consider the traffic on the Ulster & Delaware Railroad, which runs 
 in an easterly and westerly direction from Oneonta on the Delaware & 
 Hudson Railroad, 107 miles to Kingston Point on the Hudson River. 
 It also has branches aggregating about 22 miles, making its total main 
 single track mileage 128.9 miles. . . . The geographical position of 
 the proposed Delaware & Eastern Railway is a direct line between the 
 coal and iron region and the northern portion of the manufacturing New 
 England States, and its direct connections with five of the large railroad 
 
90 AMERICAN RAILROAD ECONOMICS 
 
 systems of the East would imply that it might naturally receive a good 
 share of the very large and increasing through traflSc that is passing in 
 both directions between these two districts. 
 
 The Rates to be Charged. Volume of traflSc is but 
 one element in the profitableness of a transportation 
 enterprise. Of equal importance are the rates that 
 can be charged. It was pointed out in a previous 
 chapter that the economic justification of the trans- 
 portation service is that it is profitable both to the 
 shipper and to the transportation company. If the 
 shipper does not profit through the transportation 
 of his goods he will dispose of them at home. If the 
 transportation company cannot make a profit by 
 hauling the goods, it must increase its charges or be 
 operated continuously at a loss. Hence, the economic 
 limits of rates that can be charged for the transpor- 
 tation service. On a new railroad it may not be 
 merely a question of determining what rates the 
 traffic will bear, but also what rates will best en- 
 courage and develop a traffic which will yield the 
 largest net revenue. The danger of fixing the rates 
 above this level even in the absence of competition 
 may result disastrously to the security holders. For 
 example, a railroad is built through a section favor- 
 able for dairying. The milk traffic is estimated to 
 be an important element in the expected revenue. 
 In view of the special "express service" required 
 for this commodity, the rates to yield a profit, must 
 greatly exceed (from five to even ten times as much) 
 what might be the charge for ordinary freight ser- 
 vice. But whether the dairymen will be able to pay 
 
ECONOMICS OF R. R. CONSTRUCTION 91 
 
 the proposed rate depends (1) on the length of haul ^ 
 to the market in competition with milk shipped from 
 other localities and (2) the price obtained for the 
 product at its destination. If, under these condi- 
 tions, the rate is too high, the dairymen will not 
 ship the milk. They may convert it into cheese, 
 and this article is of small bulk and may be shipped 
 as ordinary freight. Hence, the railroad fails to 
 obtain the large revenue expected from the milk 
 service. 
 
 The fixing of rates for lumber traffic in a forest 
 region comes under the same limitations. Unless 
 the new railroad can afford to encourage timber 
 operations through low rates and through the build- 
 ing of tap lines, it may fail to develop this traffic. 
 Thus, many enterprises which are passed on favor-* 
 ably as capable of securing a large local traffic fail 
 to earn the sums estimated. 
 
 In the matter of through business, estimated as 
 coming from connecting lines, similar disappoint- 
 ments may result. Even with traffic interchange 
 agreements and joint rates as described on p. 82, the 
 share of the revenue allotted to the new line may 
 not be sufficient to yield a profit. Uncertainties of 
 this character are largely responsible for the almost 
 entire absence of independent railroad promotion. 
 New construction is now mainly under the auspices 
 of established railroad systems. 
 , Selection of the Route. In addition to the calcula- 
 tion of the probable traffic and revenue, there are 
 further problems requiring solution in new railroad 
 
92 AMERICAN RAILROAD ECONOMICS 
 
 construction. The selection of the route is a factor 
 of prime importance. Generally, the proposed line 
 is to lie between two termini, determined in advance 
 and set down in the company's charter. Several 
 routes may be surveyed with a view to both econom- 
 ical construction cost and favorable traJ05c sources. 
 A prime motive is to bring the line in connection 
 with as many intermediate centers of traffic as may 
 be possible within the region traversed. The tapping 
 of an additional traffic center may mean more than 
 a mere interchange of tonnage with this point. It 
 frequently effects a connecting link with tributary 
 communities and with sections of territory far distant 
 from the direct route of the main line. 
 
 The extension of railroads for the purpose of 
 reaching new stations may entail heavy additional 
 construction cost, but this may be more than offset 
 by resulting growth in business. The reason is that 
 intercourse and communication tend to increase at 
 an accelerated ratio with each additional station. 
 Thus, three localities, A, B, and C, when brought 
 into communication or traffic interchange, theoretic- 
 ally, will have six opportunities for intercourse: 
 A with B, B with A, A with C, C with A, B with C, 
 and C with B. By adding a fourth station (D) there 
 will be twelve separate opportunities for intercourse, 
 computed in the same way, and when five localities 
 are brought into communication there are twenty 
 opportunities for traffic interchange. This multipli- 
 cation of opportunities continues at the same rate 
 as new stations are reached. When new stations 
 
ECONOMICS OF R. R. CONSTRUCTION 93 
 
 aflFord an opportunity for intercourse through their 
 existing transportation facihties with other sta- 
 tions off the route of the new line, the possible ex- 
 pansion of business may be even greater than repre- 
 sented in the above calculations. In this way, 
 traffic may expand in a geometrical ratio when sta- 
 tions increase in an arithmetical ratio. The eco- 
 nomic importance of reaching large cities, therefore, 
 as already pointed out in the previous chapter, can 
 hardly be over-estimated. The great mistake in 
 the original construction of the Erie Railroad, ac- 
 cording to plans of the New York legislature, was 
 that the route selected purposely led away from 
 the large centers of population in order not to have 
 the railroad interfere with the business of the State 
 canal. 
 
 The Estimate of Construction Cost is a problem as 
 vital as the selection of a proper route. Obviously, 
 this matter can be handled only by expert engineers. 
 The physical character of the line proposed and the 
 volume of traffic to be handled, as well as the geolog- 
 ical and engineering difficulties which must be over- 
 come, are leading elements in the cost estimates. 
 If a railroad is to be built to compete with high-class 
 lines for through business and, at the same time, 
 to afford equally good facilities for local business, 
 it must be strongly and well constructed. More- 
 over, the topography of the selected route must be 
 favorable in order to attract business from compet- 
 ing lines. 
 
 In estimating construction costs, engineers fre- 
 
94 AMERICAN RAILROAD ECONOMICS 
 
 quently study the experience of similar lines already 
 in operation. This method, however, may fail to 
 consider cost changes that have taken place since the 
 existing lines were built. Advances in property 
 values, for example, are constantly compelling the 
 railroads to pay more for right-of-way and for ter- 
 minals. In fact, few details connected with the 
 construction of a new line or with the improvement 
 of existing facilities are the source of so much trouble 
 in engineering estimates as the purchase of right-of- 
 way and the provision of proper terminals. The 
 mere announcement of a railroad project increases 
 land values along the route, and even with condem- 
 nation proceedings or appraisal boards, the railroad 
 pays the enhanced price. In one case, where a 
 Middle Western line desired a right of way through 
 a prosperous farming community, the farmers man- 
 aged to have their friends appointed as condemna- 
 tion commissioners with the result that the road paid 
 over $1,000 per acre for right-of-way when adjacent 
 land was selling at not over $150 per acre. 
 
 The question of terminal land expense is always a 
 troublesome one. To secure a maximum business, 
 a railroad must have its terminals near the town 
 centers, otherwise heavy drayage costs to freight 
 shippers and receivers, or the expense and incon- 
 venience to passengers in going to and from the 
 station will hinder large traffic.^ But city property 
 is costly, especially when the sites are already oc- 
 cupied by buildings. It is therefore of great economic 
 
 ^ This subject is discussed in greater detail on p. 120. 
 
ECONOMICS OF R. R. CONSTRUCTION 95 
 
 advantage to new and independent lines to secure 
 by lease or joint purchase the use of terminal facili- 
 ties of existing lines. In this way construction costs 
 can be greatly reduced. 
 
 In view of the topographical disparities and the 
 diverse conditions affecting costs of land, materials 
 and wages in different localities and at different 
 times, engineers can lay down no definite rules re- 
 garding the various elements of railroad construc- 
 tion costs. The following table of percentages com- 
 piled by John F. Wallace and published some fifteen 
 years ago in the Engineering Magazine,^ is given 
 merely as an interesting example of this sort of 
 work. 
 
 Element of Cost 
 
 Right of way 
 
 Fencing 
 
 Grading 
 
 Bridges and Culverts 
 
 Telegraph 
 
 Track, Material and Labor . . 
 
 Ballast 
 
 Water Supply, Stations, etc. . 
 Rolling Stock and Equipment 
 
 Proportion of Terminals 
 
 Engineering 
 
 General and Legal 
 
 Main 
 
 Secondary 
 
 Line 
 
 Main Line 
 
 % 
 
 % 
 
 5.0 
 
 5.Q 
 
 1.0 
 
 1.6 
 
 30.0 
 
 24.0 
 
 10.0 
 
 10.0 
 
 0.7 
 
 1.2 
 
 17.5 
 
 25.6 
 
 7.5 
 
 9.6 
 
 2.5 
 
 2.8 
 
 10.0 
 
 10.0 
 
 12.5 
 
 6.0 
 
 1.8 
 
 2.0 
 
 1.5 
 
 1.6 
 
 100.0 
 
 100.0 
 
 Minor 
 Branches 
 
 % 
 
 6.7 
 
 2.0 
 
 20.0 
 
 10.0 
 
 1.3 
 
 40.0 
 
 0.0 
 
 3.3 
 
 9.3 
 
 3.3 
 
 2.7 
 
 1.3 
 
 100.0 
 
 * Quoted by A. M. Van Ayken, Railway Age Gazette^ March 8, 1912. 
 
96 AMERICAN RAILROAD ECONOMICS 
 
 The Fundamental Economic Principle of Modem 
 Railroad Construction. Conscientious railroad pro- 
 moters and financiers may assure themselves of the 
 strategic position of the proposed line; of its resources 
 and of its future, and may even test in every detail 
 the cost estimates as to roadbed, superstructures, 
 equipment, terminals and other essentials; yet they 
 cannot with all these precautions assume that the 
 investment will be reasonably safe. Further pre- 
 cautions are necessary. At the basis of all economic 
 railroad building lies the fundamental maxim, that 
 the construction is to he done at as small cost as is 
 consistent ivith the rate of return expected from the 
 probable volume of traffic. If the cost is excessive the 
 enterprise will not pay for the capital investment. 
 If it is built inadequately for the traflSc the enter- 
 prise will likewise prove unsuccessful. Such was 
 the experience of the Kansas City, Pittsburgh & 
 Gulf Railroad, the predecessor of the Kansas City 
 Southern. After a receivership and reorganization, 
 this line had to be substantially rebuilt to meet tra£Bc 
 requirements. 
 
 That many American railroads, however, have 
 been originally constructed more cheaply than 
 present day standards warrant was economically 
 justified by the character of traflSc prevailing at 
 their inception. To have discounted future demands 
 too far in advance might have proven financially 
 disastrous to the original owners. In fact, before 
 condemning American railroad promoters for not 
 having constructed and equipped the lines up to the 
 
ECONOMICS OF R. R. CONSTRUCTION 97 
 
 highest standards, the conditions under which these 
 were built should be considered. The railroads of 
 Europe were from the first constructed in countries 
 already densely populated and in a high state of 
 economic advancement. They were sure of a large 
 traffic from the start. The railroads of the United 
 States were largely built through territory having a 
 sparse population and little economic development. 
 They were required to attract population and build 
 up industry for traffic. Hence, it was necessary to 
 build them cheaply if they were to be built at all. 
 Even though inexpensively constructed, the traffic 
 for them was so light that only those situated in well 
 developed sections were able to earn a return on 
 their comparatively small investment. 
 
 Even in cases where there is every probability of 
 future development of large traffic, it frequently is 
 a financial loss to provide facilities of extended dura- 
 bility and beyond immediate requirements. Since 
 money when compounded at 6% interest yearly will 
 double itself in twelve years, it is manifestly not 
 economy to tie up funds in idle property for the pur- 
 pose of discounting too far in advance future con- 
 tingencies. The fact should not be overlooked that 
 capital expended but not immediately or fully used 
 demands a current interest payment the same as 
 that which is in active and full use. 
 
 The progressive physical improvement of American 
 railroads in some instances has effected almost an 
 entire reconstruction of the properties. This ex- 
 penditure in large part is the cost of progress. It 
 
98 AMERICAN RAILROAD ECONOMICS 
 
 is not necessarily due to errors of judgment or of 
 engineering practice. The cost of these improve- 
 ments therefore should be borne by those who use 
 as well as by those who furnish the transportation 
 service. Engineers and financiers are expected to 
 exercise proper judgment in sanctioning improve- 
 ments and new construction. The ordinary layman 
 who advances funds for these purposes or who is 
 otherwise financially interested in railroad enter- 
 prise must have full confidence in their judgment, 
 if he himself is not able to judge properly the eco- 
 nomic expedience of such expenditures. 
 
 The wisdom of extending branch mileage is like- 
 wise a problem requiring trained judgment. Inas- 
 much as the construction cost of a railroad should 
 be in accord with the traffic over its lines, it follows 
 as a necessary corollary that a branch line, feeder, 
 or any physical extension or betterment should not 
 cause an additional capital investment on which 
 a fair return cannot be anticipated. Although it is 
 true that in most cases branch mileage adds to 
 traffic and earning power, the net return therefrom, 
 as measured by the cost of the extension, is fre- 
 quently lower than the profit from the main lines. 
 No system of railroad accounting has yet been 
 evolved which can satisfactorily distinguish in 
 branch mileage between "feeders" which furnish 
 profits and "suckers" which cause losses. More- 
 over, the extension of branches into unremunerative 
 territory is not always undertaken with the ex- 
 pectation of an immediate net return. Branch 
 
ECONOMICS OF R. R. CONSTRUCTION 99 
 
 mileage and extensions are frequently constructed 
 or purchased merely to ward off competition or for 
 political or remotely speculative reasons. Such 
 speculative railroad building is undoubtedly an 
 evil because of capital waste, though the incidental 
 results may finally justify the expenditure of cap- 
 ital. 
 
 Because of the fundamental importance of gaug- 
 ing construction expenditure not only of new rail- 
 roads but also of systems already in operation, it 
 may be well to point out actual instances in which 
 the economic principle of confining the investment 
 within the limits on which a reasonable return can be 
 immediately expected has been ignored. The Virgin- 
 ian Railroad, extending from the coal fields at Clear- 
 water, West Virginia, to tidewater at Norfolk, Virginia, 
 is probably the best example of recent times. The 
 late H. H. Rogers, the promoter and owner, a wealthy 
 financier, with no experience in railroad matters, de- 
 sired to have a coal carrying line far superior to 
 any other in the land. The latest, most approved 
 and most costly engineering features for handling 
 heavy traffic were installed. All grades were prac- 
 tically eliminated and curves were reduced as far 
 as possible, though at heavy capital cost. When 
 finally completed to tidewater, at a construction 
 cost of over $185,000 per mile, the railroad was 
 capable of hauling over its lines an annual traffic 
 equal to one-half the then total coal consumption 
 in the United States. To develop this amount of 
 business may require the lapse of a quarter, or even 
 
100 AMERICAN RAILROAD ECONOMICS 
 
 a half century. The excess capital expenditure, 
 therefore, when compounded at the current interest 
 rate will have trebled before it brings in a maximum 
 return. Fortunately, in this case, a private estate 
 bears the financial burden and no public loss en- 
 tailing receivership and reorganization is involved. 
 
 An instance of spectacular railroad building repre- 
 senting a physical reconstruction of an old line is 
 the Delaware, Lackawanna & Western "cut off" 
 extending from Port Morris, N. J., to Slateford, 
 Pa., a distance of twenty-eight miles. The cost of 
 this structure is reported as approximately $1,500,000 
 per mile. Its purpose was the elimination of curves 
 and the shortening of the route eleven miles between 
 New York and Buffalo. Another "cut off" on the 
 same railroad from Clarks Summit to Hallstead, Pa., 
 thirty-eight miles, reducing the length of the rail- 
 road 3.6 miles is estimated to cost when completed 
 from $10,000,000 to $15,000,000. Obviously, costly 
 improvements of this character are not expected 
 to net an immediate return to the railroad com- 
 pany. The large earning power and immense finan- 
 cial resources of the Delaware, Lackawanna & West- 
 ern alone render the expenditure possible. 
 
 In contrast with the liberal construction poli- 
 cies of the Virginian and the Lackawanna railroads, 
 the Missouri Pacific may be taken as an instance of 
 inadequate new capital expenditure through in- 
 ability to provide facilities for its business. Com- 
 pared with other trunk lines operating in the same 
 territory, its cars and other equipment had for a time 
 
ECONOMICS OF R. R. CdN&JHUGT.TON lOX 
 
 become inferior. The business* of the company 
 could not be handled properly. The effect was an 
 impairment of net earning capacity. When improve- 
 ments are completed the road may be expected to 
 again compete favorably for remunerative traffic. 
 
CHAPTER V 
 
 PHYSICAL FACTORS IN ECONOMIC OPERATION! 
 WAY AND STRUCTURES 
 
 The general principles inherent in economic rail- 
 road construction lead up to the study of the phys- 
 ical factors influencing railway operations and 
 earnings. The location of roadbed and super- 
 structure, the quality and quantity of the rolling 
 stock, the character of the terminal facilities, all 
 are elements which, combined with wise financial 
 policy, efficient management and a paying traffic 
 determine the safety of the investment represented 
 by the outstanding securities. The problems of 
 physical structure belong to the realm of the en- 
 gineer. Investors and transportation students, how- 
 ever, are also concerned with these problems and 
 cannot afford to neglect them entirely. Public safety 
 and operating efficiency require adequate physical 
 facilities. Railroads are constantly demanding addi- 
 tional capital for extensions and betterments. It 
 is with the object of assisting a proper judgment as 
 to whether the interests of both security holders 
 and the public are safeguarded in such matters that 
 the following discussion of railroad physical features 
 is presented. 
 
 102 
 
PHYSICAL FACTORS 103 
 
 RAILWAY LOCATION 
 
 A consideration of location can be limited to the 
 three leading factors: (1) Distance, (2) Grades, 
 and (3) Curves. 
 
 Distance. Though there is considerable advan- 
 tage in having a shortest possible route between two 
 important termini, the element of distance, unless 
 pronounced, is probably the least important of the 
 primary physical factors. Slight detours to avoid 
 heavy construction cost or for the purpose of reach- 
 ing cities and towns are frequently more economical 
 than a direct route, constructed without reference 
 to topography or industrial considerations. To 
 follow a water course regardless of the windings and 
 detours was the natural route of early railroad con- 
 struction. Not only were easy gradients thus ob- 
 tained, but the established centers of population 
 and of traffic were also reached along these natural 
 channels of trade. It seems, therefore, that much 
 of the large expenditures for "cut-offs," viaducts 
 and tunnels to shorten lines are not economically 
 justified. Such expenditures — caused largely by 
 public demands or the rivalry of competing lines — 
 are responsible in many instances for the diminish- 
 ing rate of return on railroad capital. Railroad 
 security holders, in consequence, have frequently 
 undergone losses in thus promoting public con- 
 venience. 
 
 Grades. Grade is probably the principal feature* 
 of location affecting railroad operations. Steep 
 
104 AMERICAN RAILROAD ECONOMICS 
 
 grades by increasing the resistance to be overcome 
 by the locomotive have a pronounced effect on 
 operating costs. When the incHne of the roadbed 
 rises but a few inches for each one hundred feet dis- 
 tance there is usually reduction of speed and an 
 extra strain on the equipment. The use of addi- 
 tional locomotives to the train may be required. 
 All this adds to the expense of fuel, wages and up- 
 keep. 
 
 As the weakest link gauges the strength of a chain, 
 so the steepest grade, (i. e,, the so-called ruling grade) 
 restricts the size of the train and the maximum 
 hauling power of a locomotive over a given stretch 
 of line. If the slant downward is in the direction 
 of the bulk of the traffic, the incline is a '' favorable 
 grade,*' since the hauling becomes a coasting opera- 
 tion. This is a decided advantage to economical 
 operation and calls for no elimination of grade. A 
 study of grades with reference to economical opera- 
 tion, therefore, requires a knowledge of the ''direc- 
 tion of the traffic." Both the Chesapeake & Ohio and 
 the Norfolk & Western railroads have relatively 
 heavy grades. As the freight carried is chiefly coal, 
 mined in the Allegheny Mountains and shipped to 
 Eastern tidewater or to the Ohio valley in the West, 
 the grades are for the most part favorable. They 
 do not interfere with heavy train loading. Similarly, 
 heavy grades on branch lines having a small traffic 
 are frequently of little consequence as a factor in 
 operating efficiency. Their elimination accordingly 
 is not economically justified if the expense will not 
 
PHYSICAL FACTORS 105 
 
 be suflSciently compensated by reduced operating 
 costs. 
 
 The constant reduction of grades has been a 
 prominent feature of American railway structural 
 development. A quarter of a century ago a one 
 per cent. (1%) grade was considered the inferior 
 limit that economy of operation on any line required., 
 But on many of the railroads having a heavy traflSc 
 a one per cent, grade is like a modern harbor channel 
 only deep enough for sailing vessels. In fact, grade 
 reduction has progressed to an extent that causes a 
 query whether much of this expense is not waste. 
 No one knows yet what it is worth to any road of a 
 given character of traffic to reduce its grades to one- 
 tenth of one per cent. i. e., an incline of one foot 
 for each 1000 feet of distance. A prominent railroad 
 engineer,^ placed the inferior limit at four-tenths of 
 one per cent., but many of the companies have spent 
 and are spending large sums in reducing grades as 
 low as two-tenths of one per cent.^ Is the capital 
 thus invested wasted .^^ 
 
 A low-grade line in competition with a line of 
 heavier grades is generally held to have many ad- 
 vantages. To eliminate unfavorable grades, some 
 companies justify the expense of relocating whole 
 .sections of line. Thus, the Atchison, in order to 
 have a low-grade freight route over the Rockies, 
 built a new line extending from Kansas City to 
 
 iMr. Barry, in Bulletin ^9 of the Railway Maintenance of Way 
 Association. 
 
 2 See Walter Loring Webb in Railway Age Gazette, March 28, 1913. 
 
106 AMERICAN RAILROAD ECONOMICS 
 
 Rio Puerco, a distance of approximately 1000 miles. 
 The maximum grade on this division does not ex- 
 ceed six-tenths of one per cent. The Erie, likewise, 
 has lately constructed a new low-grade line (the 
 Genesee River Railroad) on its heavy traffic divi- 
 sions between Hornell and Cuba, N. Y., which re- 
 duces the maximum grade from one per cent, to two- 
 tenths of one per cent. This improvement, though 
 costly, materially adds to transportation capacity 
 and more economical operation. 
 
 Curves. Though affecting operating costs less 
 than grades, curves are of no small consequence in 
 the estimation of railroad physical qualities. Be- 
 sides limiting speed of trains and lessening locomo- 
 tive hauling power, curves cost more to maintain 
 and to operate than straight stretches of track. 
 They are also a fertile source of accidents. Curva- 
 ture in railroad construction, therefore, is tolerated 
 only because of the heavy cost of its elimination. 
 The same economic considerations apply here as 
 in the case of grades. Curve elimination should be 
 in accord with traffic demands, and the capital ex- 
 penditure thus incurred should not exceed a proper 
 economic limit. This means that the resulting de- 
 creased operating costs or enlarged traffic capacity 
 is to fully compensate for the cost of the curve elimi- 
 nation. 
 
 ROADBED AND SUPERSTRUCTURE 
 
 Physically a railroad is anything from a mud 
 bank with two streaks of iron rust to a multi- tracked, 
 
I 
 
 PHYSICAL FACTORS 107 
 
 rock-ballasted steel highway equipped with con- 
 trivances for safety, speed, comfort and economy. 
 The wide disparities in physical structure not only 
 confine comparisons among railroads within very 
 narrow limits, but also render difficult the adoption 
 or establishment of proper and satisfactory stand- 
 ards for measuring the adequacy of transportation 
 facilities or of efficiency methods. Many factors 
 are to be considered in arriving at a basis of judg- 
 ment in these matters, and the relative values of 
 these factors are constantly changing. To describe 
 in detail all physical features bearing on operation 
 is manifestly uncalled for here. Attention is directed 
 only to the main factors, data concerning which are 
 contained in railroad reports and in statements 
 filed with the Interstate Commerce Commission. 
 These factors, considered in order, are (1) Track 
 Facilities, (2) Rails, (3) Ties, (4) Ballast, (5) Bridges 
 and Trestles, (6) Tunnels and (7) Terminal Facilities. 
 
 Track Facilities. Nearly all important railroads in 
 the United States have the standard gauge track, 
 i. e,, 4 feet Sj^^ inches width between the rails. The 
 percentage of narrow gauge (i. e., three feet width), 
 on a few lines, however, is not a negligible factor. 
 The Denver & Rio Grande had on June 30, 1912, 
 787 miles of narrow gauge road in operation of a 
 total mileage of 2,597 miles. This is by far the 
 largest ratio of narrow gauge mileage of any of the 
 important railroad systems of the United States. 
 
 In the consideration of trackage, the ''miles of 
 line" should be clearly distinguished from the miles 
 
108 AMERICAN RAILROAD ECONOMICS 
 
 of single track, or, to use another expression, "total 
 miles of track,'' The vast differences in the extra 
 track facihties of American railroads, of itself, is 
 sufficient to nullify the usefulness of a per mile of line 
 unit for general comparative purposes. Extra tracks 
 (second, third and fourth, etc.) entail additional 
 capital expense and higher maintenance costs and, 
 therefore, are expected to increase earning power. 
 The proportion of extra main tracks has a direct 
 relation to the amount of business done. Accord- 
 ingly, companies handling relatively the same vol- 
 ume and character of traffic apparently require the 
 same proportion of extra track mileage.^ 
 
 Figuring on the needs of extra track facilities on 
 the leading railroads can be reduced to somewhat 
 of a mathematical certainty. On practically all 
 lines, a schedule must be arranged to allow for trains 
 running at different speeds going in the same direc- 
 tion as well as for trains passing in opposite direc- 
 tions on the same track. Delays of one train on a 
 single track division caused by the taking on and 
 the discharge of freight and passengers, or through 
 accidents, entail a general "tie up." The result- 
 ing losses due to extra wages and fuel expense, idle 
 equipment, freight congestion and the like, impair 
 profits. Besides, there is the unfavorable effect 
 of inconveniencing the pubKc and lowering the 
 character of the transportation service. All this 
 
 ^ There is a distinction between "extra main track" and "extra 
 track." The former does not include sidings, spurs, and "yard "tracks, 
 which are classified separately in the reports. 
 
I 
 
 PHYSICAL FACTORS 109 
 
 is bound to reduce the return on the invested capital. 
 Whether such conditions can be remedied more 
 economically by the construction of additional main 
 track or through better management and higher 
 operating eflSciency is a problem which the railroad 
 executive must consider. Competition and the 
 relative ease with which funds can be obtained for 
 betterment purposes have an important bearing on 
 the problem. Capital expenditures for increased 
 facilities, which are not urgently needed, as has al- 
 ready been pointed out, cause a reduction of the 
 rate of return on the whole investment in the rail- 
 road property. On the other hand, a company with 
 track facilities inadequate for its business will oper- 
 ate at a decided disadvantage in competition with 
 lines better equipped. This arises in part from the 
 well accepted theory that overtaxed facilities reverse 
 the economic basis of railroad operation. Under 
 such circumstances the transportation business is 
 one of "decreasing returns" rather than of *' increas- 
 ing returns." In other words, a railroad company 
 that is handling traffic beyond its capacity toill undergo ^ 
 additional costs proportionately greater than the reve- 
 nues gained by the extra traffixi. This causes a de- 
 creased rate of profit on the whole business. 
 
 The position of the Wabash Railroad Company, 
 during the years 1908-1912, may be taken as an 
 illustration. Because of the financial losses involved 
 in the acquisition of the Wabash-Pittsburgh Ter- 
 minal Company, the Wabash's credit became im- 
 paired. It was thus unable to obtain capital fca: 
 
no AMERICAN RAILROAD ECONOMICS 
 
 the additional physical facilities demanded by its 
 growing traffic. Consequently, in spite of enlarged 
 gross earnings (which in 1911 were relatively about 
 20 per cent, greater than in 1905), the ratio of in- 
 crease in expenses exceeded that of income. The 
 company found difficulty in meeting bond interest 
 requirements. A receivership and reorganization was 
 the natural outcome. 
 
 The detrimental operating effects of inadequate 
 track facihties may be further pointed out with 
 reference to the Erie Railroad. Notwithstanding its 
 large traffic expansion and its position as an im- 
 portant Eastern trunk line, the Erie because of in- 
 ability to obtain capital on reasonable terms had 
 been struggling along with approximately 300 miles 
 of its main line a single track road. On one stretch 
 of single track some fifty miles east of Chicago, the 
 regular daily movement of business is reported to 
 have included 700 loaded eastbound freight cars, 
 500 westbound loaded freight cars, and seven pas- 
 senger trains each way. A freight train, no matter 
 how profitable it might be, is invariably sidetracked 
 for a passenger train. This means that it is held 
 "idle" on a siding to let the passenger train pass. 
 If the two trains happen to be going in the same 
 direction the delay to the freight train may be only 
 a few minutes; if they are going in opposite direc- 
 tions the freight train may lose an hour or more. 
 If there is a "mishap," a half-day tie up may be the 
 consequence. With 700 loaded cars and seven 
 passenger trains going one way and 500 loaded cars 
 
I 
 
 PHYSICAL FACTORS 111 
 
 and seven passenger trains going another, (not 
 counting work trains and trains of empty cars) 
 there is Httle leeway for efficient and expeditious 
 service or further traffic expansion. The losses on 
 a single track road from unavoidable delays devour 
 the increased revenue gained from additional busi- 
 ness. In competing with the Baltimore & Ohio, 
 the Pennsylvania and the New York Central (hav- 
 ing two, four and six- track lines), the Erie, from 
 the viewpoint of operating economy has been like a 
 man fighting with one hand tied behind him. If, 
 as is reported, a second track normally increases the 
 possible efficiency of a road 120 per cent, the Erie 
 operating management in the last decade has been 
 distinctly creditable. With its insufficient extra 
 track equipment the company handled in proportion 
 to its mileage more freight business than the New 
 York Central System which has four tracks all the 
 way from New York to Chicago. But has the Erie 
 been able to serve as well the needs of the shipper 
 and the public at as low a cost as is possible under 
 the best operating conditions.? This is the problem. 
 Railroad earning power rests not alone on perform- 
 ing the transportation service, but performing it 
 efficiently and economically. 
 
 In comparing the track facilities of different rail- 
 roads in relation to traffic, account must be taken 
 of the relative proportions of main line and branch 
 line mileage. Branches and "feeders," as a rule, 
 have a smaller traffic than the main lines. Accord- 
 ingly the need for extra track is not so pronounced. 
 
112 AMERICAN RAILROAD ECONOMICS 
 
 Caution is required, however, in the definition of 
 branch lines. These on some railroads have a 
 heavier traffic than main line mileage on other sys- 
 tems. The absence of standardization renders com- 
 parisons exceedingly difficult. 
 
 Rails. A fairly large number of railroads report 
 the quality and character of the rails in the tracks. 
 Rail facilities are measured by weight. This may 
 range from 50 to 110 pounds per yard length. For 
 ordinary service on the main line of a modern rail- 
 road system a 75 pound rail, is generally the mini- 
 mum weight that can be safely used. With the con- 
 stant tendency toward heavier rolling stock and 
 greater speed, an 85 pound rail is fast becoming the 
 standard. Taking the progress of the Norfolk & 
 Western Railroad as typical, we find that on June 30, 
 1898, of a total of 1,496 miles of main track, over 
 1,206 or slightly more than 80 per cent, had rails of 
 67 pounds per yard or under. On June 30, 1911, 
 ^however, — thirteen years later, — the 67 pound rail 
 had very nearly disappeared and more than 80 per 
 cent, of main track was laid with 85 pound rails. 
 There was, in addition, about 196 miles having 100 
 pound rails. Because of enlarged traffic and heavier 
 equipment, the light weight rails are constantly 
 displaced by a heavier and more durable quality. 
 
 Weight of rails in all cases should be properly ad- 
 justed to the traffic and to the size of the equipment 
 which is to pass over them. The mere statement 
 that one company has a larger proportion of heavy 
 rails than another, even though the business handled 
 
I 
 
 PHYSICAL FACTORS 113 
 
 is similar, is of no consequence unless a correct dis- 
 tinction is made between branch line and main line 
 mileage. The fact that the Kansas City Southern 
 has a smaller percentage of light weight rails, (i. e., 
 under 75 pounds to the yard) than the Southern 
 Railway or the "Frisco," is probably due to the 
 former's small amount of branch mileage relative 
 to that of the other two systems. In each instance 
 the information desired is whether the character 
 of rails on every section of track is best suited to the 
 traffic. 
 
 Use of rail statistics as contained in the railroad 
 annual reports is best applied in the analysis of pro- 
 gressive physical betterment. An increase in the 
 proportion of heavy to light weight rails from year 
 to year usually indicates progress both in volume 
 of traffic and in the facilities for handling same. 
 
 Although a standard quality of steel rail has been 
 adopted in the United States, the leading railroad 
 companies because of the use of heavier locomotives 
 and cars, and because of larger train-loads and in- 
 creased speed in both passenger and freight service 
 are requiring a superior quality of rail designed for 
 safety and durability. Serious accidents result from 
 broken rails caused by "crystallization" or by ex- 
 cessive strain. Some progress in rail betterment has 
 been made through the substitution of the "Open 
 Hearth" for the "Bessemer" rail. The former con- 
 tains less phosphorus than the "Bessemer" rail and 
 is, therefore, less liable to "crystallize." It also can 
 be more readily "alloyed" with other metals and 
 
114 AMERICAN RAILROAD ECONOMICS 
 
 chemicals for improving quality and durability. 
 Much experimentation is yet necessary to afford a 
 standard adapted to all the needs of modern rail- 
 road operation. ^ 
 
 No definite rule can be followed as to the proper 
 rate of rail renewals on a railroad system. Deteriora- 
 tion, wear and tear and breakage are affected by 
 many factors besides the volume of traflSc. Climate, 
 for example, is a potent factor. On some of the 
 Eastern trunk lines an 85 pound standard rail is 
 said to have an average life of from ten to fifteen 
 years. At the end of this time the rail is not worth- 
 less. It can be taken up and placed on a branch line 
 or on a siding. On some of the larger systems (the 
 
 ^ Statistics showing the quality and weight of rails in main tracks of 
 American Railroads, January 1, 1912, according to a special committee 
 of the American Railway Association, are as follows: 
 
 Rail in Main Track 
 
 Oyen Special 
 
 Bessemer Hearth Alloy Total 
 
 Percent 87.47 11.43 1.10 100.00 
 
 Per cent, 
 
 100 pounds and upward 5 . 845 
 
 90 pounds and less than 100 8.324 
 
 80 pounds and less than 90 32.941 
 
 75 pounds and less than 80 12.809 
 
 70 pounds and less than 75 8.564 
 
 60 pounds and less than 70 18.158 
 
 Less than 60 pounds 
 
 Mixed 13.314 
 
 Unknown 
 
 Iron . 045 
 
 Total 100.00 
 
PHYSICAL FACTORS 
 
 115 
 
 Union Pacific for example), it is the practice to re- 
 roll heavy, worn-out rails for use on branches requir- 
 ing only light weight rails. The period of usefulness 
 is thus extended and at the same time the quality 
 of the rail is improved through re-rolling. 
 
 Wrecks from broken and worn-out rails are costly 
 accidents. The question of rail maintenance, there- 
 fore, is important both to railroad investors and to 
 the travelling public. Some indication of what is 
 being done in this matter may be had by a compari- 
 son of rail renewals of individual companies from 
 year to year, expressed in tons; not neglecting the 
 expansion that may have taken place in the track 
 mileage or in the amount of business passing over 
 each mile. It should also be borne in mind that with 
 improvement in rail quality and durability, the rate 
 of renewals will consequently decline.^ 
 
 Ballast. The requirements of a strong, firmly 
 fastened track on a solid roadbed to accommodate 
 loaded modern railroad equipment magnifies the 
 importance of ballast as a physical factor in eco- 
 
 1 The tonnage of new rails actually used by the Pennsylvania Railroad 
 has been as follows: 
 
 1912 153,693 
 
 1911 111,799 
 
 1910 162,790 
 
 1909 137,665 
 
 1908 31,563 
 
 1907 149,878 
 
 1906 163,797 
 
 1905 128,075 
 
 1904 110,591 
 
 1903 156,522 
 
 This record shows that the company uses the maximum of rails in the 
 years of heavy traflSc (1903, 1906, 1910), and the minimum in years of 
 industrial depression (1904, 1908, and 1911). 
 
116 AMERICAN RAILROAD ECONOMICS 
 
 nomical railroad operation. The materials used for 
 ballast range from ordinary soil to sand, cinder, 
 burnt clay and broken granite rock. The geology 
 of the territory traversed by a railroad system fre- 
 quently determines the ballast material rather than 
 the volume of traffic handled or the general mainte- 
 nance policy of the management. To haul ballast 
 a long distance adds greatly to its cost. Hence, a 
 railroad in a region of poor ballasting materials may 
 use an inferior product as most economical, even 
 though there is heavy expense of upkeep because of 
 frequent renewal. The Union Pacific, for example, 
 is very heavily ballasted with Sherman gravel, a 
 disintegrated rock, possibly the finest material for 
 the purpose in the United States. Moreover, be- 
 cause of its availability to some of the Union Pacific 
 lines, it is relatively cheap. The Chicago & North 
 Western, on the other hand, is rather lightly ballasted 
 with gravel, sand and other materials of inferior 
 quality because of the poor geological resources of 
 the prairies traversed. Similarly, the Canadian 
 Pacific, from Montreal to Quebec, a distance of 178 
 miles, is largely ballasted with sand, the only ma- 
 terial economically available. These differences in 
 conditions are naturally reflected both in construc- 
 tion and in maintenance costs. These costs, when 
 suflSciently accounted for, should not mislead the 
 railroad analyst. 
 
 A few railroad companies publish statistics of the 
 depth as well as of the constituent of ballast. This 
 information, however, can be interpreted properly 
 
PHYSICAL FACTORS 117 
 
 only in connection with the size of the ties and their 
 average distance apart in the track. The kind of 
 material used has no necessary relation to the depth 
 of the ballast. In practice, however, stone ballast 
 generally has a less depth than gravel or other light 
 material. This is probably due to the higher cost 
 of stone. 
 
 Ties. In view of the constant upward trend of 
 lumber prices, tie economy has become one of the 
 most fruitful means of keeping down track mainte- 
 nance costs. Naturally, a high speed track with 
 heavy traffic requires better ties than a track with 
 light trains, but it does not necessarily follow that 
 a much used track requires more frequent tie re- 
 newals. The question of the maintenance lies in 
 the natural decay of the tie. On a carefully ballasted, 
 well drained track, notwithstanding heavy usage, 
 decay will not be as rapid as on a badly ballasted, 
 improperly drained track. Thus the length of life 
 of a tie depends, (a) on its quality (z. e,, whether 
 cypress, oak or pine), (b) whether "treated" {i. e., 
 prepared with creosote or other decay-resisting 
 chemicals) and (c) the care with which it is placed 
 and maintained in the roadbed. Very few railroads 
 furnish a clear statement of the quality of the ties 
 or of the amount of tie renewals. Though probably 
 not as important in gauging railroad physical char- 
 acteristics as rails, well-kept ties are essential to 
 efficient and economical transportation service. 
 Furthermore, tie renewal cost constitutes the largest 
 single item among track-materials costs. Wooden 
 
118 AMERICAN RAILROAD ECONOMICS 
 
 ties of good quality (cypress and oak) have become 
 so costly that some companies are endeavoring to 
 substitute other materials, such as steel and con- 
 crete. Experiments along these lines have not been 
 advanced sufficiently to permit proper judgment as 
 to the propriety of ultimately replacing wooden 
 ties. 
 
 The distribution of the various grades of ties — 
 hard wood and soft wood, treated and untreated — over 
 a large railroad system should be adjusted so that 
 each grade will give the most economical service. 
 Similarly, the keeping of accurate and complete tie 
 renewal records to eliminate waste and double haul 
 on ties supplied in excess of requirements can effect 
 a considerable saving in tie maintenance expense. 
 The engineering departments of some railroads have 
 made a careful study of this problem and now have 
 in operation schedules of tie distribution. The selec- 
 tion of one class of tie rather than another on a given 
 division depends on the climate, the traffic, the 
 weight of rail, the depth and kind of ballast, the 
 use of tie-plates and fastenings and the location of 
 the line with reference to the tie supply. 
 
 Bridges and Trestles. Bridges and trestles, as 
 elements in railroad operation, limit the size, weight 
 and speed of trains in much the same way as grades 
 and curves. A "weak" bridge on a line of heavy 
 traffic may necessitate the "breaking-up" of trains 
 or the slowing down in speed, both of which add 
 materially to operating expenses. Moreover, the 
 frequent burdening of a structure with its maximum 
 
I 
 
 PHYSICAL FACTORS 119 
 
 bearing capacity produces stresses that may lead 
 to breakdowns and wrecks. These are costly acci- 
 dents in the business of rail transportation. Thus, 
 the material and quality of bridges and trestles are 
 prime factors in economical railroad operation. The 
 tendency toward betterment and improvement in 
 bridge construction should be carefully considered. 
 The replacement of obsolete bridges and trestles by 
 stronger and more durable structures is as pertinent 
 to railroad economic progress as larger revenues and 
 greater net earnings. 
 
 The original timber trestle bridges, where they 
 still exist, are on most lines a survival of a by-gone 
 era. Their first substitutes of iron or steel seem 
 also to be doomed to give way to structures better 
 able to bear the stress of the ponderous locomotives 
 and long trains of gigantic freight cars that are now 
 becoming standard rolling stock. Unless bridges 
 are carefully strengthened or replaced with new 
 structures, suitable to the weight of heavy rolling 
 equipment, a single accident may cause greater ex- 
 pense than the precautionary outlay would entail. 
 Railroad engineers, therefore, fully alive to this con- 
 tingency, are endeavoring to determine the reason- 
 able hmits of capacity bridges should be required to 
 show beyond the weight of the heaviest trains pass- 
 ing over them. Important data in this connection 
 have been compiled by the American Railway En- 
 gineering Association. This information is of great 
 service in successful railroad construction and opera- 
 tion. 
 
120 AMERICAN RAILROAD ECONOMICS 
 
 • 
 
 Tunnels. The relation of tunnels to operating 
 costs is not so apparent as in the case of bridges and 
 trestles. Yet, aside from the higher cost of tunnel 
 maintenance as compared to that of "open cuts," 
 no other physical feature limits so effectively trans- 
 portation capacity or leads so much to traffic con- 
 gestion. Moreover, the construction of tunnels is 
 exceedingly costly. Intelligent railroad engineers 
 plan to do without them as much as possible. They 
 are built and tolerated to avoid either a wide detour 
 or an extremely costly *'open cut." 
 
 A good example of tunnel construction limiting 
 transportation capacity and adding greatly to operat- 
 ing costs is the old Bergen Hill Tunnel of the Erie 
 Railroad. When this was built its two track width 
 and other structural qualities were regarded as suffi- 
 cient to accommodate the maximum traffic that the 
 company was capable of developing. In a few 
 decades, however, growth of business at the New 
 York terminal demanded larger track facilities. Be- 
 cause of the impracticability of enlarging the Bergen 
 Tunnel, these could not be built. The result was 
 that, aside from the relatively heavier operating 
 costs due to traffic congestion, the Erie could not 
 furnish the same standard of transportation service 
 at its Eastern terminal as competitors. Finally, 
 at heavy capital cost and with much difficulty, a 
 wholly new "cut-off" was built to get rid of the 
 "Bergen nuisance." 
 
 Railroad Terminals. Terminal facilities are an 
 element in economic railroad operation that is fre- 
 
I 
 
 I 
 
 PHYSICAL FACTORS 121 
 
 quently overlooked. The necessity of having sta- 
 tions and depots at centers of population and of 
 industry to retain and promote traffic is fully recog- 
 nized by capable railroad executives who justify the 
 vast expenditures for enlarged and improved ter- 
 minals on this ground. ^ The large expense of acquir- 
 ing terminal property, in fact, is largely responsible 
 for much of the recent heavy increases in railroad 
 capitalization. 
 
 Aside from improper location, however, a railroad 
 company may suffer many disadvantages from in- 
 adequacy of terminal facilities. The expense of 
 handling traffic at terminals is a large though ill- 
 defined item in railroad operating costs. This ex- 
 pense is greatly augmented through over-crowded 
 yards and stations, or through insufficient and ob- 
 solete terminal equipment. As has already been 
 pointed out, whenever larger business is received 
 than can be conveniently accommodated, the operat- 
 ing costs increase in greater proportion than the en- 
 larged revenues until a trend of "diminishing re- 
 turns" is reached. If unabated, this condition may 
 prove disastrous to the interests of the stockholders. 
 
 The difficulty in the way of proper railroad ter- 
 minals, as already stated on page 94, is the heavy 
 cost of acquiring urban property. Development of 
 the country has produced great cities, where land 
 has risen to very high values. At the same time, 
 
 1 Mr. A. M. Wellington in his treatise on " Railway Location," (p. 64) 
 places the loss of revenue of a railroad for each mile a terminal or station 
 is distant from the center of traffic at from 10% to 25%. 
 
122 AMERICAN RAILROAD ECONOMICS 
 
 it has produced a vast increase of railroad traffic at 
 these centers. All this necessitates larger urban 
 terminals, aside from the additional tracks and 
 safety devices required by the denser traffic. Could 
 this larger volume of traffic be handled without addi- 
 tional tracks and terminals, a substantial reduction 
 would result in railroad operating costs. Much of 
 the economy in operations outside of terminals, 
 effected by doubling tracks, strengthening bridges 
 and installing block signals and the like, are un- 
 doubtedly swallowed up by the enormous cost of 
 new city terminals necessary for the handling of the 
 greater traffic. A railroad cannot handle well the 
 business of 100,000,000 tons annually with terminals 
 built and equipped to accommodate the handling 
 of but 60,000,000 tons. 
 
 Railroad expansion, by stimulating the growth 
 of great cities, has caused an enormous enhance- 
 ment of property values. Accordingly some rail- 
 roads now find themselves compelled to buy property 
 for enlarged terminals at the enhanced values which 
 they have largely created. The Pennsylvania has 
 spent over $100,000,000 on its tunnels and terminals 
 in New York City and is about to incur similar ex- 
 pense in Philadelphia. The New York Central 
 has been driven to make expenditures exceeding 
 $75,000,000 in New York City. Developments of 
 the same kind are taking place in Chicago. The 
 Wabash Railroad, figuratively, broke its back in 
 acquiring Pittsburgh terminals at heavy cost. 
 
 Besides the general terminal facilities in the way 
 
PHYSICAL FACTORS 123 
 
 of freight and passenger stations, railroads nowadays 
 must supply, when required, a great many special 
 facilities for different industries. It is common for 
 the leading transportation companies to own their 
 own piers and docks and to give direct wharfage to 
 steamship lines in order to secure their business. 
 These dockage facilities are in some cases invaluable 
 assets, the loss of which would mean financial ruin. 
 Besides piers and yards, storage facilities, such as 
 elevators and warehouses, must likewise be sup- 
 phed when required, not only at tide water, but 
 also at interior points. These facilities are frequently 
 for the roads' own protection, since car shortages 
 may be caused by the failure of shippers or of con- 
 necting steamship companies to remove freight con- 
 signed to them. In addition to storage conveniences, 
 special accommodations must be provided for the 
 transhipment of coal, iron ore, and other bulky 
 commodities which are moved in large enough quan- 
 tities to furnish a motive for economical handling. 
 It is through these specialized facilities that com- 
 peting lines arm themselves in the struggle for busi- 
 ness, to say nothing of the saving in operating costs 
 which are thereby effected. 
 
■J 
 
 CHAPTER VI 
 
 PHYSICAL FACTORS IN ECONOMIC OPERATION; 
 RAILROAD ROLLING EQUIPMENT 
 
 Improvement in the character of rolling stock has 
 been coincident with improvement of roadbed and 
 superstructure. Progress along these lines has been 
 so rapid that it is exceedingly diflScult to maintain 
 a satisfactory standard unit for measuring railroad 
 equipment facilities. Railroads differ as to their 
 rolling stock to an even greater degree than in track 
 or roadbed. Moreover, on almost all railroad sys- 
 tems there is in active service equipment represent- 
 ing the different types in the progress of the last two 
 generations. As one type becomes obsolete for the 
 highest grade service, it is not wholly discarded 
 though relegated to an inferior use.^ One of the 
 greatest expenses of American railroads is this con- 
 stant replacement of obsolete equipment to meet 
 the public demand for better service. 
 
 Locomotives. In view of the steady progress in the 
 size and quality of railroad equipment a mere enum- 
 eration of the locomotives in relation to the volume 
 of traffic is no index to adequacy of motive power. 
 
 * Thus, in 1910 the locomotive of the New York Central Railroad, 
 No. 999, that but a few years before hauled the famous Empire State 
 Express, was pulling a milk train in Northern New York. 
 
 124 
 
PHYSICAL FACTORS 125 
 
 A pronounced increase in the size of engines on some 
 railroad systems, though resulting in numerical re- 
 duction, may mean a larger hauling capacity than on 
 another system possessing a greater number of loco- 
 motives. The most advanced type in locomotive 
 construction (the Mallet articulated compound loco- 
 motive) is essentially a double engine, and, because 
 of its structural advantages, has greater power than 
 two ordinary single-expansion type locomotives. 
 
 How immensely the weight of a locomotive has 
 increased may be judged from the fact that there 
 are now in use engines of the 24-wheel type, weighing 
 600,000 lbs., and over. When the first bridge was 
 built for carrying trains, about 1835, the four-wheel 
 grasshopper type of engine weighed less than 22,000 
 lbs. It was 1873 before a consolidation type of 
 locomotive reached the weight of 100,000 lbs.; in 
 1895 the maximum of 200,000 lbs. was reached. 
 The increase above 400,000 lbs. has come within 
 the new century. It need hardly be repeated that 
 roadbed, rails and bridges have been correspond- 
 ingly strengthened to support this equipment. 
 
 The great increase in the size of locomotives has 
 largely augmented the hauling capacity of the rail- 
 roads, though in recent years the number of locomo- 
 tives built has been less than formerly. One type 
 of engine has followed another so rapidly, with con- 
 stantly increasing weights, that there seems to be 
 no limit to the possible weight of a locomotive. 
 It is not so many years ago that this weight seemed 
 to be restricted because the permissible weight per 
 
126 AMERICAN RAILROAD ECONOMICS 
 
 foot of track was necessarily limited, while the length 
 appeared to be limited on account of the radii of 
 existing curves. The appearance of the Mallet type, 
 with compound articulated boilers, however, per- 
 mitted the locomotive to be elongated beyond what 
 had formerly been regarded as the maximum. Much 
 of the growth in railroad traffic therefore, has been 
 taken care of by larger and more powerful locomo- 
 tives rather than an increase in the number of en- 
 gines. 
 
 Because of the great variety of locomotive types 
 railroad motive power is not measured by available 
 locomotives, but by tractive "power pounds. The 
 tractive power is the final pulling force that the en- 
 gine is capable of exerting. It is defined by Welling- 
 ton as being limited by the percentage of adhesion 
 to the track. Motion causes slipping which reduces 
 percentage of adhesion. The maximum percentage 
 of adhesion that can be maintained relative to weight 
 on driving wheels while in motion is the total tractive 
 power. Expressed in pounds this is the theoretical 
 measure of locomotive capacity while in operation. 
 It is dependent on the locomotive weight on the 
 driving wheels and on the boiler and cylinder power 
 of the engine. 
 
 The actual capacity of a locomotive, however, 
 depends not only upon its size but also upon its 
 efficiency for the service to which it is adapted. In 
 fast passenger service, for example, the efficiency 
 test occurs when the locomotive is developing a 
 comparatively low tractive force at high speed. 
 
PHYSICAL FACTORS 127 
 
 Under these circumstances the hauling power de- 
 pends primarily on the steaming capacity of the 
 boiler, and not upon the weight carried by the driv- 
 ing wheels. In heavy, slow freight service, the con- 
 ditions are different. Here the test comes when the 
 locomotive is ascending a grade at slow speed, and 
 developing a high tractive force. The ability to haul 
 the train thus depends upon the weight carried on 
 the driving wheels as well as upon the boiler power, 
 and an increase in hauling capacity can be secured 
 only by enlarging the locomotive and placing more 
 weight on the driving wheels. In this way a higher 
 tractive force can be developed. 
 
 Since the tractive power of freight locomotives, 
 while in motion, varies with the percentage of ad- 
 hesion of the driving wheels to the tracks, the align- 
 ment of the roadbed and the speed required by the 
 service are just as important factors in determining 
 the required hauling power of locomotives as the 
 volume and the character of the traffic. Locomo- 
 tives of high tractive power, such as the Mallet 
 compound type, maintain their pulling force near 
 the maximum only at moderate speed. Hence, 
 they have not become useful for passenger and 
 for fast freight service. Railroads with heavy 
 grades, and the coal and ore carrying roads on which 
 speed is not a factor, find it economical to use large 
 and powerful locomotives of the Mallet type. The 
 high tractive power permits large train loads with- 
 out the inconvenience and expense of employing 
 "helper" locomotives, or "double headers." 
 
128 AMERICAN RAILROAD ECONOMICS 
 
 The choice of locomotive types is not based alone 
 on hauling capacity and speed efficiency. Economies 
 that may be effected in fuel and in maintenance 
 cost are likewise important factors. Thus, on one 
 division of the New York Central, where the traffic 
 consists largely of coal, consolidation locomotives 
 formerly used have been displaced by less than half 
 the number of Mallet compound engines which 
 handle the business more efficiently with a saving of 
 35 per cent, in fuel consumption per mile. Inasmuch 
 as these matters can be determined only by actual 
 test and experiment, the efficiency of the railroad 
 management determines in each case the proper 
 selection of locomotive types. The fundamental 
 principle of sound business enterprise demands that 
 the equipment should be neither more nor less than 
 required to move the traffic in an economical and effi- 
 cient manner. Anything else is wasteful. 
 
 On American railroads, it is the practice to give 
 each freight locomotive a *' rating" of the maximum 
 tonnage it can haul over a stretch of line. This 
 rating is gauged according to the character of the 
 freight, the speed at which it is to be moved, and 
 the prevailing weather conditions. Locomotives 
 therefore can be so distributed for use over a railroad 
 system that each can be worked to full capacity while 
 in service. The locomotive on an economically 
 managed road is expected to be earning money 
 every moment that it is not in the hands of the 
 roundhouse or of the repair men. 
 
 Although enlargement of locomotive tractive 
 
PHYSICAL FACTORS 129 
 
 power has been rapid in recent years, the weight of 
 the modern locomotive cannot advance much f mother 
 except at the expense of extensive improvements in 
 alignment and track, or possibly through the adop- 
 tion of an arrangement of wheels which will permit 
 the weight to be much more widely distributed than 
 at present. Taking for illustration the Mallet type, 
 which is now acknowledged as best suited to dense 
 traffic, it may properly be asked how far may this 
 machine be made more efficient by other means 
 than by increase in size. Further contrivances such 
 as compounding cylinders and steam superheaters, 
 already largely in use, are required to offset the 
 tendencies toward higher wages and material costs. 
 All these matters are important elements in profitable 
 railroad operations. 
 
 Caxs. The difficulty in measuring the adequacy of 
 car facilities is much the same as that of locomotive 
 power. Railroad cars, both passenger and freight, 
 even when separately considered in classes, differ in 
 original cost and in expense of upkeep as well as 
 in size, in use, and in durability. Accordingly, to 
 compare the car facilities of different railroads by mere 
 enumeration of each class {i. e., box, flat, gondola, 
 etc.), frequently leads to erroneous conclusions. No 
 clue is given to the ultimate carrying capacity. By 
 car capacity is meant the amount, in terms of weight, 
 that can be loaded into a freight car or the number 
 of passengers that can be seated in a passenger car. 
 The capacity of any given car, therefore, depends 
 first, on the strength and quality of the car and. 
 
130 AMERICAN RAILROAD ECONOMICS 
 
 secondly, on the character of the traffic for which 
 the car is designed. Thus, heavy and dense commod- 
 ities, such as iron ore, coal or grain, may be loaded 
 to the full marked capacity when the car is built of 
 strong material, whereas, when loaded with light 
 and bulky articles such as furniture, the same car 
 cannot accommodate one-third of the weight. More- 
 over, certain freight because of the extreme size of 
 each piece {e, ^., automobiles) or because of perish- 
 ableness {e. g., fruits) cannot be economically loaded 
 without leaving considerable unoccupied space. A 
 company that employs cars double the capacity nec- 
 essary for the class of goods to which they are 
 adapted is as uneconomical as one that uses small, 
 antiquated and broken-down equipment for bulky 
 and dense commodities. Car capacity, therefore, 
 when apportioned in each case to accommodate the 
 volume of the different classes of commodities moved 
 on each system, is an important element in efficient 
 railroad operation. 
 
 The growth in heavy bulk shipments of freight 
 has led to the use of larger and stronger cars. The 
 average carrying capacity of a box car in 1871 was, 
 approximately, 10 tons, or 20,000 pounds. Eight 
 or ten years later a movement began to increase the 
 maximum load to 15 tons and even to 20 tons. 
 On June 30, 1902, according to the returns of the 
 Interstate Commerce Commission, the average car- 
 rying capacity of a box car on all railroads in the 
 United States was 27 tons. In 1908 this had in- 
 creased to 32 tons. The average capacity of box 
 
PHYSICAL FACTORS 131 
 
 cars in 1912 was 34 tons or more than three times as 
 much as in 1871. 
 
 The same growth has characterized the American 
 passenger car. From a length of between 40 feet 
 and 50 feet, it has increased to 75 feet and to 80 
 feet, and with the increase in length has come a 
 more than corresponding increase of weight. The 
 seating capacity of an ordinary day coach 70 feet 
 long is about 88 passengers, and its weight is about 
 135,000 lbs. 
 
 Improvements in the materials of car construction 
 have gone hand in hand with enlarged carrying capa- 
 city. The old wooden box car is fast disappearing 
 and doubtless some day will be as little used as the 
 iron rail. Railroads now demand all steel or steel 
 underframe cars. According to the Railroad Age 
 Gazette, 88 per cent, of the freight cars built in the 
 United States in 1910 were of steel or steel under- 
 frame construction, whereas, in 1907, these were 
 but 72 per cent, of the total. The figures for passen- 
 ger car construction for 1911 show that 909 all steel 
 cars were built; 619 were built with steel underframes 
 and 1,010 were of wooden construction. The proba- 
 bility is that within a few years the all steel pas- 
 senger car will take the lead. 
 
 The primary reason for using steel passenger cars 
 is to ensm-e that they shall stand up under the strains 
 incidental to very high speeds. High speed in- 
 creases the danger to life and limb due to a derail- 
 ment. Steel cars, moreover, minimize the dangers 
 from fire in wrecks or while passing through tunnels. 
 
132 AMERICAN RAILROAD ECONOMICS 
 
 The use of steel in the place of wood, therefore, may 
 result in large savings to the railroads. 
 
 The use of heavier materials for car construction 
 introduces the element of "dead weight" as partly 
 offsetting economy from increased car capacity. The 
 common passenger car has been made larger and 
 stronger, until now it is estimated to weigh eleven 
 times as much as the passengers it carries. This, 
 however, is the proportion in the case of a car which 
 is fully loaded. But on the luxurious trains on which 
 the number of passengers is usually not over 100, 
 the passenger weight is probably not more than one 
 per cent, of the weight of the car. All this has an 
 important bearing on operating costs, since the size 
 and tractive power of locomotives must be increased 
 to haul the extra "dead weight", or the number of 
 cars per train must be reduced. 
 
 The problem of increase in "dead weight," is also 
 becoming a factor in freight operations. An 80,000 
 pound capacity box car with a steel underframe 
 weighs about 45,000 pounds, whereas, a plain wooden 
 car of the same type of 40,000 pounds capacity, 
 weighs about 30,000 pounds. Hence, an increase 
 of 100 per cent, in carrying capacity is accompanied 
 by 50 per cent, increase in "dead weight." How- 
 ever, as long as the "dead weight" per unit ship- 
 ment is not enlarged in the same ratio as the carrying 
 capacity there is manifestly a direct operating econ- 
 omy in using larger and stronger cars, provided there 
 is tonnage for full loading. In the event, however, 
 that "dead weight" outstrips growth in carrying 
 
PHYSICAL FACTORS 133 
 
 capacity, heavy materials for car construction can 
 be economically justified only on the ground of 
 greater durability and smaller upkeep expense. 
 
 Because of the general practice in railroad opera- , 
 tions of inter-company car hiring, considerable prog- 
 ress has been made in the standardization of freight 
 cars. The American freight car is a wanderer from 
 home. For months, and even for years at a time it 
 may be on the tracks of another company, journey- 
 ing up and down over the face of the continent. If 
 it breaks down while thus *' hired out" it must be 
 repaired. In order to avoid delay the repair parts 
 must be those with which the mechanics on all lines 
 are familiar and which can be readily obtained. The 
 Master Car Builders' Association, which controls 
 the practices governing the interchange of cars, has 
 formulated specifications of standard parts relating 
 to car construction. These parts include journal- 
 boxes, brasses, axles, wheels, brakeshoes, safety ap- 
 pliances and the like, adapted to various types and 
 capacities of cars. These are generally used by all 
 of the railroads of the country. The wide inter- 
 change of cars that is practiced becomes possible 
 only by their strict observance. 
 
 To have a supply of both freight and passenger 
 cars on hand to meet the maximum traffic demands 
 at all times is an exceedingly important factor in a 
 railroad's earning capacity. Aside from public in- 
 convenience, a "car shortage" on a railroad system 
 implies inefficiency of management and inability to 
 take advantage of the maximum revenue that it is 
 
134 AMERICAN RAILROAD ECONOMICS 
 
 capable of receiving. The supply and the capacity 
 of equipment on hand, therefore, is an item de- 
 serving careful observation. A railroad company 
 which is compelled to use an unduly large proportion 
 of "hired" equipment may have a temporary ad- 
 vantage, in that it can surrender the foreign cars 
 during dull seasons, but the hiring expense and the 
 delays encountered before the equipment can be re- 
 turned frequently over-balance the gain. More- 
 over, during the busy season, "foreign" cars are 
 not readily obtainable, unless they have been stored 
 on the hiring company's side-tracks in anticipation 
 of the demand. During this time the per diem rental 
 must be paid on the idle equipment. To prevent 
 abuses of the car hire privilege, the per diem rental 
 rate enforced by the American Railway Association 
 for interchanged freight cars was increased on Janu- 
 ary 1, 1913, from 30c and 35c to 45c. This rental is 
 exclusive of certain repair expenses which are charged 
 to the hiring company. 
 
 The question of adequate and proper equipment 
 in connection with well constructed and efficiently 
 maintained roadbed and superstructure is worthy 
 of careful study by both railroad managers and 
 security holders. Data of this sort may be more 
 indicative of financial progress and investment sta- 
 bility than the figures of operating revenues and 
 net income. 
 
CHAPTER VII 
 
 TRA.FFIC STATISTICS 
 
 Passenger and Freight Traffic. The distinctive 
 traffic feature of American railroads is the predomi- 
 nance of freight over passenger business. According to 
 latest statistics of the Interstate Commerce Commis- 
 sion only 23 per cent, of railroad operating revenues 
 came from passengers, whereas more than 68 per 
 cent, was obtained from freight. There is a great 
 divergence from this proportion on some of the 
 Eastern lines. The New York, New Haven & 
 Hartford, the New York Central, the Long Island 
 Railroad and others having a large suburban business 
 and traversing densely populated sections have a 
 passenger revenue very nearly equal to or in excess of 
 freight earnings. Thus, the New York, New Haven 
 & Hartford passenger revenue for the fiscal year 1911 
 was 86 per cent, of freight revenue. The New York 
 Central, for the same year, had passenger earnings 
 approximately 31 per cent, of the total operating 
 revenues. This ratio is proportionately greater than 
 on the Erie, the Baltimore & Ohio and the Penn- 
 sylvania. In the West and South, railroads depend 
 very little on passenger business. The Union Pacific 
 passenger earnings for the five years ended June 30, 
 1913, never exceeded 25 per cent, of gross oper- 
 
 135 
 
136 AMERICAN RAILROAD ECONOMICS 
 
 ating revenues, and on the Northern Pacific and 
 the Southern Pacific it has not been very dif- 
 ferent. 
 
 The economic effects of these disparities in the 
 proportion of passenger to freight earnings should not 
 be overlooked. It is very generally conceded, though 
 difficult of practical demonstration, that railroad 
 passenger traffic, as a whole, is not remunerative. 
 Of course, the railroad systems that have a large 
 passenger business may gain more per unit of passen- 
 ger traffic than the lines whose revenues come almost 
 entirely from freight. This particularly applies to 
 hues having facilities adapted to large passenger 
 business, for then the traffic is one of "increasing 
 returns," i. e., the total cost of operation increases 
 in less proportion than the increase in the traffic 
 units. In any event, as long as the revenue obtained 
 from additional passenger traffic covers the ex- 
 penses caused directly by this new business (other 
 things being equal), no loss can be said to result from 
 increase in passenger service. However, passenger 
 rates are not constructed or adjusted after the 
 manner of freight rates. Hence, railroad systems 
 having dense passenger business are not statistic- 
 ally comparable with those whose operating rev- 
 enues are derived almost exclusively from freight 
 service. 
 
 In view of the predominance of the freight business 
 of American railroads, our attention in the study of 
 traffic statistics shall be devoted almost exclusively 
 to this class of transportation service. 
 
TRAFFIC STATISTICS 137 
 
 Classification of Traffic Statistics. For purposes of 
 analysis traffic statistics may be grouped under two 
 main categories: 
 
 1. Those indicating the nature of the traffic, i. e.y 
 the volume and the classes of freight and the number 
 and kinds of passengers carried. 
 
 2. Those indicating efficiency and economy in 
 conducting the transportation service. 
 
 THE MEASUREMENT OF VOLUME AND CLASS OF 
 TRAFFIC 
 
 Herein are included all data dealing with 
 
 (a) the classes and kinds of commodities carried, 
 {h) the average rate received for each and all 
 classes, 
 
 (c) the average density of the traffic, and 
 {d) the average distance each unit is conveyed. 
 Obviously, over these matters the railroad mana- 
 gers have very little direct control. A railroad is 
 compelled to accept for transportation the kind of 
 freight offered and to convey this freight to a desig- 
 nated station on its lines, or, when the point of 
 destination is not on its own lines, to a convenient 
 transfer station. The compensation received for 
 each class and kind of service is, as we have already 
 pointed out, determined largely by competitive and 
 economic forces. Each factor-^c/a55 of commodity, 
 weight, length of haul, and rate — affects earning power. 
 It is for this reason that the details of these factors 
 are so carefully collected and analyzed and that the 
 so-called ^'ton-mile" and '^ passenger-mile'' statistics 
 
138 AMERICAN RAILROAD ECONOMICS 
 
 have been developed. The resulting data are alike 
 useful to railroad managers, to investors and to the 
 public. "The system of statistics based upon 
 the ton-mile and the passenger-mile," says a British 
 Parliamentary Report,^ "takes as its foundation 
 the principle of combining in a comprehensive 
 figure the two factors of weight or number and of 
 distance. . . . The fundamental units, (the ton- 
 mile and the ^passenger-mile) being, respectively, 
 one ton carried one mile or one passenger carried one 
 mile." 
 
 The Ton-mile Averages. The fundamental traffic 
 units are employed as averages. It is the charac- 
 teristic of the average to give no information of the 
 differences and disparities of the individual units 
 on which it is based. Almost any person may have a 
 fairly definite conception of what is meant by a ton 
 of coal. How many can form a mental composite 
 picture of a ton of meat, a ton of cotton, a ton of 
 salt, a ton of rice, a ton of sugar and a ton of silk? 
 The ton-mile gives no indication of the classes and kinds 
 of commodities carried, the character of the service 
 rendered or the gross receipts and rate received from each 
 class. It covers all kinds of traffic, both "through" 
 and "local," as well as "high grade" and "low 
 grade." One railroad, let us say, has a large fruit 
 and vegetable traffic which it hauls all the way from 
 California to the Atlantic States. Another carries 
 coal, sand and iron ore, all bulky articles that are 
 
 * ** Accounts and Statistical Returns of Railway Companies," — Report 
 of the Committee Appointed by the Board of Trade (1909) cd. 4697, 
 
TRAFFIC STATISTICS 139 
 
 hauled but a short distance. In the first case the 
 haul is long and the rate received per ton is high. 
 In the second case, the rate is low and the haul is 
 short not only because a high standard of transporta- 
 tion service is not essential but also because the large 
 bulk of the commodities in relation to their low 
 monetary value places an economic maximum limit 
 on the freight charge that enters into their market 
 price. Accordingly, in every summaried statistical 
 presentation of railroad traffic full consideration should 
 be given to the relative proportions of the various classes 
 of commodities carried. 
 
 Classification of Commodity Traffic. The Inter- 
 state Commerce Commission, for a number of years, 
 has classified railroad freight tonnage as. Products 
 of Agriculture, Products of Animals , Products of 
 Mines, Products of Forests, Manufactures, Merchan- 
 dise and Miscellaneous. This classification is gen- 
 erally followed in the presentation of freight com- 
 modity statistics in railroad reports. With the 
 exception of merchandise, the classes comprise only 
 carload shipments. It is evident that, although 
 in some instances the requirements of a general 
 comparison are met with in this classification, the 
 wide disparities among the commodities within 
 each class preclude a correct indication of the real 
 character or of the profitableness of the group. 
 Thus, the Atchison's freight traffic consists of about 
 22 per cent, in agricultural products, of which fruit 
 and vegetables are about one-fourth. Measured 
 by receipts, however, and probably by profits, the 
 
140 AMERICAN RAILROAD ECONOMICS 
 
 fruit business is a very much larger proportion. 
 Similarly, dressed meats are included under Products 
 of Animals, along with live stock, hides, bone ferti- 
 lizer and the like. The length of the haul as well as 
 the receipts per ton-mile of dressed meats, how- 
 ever, is far in excess of the average for all commod- 
 ities in the group. 
 
 Essential to correct measurement of railroad 
 traffic is a knowledge of the relative proportions of 
 carload and less-than-carload freight Some classes of 
 commodities are almost uniformly shipped in carload 
 lots. Many other commodities are generally for- 
 warded in small bulk or "less-than-carload'^ lots, 
 (L. C. L. freight). The consuming capacity of the 
 territory traversed frequently determines in how far 
 a railroad company can enjoy carload lot shipments. 
 Accordingly, two railroad systems traversing different 
 localities, though carrying the same proportions of 
 similar commodities, may sustain wide differences in 
 the average rate and the net profit received from the 
 / same class of freight. In the case of carload ship- 
 ments, the freight rate on a ton-mile basis, largely 
 , because of economies in handling, is naturally les3 
 I than when the same commodity is shipped as a 
 less-than-carload lot. The profit on carload ship- 
 ments to the railroad, however, may be relatively 
 greater. 
 
 No important railroad system as yet furnishes 
 stockholders data regarding the proportion or the 
 rate per ton-mile of each class of commodity shipped 
 in carload lots. The Interstate Commerce Commis- 
 
TRAFFIC STATISTICS 141 
 
 sion, however, requires in the official annual report 
 filed by railroads, a statement of the tonnage, ton- 
 mileage and revenue from certain selected com- 
 modities transported in carload lots. Among the 
 commodities selected are grain, hay, cotton, live 
 stock, dressed meats, anthracite coal, bituminous 
 coal and lumber. This data pertaining to individual 
 railroads is not published, but the original report 
 filed by each company with the Commission is 
 available for public inspection at Washington. 
 
 Diversification of TraflSc. A railroad system may 
 be largely dependent for revenue on one class or kind 
 of commodity, or it may have a diversified traffic, 
 L e,y one class of freight is not disproportionately 
 large or small. In no instance does each class of 
 freight bear the same proportion to the total or con- 
 tribute alike to the revenue. Certain commodities 
 enter more largely into freight movement than 
 others not only by reason of their limited areas of 
 production and widespread demand but also because 
 transportation is an essential element in the prepara- 
 tion for their consumption. Moreover, raw ma- 
 terials and bulky articles, such as mine and forest 
 products, naturally tend to outweigh lighter prod- 
 ucts. It is, therefore, logical that mineral prod- 
 ucts make up more than one-half of the total freight 
 movement in the United States. It must be re- 
 membered, however, that the average distance these 
 bulky products are hauled is comparatively short. 
 Their importance to the railroads, therefore, though 
 undoubtedly very great, is unduly emphasized in a 
 
142 AMERICAN RAILROAD ECONOMICS 
 
 statement showing merely the percentage that each 
 class of freight bears to the total tonnage. 
 
 A diversified tonnage is generally considered more 
 
 i^ favorable to earning stability than traffic consisting 
 almost exclusively of one commodity. Yet, the con- 
 struction and development of many leading rail- 
 road systems has been due to the large revenue af- 
 forded by some important commodity requiring 
 transportation facilities for ultimate consumption. 
 Thus, the heavy coal tonnage of the "Anthracite" 
 and the "Bituminous" roads, and the "ore" tonnage 
 of lines from Lake Erie to Pittsburgh, in connection 
 with other freight movement, furnishes these rail- 
 roads a, heavy business which is conducive to low 
 operating costs per traffic unit. Fluctuations in the 
 predominant item of tonnage, however, occasionally 
 impair the earnings of these companies. Stability 
 of e arning power is ^ principal source of financj_al__ 
 security. Hence, every railroad management aims 
 to acquire as diversified tonnage as may be possible 
 in the territory traversed. 
 
 A further disadvantage of lack of diversified ton- 
 
 * nage is the large movement of traffic in one direction. 
 This necessitates the extra expense of the "back 
 haul" of empty cars. In some cases a "return ton- 
 nage" has been developed to offset this expense. 
 Thus, the ore carrying lines supplying the Pitts- 
 burgh district have a return tonnage of coal to the 
 lakes. Similarly, the Delaware, Lackawanna & 
 Western, in more respects than one a "Road of 
 Anthracite," has succeeded in building up a large 
 
TRAFFIC STATISTICS 
 
 143 
 
 fruit traflSc over its line from the seaboard to interior 
 points. Even though this equalization of traffic 
 flow may not eliminate or reduce the hauling of 
 empty cars, it, at least, avoids the necessity of trains 
 made up exclusively of "empties." 
 
 The effect of diversified traffic on Eastern lines 
 in reducing the percentage of empty car to the total 
 car movement is fairly indicated in the following 
 table compiled from returns submitted to the Inter- 
 state Commerce Commission for the fiscal years 
 1910, 1911, and 1912: 
 
 Company 
 
 Percentage of 
 empty car movement 
 to total car movement 
 
 1912 
 
 1911 
 
 1910 
 
 Philadelphia & Reading 
 
 Central Railroad of New Jersey . . . 
 
 Norfolk & Western 
 
 Chesapeake & Ohio 
 
 Lehigh Valley 
 
 New York Central, etc 
 
 Erie Railroad 
 
 New York, New Haven & Hartford 
 Boston & Maine 
 
 % 
 37 
 40 
 40 
 37 
 33 
 34 
 31 
 32 
 28 
 
 % 
 38 
 41 
 41 
 38 
 31 
 34 
 30 
 32 
 21 
 
 % 
 40 
 40 
 39 
 38 
 32 
 33 
 29 
 31 
 27 
 
 The four companies reporting the highest percent- 
 age of empty car movement in the above table are 
 those which, besides having a large coal tonnage, 
 have no special facilities for interchange of through 
 traffic with connecting lines. The Erie and the 
 Lehigh are both "Anthracite" lines, but the Erie 
 
144 AMERICAN RAILROAD ECONOMICS 
 
 is also a trunk line from Chicago to New York and 
 the Lehigh has an arrangement for interchange of 
 through traffic with the Grand Trunk at Buffalo. 
 Traffic interchange affords an opportunity for di- 
 versification of tonnage and reduction of "empties." 
 An instance of improved diversification through 
 gradual change in the relative proportions of each 
 class of freight tonnage is furnished by the Atchison, 
 Topeka and Santa Fe System: 
 
 Year ended June 30th 
 
 Per cent, to total tonnage 
 
 1901 
 
 190^ 
 
 1908 
 
 1911 
 
 1912 
 
 Grain Products 
 
 % 
 18.82 
 12.05 
 10.03 
 30.94 
 
 7.98 
 20.18 
 
 % 
 16.46 
 12.50 
 
 8.99 
 30.06 
 12.28 
 19.71 
 
 % 
 
 9.20 
 13.68 
 
 7.92 
 32.05 
 12.41 
 24.74 
 
 % 
 
 7.50 
 14.83 
 
 7.74 
 28.36 
 11.11 
 30.46 
 
 % 
 6.85 
 
 Other Agricultural Products 
 
 Products of Aniinals 
 
 15.33 
 7 33 
 
 Products of Mines 
 
 30.95 
 
 Products of Forests 
 
 10.24 
 
 Manufactures and Merchandise . . 
 
 29.30 
 
 
 100.00 
 
 100.00 
 
 100.00 
 
 100.00 
 
 100.00 
 
 Freight receipts per ton-mile 
 
 1.007c 
 
 1.002c 
 
 0.987c 
 
 1.028c 
 
 1.026c 
 
 A decade ago the Atchison was classed as a "granger" 
 because of its relatively large ratio of grain tonnage. 
 This ratio has since declined more than 60 per cent. 
 The loss in grain traffic has been compensated by a 
 gain in manufactured products (package freight) 
 which is usually classed as "high grade" freight. 
 The effect of this change is not indicated in the 
 average receipts per ton-mile, the rate 1.007c in 
 
TRAFFIC STATISTICS 145 
 
 1901 was approximately the same in 1912, i. e,, 
 1.026c. 
 
 Traffic Density. Large tonnage is the fundamental 
 element in profitable railroad operations. In ac- 
 cord with the economic law of "increasing returns," 
 railroad companies having their lines well supplied 
 with traflSc enjoy relatively lower operating costs 
 than lines with light tonnage. The exception, as 
 already pointed out, is when the proper facilities 
 are lacking for handling and moving the business. 
 Traffic expansion in volume and in density, however, 
 has been generally attended by corresponding im- 
 provements in the machinery of railroad operation. 
 Increasing density has brought larger engines, more 
 capacious cars and better constructed roadbed and 
 track. In other words, improvements permit the 
 traffic as it becomes of a more wholesale character 
 to be dealt with in a more wholesale and therefore 
 in a more economical manner. If this cannot be 
 done, the advantages of heavier traffic may be en- 
 tirely lost to the railroad. 
 
 The measurement of traffic volume, or traffic den- 
 sity, as it is technically known, when taken in rela- 
 tion to physical factors is thus of the highest im- 
 portance in analyzing operating results. Traffic 
 density is ordinarily computed by dividing the total 
 ton-miles by the miles of road operated in a railroad 
 system. Thus, if a railroad moved 1,000,000 tons 
 of freight an average distance per ton of 100 miles 
 the ton-mileage would amount to 100,000,000 ton- 
 miles. If the total length of line operated were 200 
 
 N 
 
146 AMERICAN RAILROAD ECONOMICS 
 
 miles, then the freight density would be 500,000 
 ton-miles per mile of road. Passenger traffic density 
 is measured in the same way. It is the quotient of 
 the passenger-miles divided by the total miles oper- 
 ated for passenger business. These items are at IP 
 best crude averages for indicating the extent of • 
 the railroad business. As has been already pointed 
 out, it is manifestly impossible, in view of the great 
 variety of commodities transported and the com- 
 plicated services rendered by railroad companies, to 
 assemble in a single average the record of actual 
 work performed. Moreover, the handling of ton- 
 nage in increasing bulk is not necessarily reflected 
 in increased revenues unless the proportion of the 
 various classes of commodities remains unchanged. 
 Different rates are received for transportation of 
 different commodities. However, unless there has 
 been a substantial change in the character of a rail- ^ 
 road company's tonnage, the average ton-miles-per- 
 mile-of-line-operated is undoubtedly the best index of 
 railroad business. Whether this progress is reflected 
 in increased net earnings depends on the adequacy 
 of the physical facilities, the operating efficiency, 
 and the retention of rates and charges. 
 
 Average Length of Haul. Along with traffic den- 
 sity, the average haul per ton is an influencing item in 
 railroad revenues and operating costs. It is obtained 
 by dividing the total ton-miles by the total tonnage 
 received for shipment. If railroad services were 
 merely confined to moving commodities in carload 
 lots and without any handling at terminals or with- 
 
TRAFFIC STATISTICS 147 
 
 out other service than the mere carriage, the varying 
 length of the average haul would not greatly influ- 
 ence operating costs or freight rates. That railroad 
 ^^rates between different points do not vary directly 
 "with the distance is due almost entirely to uniformity 
 • of terminal charges regardless of the haul. Hence, 
 it fgllows that the greater the average haul the smaller 
 proportionately will he the operating costs per unit of 
 freight. It is with good reason, therefore, that the 
 railroads seek to obtain business insuring a long haul 
 even though the rates are lower than on short-haul 
 tonnage. 
 
 For comparative purposes, and as a factor con- 
 sidered separately from other factors influencing 
 railroad operating results, the average haul is of 
 limited statistical value. Some commodities are of 
 such weight and bulk in relation to market value 
 that to convey them long distances entails an eco- 
 nomic loss. Included among this class are the basic 
 materials of industry, such as coal, iron ore, and 
 timber. On the other hand, manufactured articles 
 of small bulk and high price may be moved great 
 distances without substantially increasing the cost 
 to the ultimate consumer. Consequently, the rail- 
 roads carrying a large proportion of this high grade 
 tonnage are naturally expected to have a longer 
 average haul than those whose tonnage consists chiefly 
 of low-grade, bulky articles. This result, however, 
 is not always borne out in the yearly fluctuation of 
 the average haul. Change s in the relative propor- 
 tions of local and through traffic and in the length 
 
148 AMERICAN RAILROAD ECONOMICS 
 
 of mileage operated as well as in the character of .the 
 freight tonnage are factors influencing the average 
 haul per ton. 
 
 A further limitation to the use of the average haul 
 for comparative purposes is the differences in the 
 length of railroad companies' lines. Certainly, it 
 would be utterly foolish to compare the average 
 haul of a trunk line, such as the Pennsylvania or 
 the Union Pacific, with that of a terminal road like 
 the Reading or the Lackawanna. The former carry 
 large tonnages of through traffic, whereas the latter, 
 because of the relatively small road mileage, are 
 compelled to transfer their long haul tonnage to 
 connecting lines. It cannot be too greatly empha- 
 sized that statistical comparison is of little value 
 unless the attendant circumstances are taken into 
 account. 
 
 In considering the advantages of long-haul traflSc, 
 the offsetting effects of terminal expenses connected 
 with each class of tonnage should be kept in mind. 
 These charges vary not only as to commodities, but 
 also as to manner of shipment. Goods shipped 
 as package freight entail relatively higher handling 
 costs at terminals than when shipped in carload 
 lots. Moreover, one consignment of freight may 
 require many times as much handling, storage, care 
 and insurance as another consignment of equal 
 weight shipped the same distance; and a ton of 
 merchandise shipped to twenty different places is 
 not a similar "cost of service" proposition as a ton 
 shipped in one consignment, though the railroad's 
 
TRAFFIC STATISTICS 149 
 
 revenue in each case may be approximately the 
 same. 
 
 Diversity of freight business; growth in density of 
 freight and passenger traffic; and increase in the length 
 of haul are important features of American railroad 
 progress. They are factors in the natural course of 
 transportation development. The extent to which 
 the railroads have participated in these economic 
 advantages is exceedingly difficult to determine. 
 One of the questions now agitating American rail- 
 road managers is how to retain for the shareholders 
 a part of the gains of progressive transportation de- 
 velopment that competition, legislation and the 
 demands for better service tend to eliminate. One 
 means of solving this problem is efficient and eco- 
 nomical operation. To properly gauge the attain- 
 ments along these lines requires the use of satisfac- 
 tory statistical units. ^ 
 
 STATISTICS FOR MEASURING OPERATING ECONOMY 
 AND EFFICIENCY 
 
 These widely used statistics have been adopted pri- 
 marily to assist railroad managers in the intelligent 
 operation of their lines. They, however, furnish 
 information of the service given to the public as well 
 as of managerial efficiency. Railroad rivalry and 
 competition, and the necessity of maintaining rail- 
 road credit to provide for new capital requirements 
 create a desire on the part of operating officials to 
 make "a good showing." In this way the standard 
 
150 AMERICAN RAILROAD ECONOMICS 
 
 units for measuring operating costs have been de- 
 veloped. These units when interpreted properly 
 become an effective test of efficiency as well as a 
 means of administrative control. 
 
 The principal standard units applied in the meas- 
 urement of operating efficiency and economy are 
 the so-called "mileage costs." These comprise de- 
 ductions from the ton-mile and passenger-mile, the 
 locomotive-mile, the train-mile and the car-mile aver- 
 ages. In handling these standard units, or in using 
 them for purposes of comparison, extreme caution 
 is essential. Possible changes and differences in 
 physical facilities, in the character of the traffic 
 and in managerial policy must be constantly kept 
 in mind. Even within the same railroad system 
 it is frequently decidedly unfair to measure operating 
 results of one division against another on the sole 
 basis of "mileage" averages. Such comparisons 
 would take for granted similar physical, traffic, labor 
 and climatic conditions as well as similarity in meth- 
 ods of supervision and in administrative skill. 
 
 It is not our purpose in this work to analyze in 
 detail the numerous averages and combinations of 
 standard traffic units contained in railroad and 
 Government reports. Attention shall be given 
 merely to those that are most commonly used and 
 serve best in determining relative operating effi- 
 ciency. Among the principal units adapted to 
 this purpose are: 
 
 (a) the Train-mile, 
 
 (6) the Locomotive-mile, 
 
TRAFFIC STATISTICS 151 
 
 (c) the Car-mile, 
 
 (d) the Average Train-load, 
 
 (e) the Average Car-load. 
 
 Each of these will be considered in turn. 
 
 Train-mile. The technical conception of a train- 
 mile is the movement a distance of one mile of one 
 or more locomotives attached to any number of 
 cars. The lack of definiteness in this conception 
 destroys in large part the usefulness generally as- 
 cribed to the train-mile unit in establishing a com- 
 parative basis for measuring efficiency and operat- 
 ing costs. A passenger train may mean everything 
 from a creeping branch-line local consisting of an 
 antiquated locomotive and a haK-baggage, half- 
 passenger coach to a luxuriously appointed express 
 of a dozen or more steel cars moved at the rate of 
 60 miles an hour. Similarly, a freight train may 
 connote anything from a box car behind an engine 
 of ancient type to a train of a hundred gigantic steel 
 cars hauled by two or more powerful compound 
 locomotives. A general average obtained from units 
 of such varying characteristics is essentially defec- 
 tive unless modified in accordance with the attend- 
 ant circumstances in each case. 
 
 Having in view the lack of homogeneity in the 
 train-mile, the term cannot correctly be applied 
 unconditionally as a cost or efficiency index. To 
 say, off hand, that one railroad is operated more 
 economically than another because its freight train- 
 mileage is smaller in relation to the total ton-miles, 
 or because it has smaller operating expenses per 
 
152 AMERICAN RAILROAD ECONOMICS 
 
 train-mile, is like saying that a brick layer accom- 
 plishes more work than a stone mason because in 
 a day's work more bricks than granite blocks are 
 placed in a wall. Obviously, the train-mile will serve 
 as a unit of cost and of eflficiency only when there is 
 an approximate uniformity in the units from which 
 the general average is made, i. e,, when all the factors, 
 such as the class of commodities carried; the kind 
 and capacity of cars; and the number, tractive power 
 and speed of locomotives are proportioned alike 
 throughout the aggregations from which the arithme- 
 tical averages in each case are produced. Moreover, 
 railroads compared on the basis of train-mile averages 
 should be similar in physical and in topographical 
 characteristics and should have equal supply of 
 rolling stock and motive power in relation to ton- 
 nage and traffic density. As possible comparisons 
 under such circumstances are, to say the least, ex- 
 ceedingly rare, the use of the train-mile unit as a 
 basic measurement of railroad operating efficiency 
 and economy requires the utmost caution. 
 
 The train-mile unit, in spite of its limitations as a 
 statistical average, serves an important function in 
 the administrative control of railroad operations. 
 In fact, railroad transportation essentially consists in 
 buying train-mileage and selling ton-miles and pas- 
 senger-miles. Therefore, as little train-mileage should 
 be purchased as is economically possible in relation 
 to the traffic units sold. A manufacturer or mer- 
 chant may exceed his actual needs in the purchase 
 of goods and materials, because the surplus can be 
 
TRAFFIC STATISTICS 153 
 
 stored for future use. The railroad, however, that 
 buys more train-mileage at a given time than is ac- 
 tually required by the traffic units is paying for 
 something that cannot be stored and that is irre- 
 trievably lost. Accordingly, a reduction of train- 
 mileage without corresponding decrease in the ton- 
 mileage, all other factors remaining substantially 
 unchanged, is evidence of more economical opera- 
 tion. On the Erie Railroad, for example, the revenue 
 ton-miles were 1,990,807 or 41 per cent, more in 1911 
 than in 1899. The total freight train-mileage, how- 
 ever, decreased in the same period from 15,277,747 
 to 13,066,626, or 14 per cent. Similarly, on the 
 Burlington the freight train-miles (including mixed 
 train-miles) decHned from 19,314,987 in 1901 to 
 17,554,338 in 1912, or a decrease of 9.1 per cent. 
 In the meantime, however, the ton-miles increased 
 from 3,871,337,916 to 7,675,979,757 or 98.3 per cent. 
 In other words, substantially twice the freight busi- 
 ness of 1901 was handled by the Burlington in 1912 
 with a decrease of about 10 per cent, in freight train- 
 miles. Of course, these results have been pro- 
 duced by heavy additional capital investment, pos- 
 sibly to a greater extent than by enhanced operating 
 efficiency. Both Erie's and Burlington's locomo- 
 tives have become larger; grades have been elimi- 
 nated and other improvements have been made in 
 order to increase the size of trains and thus reduce 
 the train-miles. To understand how much each 
 factor has contributed to the results obtained re- 
 quires study of the physical improvements as well as 
 
154 AMERICAN RAILROAD ECONOMICS 
 
 an analysis of the average train-load and other stand- 
 ard units for measuring railroad service and costs. 
 
 The Locomotive-mile. As a statistical average, the 
 same limitations are applied to the locomotive-mile 
 as to the train-mile. The varieties of locomotives 
 in kind and quality almost defy classification. Be- 
 sides being grouped under passenger, freight and 
 switching engines, locomotives may be single ex- 
 pansion Pacific type; consolidated with high tractive 
 or with low tractive power; high-speed Atlantic 
 type or low-speed articulated, etc. All these have 
 different hauling power. There is no relative uni- 
 formity in their first cost, in their maintenance or 
 in their operating expense. To be of practical value 
 in indicating cost and performance, the locomotive- 
 mile as any other statistical average must be based 
 on a homogeneous aggregate. This would require 
 engines to be of the same general type and class 
 or of various classes equally proportioned. Even 
 with this uniformity the influence of varying fea- 
 tures of topography and roadbed, such as grades, 
 curves and the like, must have proper consideration. 
 There is, therefore, under existing conditions no 
 uniform relation between the amount of work per- 
 formed and the cost of the performance in the 
 locomotive-mile unit. Considerable adjustment is 
 obviously required before this standard can be ac- 
 cepted as a cost or as an efficiency index. 
 
 Inasmuch as locomotive operating costs are re- 
 lated to the time engines are employed as well as to 
 the actual performance, the locomotive-hour has been 
 
TRAFFIC STATISTICS 155 
 
 suggested as an index preferable' to the locomotive- 
 mile. The tractive-power-hour, i. e,, per-pound- 
 tractive-power-per-locomotive-hour as a standard for 
 measuring both cost and efficiency of performance 
 has been recommended by a committee of the Asso- 
 ciation of Transportation and Car-Accounting Offi- 
 cers. The employment of this average will eliminate 
 many of the objections applying to the locomotive- 
 mile, since the basic units, i. e., tractive-power pound 
 and the hour, are each homogeneous in respect to 
 the aggregates. 
 
 The Average Car-mile. Car-mileage performance 
 is an important element in the measurement of 
 efficiency. As a statistical standard it is logically 
 based upon the actual movement of the cars in 
 service. Thus, the calculation of the average mileage^ 
 per freight car would be the quotient of the actual 
 mileage covered by cars in use divided by the num- 
 ber of these cars. In the statistical returns of rail4 
 road companies, the result is not always thus cor- 
 rectly obtained. "^ In the first place, the number of 
 car-units used in the computation of average car- 
 miles may be those owned on the last day of the 
 month or year. Secondly, the total car-mileage 
 includes the mileage covered by hired cars as well 
 as by those owned. Now it is very likely that the 
 number of cars owned and in service on the last day 
 of the fiscal year is not the same as the "average" 
 for all days. Moreover, the number of rented cars 
 on a company's lines may not be the same as the 
 number of cars hired to other railroads. 
 
156 AMERICAN RAILROAD ECONOMICS 
 
 The practical defects in compiling absolutely cor- 
 rect data are not the only difficulties hindering the 
 measurement of freight car service. Disparities in 
 the ratio of "empty" to loaded car mileage directly 
 affect the average car movement. Car-capacity and 
 car-construction are also essential particulars before 
 an equitable basis can be obtained for comparing 
 freight car performance as between different rail- 
 roads, or on the same system at different periods 
 of time. 
 
 Aside from these difficulties, there is a further arti- 
 ficial limitation arising from the varying demurrage 
 regulations prevailing in the different territorial sec- 
 tions. In some states the legal period allowed for 
 unloading a car without penalty for delay is forty- 
 eight hours, and in others it is as high as seventy-two 
 hours. ^ Obviously, the longer period allowed the 
 greater the restriction on the free movement of cars 
 in service. This would hinder a good showing in car 
 performance. 
 
 After summing up all these conditions, it is quite 
 conceivable that a lower average car-mileage per 
 freight car on one line may represent greater operat- 
 ing efficiency and economy than a higher average 
 on another line better favored by conditions promot- 
 ing a free movement and a maximum use of cars. 
 
 A further circumstance limiting the performance 
 of both passenger and freight cars is the irregularity 
 
 ^ Uniform demurrage rules are being gradually adopted throughout 
 the United States, so that this difficulty in the equitable measurement of 
 car performance is being eliminated. 
 
TRAFFIC STATISTICS 157 
 
 in the volume of traflSc offered to some railroads 
 as compared with others. If the business of moving 
 passengers and freight came uniformly each day, 
 its profitableness to the railroads would be greatly 
 enhanced. On a great many lines equipment must 
 be held "idle" for many days in order to be in readi- 
 ness to move the business when offered. Grain, 
 cotton and fruit are harvested once a year and are 
 forced on the roads for movement in from one to 
 four months. The American Railroad Association's 
 monthly statistics of car performance occasionally 
 show disparities of 40 per cent, or more in the ton- 
 nage movement. This means that on some lines 
 there is an "idle" period for a large part of the car 
 equipment, and when these "idle" cars are used, 
 they are frequently handled by inefficient, temporary 
 employees. 
 
 Owing to the conditions under which railroad 
 operating statistics are compiled, and the complica- 
 tions and expense incident to their proper prepara- 
 tion, it is extremely foolhardy for railroad managers 
 or investors to rely on one item as an absolute index 
 of efficiency in operation. Because of the great 
 public inconvenience and loss from "car shortages," 
 however, freight car performance statistics are care- 
 fully studied. The American Railway Association, 
 for a number of years, has been collecting and pub- 
 lishing general data of this sort. The public is now 
 furnished with periodical statements of the loaded 
 car percentage to total car movement and with data 
 showing available car supply. There are, in addition 
 
158 AMERICAN RAILROAD ECONOMICS 
 
 statistics of actual car performance, viz. : the average 
 ton-miles per car jper day. Comparative statistical 
 suiiimaries are published from time to time by the 
 American Railway Association so that both the 
 railroads and shippers may know the relative prog- 
 ress of each company in improved car efficiency. 
 
 Average Train-load. As a basis in gauging com- 
 parative operating efficiency, the average train-load 
 {i. e., the total ton-miles divided by the total train- 
 miles) presents the same inherent defects as are en- 
 countered in ton-mile costs. A line with heavy grades 
 must necessarily adjust the loading to the Ij gulin g 
 capacity over these grades or undergo the use of 
 "pushers" and "double headers." This practice by 
 some companies of operating many trains with two 
 or more locomotives may destroy the efficacy of the 
 average train-load as an efficiency index since it alters 
 the relation of operating costs to the train's tonnage. 
 
 The character of commodities carried is also of 
 importance as an influence in "maximum" loading. 
 A train-load of silk hauled in three ordinary box cars 
 will bring in a gross revenue probably greater than a 
 consignment of lumber comprising a train of forty 
 cars and having a net weight of 2,000,000 pounds. 
 The relative proportion of car-load and less than car- 
 load shipments on each system is also a factor in 
 determining the average train-load. Car-load con- 
 signments are computed as equal in weight to the 
 marked capacity of the car whether under or over 
 this amount, whereas, package freight is actually 
 weighed before shipment. It frequently happens 
 
TRAFFIC STATISTICS 159 
 
 that shippers, in order to have the advantage of the 
 lower car-load rate will hire a car though the con- 
 signment is much less than the capacity of the car. 
 This practice, if pronounced, on a railroad com- 
 pany's lines, produces an erroneous statement of 
 the average train-load. Moreover, in the train-load 
 computations no consideration is given to differences 
 in the tare or "dead" weight of cars. The weight 
 of cars is as much a limitation on locomotive tonnage-- 
 rating as grades, speed and air temperature. 
 
 Average Car-load. As a statistical unit, the average 
 car-load, i, e., average tons carried per loaded freight 
 car-mile, is in the same category as the average 
 train-load. The disparities in the quality and 
 carrying capacity of cars as well as in the different 
 classes of goods carried are here also potent factors 
 affecting the validity of statistical comparisons. 
 However, the question of utilizing car capacity to the 
 best advantage is a matter of general importance to 
 the public as well as to railroad officials and stock- 
 holders. The Committee on Car Efficiency of The 
 American Railway Association, which has been 
 investigating the problem, has adopted as the best 
 available combination unit of car efficiency, the 
 ton-miles hauled per freight car in service per day. 
 Their statistics indicate that this item is steadily 
 increasing. The largest average number of tons hauled 
 one mile per car per day in 1907 was 348; the largest in 
 1909, 413, and in October, 1912, 434 ton-miles per 
 car per day. An interesting problem is whether this 
 general increase has been secured by better car 
 
160 AMERICAN RAILROAD ECONOMICS 
 
 loading, by reduction of empty car mileage or by 
 larger carrying capacity. 
 
 In view of the constant mcrease in size of cars, 
 there is considerable controversy as to whether the 
 average loading in recent years has kept pace with 
 the increased average carrying capacity. In 1910, as 
 compared with 1902, freight- ton mileage increased 
 59 per cent., total car-capacity 69 per cent., and total 
 car-mileage 41 per cent., while the increase in the 
 average tons moved jper loaded freight-car-mile was 
 from 16.9 tons in 1902 to 19.8 tons in 1910, an 
 increase of less than 18 per cent. This either reflects 
 a lowering of car efficiency or an increase in the 
 average car-capacity beyond the limits warranted by 
 traffic conditions. Actual tests on several roads 
 (more particularly the Erie and the Lackawanna) 
 seem to demonstrate that with the development of 
 package freight shipments and the demand for fast 
 freight service, cars are frequently moved with loads 
 less than one-half of their capacity. 
 
 Train Frequency and Speed. The highest operat- 
 ing economy manifestly implies that each locomotive 
 and each car on every line shall, during a given 
 time, move the maximum number of tons with 
 proper expedition and at a minimum expense. To 
 accomplish this requires, (aside from perfect manage- 
 rial skill), an abundance of traffic and a good roadbed, 
 weU maintained and adequately equipped with 
 motive power and rolling stock. If the volume of 
 traffic at each point is not commensurate with 
 equipment capacity, heavy car-loads and train- 
 
TRAFFIC STATISTICS 161 
 
 loads may be directly opposed to speed and train 
 frequency. The character of transportation service, 
 therefore, demands consideration in estimates of 
 operating efficiency and economy. Though good 
 railroad management decrees the handling of traffic 
 at the lowest operating costs, business requires that 
 it be handled speedily. To satisfy the public demand 
 the best railroads maintain time schedules in freight 
 as well as in passenger service. In some cases actual 
 tests have demonstrated that "time" freight trains 
 are handled more economically in relation to revenue 
 than the "tonnage" trains. 
 
 The leading railroad systems in the United States 
 operate on the principle that it is not economical to 
 have the locomotives haul the maximum load at the 
 minimum speed. Delays caused by "loading" 
 equal to the locomotive capacity frequently result in 
 greater loss than gain. The same number of cars 
 and locomotives when loaded lightly so as to make 
 speed may handle considerably more freight in a 
 given period of time than when '*held up" at stations 
 and division points awaiting a full load. Besides, 
 loading at or near to the maximum hauling capacity 
 of the locomotive enhances the liability to locomotive 
 break-downs. It is a well known fact that changes in 
 temperature and other climatic conditions alter 
 train-resistance.^ The resistance offered by railroad 
 trains is greater in cold weather than it is under 
 
 ^ See University of Illinois Bulletin, No. 59. "The eflFeets of cold 
 weather upon train resistance and tonnage rating," by Ed. C. Schmidt 
 and F. W. Marquis. 
 
162 AMERICAN RAILROAD ECONOMICS 
 
 ordinary temperatures. Recognition of this fact 
 has led to the reduction of "tonnage ratings," 
 (i. e,, the maximum loading) of locomotives during 
 cold weather. This practice is almost universal 
 among railroads in the northern part of the United 
 States and in Canada. Any study of economical 
 train loading, therefore, should recognize the fac- 
 tor of air temperature as well as of speed and of 
 train frequency. 
 
 Conclusion. It is such factors as the foregoing that 
 make the proper interpretation of statistical units 
 measuring operating efficiency a most complicated 
 and difficult task. Satisfactory results cannot be 
 obtained merely by study of the bare statistics. The 
 operating conditions must be thoroughly known 
 before safe conclusions can be drawn. It is apparent, 
 therefore, that the testing of railroad economy and 
 efficiency through the use of selected statistical units 
 requires the greatest caution. There are so many 
 diverse factors and attendant circumstances which 
 destroy or impair the efficacy of the different units. 
 To illustrate: An attempt is made to measure 
 progress in locomotive-efficiency by a year to year 
 comparison of tons hauled per locomotive-mile. This, 
 however, is found unsatisfactory because no account 
 is taken of the changes in the size and tractive power 
 of the locomotives. A comparison is then made 
 on the basis of ton-miles moved per pound of locomotive 
 tractive-power. But this gives no consideration to 
 changes in the character or in the density of freight 
 
TRAFFIC STATISTICS 163 
 
 traffic. A further analysis based on the combination 
 of units which gives consideration to the time each 
 locomotive was in use {locomotive-hours) and to 
 fluctuations in volume of traffic {ton-miles per mile of 
 road) must be made. There may be further objec- 
 tions, however. The relative supply of locomotives 
 and rolling stock may have varied at different periods. 
 These are contributory elements in measuring 
 efficiency. Moreover, the progressive improvement 
 in alignment and in superstructure of roadbed places 
 each year on an unequal comparative basis. Were 
 railroad operations subject to purely static instead 
 of highly dynamic conditions the measure of efficiency 
 and economy through the use of unrefined traffic 
 statistics would be an easy matter. 
 
 When it comes to a comparison of the operating 
 efficiency of different railroad systems on the basis 
 of statistical averages, the liability to erroneous 
 conclusions demands full consideration of all factors 
 influencing operations. The St. Louis & San Fran- 
 cisco Railroad and the Chicago, Rock Island & 
 Pacific, though not altogether similar in geographical 
 location of lines and in traffic conditions, afford an 
 interesting statistical comparison. The 'Frisco 
 serves Kansas, Missouri, Arkansas, Tennessee and 
 Oklahoma, and taps Texas. The Rock Island has 
 its lines for the most part west and north of Chicago, 
 covering Minnesota, Iowa, Missouri, Kansas, Colo- 
 rado and Oklahoma. It also has a line reaching the 
 Mexican border in New Mexico and another which 
 runs from Oklahoma into Arkansas and Louisiana. 
 
164 AMERICAN RAILROAD ECONOMICS 
 
 Thus, the two companies cover partly the same 
 geographical regions, though the 'Frisco has no 
 through line corresponding to that of the Rock Island 
 running between Chicago and Denver and north 
 thereof. The average mileage operated by the 
 'Frisco exclusive of the Chicago & Eastern Illinois, 
 during the fiscal year 1911, was 5,188 miles as 
 against the Chicago, Rock Island & Pacific's 8,026 
 miles. 
 
 As far as division of revenue is concerned, the Rock 
 Island and the 'Frisco are much alike. Sixty-seven 
 per cent, of gross revenue came from freight on the 
 'Frisco, compared with 63.3 per cent, from freight 
 on the Rock Island. Freight density is also much the 
 same on both roads. In 1911 the average ton-miles 
 per mile of road on the 'Frisco amounted to 515,754, 
 and on the Rock Island to 587,890. The average 
 revenue per ton-mile on the 'Frisco, in 1911 was 
 1.05 cents, an increase of .7 of a mill over 1910. The 
 revenue per ton per mile on the Rock Island is some- 
 what lower, in 1911 averaging 9.2 mills. 
 
 As might be expected, the 'Frisco, not having any 
 long through route comparable to the Rock Island's 
 main line from Chicago to Denver gets a much shorter 
 average haul of freight. This average haul in 1911 was 
 156.21 miles on the 'Frisco and 246.80 miles on the 
 Rock Island. However, a greater proportion of the 
 'Frisco's traffic consists of "low grade," bulky 
 materials than is the case with the Rock Island and 
 to this may be due in part its shorter average haul. 
 In 1911, Produxis of Mines and of Forests comprised 
 
TRAFFIC STATISTICS 
 
 165 
 
 57.96 per cent, of 'Frisco's tonnage as against 
 41.05 per cent, of the Rock Island's.^ 
 Tkain-Mile Averages 
 
 Year ended June 30th, 
 
 Freight Density 
 
 Average Revenue Train-load .... 
 Revenue per Freight Train-mile 
 Freight train-miles per mile of 
 road 
 
 Rock Island 
 
 1911 1910 
 
 587.890 
 269.66 
 $2,479 
 
 2.096 
 
 567.792 
 257.43 
 
 $2,380 
 
 2.110 
 
 St. Louis & 
 San Francisco 
 
 1911 
 
 515.754 
 220.93 
 
 $2,318 
 
 2.245 
 
 1910 
 
 557.886 
 222.91 
 
 $2,178 
 
 2.429 
 
 Since the ratio of freight revenue to total operating 
 revenue is much the same on both roads, and since 
 traffic density is also not widely different, the forego- 
 ing statistical comparison of train-mile and locomotive- 
 mile averages is interesting and requires careful study. 
 
 ^ The following table shows the percentage of the tonnage of each class 
 of commodity to the total tonnage carried by each company. 
 
 
 Rock Island 
 
 St. Louis & 
 San Francisco 
 
 
 Per cent, of 
 
 total freight 
 
 
 1911 
 
 1910 
 
 1911 
 
 1910 
 
 Products of Agriculture 
 
 Products of Animals. . . 
 
 % 
 25.88 
 
 7.68 
 29.46 
 11.59 
 18.41 
 
 6.57 
 .41 
 
 % 
 22.13 
 
 7.08 
 31.93 
 12.34 
 19.55 
 
 6.46 
 .50 
 
 % 
 16.31 
 
 4.02 
 38.57 
 19.39 
 15.75 
 
 5.35 
 .61 
 
 % 
 14.80 
 3.47 
 
 Products of Mines 
 
 40.41 
 
 Products of Forests 
 
 20.72 
 
 Manufactures 
 
 15.44 
 
 Merchandise * 
 
 4.94 
 
 Miscellaneous 
 
 .22 
 
 
 
 Total 
 
 100.00 
 
 100.00 
 
 100.00 
 
 100.00 
 
 
 
 * Represents all less than car-load shipments. 
 
166 AMERICAN RAILROAD ECONOMICS 
 
 The figures call for interpretation. The Rock 
 Island's density of traffic in 1911 was 587.890 ton- 
 miles or approximately 14 per cent, greater than 
 the 'Frisco's. Rock Island's freight train-miles 
 per mile of road, however, was 6 per cent. less. This 
 economic advantage of the Rock Island is accounted 
 for by the heavier average train-load (i. e. the number 
 of tons per train-mile) which in 1911 was 48.73 tons 
 or 22 per cent, greater than 'Frisco's average train- 
 load. The Rock Island's heavier train-load is ob- 
 tained with a smaller proportion of bulky freight, as 
 shown on the preceding page. Smaller proportion of 
 low grade tonnage naturally has resulted in slightly 
 larger revenue per freight train-mile, since Rock 
 Island in 1911 received an average of $2,479 against 
 $2,318 received by the 'Frisco as freight revenue 
 for each freight train-mile. It appears, therefore, 
 that the Rock Island has an economic advantage 
 over its sister road in that it is enabled to handle its 
 tonnage in a more wholesale manner, receiving at the 
 same time a larger revenue per train-mile, 
 
 A comparison of locomotive performance, however, 
 such as is shown on the opposite page, is necessary to 
 substantiate this conclusion. 
 
 It should be observed that although the Rock 
 Island handles more tonnage per locomotive-mile 
 than the 'Frisco the average locomotive tractive power 
 of the former is the greater. This excess in average 
 locomotive capacity, however, is relatively slight. 
 In 1911, the ton-miles per freight locomotive-mile 
 on the Rock Island was 319.7 against 267.5 on the 
 
TRAFFIC STATISTICS 
 
 Locomotive-Mile Averages 
 
 
 167 
 
 Year ended June 30th 
 
 Rock Island 
 
 St. Louis & 
 San Francisco 
 
 
 1911 
 
 1910 
 
 1911 
 
 1910 
 
 Total ton-miles per freight loco- 
 motive mile ^. . . . 
 
 319.7 
 
 27,622 
 
 27,770 
 38.89c 
 
 299.8 
 
 26,690 
 
 30.500 
 35.88c 
 
 267.5 
 
 26,864 
 
 28,190 
 35.49c 
 
 269.4 
 
 Average tractive power per loco- 
 motive (lbs.) 
 
 25,927 
 
 Average locomotive-miles per lo- 
 comotive 
 
 29,520 
 
 Expenses per locomotive-mile. . . 
 
 35.69c 
 
 'Frisco, an advantage of approximately 25 per cent. 
 The Rock Island's average tractive power per locomo- 
 tive, however, exceeded that of the 'Frisco by less 
 than 3 per cent. At this point in our analysis of 
 locomotive performance we must logically conclude 
 that the results on the Rock Island indicate greater 
 operating efficiency. But the miles run by each 
 locomotive (average locomotive-miles per locomotive) 
 is an important factor. In 1911 the Rock Island in 
 this respect fell slightly behind the 'Frisco, though in 
 the previous year it was ahead, having 30,500 
 against 'Frisco's 29,520 locomotive-miles per locomo- 
 tive. In computing this item however, the average 
 locomotives in service is assumed to be the number 
 at the end of the year less one-half of the increase 
 (or plus half the decrease) over the number at the 
 year's beginning. This computation may introduce 
 an element of error. New locomotives may be put 
 
 * Includes company "non-revenue" freight. 
 
168 AMERICAN RAILROAD ECONOMICS 
 
 into service and old ones withdrawn either at the 
 beginning or at the end of the year and not gradually 
 throughout the period as is assumed in the statistical 
 comparison. 
 
 An important factor of locomotive efficiency is the 
 operating cost in relation to the work done. In the 
 table it is shown that the cost per locomotive-mile on 
 both roads in the year 1910 was, approximately, the 
 same notwithstanding Rock Island's larger ton- 
 mileage per locomotive-mile. In 1911, however, the 
 operating cost per locomotive-mile on the Rock Island 
 was 38.89c. compared with 35.69c. on the 'Frisco. 
 Thus, the Rock Island's advantage in operating 
 efficiency as exhibited in the train-mile and locomotive- 
 mile averages is impaired to some extent by the rise in 
 the locomotive operating cost per mile-run in 1911. 
 This may indicate that efficiency is acquired through 
 sacrifice of economy. 
 
CHAPTER VIII 
 
 INTERSTATE COMMERCE COMMISSION'S SYSTEM OF 
 RAILROAD ACCOUNTS 
 
 Classification of Railroad Financial Data. The 
 portion of a railroad report containing the financial 
 data can be separated into three divisions repre- 
 sented by (1) the Income Account (2) the Profit & 
 Loss {or Surplus) Account, and (3) the General Bal- 
 ance SJieet, These three parts are co-related and 
 interdependent. Changes in one are generally re- 
 flected in either or both of the other two. The In- 
 come Account and the Profit & Loss Account have to 
 do, respectively, with operation and with proprietor- 
 ship. By proprietorship is meant the net gain (or 
 loss) in the corporation other than that represented 
 by the nominal investment. 
 
 The data of operation {L e., the Income Account) 
 show how the periodical profits or losses were ar- 
 rived at. The Profit & Loss Account shows the dis- 
 tribution of these net profits and the part thereof 
 that remains in the business as a surplus. The 
 General Balarwe Sheet, on the other hand, is a state- 
 ment of financial condition. It shows on a given 
 date, in summarized form, the resources or assets 
 and the offsetting liabilities or claims. Among the 
 liabilities are included the Profit & Loss, and other 
 
170 AMERICAN RAILROAD ECONOMICS 
 
 items representing net "proprietorship). The inclusion 
 of the net proprietorship among the liabilities forms 
 the connecting link between the Income Account and 
 the General Balance Sheet. Thus, the Income Ac- 
 count exhibits the financial operations producing the 
 clear gain or loss of the company's operations dur- 
 ing a definite period. This gain or loss may be di- 
 rectly taken up by the proprietors (^. e», the stock- 
 holders), or it may be transferred in whole or in part 
 to the Profit ^ Loss Account, In the latter event, 
 the net proprietorship of the corporation is increased 
 if profits are added, and decreased if losses are de- 
 ducted. A corresponding change, therefore, results 
 in the General Balance Sheet, The Profit & Loss, or 
 Surplus, as it is commonly called, is thus the ac- 
 count for recording the net financial change wrought 
 by past operations on the present condition of the cor- 
 poration. It completes the summary of the General 
 Balance Sheet as an exhibit of financial condition. 
 In the words of Prof. Wm. M. Colei^ 
 
 Only the balance sheet represents the present condition, whereas, the 
 income sheet represents the transactions which produced that condition, 
 but ceased to have independence as soon as they were completed. 
 
 It is for this reason that all financial transactions 
 which are entered only in the Income Account are 
 said to be ''charged to income" as distinguished from 
 transactions which are entered in the General Balance 
 Sheet (either directly or through the Profit & Loss 
 Account), which are said to be "charged to capital." 
 
 ^"Accounts, Their Construction and Interpretation," by Wm. 
 Morse Cole, p. 71. 
 
RAILROAD ACCOUNTS 171 
 
 An expenditure "charged to income" does not be- 
 come a part of the assets or of 'proprietorship. Hence, 
 none of the items of the General Balance Sheet are 
 in any way affected. An expenditure charged to 
 Profit iSc Loss, however, affects net proprietorship, 
 and reduces this item in the General Balance Sheet, 
 The transaction is, therefore, reflected in the ex- 
 hibit of financial condition. Similarly, an expendi- 
 ture which is made directly for the purpose of in- 
 creasing assets or reducing liabilities, and which is 
 not recorded among the data of operation, is a 
 "charge against capital." The transaction may be 
 recorded in one or more items among the assets and 
 in one or more items among the liabilities. 
 
 With this brief resume of fundamental account- 
 ing principles, we shall proceed to a study of the 
 prevailing system of railroad accounts as affecting 
 the interests of investors and of the public. 
 
 In tracing the affairs and transactions of American 
 railroad companies, "outsiders" have a less difficult 
 task than in an analysis of other business enter- 
 prises. In railroad operations there is a standardiza- 
 tion and uniformity of accounting methods that 
 insures an intelligible presentation of financial re- 
 turns. The 20th section of the Interstate Commerce 
 Act, approved June 29, 1906, authorized the Inter- 
 state Commerce Commission to prescribe and super- 
 vise a uniform system of accounting for each class of 
 interstate common carriers. Beginning with the 
 year ended June 30, 1908, a uniform accounting 
 
172 AMERICAN RAILROAD ECONOMICS 
 
 system was installed for interstate railroad com- 
 panies. The Interstate Commerce Commission's 
 agents have legal authority to inspect railroad ac- 
 counts and records. 
 
 Previous to the enforcement of a uniform account- 
 ing system the leading railroad systems had followed 
 similar methods of bookkeeping. Uniformity was 
 not compulsory, however, and departure from stand- 
 ard practice was permitted. Each railroad was at 
 liberty to follow its own system without regard to 
 the rights and interests of the public or of any class 
 of security holders. Occasional receiverships when 
 large profits and equities were reported were due 
 to lax accounting methods. 
 
 The Underlying Motives of the Interstate Com- 
 merce Commission's Accounting System. In draft- 
 ing a system of railroad accounts, two motives appear 
 to have actuated the Interstate Commerce Commis- 
 sion. The first was the desire to know actual operat-v/ 
 ing costs so as to have a basis of equitable rate mak- 
 ing. Cost data, to be authentic and incontrovertible, 
 require the keeping of accounts in a prescribed and 
 uniform manner, and their publication in accurate 
 and intelligent form. The second motive back ofv^ 
 the uniform accounting system is the desire for 
 reliable statistical information correctly portraying 
 the financial status and fiscal operations of the great 
 transportation agencies. This probably more than 
 any other consideration guided the Commission in its 
 constructive v/ork in providing a prescribed system 
 of accounts. 
 
RAILROAD ACCOUNTS 173 
 
 The statistical purpose underlying the control of 
 railroad accounts is undoubtedly closely related to 
 and interwoven with the need of an authentic basis 
 for correct statement of operating expenses. With- 
 out uniformity of accounts for all carriers of the 
 same class, and without means of detecting false 
 and misleading returns, it is very unlikely that fair 
 and correct statements of the financial condition and 
 operating results of the carriers as a whole can be 
 obtained. Moreover, the publication of misleading 
 or inadequate statistics by a governmental agency 
 possessing the authority and prestige of the Inter- 
 state Commerce Commission accomplishes no useful 
 purpose and may result in pubHc injury. On the 
 other hand, the systematization of railroad accounts 
 so as to meet the demand for clear and intelligent 
 statistics should entail neither sacrifice nor violation 
 of the principles upon which modern business ac- 
 counting is based. When there are no conflicts of 
 this character the accounts of transportation agen- 
 cies can be readily and safely adjusted to serve 
 statistical purposes. In this respect their value as 
 public records is greatly enhanced. 
 
 Principal Accoimting Regulations. The controlling 
 motives of the Interstate Commerce Commission 
 produced a system of railroad accounts designed 
 more to meet the broader and comprehensive require- 
 ments of public regulation than to specifically serve 
 the purposes and desires of railroad managers and 
 security holders. The aim to have the operating 
 costs serve as a rate making basis led to rigid regu- 
 
174 AMERICAN RAILROAD ECONOMICS 
 
 lations in certain accounting details which previously 
 had been dealt with independently in accordance 
 with the individual financial policy of each railroad. 
 Important among these regulations are: 
 
 (1) The absolute separation of rail transportation 
 operations from ancillary operations. 
 
 (2) The exclusion of taxes from among the direct 
 costs of operation. 
 
 (3) The establishment of joint facilities accounts 
 on a uniform basis. 
 
 (4) The inclusion of depreciation charges as a 
 direct operating expense. 
 
 (5) Rigid classification of improvement and bet- 
 terment expenditures. 
 
 (6) Uniform practice in crediting premiums re- 
 ceived and charging discounts paid in the sale of 
 capital securities. 
 
 (7) Strict regulations regarding losses from the 
 abandonment of physical property. 
 
 The enforcement of these regulations prescribed 
 with a view to determining actual operating costs 
 has met with some serious criticism and complaint 
 on the part of railroad managers. Regarding the 
 first three items there was little objection, although 
 the resulting bookkeeping adjustments entailed 
 many difficulties. It is well known that railroads 
 are engaged directly in a number of operations 
 other than transportation by rail. For the most 
 part, these operations are intimately connected with 
 or are ancillary to the business of transporting pas- 
 sengers and freight. The revenue as well as the ex- 
 
RAILROAD ACCOUNTS 175 
 
 pense incident to them nevertheless is sufficiently 
 distinct from the revenues and expenses which ac- 
 crue on account of rail transportation to permit 
 separate accounting. This distinction has led to 
 the recognition of a class of accounts designated as 
 *^ Outside Operations,^' They cover the operations 
 of harbor terminals, ferries, elevators, electric hght 
 and power plants, stock yards and the like. The 
 motive for requiring a separate set of accounts for 
 this class of activities is expressed in the following 
 official definition for ''Outside Operations:" 
 
 Outside operations are facilities operated or services rendered by a rail- 
 road other than those incidental to transportation by rail, the revenues 
 and expenses of which, if included in the carrier's accounts dealing with 
 transportation by rail, would impair the significance of statistics pre- 
 pared from such accounts. 
 
 Joint Facilities Accounts. A similar motive under- 
 lies the requirement of Joint Facilities Accounts 
 on a uniform basis. It is the common practice of 
 railroads to use jointly with other companies certain 
 physical facilities such as terminals, tracks, bridges 
 and the hke. The Joint Facilities Accounts are 
 provided in order to ascertain the operating expenses 
 of each company without reference to any service 
 rendered by it to another carrier or to any service 
 rendered by another carrier to it. In other words, 
 the participation of any railroad in the operations of 
 another may by means of the Joint Facilities Accounts 
 be so shown that a combined statement of the oper- 
 ating expenses of all carriers would represent neither 
 more nor less than their true expenses of operation. 
 
176 AMERICAN RAILROAD ECONOMICS 
 
 Thus, the Joint Facilities Accounts debar a railroad 
 from including in its transportation earnings certain 
 revenues which are not derived directly from the 
 public for transportation or for kindred service. 
 They also prevent the inclusion among operating 
 ' expenses of payments for the use of capital. Thus, 
 rental paid for a track which is maintained and 
 operated at the expense of the lessee represents 
 merely a payment for the use of the property. This 
 rent is not affected in any manner by the various 
 acts of operation. It is not, therefore, an operating 
 expense. According to accounting principles, rentals 
 are expenses similar to interest and taxes when the 
 full amount of the payments represent merely the 
 reward for the use of capital. Frequently, however, 
 rental payments cover costs of upkeep, deprecia- 
 tion, wages of employees, etc. All this requires a 
 distribution of the revenues and expenses arising 
 from joint facihties in a uniform manner over the 
 various accounts of each company so as to properly 
 show how much represents operating activities and 
 how much represents receipts and payment for the 
 use of capital. 
 
 Enforced Maintenance of Depreciation Accounts. 
 The Commission's rulings regarding the maintenance 
 of depreciation accounts were promulgated with 
 special reference to railroad cost accounting. Their 
 enforcement brought forth the most determined 
 opposition. Among those active in protesting 
 against the keeping of depreciation accounts were the 
 largest, best-equipped and most conservatively 
 
RAILROAD ACCOUNTS 177 
 
 managed railroad companies. Some of these claimed 
 that the renewals and repairs to their equipment 
 were made at a rate which tended to maintain the 
 property at a uniform standard of efficiency at all 
 times. Accordingly, there was no necessity for 
 depreciation accounts on their books. A number of 
 other railroads, including the Pennsylvania, the 
 New York Central and the Norfolk & Western, 
 provided for depreciation of equipment largely 
 through sinking fund charges on their equipment 
 obligations. Probably in no two important railroad 
 systems were the methods of treating depreciation 
 charges identical. Depreciation accounts, similar 
 to reserve and sinking fund accounts, are not neces- 
 sarily entries of actual and tangible transactions, 
 but are mere records of provisions for current and 
 prospective losses. The money value of the provi- 
 sions must, therefore, be estimated. The estimates, 
 however, are largely based on experience, and the 
 railroad managers contend that they are capable of 
 attending properly to such matters.^ 
 
 Classification of Additions and Betterments. In 
 its classification of additions and betterments, the 
 Commission directed a blow against the creation of 
 hidden assets by the railroads and the concealment 
 of profits through inflation of current operating ex- 
 penses. A number of American railroads had gone 
 beyond the recognized principle of charging operating 
 
 ^ The railroads at the present writing are required to keep depreciation 
 accounts only with respect to their rolling equipment. With respect to 
 other property the matter is optional with the companies. 
 
178 AMERICAN RAILROAD ECONOMICS 
 
 expenses with only the cost of such improvements 
 and betterments as do not produce revenue. By- 
 charging productive improvements to operation, 
 they have actually increased their capital assets 
 through current income without having a perma- 
 nent record thereof on their books. The continua- 
 tion of this practice under the Interstate Commerce 
 Commission's control would seriously impair the 
 value of railroad accounts as a gauge of actual 
 operating costs. The Commission, therefore, in 
 distinguishing between expenditures "chargeable to 
 capital" and expenditures "chargeable to income," 
 applied a rigid rule for all the railroads regard- 
 less of their varying traffic conditions and financial 
 policies. 
 
 In rail replacements, for example, the Commission 
 has ordered that when heavier rails than those re- 
 placed are put down, the difference in cost arising 
 from additional weight is a capital expense and 
 must not be charged against operating revenues. 
 On the Philadelphia & Reading Railroad, this ruling 
 resulted during the year 1910 in an addition of 
 $158,976 to property account, which in previous 
 years would have been included in maintenance 
 charges. 
 
 Thus, the prescribed rule in replacements and 
 renewals permits operating expense to be charged 
 only with the cost of the original structure replaced. 
 Many experienced railroad officers, however, claim 
 that in all such cases operating expenses should be 
 charged with the full amount necessary to preserve 
 
RAILROAD ACCOUNTS 179 
 
 earning efficiency. They point out that by reason 
 of the larger, heavier, more frequent and more luxu- 
 rious service called for by modern traffic, together 
 with the keen competition among the railroads and 
 the demand of the shippers and traveling public 
 for better facilities, it is vitally necessary to charge 
 to operating expenses all extra charges required to 
 preserve the railroad in the same general earning 
 status, as it was before. In other words, since rail- 
 road facilities are constantly improved and in- 
 creased to preserve earning capacity the necessary 
 expenses for doing this must be met in part at least 
 from revenue. 
 
 Railroad improvements may be roughly divided * 
 into two classes — those which increase the earning 
 capacity in proportion to their cost, and those which 
 do not. To the latter class belong the handsome and 
 expensive passenger terminals which the cities are 
 demanding. A new passenger station at Kansas 
 City costs $2,000,000. A station fully serving the 
 needs of the public could be built for $200,000. 
 Thus, nine-tenths of the expenditure is to appease 
 the aesthetic ambition of the local citizens. Only 
 one-tenth is to increase earning capacity. It is fre- 
 quently the same with expenditure for track eleva- 
 tion in cities. This promotes public safety and con- 
 venience. It also tends to reduce operating expenses. 
 The cost, however, in most cases greatly exceeds the 
 purely economic benefits gained by the railroad. 
 Financiers contend that these improvements should 
 be paid for at least partly by charges to operating 
 
180 AMERICAN RAILROAD ECONOMICS 
 
 expenses as well as from the surplus earnings or 
 from the sale of securities.^ 
 
 Commissions and Discotints Paid or Premiums Re- 
 ceived from Sale of Securities. Railroad financiers 
 and managers have also criticised oflficial regulations 
 regarding commissions and discounts paid or pre- 
 miums received in connection with the sale of securi- 
 ties. Commissions and discounts, when paid in 
 connection with stock issues are required to be car- 
 ried on the books as a "permanently deferred asset" 
 until the stock sold is returned or converted, or until 
 the discount is extinguished by premiums realized 
 on subsequent sales of the same class of stock. "If 
 the stock is retired or converted, the discount is 
 then a charge against Profit & Loss or against the 
 premium realized, if any, at the date of such retire- 
 ment or conversion." In other words, such discount 
 
 ^ The question of railroad betterments and depreciation is also under 
 discussion in Great Britain. The Committee of the Board of Trade 
 appointed to inquire into the matter unanimously agreed that the man- 
 agement of each company should be permitted to de(^de what expenses 
 were mere maintenance and what were betterments. Mr. W. M. Ac- 
 worth, who was a member of the Board of Trade Committee, re- 
 marks: 
 
 " We come then to the conclusion that all interests, the interest alike 
 of the public and of the shareholders, are best served by charging freely, 
 not mere repairs and renewals (i. e., depreciation), against the annual 
 income, but also substantial sums for additions and improvements, and, 
 further, for what perhaps might be described as contingencies. In other 
 words, the real test of what part of the gross income is net income is, not 
 whether the physical corpus of the property has been adequately kept 
 up, but whether the earning power of the undertaking as a whole is being 
 maintained." See "Railroad Accounting in America vs. England," 
 North American Review, March, 1910. 
 
RAILROAD ACCOUNTS 181 
 
 may not be charged against income, though this 
 policy is in line with correct accounting principles. 
 In the case of the sale of bonds or other form of 
 funded obligations, the Commission requires that 
 "the discount, unless extinguished by premiums ex- 
 isting on previous bond sales, should be charged to 
 income in such equal annual installments during 
 the life of the bonds as will extinguish the discount." 
 The carrier may, however, at its option, charge to 
 Profit & Loss all of the discount or any part of it 
 remaining at any time unextinguished, but the charge 
 to income in any one year must not exceed the amount 
 of the annual installment applicable to that year. A 
 similar regulation exists regarding the periodical 
 crediting of premiums received in bond sales. The 
 ostensible purpose of this ruling is to have each year 
 bear proportionately the regularly recurring costs 
 for the use of capital. Discounts and premiums on 
 bonds are held to be, respectively, an addition to or 
 a deduction from the rate of interest paid for loans. 
 This theory underlies the separation of discounts 
 and commissions when paid in connection with capi- 
 tal stock from the same items in connection with 
 bond issues. Funded indebtedness is nominally re- 
 deemable after a fixed period during which the dis- 
 count is amortized, whereas, capital stock is a per- 
 petual obligation. Under the prevailing system of 
 railroad capitalization, however, funded indebted- 
 ness is essentially as permanent as capital stock. 
 None of the great railroads make full provision in 
 advance for bond liquidation. Maturing bonds are 
 
182 AMERICAN RAILROAD ECONOMICS 
 
 usually substituted by new issues.^ The discount or 
 premium at which railroad securities are sold fre- 
 quently can be arbitrarily determined by the rail- 
 road management. It is largely dependent on the 
 rate of interest they attach to such obligations, as 
 well as on prevailing money market conditions and 
 the credit status of the railroad company. More- 
 over, it is frequently discretionary with railroad 
 financiers whether stock or bonds shall be sold to 
 obtain new capital. 
 
 Losses on Account of Abandonment of Property. 
 The method of accounting for the losses occasioned 
 by abandonment of railroad property is one of the 
 most serious of the technical problems in connection 
 with the Interstate Commerce Commission's uni- 
 form system of accounts. According to a report of 
 the Commission: 
 
 On the part of the public, the argument is strong in support of the 
 proposition that the Balance Sheet statement of "Cost of Property" 
 should cover only that property actually used in rendering the service of 
 transportation, and that abandoned property should therefore be taken 
 out of the accounts; but the argument of the stockholder also has merit, 
 which is that inasmuch as the property abandoned was abandoned to 
 make way for providing the public with better facilities, and further, in- 
 asmuch as the first investment was necessary in order that the second 
 investment might be made, it is scarcely just to require the stockholder 
 to sustain the entire loss. A sense of equity and an appreciation of busi- 
 ness conditions, rather than legal or accounting technicalities, would 
 seem to be the element out of which such a policy should be constructed.^ 
 
 The definite expression of the Commission's policy 
 is contained in the following paragraph of the Clas- 
 
 ' This is discussed in greater detail in Chapter XII. 
 « "Statistics of Railways," 1907, p. 20. 
 
RAILROAD ACCOUNTS 183 
 
 sification of Additions c& Betterments, (1st revised 
 issue), p. 15: 
 
 Property Retired and not Replaced. When property (other than 
 equipment), an addition to or a betterment of which would be chargeable 
 to the accounts of this classification, is abandoned or withdrawn from 
 service and not replaced, the cost (estimated, if not known) should be 
 credited to the account provided for such property; proper account 
 should be taken of any salvage; the reserve accounts for abandoned and 
 accrued depreciation should be debited with the amounts, if any, pre- 
 viously credited thereto with respect to the property abandoned or with- 
 drawn, and the difference between the salvage plus the reserves and the cost 
 should be charged to Profit and Loss to which should also be charged any 
 incidental expenses connected with the retirement. 
 
 The Bulletin further provides: 
 
 If any unit of property the cost of which is less than $200 is abandoned 
 and not replaced, the option may be exercised (unless the accounts 
 covering such property are specifically excepted from this option) of 
 making no credit entry with respect to such abandonment. 
 
 The foregoing provisions are restricted to property 
 retired or abandoned directly in the process of im- 
 provement. Abandonment incidental to improve- 
 ments or from other causes is held to be a loss charge- 
 able entirely to current earnings. An exception is 
 made when the aggregate amount of such loss in 
 any one year should "unduly burden the accounts." 
 In the latter event, after consent of the Commission, 
 a portion of the loss may be "carried forward as a 
 periodical charge against the earnings of subsequent 
 years." The annual amount is to be determined in 
 advance by agreement with the Interstate Com- 
 merce Commission. 
 
 The practical diflSculties arising from the "aban- 
 doned property" rulings are well illustrated in a 
 
184 AMERICAN RAILROAD ECONOMICS 
 
 legal dispute of the Kansas City Southern Railroad 
 with the Interstate Commerce Commission. In 
 1909, the Kansas City Southern issued $10,000,000 
 bonds, out of the proceeds of which $1,250,000 was 
 set aside for the reduction of grades. It was found 
 cheaper at some points to build sections over new 
 routes and to abandon the old sections rather than 
 to raise or lower the old tracks at those points. The 
 latter method would have cost $1,230,319, but by 
 putting in new sections at six points the expense 
 was reduced to $629,400. The sections abandoned 
 were discarded, "not because they were out of repair 
 or worn out or obsolete, but merely as an incident 
 to the most economical method of effecting the 
 improvement." 
 
 The regulations of the Commission required that 
 from the cost of the improvements should be deducted 
 the estimated value of the property abandoned — 
 namely, $491,121 — and that this amount (less salv- 
 age) should be entered as operating expense. "The 
 injustice and absurdity of these regulations," says 
 the brief in this case, "are clear from the fact that 
 had the improvements been made on the original 
 roadway, the regulations of the Commission, with- 
 out any of this chaotic confusion, would have per- 
 mitted and required that the entire expenditure be 
 added to the property accounts, and no sum what- 
 ever would have been charged to operating ex- 
 penses." 
 
 Further accounting rulings of the Commission 
 have been criticised as being opposed to railroad 
 
RAILROAD ACCOUNTS 185 
 
 interests. It has been claimed that the accounting 
 orders of the Commission go beyond the formulation 
 of a system of accounts; that they encroach upon the 
 legitimate right of railroad executives to manage the 
 property placed in their care; and that the adminis- 
 tration of these accounting orders implies an author- 
 ity not conferred by law. There is undoubtedly 
 some truth in these contentions. The public bene- 
 fits of enforced publicity and accounting uniformity 
 are only partially compensating factors. 
 
 The complexity of railroad organization and ac- 
 tivities and the narrow margin of operating profit 
 render extremely difficult a completely accurate 
 statement of financial results. Every financial state- 
 ment of a going business, no matter how accurately 
 and scientifically drawn up is, at best, a mere ap- 
 proximation to truth. Considerable latitude of vari- 
 ation from exact facts may occur without willful 
 intent to deceive. The earning of railroad profits 
 represents a continuous operation. Actual results 
 can be definitely stated only when the business is 
 wound up and all assets realized in the form of cash. 
 Moreover, the varying character of the railroad 
 companies leads to many difficulties in determining 
 their net incomes on uniform bases. Accounting 
 methods in large systems are frequently impractical 
 when applied to small roads. Capitalized items of 
 expense in one case may be properly considered as 
 charges against income in the other, and large capi- 
 talization of a well -equipped system may effect a 
 showing of operating profits which would be en- 
 
186 AMERICAN RAILROAD ECONOMICS 
 
 tirely wiped out under a smaller scale of capital 
 investment.^ 
 
 In calling attention here to the difficulties of laying 
 down strictly defined rules of accounting practice, 
 there is no purpose to disparage uniformity or pub- 
 licity of methods. Any system which tends towards 
 making published accounts of railroads more truly 
 an exhibit of actual operating results is desirable as 
 long as the information is supplied in simplified form, 
 intelligible to the layman. Every one conversant 
 with American railroad accounts knows that these 
 have improved continuously in accuracy, in lucidity 
 and in comprehensiveness. Much progress has been 
 due to the activities of the Association of American 
 Railway Accounting Officers. This organization has 
 long maintained cordial relations with the officials of 
 The Interstate Commerce Commission, and has co- 
 operated in the formulation of a prescribed system of 
 railroad accounts. 
 
 ^ The Interstate Commerce Commission prescribed a form of report for 
 small roads with mileage 250 miles or less and having annual operating 
 revenues of not more than $1,000,000, This form differs from that of 
 large roads only in the reduction of a number of items required in ac- 
 counts. 
 
CHAPTER IX 
 
 THE INCOME ACCOUNT — OPERATING ACCOUNTS 
 
 The Form of the Income Account. "The Income 
 Account" in the language of the Interstate Com- 
 merce Commission, "brings together those accounts 
 which show the total amount of money that a 
 company receives or becomes entitled to receive 
 from its transportation and other operations during 
 a given fiscal period; the return accrued during the 
 period upon investments; the disbursements and 
 obligations incurred that affect the amounts so 
 received or accrued, and the disposition or allocation 
 of the net income accrued." All this is exhibited in 
 the official arrangement of the Income Account 
 which is here given in condensed form: 
 
 Operating Income: 
 Rail Operations: 
 
 Operating Revenues, 
 Operating Expenses, 
 Net Operating Revenue, 
 
 Outside Operations: 
 Revenues, 
 Expenses, 
 
 Net Revenue (or Deficit), 
 Total Net Revenue, 
 
 (Deduct) Taxes Accrued: 
 
 Operating Income, 
 187 
 
188 AMERICAN RAILROAD ECONOMICS 
 
 Other Income: 
 
 Rents Accrued from Lease of Road, 
 Other Rents — Credits: 
 
 (a) Hire of Equipment — Balance 
 
 (b) Joint Facilities 
 
 (c) Miscellaneous Rents 
 Separately Operated Properties — Profit 
 Dividends Declared on Stocks Owned or Controlled. 
 Interest Accrued on Funded Debt Owned or Controlled. 
 Interest on Other Securities, Loans, and Accounts. 
 
 Gross Corporate Income, 
 Deductions from Gross Corporate Income: 
 
 Rents Accrued from Lease of Other Roads. 
 Other Rents— Debits: 
 
 (a) Hire of Equipment — Balance 
 
 (b) Joint Facilities 
 
 (c) Miscellaneous Rents. 
 Separately Operated Properties — Loss 
 
 Interest Accrued on Funded Debt. 
 Other Interest, 
 
 Sinking Funds Chargeable to Income, 
 Other Deductions. 
 
 Total deductions from Gross Corporate Income: 
 Net Corporate Income (or Deficit), 
 
 Disposition of Net Corporate Income: 
 Dividends Declared: 
 
 (a) On Preferred Stock 
 
 (b) On Common Stock 
 
 (c) On Other Securities. 
 
 Additions and Betterments Charged to Income, 
 
 Appropriations to Reserves, 
 
 Miscellaneous: 
 
 Balance for Year Carried Forward to Profit & Loss. 
 
 This prescribed form, now generally followed in 
 railroad reports, is in accord with correct accounting 
 principles. The statement contains four principal 
 
OPERATING ACCOUNTS 189 
 
 accounts (technically known as "general" accounts) 
 under which the other items (secondary accounts) are 
 grouped. The general accounts are, in their order: 
 (1) Railway Operating Income,^ (2) Other Incomb, 
 
 (3) Deductions from Gross Corporate Income^ and 
 
 (4) Disposition of Net Corporate Income, Under the 
 first are included in separate accounts the revenues 
 and expenses of "rail" and of "outside" operations. 
 The other general accounts are concerned with the 
 general business of the company. 
 
 The separation in the accounts of the transporta- 
 tion business from the ancillary operations facilitates 
 a comparison of the operating results of the various 
 railroad systems. The separation of "Taxes" and 
 "Rents" from the operating expenses establishes 
 a uniformity, the absence of which in previous years 
 was a source of difficulty in measuring operating 
 costs. Similarly, the prescribed classifications under 
 the second general account. Other Income, in which 
 are included *^ Rentals Received'' and ''Income from 
 Securities" has greatly assisted in the correct 
 analysis of railroad investment activities. 
 
 The third general account, ''Deductions from 
 Gross Corporate Income'' is itemized so as to clearly 
 distinguish between Rentals, Interest and Sinking 
 Fund charges. It should be noted that there are 
 excluded both from "Other Income" and from "De- 
 ductions from Gross Corporate Income" the receipts 
 and disbursements on account of funds held as 
 reserves or sinking funds. These transactions are 
 
 ^ Including outside operations. 
 
190 AMERICAN RAILROAD ECONOMICS 
 
 recorded in entirely separate accounts. Thus, 
 dividends received on securities held in sinking or 
 reserve funds are not a part of "dividend in- 
 come." These receipts are credited to a separate 
 account, "Income from Sinking and other Reserve 
 Funds." 
 
 Under the fourth general account, Disposition oj 
 Net Corporate Income are included dividends on 
 capital stock and appropriations for "Additions and 
 Betterments," and for "Reserves" charged against 
 the Income Account. It is discretionary with the 
 railroad company whether these deductions are made 
 in the Income Account or in the Profit & Loss Account. 
 In either event, the net result is the same. To 
 determine the full extent of these charges in any 
 period, however, requires careful examination of 
 both the Income Account and the Profit & Loss Ac- 
 count. 
 
 Details of Operating Accounts. The principal 
 items under the general account, Operating Income, 
 in the Interstate Commerce Commission's classifica- 
 tion are as follows: 
 
 Operating Revenues: 
 Freight, 
 Passenger, 
 Passenger-Other, 
 Mail, 
 Express, 
 
 Miscellaneous Transportation, 
 Revenue from Operations other than Transportation, 
 
 Total Revenues^ 
 
OPERATING ACCOUNTS 191 
 
 Operating Expenses: ^ 
 
 Maintenance of Way and Structures, 
 Maintenance of Equipment, 
 TraflSc Expenses, 
 Transportation Expenses, 
 General Expenses, 
 
 Total Expenses, 
 
 Net Operating Revenue, 
 
 The classification of these items of operating rev- 
 enues and expenses affords opportunity for detailed 
 comparative analysis of any railroad's business with 
 a view to determining the trend of earnings and the 
 standards of operating eflSciency. Of course, not all 
 the items are of equal importance. Freight and 
 passenger revenues far exceed the other classes of 
 earnings, which, largely because of their incidental 
 character, may be conveniently grouped together 
 as *' miscellaneous" operating revenues. Similarly, 
 among the Operating Expenses, the two classes of 
 "maintenance" costs and the Transportation Ex- 
 penses form the great bulk of the expenditures. Tr affix: 
 Expenses cover merely the costs incurred in retaining 
 and fostering the business of the railroad. The 
 General Expenses are the unallocated administrative 
 costs of the company. They cover general office and 
 legal expenses, insurance and relief department costs. 
 
 The items grouped under ^* Outside Operations" 
 
 * The Interstate Commerce Commission has under contemplation a 
 revised scheme of operating accounts whereby the expenses are sub- 
 classified as freight, passenger and joint. The practical success of this 
 scheme is very much in doubt. 
 
192 AMERICAN RAILROAD ECONOMICS 
 
 are inconsiderable amounts compared with those of 
 **rair' operations. The details, therefore, have no 
 particular significance. The operation of dining car 
 service, hotels, restaurants, grain elevators and 
 other services incidental to transportation, are 
 chiefly responsible for the items under the ''Outside 
 Operations^' account. 
 
 The grouping and consistent arrangement of the 
 items that follow the operating accounts dispenses 
 with the necessity for further comment on the 
 prescribed form of the Income Statement, A correct 
 understanding of the substance of the various groups 
 of income and outgo is as essential in gauging real 
 earning capacity as their logical and systematic 
 sequence. 
 
 Standard Units of Operating Receipts : In study- 
 ing railroad income accounts attention is naturally 
 first given to the operating receipts commonly known 
 as "gross earnings." Tliis general item can be suc- 
 cessfully analyzed on the basis of acceptable standard 
 units. The simplest linear unit, viz., ''mile of road'* 
 is most frequently employed. Herein is centered the 
 greatest misuse and abuse of railroad statistics. 
 Although useful for purposes of compiling general 
 railroad data, the "mile of road" is highly unsatis- 
 factory as a gauge of business progress, or as a basis 
 for computing relative earning power. On almost 
 all railroad systems in the United States, a "mile of 
 road*' today represents larger capital investment and 
 greater concentration of engineering skill than a 
 decade or even a half-decade ago. Not only are 
 
OPERATING ACCOUNTS 193 
 
 extra main and side tracks constantly being added, 
 but, as has already been pointed out, the physical 
 structure of the track and roadbed is also undergoing 
 progressive improvement enabling the handling of 
 greater volumes of traffic. Thus, even on the same 
 railroad the ''fer mile of road^* unit is of limited 
 value in correctly estimating trend of earnings. 
 When it is a question of comparative analysis of 
 two or more railroads, the utility of the '*mile of 
 road" standard is almost totally destroyed by reason 
 of the utter lack of homogeneity due to disparities in 
 extra track mileage. Very few roads have the same 
 ratio of extra main tracks or are provided equally 
 with physical facilities for handling the same volume 
 of traffic. 
 
 A more satisfactory standard is found in the ''per 
 mile of single track'* unit. This is based on total 
 main track miles, including second, third and other 
 main tracks, but not sidings in yards and stations. 
 The companies are thus statistically comparable in 
 the relation of main track to earnings. Other physi- 
 cal disparities, however, such as the presence or ab- 
 sence of grades, tunnels, terminal yards, sidings 
 and the like also have an important bearing on earn- 
 ing capacity. 
 
 Some defenders of the "per mile of road" unit for 
 measiu-ing earnings contend that a railroad's business 
 determines the proportion of extra track mileage. 
 Extra main trackage, therefore, can be ignored in 
 gauging gross revenues. Actual railroad conditions 
 do not bear out this theory. The Erie Railroad, for 
 
194 AMERICAN RAILROAD ECONOMICS 
 
 example, though not so well provided with track 
 facilities, has a larger gross revenue jper mile oj road 
 than the Baltimore & Ohio, and its freight earnings 
 "per mile of road exceed those of the New York Cen- 
 tral. For the fiscal year ended June 30, 1911, the 
 gross earnings of the Baltimore & Ohio per mile of 
 road were $19,881, whereas the Erie reported $23,762. 
 In the same year, the Erie hauled 3,039,900 tons one 
 mile for each mile of road operated, compared with 
 2,639,654 ton-miles on the Baltimore & Ohio and 
 2,610,980 ton-miles on the New York Central. The 
 Southern Railway, in the fiscal year 1911 had 1.29 
 miles of track, (including sidings), per mile of road 
 against 1.22 miles of the Atlantic Coast Line. 
 Southern's freight density, however, was 580,591 
 ton-miles compared with Atlantic Coast Line's 
 395,273, or greater by 47 per cent. Of course, the 
 Coast Line carries a greater proportion of high grade 
 freight which offsets to some extent its lower traffic 
 density. 
 
 The "per mile of road" or ^'per mile of track" 
 units are not the sole guides in comparing earn- 
 ings. The '' train-mile'' basis is also of assistance. 
 The use of this standard in comparisons, however, 
 should be restricted to lines having similar traffic. 
 The same consideration applies to the use of the 
 '^ locomotive-mile" as a gauge of earning capacity. 
 This unit presents the further difficulty that the 
 size and hauling capacity of locomotives in different 
 years or on different lines may vary. Moreover, in 
 both the '' train-mile" and the ''locomotive-mile" 
 
OPERATING ACCOUNTS ld5 
 
 averages it must be assumed that the passenger 
 revenues bear a fixed ratio to the freight earn- 
 ings — a condition not prevailing in railroad oper- 
 ations. 
 
 Operating Expenses. As an indication of efficiency 
 affecting managerial skill and financial uniformity, 
 much dependence is placed on the character of the 
 operating expenses. This arises not because operat- 
 ing expenses are a more important factor in the 
 determination of net income than gross revenues. 
 In fact, it is clearly demonstrable that under normal 
 conditions an increase in gross earnings is a greater 
 financial advantage than proportionate reduction in 
 operating revenues. This is due to the fixity of a 
 large part of operating costs. All railroad expenses 
 do not fluctuate in accordance with the amount of 
 business done. In most undertakings, there are 
 certain fixed costs which must be met regardless of 
 the amount of the business or of the revenue. There 
 are also expenses which fluctuate directly, though 
 not necessarily proportionately, with each increase 
 or decrease in the units of service performed. 
 Hence, in reducing expenses during dull periods 
 only a part of the operating costs can be materially 
 altered. 
 
 In view of this condition, it is obvious that the 
 total operating charges in relation to each traffic unit 
 diminish as the traffic grows larger and increase as the 
 traffic becomes smaller. A greater net return, 
 therefore, is afforded by expansion of revenues than 
 by reduction of expenses. Operating expenses, how- 
 
196 AMERICAN RAILROAD ECONOMICS 
 
 ever, are, at least, partly subject to the control of railroad 
 managers, whereas, the revenues are usually the result 
 of business conditions and natural forces. More atten- 
 tion is, therefore, given to the analysis of costs of 
 operation than to fluctuations in gross earnings.^ 
 Classification of Operating Expenses. For analy- 
 tical purposes, the five sub-divisions of operating ex- 
 penses adopted by the Interstate Commerce Com- 
 mission, viz.: — Maintenance of Way and Structures; 
 Maintenance of Equipment; Conducting Transportation; 
 
 ^ Wellington in his standard treatise on Railway Location places the 
 proportion of expenses that are fixed regardless of amount of traffic at 
 50% of total operating costs; proportion of expenses that are afiFected 
 only slightly by increase of traffic at 40% and the proportion of expenses 
 affected directly and proportionately by increase or decrease of traffic at 
 10%. His illustration of the efifects of this condition on net income 
 through increase or decrease of revenues is as follows : 
 
 
 Normal basis 
 
 Increase of 10% 
 in gross revenue 
 
 Decrease of 10% 
 in gross revenue 
 
 Gross Earnings. . . . 
 Exp. Unaflfected . . . 
 
 " Slight. Affect. 
 
 " Fully " 
 
 100.0% 
 33.3% 
 
 26.7% 
 6.7% 
 
 27.7% 
 
 $7,000. . 
 2,333.. 
 
 1,867. . 
 467.. 
 
 $7,700 
 
 2,333 
 
 1,870 
 
 510 
 
 $6,300 
 
 2,333 
 
 1,850 
 
 420 
 
 Total Expenses. . . . 
 Fixed Charges 
 
 4,667.. 
 1,800.. 
 
 4,713 
 1,800 
 
 4,603 
 1,800 
 
 Total 
 
 92.4% 
 
 6,467. . 
 
 6,513 
 
 6,403 
 
 
 
 Balance 
 
 7.6% 
 
 533.. 
 
 1,187 
 
 103 DeficU 
 
 
 From this illustration it will be seen that an increase of 10% in gross 
 revenue, produces an increase of 100% in the balance available for divi- 
 dends, whereas, a decrease of 10% in revenues causes a deficit. 
 
INCOME AND OPERATING ACCOUNTS 197 
 
 Traffic, and General Expenses, may be classed under 
 two groups: (1) Maintenance Expenses embracing the 
 first two sub-divisions, and (2) Transportation Ex- 
 penses, which include all the other operating costs. 
 The basis of this classification is simple. Maintenance 
 can be increased, reduced or deferred to a large extent 
 by the will of the management, whereas, other 
 operating costs are constantly recurrent and are not 
 greatly influenced by managerial policy. Money 
 that goes into maintenance retains the value of the 
 assets. It is a renewal of capital. Excessive mainte- 
 nance is like a reserve fund which can be drawn upon 
 in lean times. Excessive expenditure in handling and 
 moving traffic, however, or in administration is 
 once and for all time spent and has no more earning 
 power. Even though liberal maintenance outlay is 
 not always reflected in increased operating efficiency, 
 never is increased operating efficiency gained when 
 the physical property is permitted to deteriorate. 
 The Measurement of Maintenance. A proper an- 
 alysis of railroad maintenance costs requires satisfac- 
 tory standard units. This applies in comparative anal- 
 yses not only of different roads, but also of different 
 periods on the same road. The relative expenditures 
 required for proper maintenance of roadway and 
 structures are influenced (1) by the nature and the 
 amount of traffic, (2) by the structural character of 
 the roadbed and track, and (3) by the geographical 
 and geological conditions of the territory. A double 
 track road costs more to maintain than one of single 
 track. It does not follow, however, that the expense 
 
198 AMERICAN RAILROAD ECONOMICS 
 
 should be twice as much. Furthermore, a company 
 having double the traffic density of another, though 
 operating in the same territory and under similar 
 conditions, is not expected to have double the amount 
 of outlay for upkeep. It is plainly evident that much 
 of the physical deterioration of roadway and super- 
 structure is independent of the amount of traffic. 
 Moreover, a favorable topography accessible to 
 construction materials, and an efficient labor force 
 make a marked difference in the maintenance costs 
 on a road possessing these advantages when con- 
 trasted with another lacking some or all of them. 
 It can be readily conceived, therefore, that in measur- 
 ing maintenance no one arbitrary standard can be 
 relied on safely. A combination of various standards 
 is a better guide. 
 
 The standard unit most commonly used in the 
 analysis of maintenance-of-way expenses is the 
 ''mile of road." When two or more railroads are 
 compared and each, traversing the same territory, is 
 in similar physical condition and do the same amount 
 of business this average may be found useful. How- 
 ever, the ''mile of main track" as a substitute for 
 "mile of road" is better adapted to comparative 
 purposes. There is a rule which assumes that two 
 miles of side track or fifteen switches are as costly to 
 maintain as one mile of main track. This calculation, 
 though purely empirical, is reasonably accurate for 
 comparative purposes when traffic conditions are 
 given due consideration. 
 
 }n every case of maintenance analysis it should be 
 
% 
 
 OPERATING ACCOUNTS 199 
 
 ascertained whether the computation is based on the 
 total miles operated by the company or on total miles 
 maintained. This distinction is essential because 
 most of the American railroad systems operate their 
 trains over lines in partnership with other systems 
 or under ** trackage contracts." The mileage operated 
 under these conditions may not carry a specific 
 charge which can be allocated to the maintenance 
 account. It all depends on the agreement between 
 the companies using the facilities jointly. If the 
 lessee has no obligation of maintenance, the mileage 
 thus operated under "trackage rights" is not to be 
 included in computing the mileage maintained. 
 Thus, the Southern Railway operated, during the 
 year ended June 30, 1911, an average of 7,042 miles 
 of which 6,573 were maintained by the company. 
 The remaining 469 miles were operated under 
 agreements not involving a direct charge for up- 
 keep. 
 
 Useful checks on the per mile of track and per mile 
 of road units for gauging railroad upkeep are the 
 ^'train-mile" and 'Hon-mile" averages. The fact 
 that these units lack homogeneity mihtates some- 
 what against their statistical value. Moreover, 
 maintenance expense is influenced by the relative 
 proportions of the passenger to the freight business 
 as well as by traflfic density. Disparities in these 
 factors require caution in the use of traflSc averages 
 as a measure of maintenance. 
 
 To illustrate the methods of gauging maintenance- 
 of-way expenditure, the Southern Railway, the 
 
200 AMERICAN RAILROAD ECONOMICS 
 
 Atlantic Coast Line and the Seaboard Air Line are 
 selected for comparison: 
 
 Year ended June SOth, 1911 
 
 Southern 
 Railway 
 
 Atlantic 
 Coast Line 
 
 Seaboard 
 Air Line 
 
 Miles of Single Track per mile 
 of road 
 
 1.29 
 580,591 
 
 $ 821 
 
 $ 1,140 
 $ 1.83 
 $ 22.91 
 
 1.22 
 395,273 
 
 716 
 
 863 
 2.21 
 24.13 
 
 1.28 
 
 Ton-miles per mile of road . . . 
 
 Maintenance of Way, etc.: 
 Per Mile of Single Track 
 Operated 
 
 420,031 
 762 
 
 Per Mile of Road Main- 
 tained. . 
 
 934 
 
 Per Thousand Ton-miles. . . . 
 Per Revenue Train-mile 
 
 2.22 
 25.91 
 
 By reference to the above standards it appears 
 that the Atlantic Coast Line's upkeep is on a lower 
 scale than that of the other two systems. On u 
 'per-mile basis the Southern's expenditure is the larg- 
 est, though, when measured with respect to per- 
 formance, {i. e., by train-miles and ton-miles), it 
 falls behind both the Seaboard Air Line and the 
 Atlantic Coast Line. However, the Southern's 
 heavier traffic density would naturally reduce its 
 costs per traffic unit, for though the aggregate ex- 
 penses of operation increase as traffic increases the 
 rate of increase is at a slower ratio. Even with this 
 consideration, however, we must hesitate in granting 
 the prize to the Southern. Our conclusion may be 
 statistically sound but may lack absolute correctness 
 because of failure to consider differences in operating 
 
OPERATING ACCOUNTS 201 
 
 conditions. The disturbing element in our analysis 
 is the fact that the Southern Railway Company 
 operates largely through mountainous sections where 
 the effects of natural wear and tear are intensified 
 and where the difficulties of upkeep are enhanced. 
 The Seaboard Air Line and the Atlantic Coast Line 
 traverse, for the most part, a flat, tidewater coun- 
 try, favorable to low-cost maintenance. To what 
 extent allowance should be made for topographical 
 and geological disparities is frequently impossible 
 of determination. The best that can be done by 
 the analyst is to know where to place the handicap 
 and to see that the statistical results obtained are 
 not impaired by disparities in attending circum- 
 stances. 
 
 Equipment Maintenance. The selection of proper 
 standards in gauging equipment maintenance, 
 whether from the standpoint of adequacy or of 
 operating efficiency, is of great importance in railroad 
 management. The commonly used standards for 
 locomotive maintenance are cost per locomotive, or 
 cost per locomotive-mile. The value of these units in 
 comparisons, however, may be completely destroyed 
 by differences in the size of locomotives, in the 
 operating conditions, or in the nature of tonnage 
 hauled. The same objections apply to comparisons 
 of both passenger and freight car maintenance. 
 Not only do cars and locomotives of different rail- 
 roads vary in average size and quality, but some lines 
 are better supplied with equipment than others. 
 Those which are relatively richest in rolling stock 
 
202 AMERICAN RAILROAD ECONOMICS 
 
 naturally require less maintenance expenditure per 
 unit of equipment. 
 
 It is evident that considerable caution is demanded 
 in selecting proper standards for measurement of 
 equipment maintenance. As already pointed out 
 with reference to maintenance-of-way expenditures, 
 possible disparities in the various factors should be 
 ascertained before making comparisons. When 
 differences in conditions are found which may vitiate 
 the selected standard units, others should be em- 
 ployed. Thus, when there is considerable disparity 
 between the average tractive power per locomotive on 
 two different lines the maintenance cost per locomotive 
 should be substituted by some other standard as 
 ^^maintenance per pound of locomotive tractive power. '^ 
 If it happens that on one road the average number 
 of miles run by each locomotive per annum is decid- 
 edly in excess of the same average on another line, 
 the ^'locomotive maintenance cost per locomotive-mile'' 
 may be of value as a test of upkeep. To obviate the 
 disturbing effects of disparities in both the size of 
 locomotives and in the locomotive performance, 
 the units maintenance cost per locomotive-mile and 
 cost per pound of tractive power may be combined as 
 shown on the opposite page. 
 
 It would seem merely from the comparative state- 
 ment that on the basis of the locomotive unit the 
 Southern expended a slightly larger sum for locomo- 
 tive upkeep than the Atlantic Coast Line, and 
 less than that of the Seaboard Air Line. The slight 
 excess pver Atlantic Coast Line may arise, however, 
 
OPERATING ACCOUNTS 203 
 
 Comparative Locomotive Maintenance Expenditures 
 
 
 Southern 
 
 Atlantic 
 
 Seaboard 
 
 Year ended June 30th, 1911 
 
 Railway 
 
 Coast Line 
 
 Air Line 
 
 Average tractive power per 
 
 
 
 
 locomotive, pounds 
 
 32,300 
 
 20.560 
 
 25,920 
 
 Maintenance of Locomotives: 
 
 
 
 
 Per Locomotive $ 
 
 2,599 
 
 2,252 
 
 2,721 
 
 Per Locomotive-mile. . . . cts. 
 
 9.44 
 
 7.12 
 
 8.45 
 
 Per pound tractive power cts. 
 
 8.76 
 
 11.08 
 
 10.80 
 
 Per Locomotive-mile per 
 
 
 
 
 thousand pounds of 
 
 
 
 
 tractive power cts. 
 
 .31821 
 
 .3501 
 
 .3170 
 
 from the larger size of the Southern's locomotives. 
 This is plainly evident when the computation of 
 maintenance is based on the tractive power unit for, 
 in this respect, the Southern falls behind both the 
 Seaboard and the Coast Line. But, on the basis of 
 the locomotive-mile, the Southern, with 9.44 cts. shows 
 a higher average than the Seaboard and the Atlantic 
 Coast line with 8.45 cts. and 7.12 cts., respectively. 
 When, however, the computation of locomotive main- 
 tenance cost is made on the combined basis of perform- 
 ance and of size of locomotives (per locomotive-mile 
 per pound of tractive power) the Atlantic Coast Line 
 shows the highest average in spite of the fact that it 
 expends less per locomotive for upkeep than the other 
 two railroad systems. This analysis demonstrates 
 the caution necessary in basing judgment on the use 
 of a single statistical standard. Each separate test 
 
 ^ Approximatel;^. 
 
204 AMERICAN RAILROAD ECONOMICS 
 
 requires further confirmation by the application of 
 additional standard units. 
 
 In computing the scale of passenger and freight 
 car maintenance costs, the same methods may be 
 followed as in the study of locomotive upkeep. Here, 
 also, we may take for illustrative purposes the three 
 leading southern systems: 
 
 Freight and Passenger Car Maintenance 
 
 Year ended June 30th, 1911 
 
 Southern 
 Railway 
 
 Atlantic 
 Coast Line 
 
 Seaboard 
 Air Line 
 
 Freight Cars, number 
 Average capacity per freight 
 
 car (tons) 
 
 Revenue Ton-miles per ton 
 
 of capacity 
 
 Maintenance per freight car 
 $ 
 Maintenance per car-mile cts. 
 Maintenance per ton car 
 
 capacity cts. 
 
 Passenger Cars 
 
 Maintenance per car $ 
 
 Maintenance per passen- 
 ger car-mile cts. 
 
 51,846 
 
 35.1 
 
 2,169 
 
 82 
 .98 
 
 2.46 
 
 758 
 1.02 
 
 25.205 
 
 28.7 
 
 2,301 
 
 89 
 1.05 
 
 3.12 
 
 916 
 
 1.26 
 
 14,844 
 
 33.9 
 
 2,550 
 
 73 
 .80 
 
 2.17 
 
 880 
 1.11 
 
 It appears that the Atlantic Coast Line expends 
 relatively more for passenger and freight car upkeep 
 than the other two systems. Before accepting this 
 conclusion, however, inquiry should be made con- 
 cerning the equipment supply of each company 
 relative to traffic. The more equipment used for 
 moving a given volume of freight the less ordinarily 
 
OPERATING ACCOUNTS 205 
 
 will be the wear and tear per equipment unit. An 
 examination of the Atlantic Coast Line's freight car 
 facilities does not reveal an appreciable difference 
 in this respect from the other two companies. Thus, 
 the Atlantic Coast Line had one ton of car capacity 
 for every 2301 ton-miles of revenue freight, whereas, 
 the Southern had one ton capacity to 2169 ton-miles 
 and the Seaboard Air Line had one ton capacity to 
 2550 ton-miles. Of course, there are other factors 
 which might destroy the correctness of the statistical 
 comparison. For example, it is possible that the 
 cars of one railroad system are largely of steel con- 
 struction. This equipment requires relatively less 
 repair expense than old type wooden cars. Again, 
 one company may have its repair shops well managed 
 and conveniently distributed along its lines, whereas, 
 another line may not be so well provided with repair 
 faciUties and may find it necessary to give its dam- 
 aged equipment over to outside concerns for repair. 
 The policy of each railroad company in setting 
 aside reserves from earnings to cover equipment 
 depreciation is an influencing element in upkeep 
 expense. At this writing, the Interstate Commerce 
 Commission, though requiring depreciation accounts, 
 has instituted no definite rate or amount to be 
 periodically applied as depreciation. This matter is 
 therefore discretionary with the individual railroad 
 companies. The annual renewal expense is likewise 
 largely a question of policy with the railroad manage- 
 ment. The "scrapping" and replacing of old and 
 worn-out equipment can take place when ordered by 
 
206 AMERICAN RAILROAD ECONOMICS 
 
 operating oflScials. It is not regularly recurrent as 
 ordinary repairs. Accordingly, in analyzing equip- 
 ment maintenance expenses, it may be well to 
 separate the ''renewaV and ''depreciation" items 
 from the cost of repairs, though the most satisfac- 
 tory calculations are based on a combination of the 
 three general items, ''repairs, renewals, and deprecia- 
 tion," 
 
 In all studies of maintenance expense, the "human 
 factor" should not be overlooked. The general 
 discipline among all employees as well as the effi- 
 ciency of the mechanical departments of the railroads 
 may effect a considerable reduction in repair costs 
 without in any way lowering the standard of upkeep. 
 A recent careful investigation of freight car damage 
 has led to the belief that more than 50 per cent, of 
 such losses are due to unfair usage and rough han- 
 dling. When employees, through discipline and good 
 management, refrain from abusing equipment, repair 
 bills are reduced and the life of equipment is ex- 
 tended beyond the general average. Much of the 
 large capital outlay required by the purchase of 
 durable equipment, such as heavy, all-steel cars 
 might likewise be obviated. All this tends to widen 
 the margin of railroad profits. 
 
 The common practice of "hiring" equipment, 
 likewise, influences car repair costs. Under the pre- 
 vailing system of freight car interchange the owning 
 company usually pays for repairs arising from the 
 ordinary wear and tear of equipment due to use. The 
 borrowing line pays only for repairs due to rough 
 
OPERATING ACCOUNTS 207 
 
 iiandling, wrecks and fire. Accordingly, the rental 
 for hired cars theoretically covers interest, deprecia- 
 tion and ordinary repairs. But under the Interstate 
 Commerce Commission's rules no portion of the 
 car rental is credited to car repairs. It is therefore 
 evident that in the case of a road owning 1,000 cars 
 and borrowing 500 foreign cars the cost of keeping 
 up repairs is less per unit than if all the 1,500 cars 
 were owned. The owning road, on the other hand, 
 will have a relatively higher cost per unit since its 
 repair account is charged with the wear and tear 
 of service given to another line. Of course, the 
 rental received may reimburse the owner, but this 
 is not a factor in the maintenance computations. 
 Thus, cost of repairs 'per car as usually figured may 
 be misleading. A casual inference that a company 
 has made a good maintenance showing may be re- 
 versed by a careful analysis. 
 
 The correct computation of equipment mainte- 
 nance costs is of the highest economic importance to 
 the railroads. In this department, lack of close ob- 
 servation and managerial skill produce wastes and 
 losses seriously impairing earning power. The expe- 
 riences of both the Atchison and the Illinois Central 
 railroads are cases in point. The Illinois Central in 
 1907, began to "farm out" its freight cars for repairs 
 with the result that the cost of freight car upkeep 
 increased steadily, jumping from $3,924,296 in 1906, 
 to $7,975,992 in 1910. An investigation finally re- 
 vealed that gross frauds had been practiced in the 
 company's repair department. Had the company's 
 
308 AMERICAN RAILROAD ECONOMICS 
 
 directors compared its freight car maintenance cost 
 with those of competing companies, the condition 
 of affairs might have been discovered much sooner. 
 The stockholders might have been spared the heavy 
 loss, estimated in some quarters, as high as $6,000,000. 
 Thus, a comparison of freight car maintenance of 
 the Illinois Central, the Cincinnati, New Orleans & 
 Texas Pacific, and the Mobile & Ohio would have 
 shown: ^ 
 
 
 Illinois Central 
 
 Cm. N. 0. & 
 T. Pac. 
 
 Mobile & Ohio 
 
 Year 
 
 
 
 
 Per Frt. 
 
 Per Frt. 
 
 Per Frt. 
 
 Per Frt. 
 
 Per Frt. 
 
 Per Frt. 
 
 
 car 
 
 car mile 
 
 car 
 
 car mile 
 
 car 
 
 car mile 
 
 1908 
 
 $ 86.02 
 
 1.03c 
 
 $91.47 
 
 1.63c 
 
 $75.92 
 
 0.72c 
 
 1909 
 
 99.08 
 
 1.28 
 
 69.72 
 
 1.17 
 
 60.53 
 
 0.66 
 
 1910 
 
 130.22 
 
 1.51 
 
 78.04 
 
 1.20 
 
 94.94 
 
 0.99 
 
 The pronounced increase in Illinois Central's 
 freight car maintenance costs in 1909 and 1910 would 
 seem to indicate a ** leakage," without reference to 
 similar costs on rival systems. By making a com- 
 parative analysis, however, and allowing for pos- 
 sible disparities due to differences in attending 
 circumstances, evidence of fraud becomes clearly 
 manifest. 
 
 ^ The computations are taken from Messrs. Price, Waterhouse & 
 Company's excellent compilation of Railroad Statistics. The averages 
 are arrived at by dividing the total "Repairs, Renewals and Deprecia- 
 tion" accounts, as shown under the heading "Maintenance of Equip- 
 ment," by the number of units of each class of equipment on hand at the 
 beginning of the year. 
 
OPERATING ACCOUNTS 209 
 
 Conducting Transportation Costs. The trans- 
 portation costs are the items of expense directly 
 incurred in moving the traflSc. As has already been 
 pointed out, they differ in character from mainte- 
 nance expenses; first, because they cannot be ar- 
 bitrarily adjusted and, secondly, because when once 
 paid out no value remains to represent the outlay. 
 These fundamental distinctions make it evident 
 that all possible economy consistent with service 
 should be practiced in conducting transportation. 
 As many operating costs are unaffected by volume 
 of business, increase in gross earnings, other things 
 being equal, should result in a smaller ratio of oper- 
 ating expense to earnings. The ratio of the cost of 
 conducting transportation to operating revenues is, 
 therefore, a good index of efficiency when not accounted 
 for by changes in rates or in operating conditions. As 
 between different railroads, however, caution must 
 be exercised in using this index. Local conditions 
 as well as disparities in kind and in amount of 
 traflBc affect transportation costs to an even greater 
 degree than maintenance costs. Fast and frequent 
 freight service requiring light train-loads increase 
 transportation costs. Similarly, heavy grades, in- 
 sufficient trackage, weak bridges and the like cause 
 loss in speed and in service. All this means larger 
 wage and fuel costs than when physical facilities 
 permit the maximum speed and the minimum time. 
 On the other hand, the relatively smaller transpor- 
 tation costs resulting from improved physical facili- 
 ties are generally effected by heavy increase in the 
 
210 AMERICAN RAILROAD ECONOMICS 
 
 permanent capital investment in the property. The 
 heavier interest and dividend charges on capital 
 investment may therefore wholly offset the saving 
 in operating expense. The great problem always 
 before the railroad financier is to determine how far 
 the saving in transportation and in other costs aris- 
 ing from proposed improvements and betterments 
 will outstrip the cost of the new capital required for 
 these purposes. 
 
 The very nature of the transportation expenses, 
 (i. e., the impossibility of physically tracing their 
 results on the property), affords opportunities for 
 waste and extravagance. Consequently, their close 
 supervision and proper measurement is of great 
 value to railroad managers and investors. This is 
 particularly true at the present time when railroad 
 operations are circumscribed by government regula- 
 tions and susceptible to the scrutiny of expert ana- 
 lysts and efficiency engineers. The Interstate Com- 
 merce Commission has publicly announced that no 
 increase in freight rates would be sanctioned until 
 it was proven that all possible efforts towards econ- 
 omy in operations had been made by the companies.^ 
 
 Through economy experiments conducted by the 
 railroads, and through the activities of efficient 
 executives, some splendid results in reduction of 
 transportation costs have been obtained. In view 
 of the Government's attitude in rate-making further 
 progress along these lines may be expected. The 
 
 1 See In re Investigation of Advances in Rates by Carriers in Official 
 Classification Territory No. 3400. 
 
OPERATING ACCOUNTS 211 
 
 investor in railroad securities will enjoy the benefits, 
 however, only in so far as the economies effected by 
 the company in which he is concerned are equal to 
 or in advance of the general standards obtaining 
 among all railroad companies. 
 
 Locomotive Fuel Expense, One of the 
 
 largest items among the transportation costs is loco- 
 motive fuel. This item consumes, approximately, 
 10 per cent, of the gross railroad earnings, and the 
 railroads in the aggregate use about one-fourth of 
 the total coal production of the country. The fuel 
 cost to railroads in the United States now exceeds 
 $200,000,000 annually, or about $4,000 per locomo- 
 tive. For individual railroad systems, the locomo- 
 tive fuel comprises from 20 per cent, to 35 per cent, 
 of the total expenses grouped under " Conducting 
 Transportation . ' * 
 
 In view of the upward price tendency of fuel ma- 
 terials an analysis of this item from year to year, 
 particularly in reference to locomotive performance, 
 is worthy of close attention. Fuel economy means 
 not only reduced fuel expense, but also increased 
 hauling capacity in proportion to the weight of the 
 locomotive. It means less difficulty in firing locomo- 
 tives and more reserve power for making up time 
 and for handling trains in bad weather. Accord- 
 ingly, the possibility of decreasing fuel costs presents 
 a promising field for scientific investigation and ex- 
 perimentation. Data regarding locomotive fuel ex- 
 pense generally can be found in railroad reports 
 under the statistics of locomotive performance. 
 
212 AMERICAN RAILROAD ECONOMICS 
 
 Thus, the Erie's reports for the fiscal years 1909 to 
 1912, inclusive, contain the following relative to 
 locomotive fuel: 
 
 Locomotive Fuel Statistics 
 
 1912 
 
 1911 
 
 1910 
 
 1909 
 
 Pounds consumed per locomotive 
 mile 
 
 168.1 
 12.46c 
 15.57c 
 
 168.8 
 12.19c 
 15.27c 
 
 170.4 
 12.04c 
 16.06c 
 
 174.0 
 
 Cost per locomotive-mile 
 
 Cost per 1,000 ton-miles 
 
 12.26c 
 15.27c 
 
 There is here some evidence of better fuel economy, 
 for notwithstanding the larger size of locomotives, 
 the consumption of coal per locomotive-mile was 
 5.9 pounds less in 1912 than in 1909. The cost per 
 locomotive-mile, however was 20c. more. The cost 
 per thousand ton-miles, in 1912, was also more than 
 in 1909, though slightly below that of 1910. 
 
 Wages. Wages constitute another leading ex- 
 pense in conducting transportation. Opportunities 
 for economy under this heading are not as available 
 as with other expense items. The strong organiza- 
 tions of railroad employees engaged in the moving 
 of traflSc enhance their ability to command com- 
 pensation as great, if not greater, than prevails among 
 other classes of workers of similar standing. This 
 forces the railroads to economize by promoting effi- 
 ciency among their working forces. A highly dis- 
 ciplined force of employees undoubtedly contri- 
 butes to economies in transportation operations 
 which more than offset the high wage cost. It is 
 evident, therefore, that reductions in the wage pay- 
 
OPERATING ACCOUNTS 213 
 
 ments to employees are not always an indication of 
 more economical and efficient management. 
 
 The Operating Ratio. The percentage of the total 
 operating expenses to the operating revenues is desig- 
 nated by railroad statisticians as the Operating 
 Ratio, This is generally considered a valid index 
 of economical handling of the railroad's business. 
 In this respect, however, its value is liable to ex- 
 aggeration. Considered by itself, without reference 
 to the various conditions and factors influencing 
 operating costs, the "Operating Ratio" is absolutely 
 worthless. -^ In the first place, error can easily be 
 made in comparing operating ratios of different sys- 
 tems by reason of opposed financial policies in the 
 roads compared. For example, the operating ratios 
 would not be comparable in the case of two systems 
 one of which charges as much of permanent improve- 
 ment expenditure as possible to ** repairs account" 
 and the other as little as possible. Secondly, a large 
 proportion of low grade tonnage moved at a cheap 
 rate over a line of light traffic causes a high operating 
 ratio. Thus, an increase of branch mileage, with 
 but few exceptions, leads to higher operating ratios. 
 Low grade tonnage, however, when combined with 
 heavy traffic density and a capacity for doing the 
 business, may mean a profitable net return on capi- 
 tal even at a high operating ratio. On the other 
 hand, a low operating ratio with a light traffic den- 
 sity may afford no return at all on capital invest- 
 ment. In fact, many of the standard dividend pay- 
 
214 AMERCAN RAILROAD ECONOMICS 
 
 ing railroads that do a heavy business have larger 
 operating ratios than their nondividend paying rivals. 
 On the other hand, companies whose tonnage in- 
 cludes high-class commodities of small bulk, but 
 which involve costly transportation service are likely 
 to have high operating ratios, without a detriment 
 to good earning power. Thus, the Chicago & North 
 Western had an operating ratio in 1911 and 1912, 
 respectively, of 71.5 per cent, and 70.8 per cent, com- 
 pared with but 61.4 per cent, and 56.9 per cent, on 
 the Great Northern. But the Chicago & North 
 Western carries a much smaller proportion of low 
 grade freight and a considerably larger amount of 
 package freight (merchandise). It has also a heavier 
 passenger business than the Great Northern. All 
 these factors are conducive to a higher operating 
 ratio, but do not necessarily imply inferior earning 
 power. 
 
 With intensive development of transportation 
 facilities there is a natural tendency for the operating 
 ratio to increase. In all business enterprises, the 
 margin of profit in the exchange of commodities or 
 of services is largely dependent on the rapidity of 
 the "turnover." By "turnover" is meant the rela- 
 tive time required in converting the capital "locked 
 up " directly in the manufacture or sale of commodi- 
 ties or in the performance of a service back into its 
 original substance, "cash." A grocery merchant, 
 who changes his stock in trade an average of twelve 
 times a year, other things being equal, will earn the 
 same rate on his capital as a jewelry merchant whose 
 
OPERATING ACCOUNTS 215 
 
 stock changes but once a year, but whose margin of 
 profit on each sale is twelve times that of the grocer. 
 This condition applies to railroad operations. The 
 large investment of railroads in fixed property adds 
 to the economic importance of doing a maximum 
 business in the minimum time, even though the 
 average margin of profit on the services performed 
 may be thereby reduced. A railroad company that 
 doubles its traffic without increase in permanent 
 investment will earn as much for its stockholders on 
 a 1^3/^ per cent, margin of profit as on a 25 per cent, 
 margin with half the business. Under the old 
 conditions, however, its operating ratio was 75 per 
 cent, but for the purpose of doubling the business, 
 it becomes just as profitable to work under an oper- 
 ating ratio of 873/2 per cent. In this event, an in- 
 creased operating ratio is no loss to the railroad and 
 a direct gain to the public. 
 
 When outside business circumstances and operat- 
 ing conditions undergo no pronounced change, the 
 operating ratio may be used as an index of efficiency 
 on the same railroad over a period of years. Its 
 proper use, however, requires caution. Aside from 
 accounting changes, the general ratio of expense 
 to revenues may fail to indicate changes in mainte- 
 nance and in operating policy, or in the physical 
 substance of the property and equipment. Exten- 
 sive improvement work on railroad lines interferes 
 with traffic operations and thus causes a pronounced 
 increase in the operating ratio. The human factor 
 as an element should likewise not be overlooked. 
 
216 AMERICAN RAILROAD ECONOMICS 
 
 Economy at the expense of efficiency is a loss, though 
 it may result in lowering the operating ratio, A 
 high standard of service, a well paid, well disciplined 
 force of employees, and a well maintained property, 
 are of more permanent value than temporary show 
 of large earning capacity. 
 
 In making a comparative analysis of the operating 
 ratio from year to year an advantage is gained by 
 separately considering the five main divisions of 
 the operating expenses. In this way is determined 
 how far each group has contributed toward an in- 
 crease or a decrease in the general ratio. Thus, 
 the Baltimore & Ohio Railroad's operating ratio for 
 the fiscal years 1908-1911, inclusive, has been as 
 follows: 
 
 Percentage of gross earnings ex- 
 pended for 
 
 Baltimore & Ohio Railroad 
 
 1908 
 
 1909 
 
 1910 
 
 1911 
 
 Maintenance of Way and struc- 
 tures 
 
 Maintenance of Equipment 
 
 Traffic Expenses 
 
 Conducting Transportation Ex- 
 penses 
 
 General Expenses 
 
 Total Operating Ratio 
 
 % 
 14.37 
 17.51 
 
 2.27 
 
 37.66 
 2.08 
 
 73.89 
 
 % 
 12.69 
 15.46 
 
 2.26 
 
 34.41 
 2.08 
 
 66.90 
 
 % 
 13.12 
 18.42 
 
 2.11 
 
 33.45 
 1.89 
 
 68.99 
 
 % 
 11.66 
 18.02 
 
 2.21 
 
 37.23 
 2.08 
 
 71.20 
 
 A study of the above table shows that the high 
 operating ratio in the year 1911 was caused by in- 
 crease in the proportion of transportation costs. 
 The maintenance expenses combined, in 1911, were 
 
OPERATING ACCOUNTS 217 
 
 29.68 per cent, against 31.54 per cent, the previous 
 year, whereas, the transportation expenses amounted 
 to but 33.45 per cent, in 1910, compared with 37.23 
 per cent, in 1911, and as against 34.41 per cent, in 
 1909. By thus separating the principal factors of 
 the operating ratio, the trend and fluctuations in 
 maintenance and other expenses can be readily 
 traced. This must always be done in order to deter- 
 mine operating efficiency by means of the general 
 ratio. Otherwise, the standard is meaningless. 
 
 Net Operating Revenue. The deduction of the 
 *^ Operating Expenses'' from the ^'Operating Reve- 
 nues'' gives the ^^Net Revenue from 'Rail' Opera- 
 tions, " or " Net Operating Revenue. ' ' ^ Except in small 
 and unimportant systems this item does not indicate 
 the extent of earning capacity or the return on 
 capital investment. The fact that one company 
 has net operating revenue "per mile of road" or 
 ''per train-mile" twice as great as another does not 
 necessarily indicate that the profitableness of the 
 business of the first is greater. The Erie Railroad's 
 net operating revenue "per mile of road" is about 
 six times that of the Atlantic Coast Line. Yet, the 
 latter company, because of the low construction cost 
 of its property and conservative capitalization, affords 
 a better return on actual investment than the Erie. 
 
 ^ There is an absence of uniformity in the use of the terms " Net 
 Operating Revenue" and "Operating Income." According to the Inter- 
 state Commerce Commission, the latter represents the balance of the 
 "Net Operating Revenue" after the inclusion of the net income or net 
 deficit arising from "Outside Operations" and after the deduction of 
 "Taxes Accrued." 
 
218 AMERICAN RAILROAD ECONOMICS 
 
 The growth of net revenue in relation to capital 
 investment in the railroad is an important factor in 
 gauging j&nancial progress. Although both gross 
 and net earnings of a railroad system may be con- 
 stantly expanding, the gains along these lines may 
 not compensate for the additional capital utilized in 
 producing the improved operating results. Increased 
 traffic density, heavier car loading and the progres- 
 sive betterment in transportation facihties have 
 promoted the expansion of railroad revenues. This 
 is the natural effect of growth in wealth and popula- 
 tion. Financial interests, however, are unfavorably 
 affected if the result has been obtained with larger cajrl- 
 .tal expenditure than is warranted by the increased 
 "profits. 
 
 The financial troubles of the Wabash Railroad 
 illustrate this point. During the years 1905-1912 
 the gross and net earnings of the Wabash under- 
 went considerable expansion. Without change in 
 mileage, net operating revenue grew from $4,987,025 
 in 1905 to $7,517,854 in 1911, a gain of about 60 
 per cent. In the meantime, however, the charges 
 against income increased enormously. These fixed 
 charges, because of necessary expenditures to keep 
 the railroad in efficient condition, could not be met. 
 A receivership and reorganization is the usual out- 
 come of this condition. 
 
 Taxes. According to the ruling of the Interstate 
 Commerce Commission, "Taxes" are separated from 
 ^'Operating Expenses'^ and are deducted from ''Net 
 Operating Revenue" so as to obtain the ''Operating 
 
OPERATING ACCOUNTS 219 
 
 Income.^' The underlying basis of this ruling lies 
 in the fact that taxes, unlike other railroad expendi- 
 tures, are determined by political authority and not 
 by the policy of the railroad directors, or by the 
 exigencies of the transportation service. Moreover, 
 taxes are "fixed" charges against railroad revenues 
 and take precedence over all other liens on property 
 and earnings. The item " Taxes" in the Income State- 
 ment, therefore, is worthy of close attention in the 
 study of railroad earnings. Practically all important 
 transportation systems are subject to the varying 
 tax laws of two or more states. Lack of uniformity 
 and frequent changes in taxing methods afford no 
 certainty of the aggregate amount any company 
 may be assessed for public revenue. The contrasts 
 in the scale of railroad taxation in the various states 
 is most striking. An oflScial computation made some 
 time ago showed variations in the percentage of. 
 taxes to railroad gross earnings ranging from 2.7 
 per cent, up to 4.8 per cent, the lowest being in a 
 group of states made up of Maryland, Pennsylvania, 
 District of Columbia and Delaware, and the highest 
 in the group made up of Connecticut, Maine and 
 Rhode Island. In percentage of taxes to net earnings 
 the range was from 6.9 per cent, in a group of states 
 made up of California, Nevada, Oregon, Utah and 
 Washington, to 17.3 per cent, in Connecticut, Maine 
 and Rhode Island.^ Another computation based on 
 returns of 13 important railroad systems showed a 
 variation in ratio of taxes to gross earnings ranging 
 * "The (London) Times American Railway Number," 1912, p. 30. 
 
220 AMERICAN RAILROAD ECONOMICS 
 
 from 2.5 per cent, on the Erie Railroad system, to 
 6.3 per cent, on the New York, New Haven & Hart- 
 ford property. A few states, particularly Connect- 
 icut, base taxes on market value of the shares of 
 the taxed corporation. When the securities com- 
 mand higher prices the taxes are greater. There is 
 a tendency in some cases to lighten the taxes of non- 
 dividend paying railroads. Moreover, prevailing 
 publicity of railroad accounts would seem to enable 
 public oflScials to judge properly the net earning 
 power of each railroad and what is a reasonable 
 assessment for taxation. 
 
 For their own convenience and in order to show 
 the portion of their revenues assessed for govern- 
 mental purposes, a number of railroads compute 
 their annual tax payments as a percentage of gross 
 earnings. In view of the fact, however, that some 
 states base tax rates on the average ^^fer mile'* 
 valuation of railroad property, a "per mile of road'' 
 computation is also used. There can be uq doubt 
 that, notwithstanding the enhancement in the value 
 of railroad property and the almost uninterrupted 
 expansion in railroad earnings, heavier taxation is 
 becoming an increasing burden to the companies. 
 Even though railroad net income may not be seri- 
 ously impaired thereby, railroad shareholders suffer 
 a permanent loss. 
 
I 
 
 CHAPTER X 
 
 NET INCOME AND ITS DISTRIBUTION 
 
 Operating Income. *^ Operating Income" as indi- 
 cated on page 187 is the balance after the deduction 
 of ''Taxes" from ''Net Operating Revenues** The 
 item represents the financial result obtained from 
 the direct operation of the railroad property, with- 
 out reference to investment or to other activities, 
 and without deduction of capital charges in the form 
 of interest, rentals and dividends. It, therefore, 
 purports to exhibit the net earning capacity of a 
 railroad as an operating company. If American 
 railroad corporations had confined their activities to 
 operating "rail" transportation facilities directly 
 under their own corporate organizations, the "Oper- 
 ating Income" would be the item in the Income Ac- 
 count attracting the closest interest of security 
 holders. From this "balance" alone would come the 
 interest and dividend payments. However, because 
 of the acquisition of legally independent and sepa- 
 rately operated lines, and because of the develop- 
 ment of activities not directly connected with or 
 incidental to transportation, additional sources of 
 revenue are added from which payments for the 
 use of capital are drawn. 
 
 "Other Income" Attention has already been 
 
 221 
 
m AMERICAN RAILROAD ECONOMICS 
 
 called to the fact that American railroad companies 
 are holding concerns, owning securities of other com- 
 panies as well as operating directly their own cor- 
 porate lines. The results of these investment ac- 
 tivities affect financial progress as much as the direct 
 railroad operating results. In fact, the ownership 
 of subsidiaries affords opportunities of misinterpre- 
 tation of equities and earning power. For this reason, 
 it is frequently necessary to combine the accounts of 
 railroad companies comprising a "system" in order 
 to properly determine the actual earnings and finan- 
 cial condition of the parent or holding, company. 
 
 The New York Central system furnishes an illus- 
 tration. An analysis of the surplus earnings of the 
 New York Central lines for the calendar year 1910 
 reveals the following. 
 
 Year ended December 31, 1910 
 
 New York Central 
 
 Lake Shore 
 
 Michigan Central 
 
 Pittsburgh & Lake Erie 
 
 Chicago, Indiana & Southern 
 
 New York, Chicago & St. Louis 
 
 Monongahela Railroad 
 
 Cleveland, Cincinnati, Chicago & St. Louis 
 
 Surplus for 
 the year ^ 
 
 New York 
 
 Central's 
 
 Equity 
 
 $ 924,914 
 
 $ 924,914 
 
 4,883,065 
 
 4,394,758 
 
 593,051 
 
 533.745 
 
 89,906 
 
 44,953 
 
 314,798 
 
 283,318 
 
 639,823 
 
 301,914 
 
 30,245 
 
 96,804 
 
 34,371 
 
 20,124 
 
 $7,910,173 $6,600,530 
 
 According to the above computation, the surplus 
 remaining, after all charges and dividends of the 
 
 * After dividend payments. 
 
NET INCOME AND ITS DISTRIBUTION 223 
 
 New York Central Lines, amounted, approximately, 
 to 3 per cent, of $222,724,400 New York Central 
 outstanding stock. This, combined with the 6 per 
 cent, dividend paid to New York Central stock- 
 holders, would have permitted a dividend of 9 per 
 cent, on New York Central stock. Confining the 
 computation to the undistributed surplus of the 
 Lake Shore and the Michigan Central lines, the 
 surplus profits available for New York Central stock 
 would be in the neighborhood of 8 per cent., instead 
 of 6 per cent, as exhibited in the parent company's 
 own income statement. ^ 
 
 It is readily apparent that a company controlling 
 other railroads through stock ownership can arbi- 
 
 1 The following table shows the dividends earned by the Lake Shore 
 and the Michigan Central companies on their respective capital stocks 
 since 1905, together with dividends paid, and the equity of New York 
 Central in the surplus remaining after dividends. This equity is com- 
 puted in percentage of New York Central's outstanding stock. 
 
 
 Lake Shore 
 
 Michigan Central 
 
 Yv,AR 
 
 
 
 Approx. 
 
 
 
 Approx. 
 
 
 Am't 
 
 Div. 
 
 equity of 
 
 Am't 
 
 Div. 
 
 equity of 
 
 
 Earned 
 
 Paid 
 
 N. Y. Central 
 in surplus 
 
 Earned 
 
 Paid 
 
 N. Y. Central 
 in surplus 
 
 1912 
 
 32.2% 
 
 18% 
 
 3^0% 
 
 14.6% 
 
 6% 
 
 0.7% 
 
 1911 
 
 28.6 
 
 18 
 
 2.2 
 
 11.3 
 
 6 
 
 0.4 
 
 1910 
 
 27.7 
 
 18 
 
 1.9 
 
 7.8 
 
 6 
 
 0.14 
 
 1909 
 
 26.1 
 
 12 
 
 2.9 
 
 15.8 
 
 6 
 
 0.7 
 
 1908 
 
 18.4 
 
 12 
 
 1.3 
 
 8.6 
 
 6 
 
 0.2 
 
 1907 
 
 25.0 
 
 14 
 
 2.2 
 
 9.2 
 
 8 
 
 0.1 
 
 1906 
 
 24.0 
 
 8 
 
 3.2 
 
 5.2 
 
 5 
 
 0.0 
 
224 AMERICAN RAILROAD ECONOMICS 
 
 trarily draw on the profits and surplus of its subsid- 
 iaries. A correct computation of earning power is 
 not limited to analysis of the parent company's 
 accounts. The subsidiaries must also be closely 
 examined to ascertain whether the income credited 
 to security holdings represents a proper application 
 of the surplus earnings of the controlled corporation. 
 Income may be credited without being earned, and 
 it may be earned and not credited. 
 
 The Denver and Rio Grande Railroad in 1910 
 furnishes an instance of a possible misinterpretation 
 of an income statement, through adding to income 
 accrued, but unpaid, interest on securities of a sub- 
 sidiary company. Entirely in conformity with the 
 Interstate Commerce Commission's rules and re- 
 quirements, the year's interest accrual of $1,152,844 
 on Denver & Rio Grande's Western Pacific Second 
 Mortgage Bonds was credited as income. As this in- 
 terest was not actually paid, it is held as a "deferred 
 asset." By reckoning in this fictitious revenue the 
 Denver and Rio Grande could have carried for- 
 ward a surplus of $1,552,000 instead of reporting an 
 actual credit of approximately $400,000. For doing 
 exactly this, many railroads have come under the 
 severest criticism in the past. The ultimate outcome 
 in some cases was the requirement of receivers. 
 
 A great American railroad system which is partic- 
 ularly prominent because of its investment activi- 
 ties is the Union Pacific Railroad. The policy of the 
 late Mr. Harriman in developing and extending 
 Union Pacific lines and in preventing advantages 
 
NET INCOME AND ITS DISTRIBUTION 225 
 
 to other transcontinental railroads* was through ac- 
 quisition of large blocks of stocks in competing and 
 connecting systems. These and other investment 
 holdings amounted in 1911 to a book value in the 
 neighborhood of $260,000,000. The income from 
 this source was $18,398,000, compared with net 
 operating revenue (before deduction of fixed charges) 
 of $35,711,000. The Union Pacific's big return from 
 stocks of other roads held in its treasury has been 
 responsible for a good deal of misconception as to 
 the earning power of the railroad property. As a 
 matter of fact, that company's return on its capital 
 stock as measured by its own railroad operations is 
 not large. In 1912, it was slightly more than one- 
 half the amount needed for its 10 per cent, common 
 stock dividends. Up to 1912, it was customary for 
 the Union Pacific to pay 6 per cent, on its common 
 stock from transportation earnings. The remaining 
 4 per cent, in dividends was charged directly against 
 income from securities owned. 
 
 Deductions from Corporate Income. These in- 
 clude Rentals, Interest and Sinking Fund payments 
 and are familiarly known as the "Fixed Charges." 
 Attention has already been called to the fact that 
 under Interstate Commerce Commission classifica- 
 tion, the item " Taxes " is deducted directly from the 
 Net Operating Revenue, It is, therefore, not among 
 "fixed charges." Taxes are a fixed expense, however, 
 and, for purposes of analysis, may be conveniently 
 grouped with Rentals, Interest and Sinking Fund 
 payments. 
 
226 AMERICAN RAILROAD ECONOMICS 
 
 Rentals represent, in addition to car-hire expense, 
 the periodical payments for lease or use of railroad 
 lines, terminals and other facilities and are there- 
 fore analogous to interest payments. The arrange- 
 ments under which one railroad operates or uses 
 the facilities of another railroad are matter of con- 
 tract. Frequently, the rental is nothing more than 
 an agreement to guarantee the payment of stipu- 
 lated rates on part or all of the securities of the leased 
 concern. In other instances no fixed rental is speci- 
 fied but the surplus earnings of the leased line may 
 be distributed or apportioned between the owners 
 and the lessee according to fixed agreement. Under 
 this arrangement the rental is not essentially a fixed 
 charge though classed under ''Deductions from In- 
 come" 
 
 The nature of railroad interest charges requires 
 little explanation. These are generally more 'fixed' 
 in character than the other deductions from net 
 income. The amount each year, accordingly, can 
 be calculated in advance. As pointed out on page 41 
 a few railroads have income bonds outstanding the 
 interest on which is not required to be paid unless 
 earned. This provision would seem to remove the 
 payments on these obligations from the category of 
 "Fixed Charges." There are only a very few issues 
 of income bonds, however, and no separate classifica- 
 tion is made for their interest charge in the Income 
 Account, Similarly, the interest paid on unfunded 
 indebtedness, as well as the cost of exchange and 
 discount transactions are included among the "D^- 
 
NET INCOME AND ITS DISTRIBUTION 227 
 
 ductions from Income^' along with the fixed interest 
 charges on capital securities. 
 
 Sinking fund and other amortization charges are a 
 relatively unimportant item among the Deductions 
 from Net Income. Railroads, as a rule, make no 
 substantial provisions for debt amortization. The 
 exception is in the case of "car trust" indebtedness 
 in which a part of the principal is paid off periodically 
 so as to be wholly amortized before the equipment 
 is worn out. 
 
 The amortization of discount on funded debt is also 
 an item under Deductions from Net Income, Refer- 
 ence has already been made to the regulations of 
 the Interstate Commerce Commission whereby the 
 periodical amortization is proportioned equally 
 throughout the interval between the date of sale and 
 the date of maturity of the obligations on which 
 the discount expense was incurred. However, if 
 the company desires to extinguish the discount 
 sooner, it may do so at its own option through a 
 charge against Profit & Loss. As long as any of 
 the discount is unextinguished, a proportionate 
 charge must be made against annual income suflScient 
 to amortize the discount during the interval in 
 which the funded debt remains outstanding. 
 
 The miscellaneous items included by the Inter- 
 state Commerce Commission under '' Deductions from 
 Income^' are not of sufficient general importance 
 to require description here. The investor, however, 
 should examine the items carefully to ascertain in 
 each case the exact nature of the liabilities charged 
 
228 AMERICAN RAILROAD ECONOMICS 
 
 against current earnings. Notwithstanding oiOficial 
 regulations there are possibiHties of omitting or 
 understating charges or losses which, in accordance 
 with correct accounting principles, should be in- 
 cluded under the '' Deductions from Net Income'' 
 Among these are the so-called "contingent obliga- 
 tions" arising either from the guarantee of interest 
 and dividends on subsidiary company securities or 
 from the income deficits of railroads and other con- 
 cerns which are owned but operated separately or 
 which are controlled through majority stock owner- 
 ship. Liabilities of this character demand atten- 
 tion. Control of subsidiaries is more often for the 
 purpose of furnishing traffic to the main lines than 
 for direct pecuniary gain. Consequently, the operat- 
 ing deficits of such "feeders'* are as properly a 
 charge against the general net earnings for the period 
 in which they accrue as is the interest paid on capi- 
 tal utilized directly in increasing traffic. However, 
 because these charges are not "fixed" or regularly 
 recurrent and do not appear on the books of the 
 parent company they are frequently omitted in 
 income calculations. There are instances, however, 
 in which railroad companies regularly take into their 
 income account their proportionate share of deficits 
 in the operations of a controlled road. The Colorado 
 & Southern Railroad, for example, jointly with the 
 Rock Island system, owns the stock of the Trinity & 
 Brazos Valley Railroad, a line furnishing to both 
 systems an outlet to the Gulf of Mexico. The net 
 earnings of the Trinity & Brazos Valley have been 
 
NET INCOME AND ITS DISTRIBUTION 229 
 
 insufficient to pay its fixed charges. Each of the 
 parent companies, therefore, assumes one-half of 
 the annual deficit. During the last four years, this 
 deficit has been in the neighborhood of $1,000,000 
 annually. 
 
 The Yazoo & Mississippi Valley, whose stock is 
 held by the Illinois Central Railroad is an instance 
 of the operation of a controlled line which frequently 
 shows an annual deficit after deduction of charges 
 against income. In this case the Illinois Central is 
 not required to carry the loss into its own income 
 account. The deficits are not regularly recurrent. 
 Moreover, the Yazoo & Mississippi Valley has a 
 Profit (& Loss surplus against which operating losses 
 may be charged. 
 
 Net Corporate Income and the Margin of Safety. 
 After the deduction of all proper charges against 
 current income, the surplus, if any, can be disposed 
 of in accordance with the judgment of the com- 
 pany's directors. This surplus is designated by the 
 Interstate Commerce Commission as *^ Net Corporate 
 Income,'*^ Considered in relation to the funded obli- 
 gations outstanding, this item determines to some 
 extent the investment values of these securities. 
 Considered solely with reference to the interest re- 
 quirements, it is commonly termed the *^ Margin of 
 Safety. ^^ Thus, if a company has but one bond issue 
 bearing an annual interest requirement of $100,000, 
 and the Net Corporate Income (after all fixed charges 
 and reserve requirements) for a series of years is 
 approximately $100,000 annually, the *^ Margin of 
 
230 AMERICAN RAILROAD ECONOMICS 
 
 Safety" is said to be 100 per cent. Most railroad 
 companies however, have a number of different bond 
 issues ranging in priority as to claim upon net in- 
 come, and the ''Margin of Safety'' is frequently 
 calculated with reference to each issue. The relative 
 market standing, other things being equal, is largely 
 gauged by the size of the ratio. Thus, the First Con- 
 solidated Mortgage 5 per cent. Bonds of the South- 
 ern Railway, having claim upon net income prior to 
 several other direct funded obligations of the com- 
 pany, with a margin of safety in 1912 of about 500 
 per cent., have sold at 101 when the Development & 
 General Mortgage 4 per cent. Bonds, which are not 
 so well secured, sold at slightly less than 72. The 
 difference in the interest rate, therefore, does not 
 fully account for the disparity in price. Similarly, 
 the First Mortgage 5 per cent. Gold Bonds of the 
 Wabash Railroad sold in January, 1912, as high as 
 lOTJ/^, whereas, the First & Refunding Gold 4 per 
 cent. Bonds of the company, on wliich the interest 
 requirements were at the time barely met from net 
 earnings, sold around 56. 
 
 The question as to an "ideal" Margin of Safety in 
 the analysis of railroad income statements is of 
 purely academic interest. The wide disparities in 
 operating conditions affecting income stability do 
 not permit the establishment of a definite rule. It 
 is evident from the relative market prices of railroad 
 securities, that a margin of 25 per cent, above fixed 
 charges in one railroad company's income statement 
 is a better basis of security value than a 50 per cent. 
 
NET INCOME AND ITS DISTRIBUTION 231 
 
 margin of another line. Thus, the Boston & Maine 
 Railroad in the fiscal year 1911 had a margin of 
 safety of but 23 per cent, above its fixed interest 
 requirements, whereas the Erie Railroad had a 
 margin of 53 per cent. It would be difficult to argue 
 that Erie's bonds have a better investment value 
 than similar issues of the Boston & Maine. The 
 same is true when comparison is made between the 
 Margin of Safety of the Union Pacific securities and 
 those of the Lake Shore and Michigan Southern 
 system. The former has been earning its interest 
 charges four times over, whereas, the charges of the 
 Lake Shore were hardly trebled. Stability of earn- 
 ings is a factor in market values eliminating the 
 necessity of a large Margin of Safety, 
 
 Distribution of Corporate Net Income. The sur- 
 plus income remaining after all *' fixed" and neces- 
 sary charges is available for shareholders' dividends. 
 Dividend distribution, however, as already men- 
 tioned, is largely discretionary with each company's 
 directors. The financial policy of standard American 
 railroads differs from that of the English companies 
 in which earnings are divided "up to the hilt" among 
 shareholders, and nothing is reserved for permanent 
 improvements or for contingencies. In the United 
 States vast sums taken from income have been 
 "turned back into the property." The stockholders 
 thus do not reap the immediate and direct benefit 
 represented by the earning power back of their secur- 
 ities. The Pennsylvania Railroad's directors for 
 many years are said to have adhered to the dictum. 
 
232 AMERICAN RAILROAD ECONOMICS 
 
 "A dollar for improvements for each dollar in divi- 
 dends.'* Through this means they have built up 
 an aggregate surplus of more than $100,000,000 
 (which does not include the surplus accounts of its 
 subsidiaries). In addition, large sums have been 
 put into property directly through charges to operat- 
 ing expenses. The Chicago, Burlington & Quincy 
 has likewise accumulated through earnings a surplus 
 of over $60,000,000, applied largely to permanent 
 improvements and additions. The Atlantic Coast 
 Line during the decade ended June 30, 1912, had 
 net earnings available for dividends of $48,292,000, 
 of which only about one-half was paid to stock- 
 holders. The remainder served as additional capital 
 for railroad operations. 
 
 Guided by the success of this policy, several of 
 the less prosperous companies, though showing sur- 
 plus earnings sufficient for dividend payments, have 
 been withholding a full distribution to shareholders 
 in order to strengthen their finances and credit. 
 For example, the Erie had surplus net income in the 
 fiscal year 1911 sufficient to meet the preferred divi- 
 dend requirements and to pay, in addition, a divi- 
 dend of 2.5 per cent, on its common stock, but no 
 class of shareholders participated in a distribution. 
 In the same year, the Southern Railway also had a 
 surplus above fixed charges of $6,670,000, of which 
 but $1,200,000 (a dividend of 2 per cent.) was paid 
 to preferred shareholders, the remainder having been 
 applied to strengthen the financial position of the 
 company. A conservative dividend policy of this 
 
NET INCOME AND ITS DISTRIBUTION 233 
 
 sort is expected to enhance the intrinsic merits of the 
 shares of such companies even though the owners 
 are receiving no immediate return. 
 
 It is thus a common practice among American 
 railroad companies to apply each year a part of the 
 Net Corporate Income directly to the uses of the 
 property. Sums so set aside are called '^Appropria- 
 tions from Income." In accordance with Interstate 
 Commerce Commission regulations these appropria- 
 tions are to be permanently credited to an account 
 called '^ Appropriated Surplus" so as to be distin- 
 guished from the '* Profit & Loss" Surplus. 
 
 The purpose of withholding a full distribution of 
 the Net Corporate Income from shareholders is to 
 prevent a large increase in capital obligations. In 
 this way the railroad's credit is improved. The late 
 President McCrea, of the Pennsylvania Railroad, 
 testifying before the Enginemen's Wage Arbitration 
 Board of 1912, said: 
 
 The basis of a company's credit is what it has over at the end of the 
 year, after having made a reasonable return on the capital already in- 
 vested. That is because when you want to borrow money, or sell your 
 stock, those who want to buy or are going to buy want to know whether 
 there is enough margin to carry you over and to pay returns on the money 
 they are advancing until it can be made to pay itself. 
 
 Today we are spending a great deal of money on which we can never 
 expect to get an adequate return, really any return, or if we do, it is so 
 small or so indefinite that it is very hard to describe just what it will be. 
 All of that is naturally known, and the investor must be assured that he 
 is going to get a return on what he invests. 
 
 The standard railroads of America have been 
 enabled to develop and expand without State guar- 
 
234 AMERICAN RAILROAD ECONOMICS 
 
 anty of interest charges and without excessive capital 
 obligations largely because of this so-called "Amer- 
 ican financiering policy" which aims to maintain 
 the company's credit by developing the property 
 from surplus earnings and not by increased capitali- 
 zation. It may be safely said that only because of 
 the enormous expenditures made from current in- 
 come for new railroad construction and for additions 
 and betterments the leading railroad systems have 
 succeeded in maintaining or increasing the return to 
 shareholders. 
 
 The superiority of the American system is mani- 
 fest when contrasted with the methods of British 
 railroads. The latter charge revenue with only the 
 amount necessary to keep the line at its original 
 efficiency; practically all additions to rolling stock 
 and all kinds of extensions and betterments are 
 charged to capital. After that, the profits are di- 
 vided among security holders. This policy has re- 
 sulted in enormous increase of British railroad capi- 
 talization and a consequent diminution in market 
 value of their shares.^ 
 
 THE PROFIT & LOSS ACCOUNT 
 
 The foregoing discussion of the principal items in 
 the Income Account gives occasion for only a brief 
 description of the Profit & Loss Account, In the 
 
 * See W. M. Acworth, "Railroad Accounting in America vs. England," 
 North American Review, March, 1910; also a paper by the author, 
 "Control of Railroad Accounts in Leading Eurqjean Countries," Quar- 
 terly Journal of Economics, May, 1910. 
 
NET INCOME AND ITS DISTRIBUTION 235 
 
 language of the Interstate Commerce Commis- 
 sion: 
 
 The Profit and Loss Account summarizes the changes in the corporate 
 surplus or deficit during a given fiscal period resulting from the operations 
 and business transactions during that period as well as changes effected 
 by appropriations of surplus made at the option of the company, by ac- 
 counting adjustments not property attributable to the period, or by 
 miscellaneous losses or gains not provided for elsewhere. 
 
 The Profit and Loss Account is the connecting link between the 
 Income Account and the General Balance Sheet, and the total balance 
 in the account should therefore be shown in the General Balance Sheet 
 Statement.^ 
 
 The necessity of a permanent Profit & Loss Ac- 
 count is due to conditions which prevent the definite 
 allocation or distribution of all gains and losses to a 
 specific period. The account, however, is not in- 
 tended to cover every item of income or expense 
 which overlaps from one year to another and which 
 cannot be fully determined in each period. It is in- 
 tended primarily for extraordinary and seriously 
 delayed transactions which at the time they are 
 finally entered on the books have no relation to 
 current business. 
 
 Probably no better illustration of the use of the 
 Profit & Loss Account is afforded than that in con- 
 nection with the abandonment of property. It was 
 pointed out on page 183 that in accordance with 
 Interstate Commerce Commission regulations the 
 value of property abandoned incidentally in the mak- 
 ing of additions and betterments is a charge against 
 revenues and not against accumulated surplus. 
 Under this ruling no part of the losses from prop- 
 
 * "Form of the Income and Profit and Loss Statement," First Issue, p. 9. 
 
236 AMERICAN RAILROAD ECONOMICS 
 
 erty abandoned because of the construction of new 
 sections of roadbed or track, or of new buildings, 
 would be entered in the Profit & Loss Account, 
 However, in the case of property abandoned without 
 replacement of any hind, the loss is entered directly 
 in the Profit <Sc Loss Account Though the net result 
 to the railroad company is the same whichever 
 method is used, the effect on the market value of 
 securities is vastly more pronounced when the loss 
 is deducted from current income instead of from 
 the Profit d; Loss Surplus, The impairment of net 
 income in any one year may necessitate a temporary 
 reduction in the dividend rate which is an influential 
 factor of market value. 
 
 Extraordinary payments other than losses through 
 abandonment of property are entered in the Profit & 
 Loss Account, Thus, it is permissible for a railroad 
 company, at its option, to charge all or a part of dis- 
 count on funded debt to Profit & Loss, thereby ex- 
 tinguishing or reducing this charge against annual 
 income during the period of the indebtedness.^ The ^ 
 cost of extensions, improvements and betterments r 
 may likewise be deducted directly from Profit <^ 
 Loss, The amounts thus deducted, however, be- 
 come a part of the *' Appropriated Surplus,^^ and the 
 transaction is merely a bookkeeping entry. A rail- 
 road company's accumulated surplus representing 
 net proprietorship, therefore, is separated into two 
 parts: the '^Appropriated^' Surplus which cannot 
 be arbitrarily withdrawn or reduced, and the "Profii 
 
 1 See pp. 180-181. 
 
NET INCOME AND ITS DISTRIBUTION 237 
 
 & Loss" Surplus, which is the reservoir for meeting 
 extraordinary losses and dividends, and to which cur- 
 rent surplus profits and extraordinary gains are added. 
 
 A railroad has the option of charging any divi- 
 dends to Profit & Loss or to current income. The 
 Louisville & Nashville, the Chesapeake & Ohio, the 
 Lehigh Valley and a number of other railroads 
 regularly pay dividends from Profit & Loss Surplus 
 instead of charging them in the Income Account. 
 It would seem that under ordinary circumstances 
 dividend deductions made from one account would 
 preclude deductions for like purposes from the 
 other. This, however, is not the case. The Chicago, 
 Milwaukee & St. Paul Railroad's first semi-annual 
 dividend for the fiscal year 1911 on both the Preferred 
 and Common Stock was entered in the Income Ac- 
 count, whereas, the second semi-annual payments 
 appear as deductions in the Profit & Loss Account, 
 This may have been due to the fact that the full 
 amount of the dividends consumed the total Net 
 Corporate Income available for this purpose, and 
 in order to avoid showing a "deficit" the second 
 semi-annual disbursements were charged against 
 the accumulated surplus. Transactions of this kind, 
 rendered necessary by accounting exigencies, are 
 apt to mislead the layman desirous of knowing the 
 actual financial results of railroad operations. 
 
 As illustrating items in a railroad Profit & Loss 
 Account, the following example from an annual re- 
 port of the Chicago & North Western Railway Com- 
 pany is presented: 
 
238 AMERICAN RAILROAD ECONOMICS 
 
 Profit and Loss Account, June 30, 1911 
 
 DR. 
 
 
 
 CR. 
 
 Depreciation ac- 
 
 
 Balance, June 30, 
 
 
 crued prior to 
 
 
 1910 $32,178,932.10 
 
 July 1. 1907, on 
 
 
 Balance Income for 
 
 
 equipment re- 
 
 
 Year ending June 
 
 
 tired or changed 
 
 
 30, 1911, brought 
 
 
 from one class 
 
 
 forward from In- 
 
 
 to another dur- 
 
 
 come Account . . 
 
 1.703,485.01 
 
 ing the current 
 
 
 Balance from oper- 
 
 
 fiscal year 
 
 $1,282,296.73 
 
 ations of Land 
 Properties for 
 year ending June 
 
 
 
 
 30, 1911 
 
 522.145.69 
 
 Discount on C. & 
 N. W. Ry. 4% 
 General Mort- 
 gage Gold Bonds 
 of 1987 sold dur- 
 ing the year 
 
 825,000.00 
 
 Amount transferred 
 from "Appropri- 
 ated Surplus" on 
 account of the 
 retirement of 
 Madison Exten- 
 sion and Menom- 
 inee Extension 
 First Mortgage 
 Sinking Fund 
 
 
 Net loss on prop- 
 
 
 Bonds 
 
 806,323.05 
 
 erty sold or aban- 
 
 
 Balance of accounts 
 
 
 doned and not 
 
 
 written off the 
 
 
 replaced 
 
 53,854.24 
 
 books, etc 
 
 16,728.34 
 
 Balance Credit, 
 
 
 
 
 June 30, 1911, 
 
 
 
 
 carried to Bal- 
 
 
 
 
 ance Sheet 
 
 33,066,463.22 
 
 $ 
 
 
 $35,227,614.19 
 
 55,227,614.19 
 
 
 
 
 
NET INCOME AND ITS DISTRIBUTION 239 
 
 The first item among the deductions (left-hand 
 side) calls for explanation. It represents losses to 
 the company due to the depreciation on equipment 
 prior to July 1, 1907, This depreciation had not 
 been charged against income during the time the 
 depreciation accrued, A valuation must be placed 
 by the railroad on equipment retired from service 
 or reclassified so that such changes can be entered 
 on the books of account. In making these revalua- 
 tions consideration is given to the losses due to use, 
 i. e., depreciation. Now, it is evident that all of this 
 loss did not occur since July, 1907, when the Inter- 
 state Commerce Commission's depreciation ac- 
 counts went into effect. Consequently, to charge 
 the depreciation of years prior to July, 1907, to the 
 income of later years is unfair and improper. The 
 money value of the depreciation estimated to have 
 accrued in the earlier years is therefore deducted 
 from the Profit & Loss balance. Under modern 
 bookkeeping methods this is the only proper way of 
 accounting for losses that have occurred in past 
 periods, but had not been entered on the books. 
 
 The deduction of discount on bonds of the com- 
 pany sold during the year indicates that the man- 
 agement prefers to wipe out expenses of this charac- 
 ter instead of charging the income of each year 
 equally during the time the bonds are outstanding. 
 The charging of the Profit & Loss Account with the 
 net loss on property sold or abandoned and not re- 
 placed is in accord with the regulations of the In- 
 terstate Commerce Commission. 
 
240 AMERICAN RAILROAD ECONOMICS 
 
 The items entering into the Profit & Loss Account 
 as additions to the credit balance which has been 
 carried over from the preceding period inchide, first 
 of all, the surplus income for the year transferred 
 from the Income Account, The second item is the 
 net income from the sale and operation of the com- 
 pany's "land grant" lands. The transactions in 
 connection with these lands are entirely apart from 
 railroad operations. Consequently, in accord with 
 Interstate Commerce regulations, the profit may be 
 entered in the Profit & Loss Account. The fourth 
 item represents merely a bookkeeping transaction 
 arising from the redemption of bonds. In this case 
 a part of the surplus of the Company previously 
 appropriated is again made available for adjust- 
 ments of loss or for distribution in dividends. The 
 last credit item requires no comment, probably repre- 
 senting accounts payable for which demand has 
 not been made or is not expected to be made. 
 
 Summing up the deductions and additions to the 
 account, the Company shows a net gain in Profit & 
 Loss for the year of $887,531.12 and the total bal- 
 ance $33,066,463.22 is carried forward to the General 
 Balance Sheet, 
 
CHAPTER XI 
 
 THE GENERAL BALANCE SHEET 
 
 In studying railroad financial progress, the BaU 
 ance Sheet as a rule is hurriedly passed over, not 
 because it is less important than the Income Account, 
 but because it is less readily understood. The Gen- 
 eral Balance Sheet, if properly compiled, purports 
 to show as nearly correctly as possible a company's 
 financial condition as determined or influenced by 
 operating results and by fiscal changes since its 
 corporate organization. It is thus the representation 
 of cumulative effects, whereas, the Income Account 
 is merely an exhibit of the results of a year or even 
 shorter period. The General Balance Sheet, there- 
 fore, when properly interpreted, furnishes a better 
 indication of financial status and of investment value 
 than current earnings, which frequently are the re- 
 sult of temporary conditions. 
 
 General Survey of the Balance Sheet. The In- 
 terstate Commerce Commission's prescribed Con- 
 densed General Balance Sheet is as shown opposite 
 p. 240. The form of the General Balance Sheet here 
 given does not greatly differ from the form prevailing 
 previous to the inauguration of uniform railroad 
 accounts. The items are now stated in greater de- 
 tail and, in some cases, the classification is slightly 
 
 241 
 
242 AMERICAN RAILROAD ECONOMICS 
 
 different than formerly. The Interstate Commerce 
 Commission endeavors, as far as possible, to have rail- 
 road property separated from the other items in 
 the General Balance Sheet. This is in line with the 
 policy of exhibiting railroad operations distinct from 
 other activities. The purpose, however, cannot be 
 fully accomplished until there is a complete inven- 
 tory of each company's assets. Acknowledgment 
 of this fact is indicated in the prescribed General 
 Balance Sheet, in which all physical property is in- 
 cluded under one general item "Property Invest- 
 ment." 
 
 The assets in the General Balance Sheet are placed 
 under six groups: (1) Road & Equipment; (^) Se- 
 curities; (3) Other Investments; (4) Working Assets; 
 (5) Accrued Income; and (6) Deferred Debit Items. 
 The first three are classed as "Property Investment" 
 and are technically known as "fixed" assets because 
 they are permanent factors of the enterprise. The 
 other assets are called "current" or "liquid" assets 
 because the identity of each unit is constantly con- 
 verted and interchanged by the operations of the 
 company. The last general group. Deferred Debit 
 Items, represents chiefly prepayments or claims not 
 yet due. These include prepaid rent, insurance and 
 taxes, accrued interest, and funds held apart from 
 the general assets of the company for reserve and 
 sinking fund purposes. 
 
 The two main items under Road & Equipment, it 
 will be noticed, are distinguished as to time of ac- 
 quisition rather than as to class of property. This 
 
THE GENERAL BALANCE SHEET 243 
 
 arises from the fact that previous to the Interstate 
 Commerce Commission's accounting regulations, no 
 compulsory distinction in the accounts was made 
 with reference to separate value of road and of 
 equipment. In most cases these had been agglomer- 
 ated in a " Cost-of-Road Account," Since 1907, how- 
 ever, new acquisitions of physical property must 
 be classified in accordance with the official regula- 
 tions under (a) Road, (b) Equipment and (c) Gen- 
 eral Expenditures. Thus we see that in the General 
 Balance Sheet here selected for illustration the 
 investment in road since 1907 amounts to $10,144,118 
 and the investment in equipment, $10,727,385. 
 The previous investment in physical property is 
 stated at $271,099,017. 
 
 The requirement of equipment depreciation ac- 
 counts on the books of the railroads creates a new 
 item, '^ Reserve for Accrued Depreciation," which ap- 
 pears in the General Balance Sheet as a deduction 
 from *^Road and Equipment." This reserve repre- 
 sents the unextinguished charge against income 
 since 1907 to cover accrued depreciation of equip- 
 ment in the service of the company. 
 
 The second main item under Property Investment, 
 viz.: "Securities Owned" represents the company's 
 own unsold funded indebtedness and the security 
 holdings in other railroads or kindred undertakings. 
 All these are classified into three categories — (1) Se- 
 curities of Proprietary, Affiliated and Controlled Com- 
 panies — Pledged, (2) Securities Issued or Assumed — 
 Pledged, and (3) Securities of Proprietary, Affiliated 
 
244 AMERICAN RAILROAD ECONOMICS 
 
 and Controlled Companies — Unpledged. The basis 
 of this classification is discussed on page 251. 
 
 The item "Investments'^ in the General Balance 
 Sheet is sub-divided into (1) Advances to Proprietary 
 Affiliated and Controlled lines for Construction, Equip- 
 ment and Betterment, and (2) Miscellaneous Invest- 
 ments, Under the first are included only advances 
 made for capital expenditure. Temporary and cur- 
 rent loans are under "Deferred Debit Items.'' Mis- 
 cellaneous Investments comprise the cost of securities 
 of concerns other than transportation or kindred 
 enterprises. They are the equities in the "extran- 
 eous undertakings" and "outside properties" of 
 the railroad companies. 
 
 The Working Assets are the available cash or 
 cash equivalents together with the materials needed 
 in current operations. As already mentioned, these 
 items undergo constant change, being either ex- 
 pended or consumed, or converted into the fixed 
 assets. 
 
 The classification of the liabilities corresponds 
 very closely to that of assets. The Capital Stock 
 and the Bonded Indebtedness are set opposite the 
 Property Investment, and the Working Liabilities are 
 an offset to the Working Assets. The Accrued Lia- 
 bilities not Du£ together with the Deferred Credit 
 Items are accounts of the same nature as the De- 
 ferred Debit Items. The Surplus accounts (which 
 include the Profit & Loss balance), however, have 
 no distinctive countervailing item among assets. 
 In fact, the Surplus is merely an item balancing 
 
THE GENERAL BALANCE SHEET 245 
 
 assets and liabilities. It is placed on the asset side 
 of the General Balance Sheet whenever all the other 
 liabilities exceed the total assets. In this event the 
 net ^proprietorship (see page 170) represented by 
 the Surplus becomes a negative quantity, i. e., a 
 ''deficit:' 
 
 The Capital Stock and the Bonded and Secured Debt 
 constitute railroad capitalization. Herein is in- 
 cluded all funded debt which has a matiu'ity period 
 of not less than a year. Thus, as pointed out in 
 Chapter II, temporary notes which are issued to ma- 
 ture in one or more years are a part of railroad capi- 
 talization. 
 
 Capital Stock is classified in the General Balance 
 Sheet as ''Common," "Pref erred'' and "Debenture 
 Stock." The Funded Debt is also classified, six separ- 
 ate categories having been established by the Inter- 
 state Commerce Commission. 
 
 Under Working Liabilities are included items 
 representing debts and obligations of a maturity of 
 less than one year. The Accrued Liabilities not Due 
 are items which have already been charged against 
 income but which have not been actually disbursed. 
 The Deferred Credit Items cover the various operating 
 reserves and special trust funds (except the Equip- 
 ment Depreciation Reserve which is deducted directly 
 from the Property Investment). These reserves 
 have been accumulated through charges to Operat- 
 ing Expenses. They are, therefore, separate and 
 distinct from sinking funds, and from other reserves 
 that are deductions from Net Corporate Income or 
 
246 AMERICAN RAILROAD ECONOMICS 
 
 from Profit Sc Loss. These are a part of the surplus 
 which as previously mentioned, is divided into 
 two parts: (1) the Appropriated Surplus, represent- 
 ing appropriations or reserves maintained for some 
 definite purpose, and (2) the Profit & Loss balance, 
 which is the free surplus held at the discretion of 
 the company's directors. 
 
 Before passing to a detailed analysis of the items 
 in the General Balance Sheet, reference should be 
 made to "contingent liabilities," As pointed out 
 on page 228, many of the leading railroad companies 
 guarantee by endorsement the obligations of sub- 
 sidiaries. No real indebtedness is thus assumed un- 
 less default is made by the issuing corporation. The 
 contingent liability, therefore, is not taken on the 
 books of the parent company and finds no place in 
 the General Balance Sheet. However, a foot-note 
 attached to each company's financial statements 
 setting forth the contingent liabilities would assist 
 the purposes of publicity. 
 
 Property Accounts. These in the Balance Sheet 
 are intended to be a statement of the actual invest- 
 ment in the property. The failure to meet this pur- 
 pose may arise from various causes. Reference has 
 already been made to the practice of a number of 
 American companies of charging the cost of a large 
 part of improvements and betterments directly to 
 Operating Expenses. Such charges increase the in- 
 vestment but leave no permanent record of the 
 property value thereby created. Consequently, 
 the increase is not shown in the General Balance 
 
THE GENERAL BALANCE SHEET 247 
 
 Sheet. On the other hand, many financially weak 
 roads neglect to charge losses in actual value of 
 property, whether through operations, through re- 
 construction or through obsolescence, against earn- 
 ings. The actual investment is thus correspondingly 
 reduced without a bookkeeping record thereof. 
 
 With reference to some of the standard railroads 
 such as the Pennsylvania and the Illinois Central, 
 it is sometimes possible by an analysis of the annual 
 reports over a series of years to determine, approxi- 
 mately, to what extent permanent improvements 
 were made from current earnings. No such ap- 
 proximation can be made, however, in the case of 
 railroad companies failing to enter losses due to 
 abandonment of property and to obsolesence. A 
 railroad, let us say, constructed a line over a moun- 
 tain because it was more economical at the outset 
 to haul the traffic over steep grades than to undergo 
 the heavy cost of cutting a tunnel. In the course 
 of time, because of the growth of traffic, the business 
 can no longer be handled over the mountain line, 
 and a tunnel is constructed. The entire cost of 
 this tunnel is added to the account. Cost of Road & 
 Equipment, without any deduction or allowance for 
 the cost of the original mountain section which is 
 abandoned. According to correct accounting theory 
 the cost of the displaced line — (assuming that it 
 was known several years in advance that it would 
 be displaced) — should have been gradually effaced 
 from the company's books by deductions from 
 Net Income or from Profit <&: Loss, In the absence of 
 
248 AMERICAN RAILROAD ECONOMICS 
 
 official regulation prior to 1908, no railroad was 
 required to follow this practice, though they are 
 now governed by strict regulations in these mat- 
 ters. 
 
 Aside from errors in accounting principles, the 
 property accounts frequently fail to correctly rep- 
 resent actual investment because of ''stock water- 
 ing." This phrase is too familiar to require detailed 
 explanation. Railroad reorganizations; the purchase 
 by one company of the property of another through 
 exchange of securities; the issue of stock bonuses 
 and the like, all have affected the book valuation of 
 railroad property without changing correspondingly 
 the "actual" money cost of the investment. The 
 resulting difficulties in measuring investment or 
 value led Congress early in 1913 to pass a law au- 
 thorizing governmental valuation of railroad physi- 
 cal property. Whether this will accomplish the 
 desired effect is a matter of much controversy and 
 does not call for comment in this work. 
 
 The important problem in the study of property 
 investment is the measurement of the ''Cost of Road 
 and Equipment ^ by some satisfactory standard unit. 
 Cost per mile of single track owned is frequently em- 
 ployed as the most acceptable unit. Great caution, 
 however, must be exercised in using this standard. 
 Differences not only in the physical qualities of the 
 railroad property itself but also in the cost of con- 
 struction (due to topographical and geological con- 
 ditions) may render comparisons on the per mile 
 basis absolutely worthless and even misleading. No 
 
THE GENERAL BALANCE SHEET 249 
 
 two miles of railroad cost exactly the same. Some 
 cost less than $18,000, others cost $500,000 or more. 
 Moreover, miles of yard tracks in some large ter- 
 minals where right of way is expensive cost more 
 than the average cost of the main track. 
 
 A fm*ther objection to the 'per mile valuation is 
 that "Cost of Road & Equipment" as between 
 different railroad companies (or in the same com- 
 pany at different periods of time) does not constitute 
 the same items or identical items similarly appor- 
 tioned. Some of the strong railroad companies own 
 their own terminals and dock facilities instead of 
 incorporating them separately or sharing the owner- 
 ship with other roads. The inclusion of these ter- 
 minals under ^^ Property Investment^', because of their 
 extremely high cost relative to other property, makes 
 a railroad appear to have a much larger per mile 
 investment in physical property than if these facili- 
 ties were leased or operated separately. The ab- 
 sence of itemization and of detailed classification 
 of railroad property in the General Balance Sheet 
 is thus a deterrent to correct analysis of relative 
 property cost. 
 
 Another difficulty of the same nature arises from 
 the intercorporate relations of railroad companies 
 whereby a large part of railroad mileage is not owned 
 and operated in fee simple, but through leasehold 
 and stock ownership. The value of the equity in 
 the controlled properties is not always accurately 
 represented under ''Securities of Proprietary, Affili- 
 ated or Controlled Companies." Yet in many cases 
 
250 AMERICAN RAILROAD ECONOMICS 
 
 the parent company combines the mileage of sub- 
 sidiaries with its own mileage, and when a General 
 Balance Sheet represents a "system report" the 
 property accounts of subsidiaries are rightly in- 
 corporated with the parent company's own prop- 
 erty held in fee simple. 
 
 Examples of statistical complexities due to rail- 
 road intercorporate relations are to be found in the 
 oflScial statements submitted to the Interstate Com- 
 merce Commission during the freight rate contro- 
 versy of 1910. Thus, the ''Cost of Road & Equip- 
 ment" as submitted by the Baltimore & Ohio Rail- 
 road for the years 1908 to 1910, inclusive, were: 
 
 Miles Owned— All Tracks i 
 
 1908 
 7,358.43 
 
 1909 
 7,3U-16 
 
 1910 
 8,215.19 
 
 Cost of Road and Equipment. . 
 — per mile of line owned .... 
 — per mile owned — all tracks 
 
 $396,018,427 
 100,337 
 
 52,818 
 
 $405,984,542 
 
 102,447 
 
 55,280 
 
 $281,153,035 
 64,881 
 34,224 
 
 It will be noticed that although the miles owned in 
 1910 were 871 miles greater than 1909, the cost of 
 road declined from $405,984,542 to $281,153,035, 
 representing a decrease per mile of track owned from 
 $55,280 to $34,224. The annual report of the com- 
 pany for 1910 offered no explanation of this startling 
 discrepancy. Inquiry revealed the cause as a change 
 in the "system report" of the company. Previous to 
 1910 the property accounts of the Baltimore & 
 Ohio's proprietary companies (companies owned en- 
 
 1 Includes mileage of proprietary companies. 
 
THE GENERAL BALANCE SHEET 251 
 
 tirely but operated under separate corporate or- 
 ganizations) were incorporated in the parent com- 
 pany's item ^^Cost of Road & Equipment In 1910, 
 however, they were excluded from this item and 
 placed under ^'Securities Owned."" Thus, to arrive at 
 actual cost of the Baltimore & Ohio property, on 
 which to base operating revenues of 1910, about 
 $185,000,000 book value of ''Securities Owned'' 
 should be added to the $281,000,000 representing 
 the reported book value of " Cost of Road & Equip- 
 ment.'' This makes the actual cost of road $466,- 
 236,743 on June 30, 1910, which compares properly 
 with the figures in the 1909 statement.^ 
 
 Securities Owned: The intricate corporate inter- 
 relationships of American railroad companies de- 
 mand a careful analysis of the items included under 
 "Securities Owned.'' As has been already pointed 
 out, the Interstate Commerce Commission distin- 
 guishes three classes of securities owned; (1) those 
 of subsidiary companies — pledged; (2) those issued 
 directly or assumed by the company and also pledged; 
 and (3) the securities of subsidiary companies held 
 unpledged. 
 
 (1) Under the first is included the book value of 
 pledged securities of proprietary, affiliated and con- 
 trolled companies "whose property is u^ed by or forms 
 
 ^ A similar apparent discrepancy was produced when the Union Pacific 
 in 1901 merged the accounts of the Oregon Short Line and the Oregon 
 Railroad and Navigation Company with its own. In this case an 
 increase of approximately $83,000,000 in the "Cost of Road and 
 Equipment" item was caused in order to properly readjust the ac- 
 counts. 
 
252 AMERICAN RAILROAD ECONOMICS 
 
 a "part of the railroad system of the respondent com- 
 pany,*^ These securities have been pledged as col- 
 lateral for some part of the parent company's funded 
 debt or other obligations. They may include stocks 
 and bonds of controlled railroad lines, of terminal, 
 bridge and ferry companies or of other concerns 
 forming a link in a general transportation system. 
 Since these securities are pledged under a deed of 
 trust they are not readily convertible into cash or 
 other assets, and cannot be used for purposes of 
 obtaining further credit. 
 
 (2) Under the second class are included the par 
 or face value of the respondent company's own 
 funded obligations or the obligations it has legally 
 assumed as a direct liability,^ which are pledged as 
 collateral for other indebtedness. Under the ruling 
 of the Interstate Commerce Commission, both the 
 par value of these pledged "treasury" securities 
 and the new obligations for which they are pledged 
 as security appear as liabilities in the General Balance 
 Sheet, There is thus an artificial inflation of both 
 assets and liabilities. 
 
 (3) As to the third class. Securities of Controlled 
 Companies — Unpledged, though these are technically 
 **free assets" since no deed of trust restricts their 
 sale, for all practical purposes they are as "fixed" 
 as the railroad's own physical property. Accordingly 
 these securities are not deemed "marketable." 
 They may be used, however, for purposes of obtain- 
 
 ^ Under this class are not included securities which have been endorsed 
 or the payment of which has been guaranteed. 
 
THE GENERAL BALANCE SHEET 253 
 
 ing additional credit and therefore may form the 
 basis of new capital obligations. 
 
 Ordinarily a corporation is said to be administered 
 and controlled by another company when the lat- 
 ter owns 51 per cent, of the class or classes of capi- 
 tal stock in which the voting power and the cor- 
 porate management is lodged. This constitutes 
 corporate control. However, among railroad com- 
 panies, particularly when control is held jointly 
 with other companies, this majority proportion of 
 stock ownership is not required. For, although the 
 relative equity in a subsidiary may represent only 
 a minority of the capital stock having voting power, 
 if this minority forms a part of a "joint control" 
 with other lines or is held for the purpose of obtaining 
 use of additional facilities or for promoting exchange 
 of traffic, the equity is to all intents and purposes a 
 "fixed" asset. 
 
 There is probably no better example of "joint 
 control" for the purpose of obtaining additional 
 facilities than that of the Terminal Railway Associa- 
 tion of St. Louis, declared a violation of the Sherman 
 Anti-Trust Law by the United States Supreme Court 
 in April, 1912. Nine railroads owned each a pro- 
 portionate share of the capital stock of this terminal 
 company. One of the regulations of the terminal 
 company was a requirement that no privileges should 
 be granted to any new railroad as long as any one 
 of the nine controlling roads should object. This 
 constituted a practical monopoly of the facilities, 
 inasmuch as it is out of the question for any new 
 
254 AMERICAN RAILROAD ECONOMICS 
 
 terminal to be constructed or access gained to St. 
 Louis, owing to the peculiar topography of the place. 
 In this instance, it is readily seen that, although 
 one-ninth ownership did not constitute administra- 
 tive control by any individual company, nevertheless, 
 it gave each company a valuable right to use a ter- 
 minal facility. Consequently, the stock of the St. 
 Louis Terminal Railway Association represents, in 
 each case, a part of the property investment of the 
 holding companies. 
 
 Miscellaneous Investments: With some classes of 
 American railroads, business operations other than 
 transportation have been a leading factor in their 
 financial progress. The ownership of large coal 
 mines, of steel mills and of oil and ore lands are but 
 a few of the large railroad undertakings. The Phila- 
 delphia & Reading Railroad was forced to submit to 
 at least three reorganizations in order to scale down 
 the heavy funded obligations caused by excessive 
 investments in unproductive coal lands. On the 
 other hand, the Northern Pacific, because of a divi- 
 dend received from the Northwestern Improvement 
 Company — one of its "mysterious" subsidiary con- 
 cerns — was enabled in 1908 to pay an extra cash 
 distribution of more than 11 per cent, to its share- 
 holders. Similarly, the Great Northern Railroad, in 
 order to divest itself of the swollen value in its ore 
 properties, in November, 1906, created the Great 
 Northern Ore Trust, distributing to each stock- 
 holder a proportionate share of participation cer- 
 tificates. Other instances of bankruptcy or of 
 
THE GENERAL BALANCE SHEET ^55 
 
 bonuses from the ownership of "outside" enter- 
 prises might be given. A diflScult problem is the 
 ascertainment of the real worth and profitableness 
 of these undertakings. Notwithstanding publicity 
 of railroad affairs, this information is not generally 
 obtainable from the annual reports of the companies 
 or from the official data of the Interstate Commerce 
 Commission. Certainly the values at which these 
 investments are carried in the General Balance Shed 
 do not necessarily correspond in any way with their 
 actual worth. The profit with which the railroad 
 company credits itself as coming from these sources 
 does not necessarily coincide with the actual earn- 
 ings of the properties. There is no law which pro- 
 vides for the publicity of the accounts of the non- 
 transportation corporations controlled by railroad 
 companies. It is discretionary with the railroad's 
 directors whether the facts and conditions in each 
 case shall be made known. The occasional suspicion 
 of "hidden assets," nurses from time to time a specu- 
 lative interest in certain railroad shares. Thus, it 
 seems very plausible that in view of the Northern 
 Pacific's "melon" to stockholders in November, 
 1908, from the Northwestern Improvement Com- 
 pany, another of the same kind is likely to come. 
 The Balance Sheet of the Northern Pacific, however, 
 reveals the book value (which is evidently the orig- 
 inal cost) of the Northwestern Improvement Com- 
 pany's stock as $7,000,000 (the par value). But a 
 concern which can pay a cash dividend of $17,453,000 
 is presumably of greater worth. The General Balance 
 
^56 AMERICAN RAILROAD ECONOMICS 
 
 Sheet does not necessarily reflect the real worth. 
 It contains merely the book values of the assets. 
 
 The Canadian Pacific Railway is another instance 
 where great importance is attached to "hidden" 
 assets in outside properties. It is contended that 
 the company's vast holdings in farm and townsite 
 lands, when analyzed, show an amazing accumula- 
 tion of wealth from which the shareholders will 
 profit in the future. In appraising the value of 
 Canadian Pacific's "hidden assets" the fact is 
 pointed out that the company is the largest indi- 
 vidual landowner on the face of the globe. More- 
 over, there is probably no landowner in the world 
 whose property is mounting so rapidly in value as 
 is the property of the Canadian Pacific Railway. 
 
 There is generally no way of telling whether the 
 profits received from miscellaneous investments as 
 shown in the Income Account or Profit & Loss state- 
 ments of the railroads represent in each case, even 
 approximately, the amounts actually earned. A 
 general feeling is prevalent in some quarters that 
 the directors of the Reading Company have been 
 persistently understating the earnings of its coal 
 properties. Yet, even after several reorganizations, 
 the accounts of the Reading Coal and Iron Company 
 have shown a very small return on the investment. 
 The existence of such uncertainties in large organiza- 
 tions whose affairs are so closely observed makes it 
 evident that the public judgment should be based only 
 on certified and readily confirmed facts or conditions 
 and not on suppositions and speculative rumors. 
 
THE GENERAL BALANCE SHEET 257 
 
 The movement toward the acquisition and opera- 
 tion of non-transportation enterprises by railroad 
 companies has been somewhat curtailed by the so- 
 called Commodities Clause of the Interstate Com- 
 merce Act, enacted June 29th, 1906. This clause 
 prohibits a railroad company from transporting over 
 its own hues commodities produced by it either 
 directly or through control of separately organized 
 corporations, unless such commodities are for its 
 own use. As a result of this prohibition, the Dela- 
 ware, Lackawanna & Western and the Lehigh Valley 
 Railroad each organized "coal sales companies" to 
 purchase the product of their respective coal mines. 
 Litigation is still pending in the case of some other 
 coal roads. 
 
 Another element besides the direct profits re- 
 ceived from outside enterprises enters into the es- 
 timation of their value. Most of the acquisitions of 
 this nature have been made largely or entirely with 
 the view of creating or maintaining railroad traffic. 
 Thus, Mr. F. B. Gowen, who as President of the 
 Philadelphia & Reading Railroad during the period 
 1869-1875 acquired the company's vast coal lands, 
 stated that his purpose was first to forestall the 
 building of rival coal roads and, secondly, to use 
 the coal traffic as a means of providing a west bound 
 tonnage by the aid of which the Reading could de- 
 velop into a "trunk line" and compete with the 
 Erie and the New York Central for ''through" 
 business. Accordingly, the aim was not to obtain 
 profit directly from coal mine operations. Similarly, 
 
^58 AMERICAN RAILROAD ECONOMICS 
 
 the Pennsylvania Railroad's ownership of the Cam- 
 bria Steel Company is apparently not with a view 
 to operating the plant for a profit, but rather as a 
 curb to the price exactions of steel companies for 
 materials. The intrinsic value of these investments 
 are not to be gauged exclusively by the amount of 
 their cash dividends. 
 
 Working Assets and Liabilities. The relative 
 amount and kind of the free "working" or "liquid" 
 assets {i. e., cash or cash substitutes) of a railroad 
 company require in many cases closer observation 
 and analysis than the property accounts. It is with 
 these assets that the railroad meets current business 
 needs and pays current expenses and obligations. 
 If they do not suffice for this purpose the company 
 must either borrow additional funds or acknowledge 
 insolvency. A receivership might result, therefore, 
 even when the value of the "fixed" assets are in 
 excess of its actual liabilities, or when the net earn- 
 ings are sufficient to cover interest on funded obliga- 
 tions. Liquid assets are a part of the necessary 
 working machinery of a railroad company. When 
 the amount on hand is depleted, it must be replen- 
 ished by borrowing or by reduction of wages or of 
 dividends. Wage cutting may lead to costly labor 
 difficulties. Dividend cutting may impair the com- 
 pany's credit, rendering impossible the securing of new 
 capital required for improvements and extensions. 
 As a rule, railroad transactions are conducted on 
 a "cash basis," (passengers and shippers generally 
 paying in advance or immediately after the services 
 
THE GENERAL BALANCE SHEET 259 
 
 are rendered). Need for working capital arises 
 mainly from the expenditures for upkeep, improve- 
 ments and extensions and not generally from trans- 
 portation operations. 
 
 Among the Working Assets are included the in- 
 ventories, (i. e.y materials and supplies) and the 
 marketable treasury securities. The items requiring 
 first consideration, however, are the Cash and the 
 Accounts Receivable, The size of the cash balance 
 together with other items readily convertible into 
 cash, when taken in relation to current requirements 
 and to the amount of construction work on hand, 
 may indicate roughly whether or not additional 
 financing through sale of securities is forthcoming. 
 The borrowing of additional funds has a direct in- 
 fluence (in some instances favorable, in others un- 
 favorable) on the market value of securities already 
 outstanding. The cash position of a railroad system, 
 therefore, is closely observed by railroad financiers. 
 
 A common method of determining the relative 
 adequacy of the "working assets'' is by contrasting 
 these items with the corresponding "working liabili- 
 ties'' on the opposite side of the General Balance 
 Sheet. This may be done in the following manner; 
 
 Working Assets: 
 
 Cash Balances $8,000,000 
 
 Accounts and Balances Receivable 13,000,000 
 
 Materials and Supplies 6,500.000 
 
 Total Working Assets $27,500,000 
 
 (Deduct) Working Liabilities: 10,500,000 
 
 Net Working Assets $17,000,000 
 
260 AMERICAN RAILROAD ECONOMICS 
 
 The result shown by the above computation has 
 no significance unless compared with that of the 
 years immediately preceding or contrasted with the 
 cash position of other railroad companies. All 
 changes and disparities in gross earnings, operating 
 conditions and immediate capital requirements are 
 to be taken into consideration. Tests of this char- 
 acter, though not final, frequently furnish a clue to 
 future financial developments. 
 
 Surplus. We come now to a consideration of the 
 Surplus items in the General Balance Sheet, These, 
 in the aggregate, form a foundation for credit. In 
 other words, they constitute a sort of guarantee fund 
 against disaster. At the same time, they are a re- 
 serve out of which improvements and extensions may 
 be made. 
 
 Attention has already been directed to the Amer- 
 ican railroad policy of improving the physical prop- 
 erty by appropriations from current income. This 
 has been accomplished in two ways. In the first 
 place, many improvements and betterments have 
 been charged to Operating Expenses as a part of 
 maintenance. Secondly, surplus earnings, instead 
 of being distributed in toto to shareholders, have 
 been partly applied to improvements and extensions 
 or to the general resources of the corporation. In 
 the decade ended June 30, 1910, the railroads, not- 
 withstanding heavier maintenance outlays and in- 
 creased fixed charges, accumulated an aggregate 
 surplus of $606,536,556. This, according to the 
 Interstate Commerce Commission's computation. 
 
THE GENERAL BALANCE SHEET 261 
 
 represents an increase of 312 per cent, of the surplus 
 of 1899, whereas, the mileage had increased only 
 36 per cent.^ 
 
 This accumulated Surplus of the American rail- 
 roads does not constitute cash or its equivalent. 
 It cannot be physically distributed as a bonus. Most 
 of it is expended for additional property and facili- 
 ties. Accordingly, even with a large Surplus in the 
 General Balance Sheet, a company may be financially 
 embarrassed because of insufficient cash assets to 
 meet current obligations. The recourse under these 
 circumstances is to borrow cash on the basis of the 
 accumulated Surplus. 
 
 The Surplus accounts of the railroads, do not 
 represent in all cases merely the aggregate net earn- 
 ings which the directors have chosen not to distrib- 
 ute among shareholders. As pointed out on page 244, 
 the term "Surplus," as used in accounting, means 
 simply the excess of the book value of the assets 
 over the liabilities. It is the item which makes an 
 equation of the two sides of the General Balance Sheet, 
 Hence, the Surplus, of which the Profit & Loss Ac- 
 count forms the **free" or unappropriated part, is 
 the result of adjustments made from year to year 
 on both the debit and credit sides. Some of these 
 adjustments have no reference whatever to current 
 income. Thus, profits from the sale of assets and 
 from other extraneous sources are regularly credited 
 to Profit & Loss. The item may also include premi- 
 
 ^See Report of the Commission, "In re Advances in Rates," etc. 
 No. 3500. p. 5378. 
 
262 AMERICAN RAILROAD ECONOMICS 
 
 urns realized from the sale of new stock or bonds. 
 We had an illustration of this in 1909 when the 
 "St. Paul" directors credited to the Surplus, through 
 the Profit & Loss Account, $1,532,336 received as 
 premiums on stock sold back in 1901 and 1902. 
 Similarly, in 1903 the Pennsylvania Railroad sold 
 $75,094,750 stock at 120. The premium received 
 represented over $15,000,000. The New York Cen- 
 tral, also, in 1902, disposed of stock amounting to 
 $17,250,000 which was put out at 125. In the same 
 way, the New York, New Haven & Hartford dis- 
 posed of $44,643,800 of stock at 125 and back in 
 1903-04 put out new shares as high as 175.^ 
 
 Furthermore, several leading companies have 
 created some large issues of "convertible" bonds. 
 The holders frequently exchange these bonds for 
 stock on such terms that the par value of the stock 
 given in exchange makes a very much smaller total 
 than the par value of the bonds taken up. The book- 
 keeping effect of such an operation is to diminish 
 the amount of the liabilities as represented by the 
 original par value of the bonds, and to swell the sum 
 total of the Profit & Loss balance to the extent of 
 the difference. The Pennsylvania created $50,000,000 
 of convertible 3j^s in 1902 and made another issue 
 of the same kind for $100,000,000 in 1905. The 
 first issue is convertible into stock on the basis of 
 140 for the shares and the second on the basis of 150; 
 $52,942,500 of the bonds had been converted up to 
 January 1, 1911, and were represented on the books 
 
 * "The Commercial and Financial Chronicle," vol. 92. p. 920. 
 
THE GENERAL BALANCE SHEET 263 
 
 by only $37,189,167 of stock. Thus, there was a 
 "paper" profit of, approximately, $15,000,000, 
 which had no connection whatever with surplus 
 earnings. To assume, therefore, that growth of 
 the Surplus account represents nothing but accu- 
 mulated earnings from operation is technically in- 
 correct. 
 
 On the other hand, the amount of the Surplus 
 is no accurate indication of the actual additions in 
 value to the railroad property beyond the invest- 
 ment represented by the par of the outstanding 
 capital securities. Among some companies, the 
 practice has prevailed of reducing Surplus from 
 time to time for the purpose of "writing off" as- 
 sets not essentially productive of income, or to 
 offset possible obsolescence. Thus, the Pennsyl- 
 vania Railroad deducted more than one-half the 
 cost of its New York terminal from accumulated 
 Surplus, The Pennsylvania Company also in 1909 
 reduced Surplus by $10,000,000 on account of New 
 York terminal construction though the property is 
 not a part of its corporate assets. 
 
 Reference has already been made to the theory 
 of railroad directors and financiers that a large 
 Surplus must be accumulated and shown in the 
 Balance Sheet in order to enhance railroad borrowing 
 power. In other words, each addition to Surplus 
 means greater underlying strength to the securities. 
 This is only true, however, when additions represent 
 actual increased value of assets. The theory as- 
 sumes that all expenses properly chargeable to 
 
264 AMERICAN RAILROAD ECONOMICS 
 
 operating revenues have been fully met and that 
 reserves or appropriations for obsolescence, actual 
 or probable displacement, and impairment in earn- 
 ing power of assets have been fully deducted. Other- 
 wise, the Surplus is a "paper surplus." 
 
 A large surplus fosters stock speculation because 
 of "melon-cutting." By this is meant a pro rata 
 distribution to shareholders, usually in additional 
 stock representing the whole or part of the accumu- 
 lated Surplus. Thus, the Lehigh Valley Railroad, 
 having built its property up largely through earn- 
 ings and through very conservative financing, and 
 having put the physical plant in excellent shape, 
 was ready in 1912 to make an adjustment with its 
 stockholders covering accumulated profits. The 
 adjustment took the form of an extra dividend of 
 10 per cent, to be applied to the purchase of new 
 shares of the company. While there was not the 
 slightest concealment of Lehigh's gradual accumula- 
 tion of profit and of the fact that at some time in 
 the not distant future stockholders would receive 
 stored up earnings which had previously been put 
 back into the property, the fact that the "melon" 
 was possible tended to give the Lehigh Valley shares 
 a speculative character. 
 
CHAPTER XII 
 
 RAILROAD CAPITALIZATION 
 
 Nature of Railroad Capitalization. In analyzing 
 railroad capitalization a distinction must be made 
 at the outset between Capital and Capitalization, 
 Capital is the amount of actual money or equivalent 
 value invested in the property. It comes both from 
 the issue of securities an^ffom surplus earnings. 
 Capitalization, however, represents the nominal 
 amount of securities outstanding, including funded 
 indebtedness. Surplus earnings turned back into 
 1Ee"property thus become a part of capital, but are 
 not correspondingly represented in capitalization. 
 Because of this distinction it is clearly evident that 
 capitalization even when paid in entirely at face 
 value does not represent the actual value of the prop- 
 erty. It does not indicate what it is worth, the 
 present or potential earning power, or the amount 
 of the annual charges against income. 
 
 Among most American railroads, capitalization, 
 {i. e., the aggregate face value of stocks, bonds and 
 other securities as stated in the General Balance 
 Sheet), is as much due to arbitrary adjustments, 
 necessitated by reorganizations, mergers and credit 
 conditions, as to the receipt of cash paid in by the 
 public. The regulation and control of railroad capi- 
 
 265 
 
266 AMERICAN RAILROAD ECONOMICS 
 
 talization by governmental authorities is of relatively 
 recent development in the United States. Until 
 within the last two decades, railroad companies, 
 with but few exceptions, were permitted to issue 
 shares and securities whenever and in whatever 
 manner they desired. The evils resulting from this 
 liberal policy have been sufficiently magnified.^ 
 Unlike many industrial concerns, railroads, as a 
 rule, have no sinking fund or other provisions for 
 the amortization and extinguishment of capital lia- 
 bilities. With but few exceptions, railroad stocks 
 and bonds are issued as permanent and perpetual 
 obligations. Bonds may mature on a fixed date, 
 but, with few and unimportant exceptions, their 
 refunding is necessary. Accordingly when injudicious 
 financing or mismanagement require capitalization 
 readjustment, it is accomplished only through re- 
 ceivership or reorganization. 
 
 The Pere Marquette Railroad furnishes an in- 
 stance of the absence of proper capital amortization 
 provisions. This railroad system was built orig- 
 inally through a timber region to afford transporta- 
 tion facilities to lumber camps and saw mills. The 
 mileage, therefore, was extended wherever timber 
 operations were large enough to furnish traffic. 
 Bonds were sold with which to build these lines. 
 After a time, however, the gradual exhaustion of 
 timber supplies caused the lumber industry to move 
 to other regions. The Pere Marquette was thus 
 deprived of its principal business. Unable to de- 
 
 ^ See "Report of the Railroad Securities Commission," 1911. 
 
RAILROAD CAPITALIZATION 267 
 
 velop new traffic, and compelled* to pay interest 
 charges on "dead" capital, the credit of the com- 
 pany became impaired. The failure to extinguish 
 the portion of Pere Marquette's capitalization repre- 
 senting unproductive property prevented the com- 
 pany from acquiring new funds with which to im- 
 prove its main lines. Handicapped by inadequate 
 physical facilities, it cannot compete for through 
 traffic with better equipped rivals. Moreover, it 
 must continue to operate branch lines which, though 
 originally profitable, have ceased to pay interest or 
 even working expenses. 
 
 There are many other instances of incautious 
 financing. The Toledo, St. Louis & Western Rail- 
 road, for example, issued bonds bearing a fixed in- 
 terest charge in order to acquire a majority of the 
 Chicago & Alton Railroad's capital stock. In 1907, 
 at the time these securities were exchanged, the 
 dividends on the Chicago & Alton's shares covered 
 the interest charges on the Toledo St. Louis & West- 
 ern bonds issued for their acquisition. The earnings 
 on the Chicago & Alton's lines have since declined, 
 however, resulting in discontinuance of dividends. 
 Consequently, Toledo, St. Louis & Western, as a 
 stockholder, has been deprived of income with which 
 to pay interest charges on the collateral bonds. Its 
 own margin of earnings above fixed charges were 
 barely sufficient to withstand this loss and all its 
 securities have depreciated in value. 
 
 The cases above cited are merely illustrative of 
 the caution required in sanctioning issues of railroad 
 
268 AMERICAN RAILROAD ECONOMICS 
 
 securities. Wise financial operations demand shrewd 
 judgment and close scrutiny. It is for this reason 
 that an accurate statement of the facts underlying 
 security issues is a matter of public concern. Pub- 
 licity is a requisite of modern investment finance. 
 The capital outlay of railroads is enormous in pro- 
 ' portion to the business done. This capital is spent 
 once for all on the supposition that a certain mini- 
 mum traffic will be moved at prescribed rates. These 
 rates cannot be changed arbitrarily. As pointed out 
 in Chapter III, though large traffic is necessary to 
 make possible low rates, low rates are necessary to 
 secure large traffic. A railroad, therefore, cannot 
 readily recover loss in revenues by increasing charges. 
 If an ordinary manufacturing or commercial business 
 gets into financial difficulties because of unwieldy 
 capitalization it may cease operations and be liqui- 
 dated. Not so with a railroad. When a railroad 
 company has exhausted its credit; is unable to raise 
 money for new extensions, and cannot afford to im- 
 prove f acihties or reduce rates, it is a lasting financial 
 burden. The enterprise, however, even though 
 poorly paying, continues. There is, therefore, a 
 clear public interest that railroad companies should 
 be strong financially. In order that they may be 
 strong, they must put aside from income the cost of 
 actual replacements of property. They must also 
 make ample provision for depreciation and for obso- 
 lescence of property. They must even provide for 
 the contingency that portions of the property may 
 cease to earn an investment return. Thus, the cost 
 
RAILROAD CAPITALIZATION 269 
 
 of a branch built to develop coal lands, estimated 
 to be worked out in twenty-five years, is properly a 
 charge against earnings in this period. The line may 
 continue to be operated even after the coal depletion 
 has occurred, though it has ceased to earn interest 
 on its cost or perhaps may not even earn direct 
 operating expense. 
 
 Gross Capitalization and Net Capitalization. The 
 principal stumbling block and the chief source of 
 statistical errors in the measurement of railroad 
 capitalization is the difficulty of clearly separating 
 the portion of outstanding capital securities repre- 
 senting investment in a company's own railroad 
 property from the portion covering the cost of in- 
 vestments in other companies or other enterprises. 
 Railroad capitalization statistics distinguish ^^net 
 capitalization" from '* gross capitalization," It is 
 manifestly erroneous to measure the total capitaliza- 
 tion of a modern railroad system on a per mile basis, 
 when a large part of this capitalization arises from 
 the acquisition of subsidiary railroads and of other 
 enterprises not a part of its own mileage. 
 
 Because of both the complex business activities 
 of American railroad companies and the incomplete- 
 ness of accounting data, the separation of the "out- 
 side" investments represented in railroad capitaliza- 
 tion is an extremely perplexing and difficult matter. 
 In the first place, duplication must be avoided by 
 deduction of inter-company holdings, i, e.^ the inter- 
 ownership of securities of railroads comprising a 
 system. When holdings have been acquired by 
 
270 AMERICAN RAILROAD ECONOMICS 
 
 giving in exchange the purchasing company's own 
 securities, net capitalization can be measured with 
 some degree of accuracy by deducting the par value 
 of the exchanged securities from the aggregate capi- 
 tahzation. Thus, the Atlantic Coast Line in 1902 
 acquired 51 per cent, of the Louisville & Nashville 
 stock, issuing therefor $35,000,000 collateral trust 
 bonds. The stock thus obtained, according to proper 
 accounting methods, is given a book value equal 
 to the par value of these bonds. Therefore, in de- 
 termining the net capitalization of the Atlantic Coast 
 Line, $35,000,000 in bonds is one of the items de- 
 ducted from the company's aggregate of capital 
 securities outstanding. Similarly, the $215,227,000 
 Chicago, Burlington & Quincy Collateral Trust 
 4 per cent. Bonds, issued in 1901 jointly by the 
 Great Northern and the Northern Pacific railroads, 
 forms no part of the net capitalization of either of these 
 systems, though each, in its respective General 
 Balance Sheet, places one-half of the entire issue 
 among outstanding capital securities. 
 
 The deduction from ''gross capitalization*' of 
 amounts representing ownership or equities in sub- 
 sidiary companies and other enterprises is frequently 
 not sufficient in order to determine the ''net capitali- 
 zation,** On page 252 it was pointed out that under 
 the Interstate Commerce Commission's ruling, securi- 
 ties issued or assumed and pledged as collateral for 
 outstanding securities, are to be included at par 
 value both among assets and liabilities. A company, 
 let us say, issues $10,000,000 of bonds. Instead of 
 
RAILROAD CAPITALIZATION 271 
 
 offering them for sale, it deposits them with a trustee 
 as collateral for a loan of $5,000,000 in the form of 
 three-year notes. In this way $15,000,000 is added 
 to the company's gross capitalization, because both 
 the $10,000,000 bonds and the $5,000,000 three-year 
 notes are placed among the outstanding capital 
 securities. The actual addition to the company's 
 resources, however, is but $5,000,000 represented 
 by the cash received from three-year notes. Ac- 
 cordingly, the net capitalization has increased but 
 $5,000,000. The $10,000,000 in par value of pledged, 
 but unsold, securities represents merely a contingent 
 liability. Only in the event of their sale either to 
 satisfy the claims of the note holders or to realize 
 additional capital funds do these securities actually 
 become a part of net capitalization. 
 
 A further adjustment, in many cases, may be re- 
 quired to correctly ascertain net capitalization. The 
 Interstate Commerce Commission's accounting regu- 
 lations place unsold and unpledged company securi- 
 ties among the working assets in the General Balance 
 Sheet and at the same time among the liabilities 
 under Capital Stock or Funded Debt It had formerly 
 been the practice of many railroads to exclude their 
 own unsold and unpledged securities from among 
 assets, thereby excluding them from the capital lia- 
 bilities. This is undoubtedly the proper method. 
 These unsold securities are neither a resource nor 
 an obligation. They are nothing more than paper. 
 To include them as a part of railroad capitalization, 
 is obviously an unwarranted inflation. 
 
9m AMERICAN RAILROAD ECONOMICS 
 
 l^et capitalization is commonly determined by 
 deducting the items under '^ Other Investments^^ and 
 also the par value of the companies own unsold 
 securities from the capital liabilities in the General 
 Balance Sheet. Applied to the Erie Railroad (June 30, 
 1911), the process is as follows: 
 
 Capital Stock Outstanding $176,271,300 
 
 Bonded and Secured Debt 237,766,159 
 
 Gross Capitalization $414,037,459 
 
 Less: Pledged Bonds included in above 14,160,000 
 
 $399,877,459 
 (Deduct) 
 
 Securities of other railroads, pledged $66,382,850 
 
 " " " unpledged 1,045,211 
 
 Other Investments 35,730.740 
 
 Total Investments in Other Properties $103,158,801 
 
 Net Capitalization $296,718,658 
 
 Since the investments of railroads other than in 
 their own corporate lines have not always been ac- 
 quired directly or wholly from the proceeds of the 
 sale or the exchange of securities, this method is 
 obviously not applicable in every case. As was 
 pointed out by the auditor of the Atchison system 
 in a rate investigation; "Subsidiary companies that 
 form a part of the regular company come to us and 
 there is no way of telling how much of these com- 
 panies is represented in our investment."^ Many 
 
 1 Evidence taken in the Proposed Advances of Freight Rates, Vol. X, 
 p. 5.419., note. 
 
RAILROAD CAPITALIZATION 273 
 
 of the large railroad systems have acquired outside 
 enterprises with accumulated surplus funds. The 
 Union Pacific furnishes a notable example. In a 
 case of this kind, if the Surplus accounts of the hold- 
 ing company are added to the '* gross capitalization" 
 (assuming that these items represent their equivalent 
 in money value) and from the sum is deducted the 
 aggregate book value of ^^ Other Investments,^^ the 
 resulting balance shows an approximately correct 
 amount of capital investment in the railroad property. \ 
 It does not show, however, true net capitalization as \ 
 measured by outstanding securities. Thus, it is evi- 
 dent that, v)ith the exception of instances where the 
 aggregate holdings in other corporations have been 
 directly acquired by additional issues of securities, 
 net capitalization under existing circumstances can- 
 not be accurately measured from the General Balance 
 Sheet. 
 
 Capitalization and Leased Mileage. A further dif- 
 ficulty presents itself in the correct measurement of 
 railroad capitalization. Erroneous computations of 
 relative capitalization are frequently made because 
 of neglect to consider leased and rented mileage. 
 Theoretically, a rental charge is as much a payment 
 for the use of capital as interest and dividends, and 
 a railroad company at times has the choice of pur- 
 chasing a company by selling securities, or operating 
 it under a lease or guarantee. But the terms under 
 which one railroad company operates the property 
 or uses the facilities of another frequently require 
 payments which are partly operating expenses and 
 
274 AMERICAN RAILROAD ECONOMICS 
 
 partly rentals. The Joint Facilities Accounts insti- 
 tuted by the Interstate Commerce Commission 
 were for the purpose of requiring the railroads to 
 allocate payments and receipts arising out of the 
 use of leased and joint faciHties accordingly as such 
 payments or receipts represent charges or credits to 
 operating expenses and charges or credits for the 
 use of capital. This provision with reference to 
 many railroad leases is practically impossible of 
 execution. Accordingly, a computation of capitaliza- 
 tion so as to include the rented and leased property, 
 cannot always be made by merely adding the out- 
 standing capitahzation of the leased line. 
 
 Another method of computing capitalization so ^ 
 as to include leased property is by capitalizing the 
 rentals at a fixed rate. This assumes that the rentals 
 are based on the current interest rate. Let us say 
 that the rate is 5 per cent. Then, in order to capi- 
 talize the leased property, total rentals are divided 
 by this current rate (5 per cent.), and the resulting 
 quotient is multiplied by 100. Thus, a company 
 paying an annual rental of $500,000 for leased lines 
 should have $10,000,000 added to the capitalization 
 represented by its own outstanding securities. This 
 is, at best, an artificial adjustment. Lines which 
 are built by railroad companies ostensibly as sepa- 
 rate undertakings, but primarily for the purpose of 
 operation through leasehold, are in many cases ar- 
 bitrarily capitalized, whereas, leased lines which 
 were previously independent competitors or which 
 are operated as "feeders" may bring a rental either 
 
RAILROAD CAPITALIZATION 
 
 275 
 
 greatly above or below that warranted by earnings 
 or by the current interest rate. 
 
 Errors in Capitalization Statistics. An illustration 
 of the perplexities in measuring capitalization was 
 furnished during the Railroad Rate Investigation 
 of 1910. In the course of the proceedings an at- 
 tempt was made to compare the capitalization of 
 the New York Central and the Pennsylvania Rail- 
 roads. The tables compiled by the Interstate Com- 
 merce Commission made it appear that the New 
 York Central was capitalized at $609,974 and the 
 Pennsylvania at $332,492 per road-mile owned. The 
 capitalization of neither, intelligently computed, is 
 anything like the amounts assigned, not even the 
 gross capitalization which includes the value of stocks 
 and bonds owned by the respective companies. 
 Both the New York Central and the Pennsylvania 
 operate a considerable mileage of leased lines. The 
 proportion of owned to the total operated mileage 
 in these two systems in 1910 was as follows: 
 
 Miles of Road Owned. . 
 Miles of Road Operated. 
 
 New York Central 
 
 805 
 3.782 
 
 Pennsylvania 
 
 2,123 
 3.947 
 
 The owned mileage is practically all main line and 
 terminals, on which the capitalization is necessarily 
 high. Fin- ther more, each parent company has issued 
 many millions of its own securities to furnish im- 
 provements, equipment and working cash for its 
 entire system, owned and leased lines alike. The 
 
^76 AMERICAN RAILROAD ECONOMICS 
 
 capitalization per mile on which the Commission 
 evidently relied was obtained by dividing the entire 
 capitalization of each parent company by the miles 
 of road owned, regardless of the fact that in each 
 case parent company's capital obligations had been 
 issued to supply the leased as well as the owned mile- 
 age with improvements and equipment; regardless 
 also of the fact that each company's capitalization 
 included obligations issued to acquire securities on an 
 enormous mileage of connecting and competing lines. 
 
 Probably no better instance of errors in the use 
 of per mile capitalization statistics can be pointed 
 out than that contained in the Opinion of the Inter- 
 terstate Commerce Commission in the Western Rate 
 Advance Case, reported February 22, 1911. In the 
 text of this decision the capitalization per mile of 
 road of the Atchison system is stated as $84,000. 
 This amount was obtained by dividing the total 
 capitahzation of the Atchison "System" by the 
 mileage of the Atchison, Topeka & Santa F^ "Rail- 
 road" proper. It is, therefore, entirely misleading. 
 The system mileage of the Atchison, on June 30, 
 1910, was 10,406 miles against 6,837 miles for the 
 company. Based on system mileage, Atchison's capi- 
 talization is nearer $56,000 per mile than $84,000. ^ 
 
 Relative Interest Burden. In a correct estimate 
 of capitalization it is of fundamental importance to 
 
 * Commissioner Lane, who wrote the opinion, tactfully acknowledged 
 the error in a note added to a subsequent printing of the text. See 
 "Evidence in the Proposed Advances in Freight Rates," Vol. X, p. 5319» 
 note. 
 
RAILROAD CAPITALIZATION 277 
 
 clearly indicate the interest or dividend rate attached 
 to railway security issues. If all railroad companies 
 had the same proportion of each class and kind of 
 securities outstanding, with correspondingly uni- 
 form interest and dividend rates, the measurement 
 of relative capitalization on the basis of the par value 
 of outstanding securities would be a simple matter. 
 The absolute diversity in this respect, however, 
 renders any study or comparison of railroad capitali- 
 zation based on general compilations utterly nuga- 
 ^ry and of mere academic interest. It requires 
 very little analysis to demonstrate that a railroad 
 having $60,000,000 of irredeemable preferred stock 
 outstanding on which it pays the full dividend of 
 5 per cent, is no better off in respect to this item of 
 capitalization than a company which has $75,000,000 
 of preferred stock on which it is required to pay only 
 4 per cent. Moreover, a railroad company which 
 issues 5 per cent. 30-year bonds at par for $50,000,000 
 cash instead of issuing for the same cash sum 
 $55,000,000 4 per cent, bonds of the same maturity 
 may be justly accused of poor financial management. 
 In the case of the 5 per cent, bonds the annual in- 
 terest is $2,500,000. The charge on the 4 per cent, 
 issue, including discount amortization, is less than 
 $2,367,000. 
 
 The sale of railroad bonds or other obligations at 
 less than the face value does not always indicate 
 poor credit. Successful railroad financiers by closely 
 studying investment conditions try to ascertain by 
 what method capital may be acquired at the lowest 
 
278 AMERICAN RAILROAD ECONOMICS 
 
 net cost. If this can be done by issuing at a discount 
 bonds bearing a low interest rate it is good financial 
 policy to offer these for sale instead of bonds bearing 
 a higher rate. Investors are frequently satisfied 
 with a smaller net return from a security to which a 
 progressive enhancement of value is attached as 
 the date of maturity approaches. The richest rail- 
 road companies, therefore, do not hesitate to sell 
 33^ per cent, and 4 per cent, bonds at a discount, 
 though by issuing 4J/^ per cent, and 5 per cent, 
 obligations they might obtain a premium. It is 
 undoubtedly for the best interests of the corporation 
 to sell securities at a rate which furnishes capital 
 at the lowest cost. Of this important factor in sound 
 financial policy, the capitalization statistics com- 
 monly used give no clue whatever. It is the relative 
 burden of the annual charge for the use of capital which 
 is a better index to comparative capitalization than the 
 nominal amount of outstanding securities. 
 
 The Kansas City Southern, for example, ha^ a 
 capitalization per mile of line owned of about $119,000 
 which is higher than that of the St. Louis & South- 
 western ($70,406) and the Missouri Kansas & Texas 
 ($65,000), or any other railroad system in the same 
 territory. However, of the $47,488,000 of Kansas 
 City Southern funded debt, $30,000,000 consists of 
 3 per cent, first mortgage bonds. This large propor- 
 tion of low interest-bearing debt combined with a 
 large ratio of capital stock (51 per cent.) to total 
 capitalization offsets considerably the disadvantage 
 pf high "per mile^' capitalization. A comparison of 
 
RAILROAD CAPITALIZATION ^79 
 
 the fixed charges of Mississippi Valley railroad sys- 
 tems reveals that the burden of the Kansas City 
 Southern in the fiscal year 1912 was but $2,159 per 
 mile operated, against $2,761 borne by the St. Louis 
 & Southwestern and $1,822 by the Missouri, Kansas 
 & Texas. There is thus no abnormal capitalization 
 burden on the Kansas City Southern. This is further 
 indicated from the fact that its net income for several 
 years has been suflScient to meet all interest charges 
 and to permit, in addition, a maximum dividend 
 distribution of 4 per cent, on $21,000,000 preferred 
 stock. There has been, besides, a surplus available 
 for general improvements and betterments. 
 
 Style of Capitalization. From an investment 
 standpoint, the relative proportions of the various 
 classes of securities is of far greater import than ag- 
 gregate amount of capitalization. When a railroad 
 system is earning a good return on all classes of its 
 outstanding securities, it is largely a question of 
 financial policy whether bonds or whether capital 
 stock shall be sold to acquire additional capital. 
 Companies that are unable to distribute dividends to 
 shareholders, however, cannot readily issue new 
 capital stock for the reason that people will not 
 buy it, except at much below the face value. Accord- 
 ingly, the only recourse of these companies in pro- 
 viding new capital through issue of securities is to 
 sell obligations bearing a fixed interest charge. This 
 enlarges the ratio of funded debt to the total capital- 
 ization. It also means an immutable burden on 
 current earnings. 
 
280 AMERICAN RAILROAD ECONOMICS 
 
 The consequence of inability to sell additional 
 capital stock is clearly shown in the capitalization 
 changes of the Erie Railroad as compared with those 
 of the New York Central during the period 1901 to 
 1910, inclusive: ^ 
 
 
 Erie 
 
 % 
 
 New York Central 
 
 % 
 
 
 1901 
 
 1910 
 
 1901 
 
 1910 
 
 i**t 
 
 Capital 
 Stock 
 
 Funded 
 Debt 
 
 $176,271,300 
 169,862,815 
 
 $176,271,300 
 225,997,748 
 
 0.0 
 33.2 
 16.2 
 
 $116,000,000 
 193,772,941 
 
 $222,729,300 
 268,592,427 
 
 92.0 
 38.5 
 
 Total 
 
 $346,134,115 
 
 $402,269,048 
 
 $308,772,941 
 
 $491,321,727 
 
 59.1 
 
 It will be noticed that during the last decade the 
 outstanding stock of the Erie Railroad has remained 
 stationary. The capital stock of the New York 
 Central during the ten year period, however, almost 
 doubled. Hence, the total increase in Erie's capi- 
 talization was in fixed interest-bearing obligations, 
 whereas, less than 41 per cent, of New York Central's 
 capitalization increase is thus represented. Because 
 Erie's shares sell much below par, the company in 
 order to obtain new capital is forced to increase its 
 funded debt. This method of financing tends to 
 burden a company with fixed interest charges. 
 
 There is another side to the shield, however. New 
 financing, through the sale of capital stock on which 
 
 ^ Interstate Commerce Conmiission computations. 
 
RAILROAD CAPITALIZATION 281 
 
 a relatively high dividend rate is paid, entails a 
 heavier distribution from earnings than the same 
 amount of interest-bearing obligations. In other 
 words, the new capital is obtained at a higher cost 
 than through sale of bonds. This has been the ex- 
 perience of the Chicago, Milwaukee, & St. Paul in 
 the financing of its Pacific Coast extension. The 
 New York Central, the Pennsylvania and the Il- 
 linois Central also have caused material disadvantage 
 to shareholders that may come from acquiring new 
 capital mainly through the sale of dividend paying 
 capital stock. The financial disadvantage remains 
 only as long as the prevailing dividend rate exceeds 
 the net rate on new funded debt. 
 
 Trend of Railroad Capitalization. The record of 
 railroad financing in the years 1900 to 1913 seems to 
 indicate that bonded indebtedness is growing at a 
 much faster rate than capital stock. The continua- 
 tion of this trend, however, is not certain. The 
 history of American railroad finance shows that first 
 one and then the other of the two groups of securities 
 excels in popularity. This is because of varying 
 money market and investment conditions. 
 
 Increase of bonds rather than stock has been 
 assisted at different times through the issue of 
 convertible bonds. Thus, the Atchison has issued 
 up to July 1, 1912, a total of $147,711,000 conver- 
 tible bonds, of which $74,328,000 had been con- 
 verted at the option of holders into common stock. 
 The Norfolk & Western's financing by means of 
 convertible bonds is another good illustration 
 
282 AMERICAN RAILROAD ECONOMICS 
 
 of successful financing of this kind. At the end of 
 the 1912 fiscal year $19,653,000 of a total issue of 
 $25,569,000 of 4 per cent, bonds of the Norfolk & 
 Western, dated June 1, 1907, were converted into 
 stock, reducing the fixed charges by $786,120. It 
 should be noted that this method of securing money 
 cheaply and of reducing future fixed charges later 
 is dependent on ability to earn a substantial divi- 
 dend on capital stock. In other words, the net 
 dividend return on the stock must be a good margin 
 above the interest rate attached to the bond in order 
 that conversion may take place. 
 
 A great deal of criticism has been recently directed 
 against railroads selling additional capital stock to 
 shareholders at less than prevailing market prices. 
 In fact, this practice has been condemned as a species 
 of stock "watering." A little reflection as to the 
 exigencies of railroad finance and the factors deter- 
 mining market value should soon dispel these objec- 
 tions. In the first place it can be readily demon- 
 strated that market prices of securities do not always 
 form a reliable guide of value. These are the prices 
 usually of but limited amounts. It is well known to 
 experienced financiers that such prices cannot be 
 maintained if a new issue is placed on the market. 
 Secondly, the market price of railroad stock, to which 
 there is attached the probability of a valuable "sub- 
 scription" right is enhanced by reason of this condi- 
 tion. This enhancement in value begins and usually 
 culminates before the subscription privilege has 
 been received. When the profit of the subscription 
 
RAILROAD CAPITALIZATION 283 
 
 right has been taken away, the market value of the 
 shares correspondingly declines. Moreover, the an- 
 nouncement of an issue of new stock in appreciable 
 amounts, when the old shares are selling at a slight 
 margin above par, frequently causes a substantial 
 decline in the market value of the outstanding 
 shares. Railroad financial experience clearly demon- 
 strates that a stock must sell considerably above par 
 value when shareholders are willing to subscribe 
 for new issues at a premium. The Pennsylvania 
 Railroad Company, for instance, in 1903 offered 
 $75,000,000 new stock to its shareholders at 120 
 when the market price was above 140. The share- 
 holders did not fully subscribe for the new stock so 
 a syndicate of bankers were employed to under- 
 write the new shares. In the meantime, Pennsyl- 
 vania shares actually fell to 110^. In this case it is 
 plain that the difference between the market price 
 and the subscription price was not sufficient to give 
 shareholders a profit. The new stock certainly 
 could not have been sold immediately on the open 
 market at 120. There were not enough buyers will- 
 ing to pay this price. 
 
 In view of the influence of capitalization changes 
 on railroad credit, the importance of studying rail- 
 road capital requirements cannot be magnified un- 
 duly. Because of extensions and improvements due 
 to heavier traffic, to increasing competition and to 
 public demands for efficient transportation service, 
 additional capital expenditures of American rail- 
 roads are continuous. Both Mr. E. H. Harriman 
 
284 AMERICAN RAILROAD ECONOMICS 
 
 and Mr. J. J. Hill, two of the best informed railroad 
 magnates of their time, repeatedly called attention 
 to the heavy demands for funds necessary to en- 
 able the railroads to handle properly the constantly 
 expanding traffic. A growing enterprise has constant 
 need of money. The greater part of the new capital 
 must be obtained from private investors. These, 
 naturally, place their funds where the prospects for 
 returns are fair and reasonably assured. They will 
 put their money into railroads, therefore, only as 
 long as the investment returns in railroad properties 
 are as good and as well secured as in other enter- 
 prises. This competition of outside securities is an 
 element in the cost of capital to the railroads. It 
 must be successfully met if transportation systems 
 are to continue developing and expanding. 
 
 The estimated future capital requirements of the 
 New York Central System may be taken as illus- 
 trative of the constant railroad demands for addi- 
 tional funds for improvements and extensions. On 
 the New York Central Lines it is conservatively 
 estimated, on the assumption of a normal growth 
 of business, that the additional capital expendi- 
 tures for the next ten years will aggregate $50,000,000 
 per annum. Many of the improvements contem- 
 plated are matters of public importance. For in- 
 stance, the freight terminals in the streets on the 
 West Side of New York city must be modernized 
 and the grade crossings eliminated, involving an 
 investment of probably $45,000,000. New terminals 
 p-re needed at IJtica^ Rochester, Buffalo, Cleveland, 
 
RAILROAD CAPITALIZATION 285 
 
 Cincinnati, Indianapolis and Detroit; four tracks are 
 required on the Hudson division of the New York 
 Central road and double tracks on many parts of 
 the Big Four, Lake Shore, and Michigan Central 
 lines; ehmination of grade crossings in Syracuse, 
 Rochester, Buffalo, Cleveland, Dunkirk and other 
 places must likewise be provided. These are all 
 improvements for facilitating the transportation 
 service. The money used for the purpose must be 
 furnished in large part by the investing public. 
 
 New capital expenditures such as those contem- 
 plated by the New York Central undoubtedly tend 
 to increase or to maintain earning power. The 
 resulting additional income, however, may not, in 
 some cases, offset the cost of acquiring the new capi- 
 tal. The purpose of new capital expenditure in each 
 instance gives only a partial indication of its profit- 
 ableness. One railroad may borrow heavily and 
 enlarge its capitalization without augmenting earn- 
 ing power proportionately. On the other hand, a 
 rival system, which does not apply new capital to 
 develop aggressively, is pretty certain to suffer a 
 decline in the net return on its investment. The 
 latter fails to keep up with the improvements taking 
 place around it. Its inferior transportation service 
 diverts traffic to competitors. This loss of business, 
 unless recovered in time, is the first step to receiver- 
 ship and reorganization. 
 
INDEX 
 
 Abandonment of Property, 182- 
 183, 235. 
 
 Accounting — Fundamental Prin- 
 ciples, 169-171. 
 
 Accounts (See Interstate Com- 
 merce Commission, Railroads, 
 etc.). 
 
 Acworth, W. M.— quoted, 3, 180. 
 
 Additions and Betterments, classi- 
 fication, 177-180; necessity for, 
 283-285. 
 
 "AflSliated" Companies, defined, 
 54. 
 
 American Railroads (See also 
 Railroads), Contrasted with 
 European, 97-98; physical im- 
 provement of, 16; financiering 
 policy, 235. 
 
 American Railway Association, 
 rail statistics, 114, n.; car- 
 performance statistics, 157. 
 
 Anthracite Systems, 64. 
 
 Assets, accounts, 242; "fixed," 242; 
 "hidden," 255-256; "working" 
 or "current," 258-260. 
 
 Atchison, Topeka & Santa Fe R. 
 R. System, 79; reduction of 
 grades, 105; diversification of 
 tralEc, 144; convertible bond 
 issues, 280. 
 
 Atlantic Coast lone; issue of col- 
 
 lateral trust bonds, 37; system 
 described, 66-67; locomotive 
 maintenance costs, 203; car 
 maintenance costs, 204; dividend 
 policy, 232. 
 
 B 
 
 Balance Sheet (General): general 
 survey of, 241; classification of 
 items, 243-246. 
 
 Ballast, 115-116; factors influenc- 
 ing kind used, 116; depth of, 
 116-117. 
 
 Baltimore & Ohio Railroad: orig- 
 inal purpose of construction, 44; 
 joint control of Reading Com- 
 pany, 53; location of lines, 63; 
 comparative operating ratios, 
 216; comparative cost of road 
 and equipment, 251. 
 
 Betterments (See Additions & 
 Betterments). 
 
 Bonds: classification, 32; mort- 
 gage, 32-36; collateral trust, 36- 
 37; convertible, 38-40; plain, 
 40; income, 40; discounts and 
 premiums on, in the accounts, 
 181; increase in amount of, 281. 
 
 Bonuses to Stockholders, 30, 254- 
 255, 264, 282. 
 
 Bridges: injBiuence of, on economic 
 
 287 
 
288 
 
 INDEX 
 
 operations, 118; growth in capac- 
 ity. 119. 
 
 California Citrus Fruit Rate 
 Cases, 14. 
 
 Canadian Pacific System: in the 
 United States, 77-79; hidden 
 assets; capital, charges to, de- 
 fined, 171-172. 
 
 Capital (railroad), 265; (See also 
 Investment, Expenditure, etc.), 
 265; Capital stock, nature of, 
 17-21; voting privileges, 19; 
 classes, 22; preferred, 22-28; 
 common, 28. 
 
 Capitalization Railroad (Chapter 
 XII), defined. 17, 265; per- 
 manent nature of, 266; gross 
 and net capitalization, 269; 
 measurement of, from the gen- 
 eral balance sheet, 270-273; 
 effect of leased mileage, 273- 
 £75; errors in statistics of, 275- 
 276; style of capitalization, 279; 
 effect of varying rates of inter- 
 est, etc., 276-279; trend of, 281- 
 283; importance of studying 
 changes in, 282. 
 
 Cars: growth in size and capacity, 
 129-131; tendency toward steel 
 construction, 131-132; influence 
 of "dead weight" on size, 132- 
 133; standardization of parts, 
 133; **car shortages" and car 
 performance, 133-134. 
 
 Car Load, 158. 
 
 Car movement, empty, 143. 
 
 Car-MUe, 155, 160, 
 
 Car Performance (See Car-Mile). 
 
 Car rentals, 134. 
 
 Car Shortages, 157. 
 
 Charge, Margin of (See Rates). 
 
 Chesapeake & Ohio R. R. : location 
 of lines, 53; grades, 104. 
 
 Chicago & Alton R. R.: location of 
 lines, 72; majority stock ac- 
 quired, 267. 
 
 Chicago & North Western R. R.: 
 location of lines, 76; participat- 
 ing preferred stock, 25; profit & 
 loss statement analysed, 238- 
 240. 
 
 Chicago, Burlington & Quincy R. 
 R.: control by Great Northern 
 and Northern Pacific railroads, 
 49, 73; location of lines, 77; 
 train-mile and ton-mile statis- 
 tics, 153. 
 
 Chicago, Milwaukee & St. Paul 
 R. R.: participating preferred 
 stock, 25; location of lines; Pa- 
 cific Coast extension; dividend 
 deducted from Profit and Loss. 
 
 Chicago, Rock Island & Pacific R. 
 R. (See Rock Island Co.). 
 
 Cincinnati, Hamilton & Dayton 
 R. R., 63. 
 
 Clark, Prof. John M., quoted, 4. 
 
 Cole, Prof. Wm. M., quoted. 
 170. 
 
 Collateral Trust Bonds, 36-37. 
 
 Colorado & Southern R. R., 77. 
 
 Competition, Sectional and Rate 
 Adjustments, 10-12. 
 
 Construction (Railroad): econom- 
 ics of, (Chapter III), cost es- 
 timates, 93-95; fundamental 
 economic principle, 96-97; il- 
 
INDEX 
 
 lustrations of high cost, 99- 
 106. / 
 
 Control, Joint, 253. ^ 
 
 Convertible Bonds, 38-39. 
 
 Costs (See Expenses). 
 
 "Cost-of-Road," 243. 
 
 Credit. Railroad, 51, 233 (See also 
 Surplus). 
 
 Current Assets, 258-260. 
 
 Current Indebtedness, 30. 
 
 Curves, Effect on economic opera- 
 tion, 106. 
 
 Debenture Bonds, 40-41. 
 
 Deed of Trust, 33. 
 
 Deferred Credit Items, 245. 
 
 Deferred Debit Items, 242. 
 
 Delaware & Eastern R, R., Pro- 
 spectus of (extract), 89. 
 
 Delaware & Hudson Co., 64. 
 
 Delaware, Lackawanna & West- 
 ern R, R., "cut off," 156; loca- 
 tion of lines, 64. 
 
 Demurrage Regulations, 156. 
 
 Denver & Rio Grande R. R. : loca- 
 tion of lines, 80-81; narrow 
 gauge track, 107, crediting ac- 
 crued income, 224. 
 
 Depreciation in R. R. Accounts, 
 176-177, 243. 
 
 "Diminishing Returns" (See Re- 
 turns). 
 
 Direction of Traffic, 104. 
 
 Distance: as an element in eco- 
 nomic operation, 103. 
 
 Dividends, 30. 
 
 Dividends, Stock (See Bonuses). 
 
 Docks, 123. 
 
 E 
 
 Earnings, Gross (See Receipts Op- 
 erating). 
 
 Earnings, Net (See Revenue^ Net 
 Operating). 
 
 Earnings, surplus (See also Net 
 Corporate Income), Analysis of, 
 in New York Central system, 
 222-223. 
 
 Eastern Trunk Lines, 59-69. 
 
 Economy in Operations: statistics 
 for measuring (See Efficiency); 
 • economy in use of fuel, 211. 
 
 Economics of Railroad Construc- 
 tion, Chapter III, 85-101. 
 
 Economic Conditions: changes in 
 and rates, 15-16. 
 
 Efficiency in Operations, statistics 
 for measuring, 149-160. 
 
 Efficiency in Equipment Main- 
 tenance, 201 et seq. 
 
 Efficiency Index: transportation 
 costs as, 209. 
 
 Equipment, Railroad Rolling (See 
 also Locomotives and Cars), 
 Chapter VI: adequacy of, 124; 
 proper amount for economical 
 operation, 128; maintenance 
 costs, units for measuring, 201- 
 208. 
 
 Equipment Trust Certificate, 43. 
 
 Erie Railroad: conservative divi- 
 dend policy, 24; voting privilege 
 of bonds, 32; purpose of con- 
 struction, 44; location of lines, 
 62; reduction of grades, 106; 
 improvement in track facilities, 
 110; Bergen Hill tunnel, 120; 
 improvement in operating effi- 
 
^90 
 
 INDEX 
 
 ciency, 153; locomotive fuel 
 costs, 211; growth in bonded in- 
 debtedness, 280. 
 
 Expenses, Operating: importance 
 of, in gauging efficiency and 
 financial progress, 195; nature 
 of, 195-196; classification, 196- 
 197. 
 
 Expenses, Conducting Transporta- 
 tion, 209-213. 
 
 Expenses, Maintenance (See Main- 
 tenance). 
 
 Expenditures, Capital (See also 
 Additions and Betterments, 
 Capital, Construction Costs, 
 etc.), 283-285. 
 
 "Feeders," 60-228. 
 
 Financial Data, classification of, 
 169-172. 
 
 Fixed Assets (See Property Ac- 
 counts). 
 
 Fixed Charges, 225-226. 
 
 Freight (See also Rates, Traffic, 
 etc.), predominance of freight 
 business, 135-136; carload and 
 less than carload freight, 140; 
 diversified tonnage, 141. 
 
 Fuel Costs, Locomotive, 211-213. 
 
 Funded Indebtedness (See also 
 Bonds, Notes, etc.), 31-32. 
 
 Gould Group of Railroads, 49- 
 
 50. 
 Grades, Influence on Economic 
 
 Operation, 103-106; their con- 
 stant reduction, 105. 
 Great Northern Railway Com- 
 pany: its preferred stock, 29; 
 joint control of Burlington, 73; 
 location of lines, 75; distribution 
 of ore trust certificates, 254. 
 
 Harriman, E. H., 21, 73, 283; 
 Harriman lines (See also South- 
 ern Pacific R. R. and Union 
 Pacific R. R.), 50. 
 
 Haul: average length of, 146-149; 
 method of computing, 146; 
 limited statistical value of, 147- 
 148; advantages of "long haul," 
 148. 
 
 Hawley, E. H., Group of Rail- 
 roads, 49-50. 
 
 Hepburn Act, 7. 
 
 Hill, James J., 284; group of rail- 
 roads, 49-50. 
 
 Hocking Valley R. R.: preferred 
 stock redeemed, 25; controlled 
 by Chesapeake & Ohio, 64. 
 
 Holding Companies, 53-55. 
 
 I 
 
 Illinois Central Railroad: contest 
 for administrative control, 21; 
 location of lines, 68-69; owns 
 stock of Yazoo & Mississippi 
 Valley R. R., 229; fraud in re- 
 pair shops, 207-208. 
 
 Improvements, and Increased 
 Earning Capacity, 179-180, 
 
INDEX 
 
 291 
 
 283-285 (See also Additions and 
 Betterments). 
 
 Income Account (Chapter IX), 
 169; definition, 186; prescribed 
 form of, 186-190. 
 
 Income, charges to, 170, 178. 
 
 Income, Operating (See also Rev- 
 enues), 190 et seq., 221. 
 
 Income, Net, and its Distribution 
 (Chapter X), 221-234. 
 
 Income, Corporate, Deductions 
 from, 225-229; net corporate, 
 229 et seq. 
 
 Interstate Commerce Commission, 
 creation of, 6; progress of rate 
 control, 6-8; rate decisions (See 
 Spokane Case, Shreveport Case, 
 California Citrus Cases, etc.). 
 
 Interstate Commerce Commission, 
 System of Railroad Accounts 
 (Chapter VIII), 169-186; under- 
 lying motives, 172-173; princi- 
 pal accounting regulations, 173- 
 184. 
 
 Investments: in other railroads, 
 52, 222 et seq.; classification of, 
 in the General Balance Sheet, 
 243-244, 251-253; miscellan- 
 eous, 254-258. 
 
 Iowa Central Railroad (See Min- 
 neapolis & St. Louis R. R.). 
 
 Joint Administrative Control, 253. 
 Joint Facilities Accounts, 175-176. 
 
 Kansas City Southern Railway 
 Company, location of lines, 71; 
 
 traffic agreement with Southern 
 Pacific and Union Pacific Sys- 
 tems, 83; suit against Interstate 
 Commerce Conunission, 184. 
 
 Leased Lines, and System Expan- 
 sion, 55-56. 
 
 Leased Mileage, and Capitaliza- 
 tion, 273-275. 
 
 Lehigh Valley Railroad: location 
 of lines, 64; stock bonus, 264. 
 
 Liabilities, classification, 244-245; 
 "Working," 258-260. 
 
 Local Lines: defined, 45. 
 
 "Long and Short Haul" Rates, 
 12-14. 
 
 Locomotives: growth in size and 
 capacity, 124-125; tractive 
 power unit, 126-127; types de- 
 termined by traffic, 127-128; 
 "rating," 128; contrivances for 
 promoting efficiency, 129; fuel 
 costs, 211-212. 
 
 Louisville & Nashville R. R. : con- 
 trol by Atlantic Coast Line, 37; 
 location of lines, 69. 
 
 M 
 
 McCrea, Samuel, quoted, 233. 
 
 Maintenance Accounts, 176-177. 
 
 Maintenance of Way: measure- 
 ment of, 197-201. 
 
 Maintenance: of equipment, 201- 
 208. 
 
 "Melon Cutting" (See also Bon- 
 uses), 28-29, 264. 
 
 Middle Western Railroad Systems 
 in the North, 72-73. 
 
29^ 
 
 INDEX 
 
 Mileage: directly operated, 53; 
 wisdom of branch extensions, 98. 
 
 "Mileage Costs," 150-157 (See 
 also Ton-Mile, Train-Mile, Lo- 
 comotive-Mile, etc.). 
 
 Mileage, Leased, and Capitaliza- 
 tion, 273-275. 
 
 Minneapolis & St. Louis R. R., 50. 
 
 Minneapolis, St. Paul & Sault Ste. 
 Marie R. R.: location of lines, 
 77. 
 
 Minnesota Rate Cases, 9. 
 
 Missouri, Kansas & Texas R. R., 
 50; location of lines, 71. 
 
 Missouri Pacific System, 100; lo- 
 cation of lines, 80. 
 
 Missouri River Rate Case, 11. 
 
 Mortgage Bonds, 32-34. 
 
 Mortgages, General and Divi- 
 sional, 35. 
 
 N 
 
 New England Systems, 59. 
 
 New York Central Lines: expan- 
 sion through leases, 56; location 
 of lines, 61-62; capitalization 
 per mile of road, 275; increase 
 in capitalization, 1901-1910, 
 280; surplus earnings of sub- 
 sidiaries, 222; new capital re- 
 quirements, 284-285. 
 
 New York, New Haven & Hart- 
 ford R. R. System, 59; passen- 
 ger business, 135; sale of stock at 
 a premium, 262. 
 
 Norfolk & Western Railway Com- 
 pany: in Pennsylvania R. R. 
 group, 60; grades, 104; weight of 
 
 rails in track, 112; convertible 
 bond issue, 282. 
 
 Northern Pacific R. R.: joint con- 
 trol of "Burlington," 49; loca- 
 tion of lines, 75; dividend from 
 Northwestern Improvement 
 Company, 254. 
 
 Northwestern Trunk Lines, 73-78. 
 
 Notes, Railroad, 32, 42-43. 
 
 O 
 
 Obligations, Capital (See Funded 
 
 Indebtedness). 
 Obligations, Contingent, 228. 
 Obsolescence (See Depreciation). 
 Operating Accounts, 190-192. 
 Operating Companies, 52. 
 Operating Economy and EflS- 
 
 ciency, statistics for measuring, 
 
 149-168. 
 Operating Income, 221-225. 
 Operating Ratio, 213-217. 
 Operating Receipts (See Receipts). 
 Operating Revenue, Net, 217-218. 
 Organization: complexity of R. R., 
 
 and accounting methods, 185. 
 "Outside Operations," 174-175, 
 
 191-192. 
 
 "Parent" Company, 46. 
 
 Passenger Business, 135-136. 
 
 Pennsylvania R. R.: number of 
 stockholders, 21; ownership of 
 Pennsylvania Company, 55; sys- 
 tem lines, 60-61; large leased 
 
INDEX 
 
 293 
 
 mileage, 56, 275; stock issue in 
 1903, 283. 
 
 Pere Marquette R. R.: its cumu- 
 lative preferred stock, 24; orig- 
 inally a lumber road, 266. 
 
 Preferred Stock, 22-28. 
 
 Profit and Loss Account, 169, 234- 
 240. 
 
 Property, Abandonment of, 182- 
 186. 
 
 Property Accounts, 246-258. 
 
 Property, Railroad: valuation of, 
 248. 
 
 Proprietary Companies: defined, 
 54. 
 
 Pro-Rating, 47. 
 
 Prospectus, 87-88. 
 
 Proxy Voting, 21. 
 
 R 
 
 RaUs, 112-115. 
 
 Railroad Construction (Chapter 
 IV): investment basis of, 85; 
 estimates of cost, 93-96; funda- 
 mental economic principle of, 
 96-99; illustrations of high cost, 
 99-100. 
 
 Railroad Securities (Chapter IV), 
 17-43 (See also Bonds, Notes, 
 Stocks). 
 
 Railroad Systems of the United 
 States (Chapter III): develop- 
 ment of, 44-46; mileage of lead- 
 ing systems, 48-49; grouped ac- 
 cording to administrative con- 
 trol, 49-50; methods of unifica- 
 tion, 51-52; geographical groups, 
 56-58; New England Systems, 
 59; Eastern Trunk Line Sys- 
 
 tems, 59-64; Anthracite Sys- 
 tems, 64; Southern Systems, 64- 
 67; Mississippi Valley Systems, 
 67-71; Middle Western Sys- 
 tems in the North, 72-73; 
 Northwestern Systems, 73-78; 
 Southwestern Systems, 78-82. 
 
 Railway, Location, 103. 
 
 Rates, Railroad (Chapter I): eco- 
 nomic theory of, 1-5; regulation, 
 5-8; interstate and intrastate, 
 8-10; rate adjustments and 
 sectional competition, 10-12; 
 "Long and Short Haul," 12-15; 
 effect of changes in economic 
 conditions, 15-16. 
 
 Rates and new railroad construc- 
 tion, 90-91. 
 
 Ratio, Operating, 213-217. 
 
 Receipts per Ton-Mile, 140-144. 
 
 Receipts, Operating: classified, 
 190; standard units of, 192-195; 
 effect of, on net income, 196, n. 
 
 Regulation: of rates, 5-8; of rail- 
 road accounts, 171. 
 
 Rents, 189. 
 
 Returns, Theory of Increasing and 
 Decreasing, 109, 195. 
 
 Revenue (See also Income, Re- 
 ceipts): net operating, 217; in 
 relation to capital investment, 
 218. 
 
 "Rights," 30. 
 
 Road and Equipment: cost of, in 
 the accounts, 248-251. 
 
 Roadbed and Superstructure, 106- 
 123. 
 
 Rock Island Company: a holding 
 corporation, 53; voting privi- 
 leges of preferred stock, 27. 
 
294 
 
 INDEX 
 
 Route: advantages of a favorable, 
 
 82; selection of, 91-92. 
 Rutland Railroad: cumulative 
 
 preferred stock, 24. 
 
 Safety, Margin of, 229. 
 
 Seaboard Air Line: location of 
 lines, 64; comparative cost of 
 equipment maintenance, 203- 
 204. 
 
 Securities, Railroad (Chapter II), 
 17-43; sale of, at discount or 
 premium, 181; market value in- 
 fluences, 236, 282. 
 
 "Securities Owned" (See Property 
 Accounts). 
 
 "Service, cost of, and value of," 4. 
 
 Sherman Anti-Trust Law: applica- 
 tion to railroads, 58. 
 
 Shreveport Rate Case, 10. 
 
 Southern Railway: voting trust 
 agreement, 20; dividend policy, 
 24; location of lines, 65-66; com- 
 parative maintenance-of-way 
 cost, 200; equipment mainte- 
 nance, 203-204. 
 
 Southern Railroad Systems, 64-67. 
 
 Southwestern Railroad Systems, 
 78-81. 
 
 Speed of trains, 160. 
 
 Spokane Rate Cases, 13. 
 
 Stations: effect of location on traf- 
 fic, 93. 
 
 Stock: classes of, 22; preferred, 22- 
 28; common, 28-32. 
 
 Stock Book, 22. 
 
 Stockholders: rights and privileges, 
 18-19. 
 
 Subsidiary Companies, 46. 
 
 Superstructure (See Roadbed). 
 
 Surplus (See also Profit and Loss 
 Account) : relation to credit, 233; 
 "Appropriated," 236; interpre- 
 tation of, 261-262; in relation to 
 stock dividends and bonuses, / 
 264. 
 
 Systems, Railroad in the U. S. 
 (Chapter III), 44-83; New 
 England, 59; Eastern Trunk 
 Lines, 59-64; Southern, 64-67; 
 Mississippi Valley, 67-71; Mid- 
 dle Western Systems in the 
 North, 72-73; Northwestern 
 Trunk Lines, 73-78; Southwest- 
 ern Trunk Lines, 78-81. 
 
 Taxes, in the Income Account, 189, 
 218-219; varying rates in dif- 
 ferent States, 219-220. 
 
 Terminal Sites: cost of, 94, 122- 
 123. 
 
 Terminal Facilities, 120-121; spe- 
 cial, supplied by railroads, 123. 
 
 Terminal Expenses: nature of, 147. 
 
 Through Routing, 47. 
 
 Ties, Railroad, 117. 
 
 Toledo, St. Louis & Western R.R.: 
 location of lines, 72; purchase of 
 Chicago & Alton R. R. stock, 
 267. 
 
 Ton-Mile Averages, 138-139. 
 
 Track Facilities, 107, 111. 
 
 Traffic Interchange Agreements, 
 82-83. 
 
 Traffic: methods of estimating, 88- 
 90; and additional stations, 93; 
 
INDEX 
 
 295 
 
 direction of, 104; freight and 
 passenger, 135-136; diversifica- 
 tion of, 140-141; density of, 
 145-146. 
 
 Traffic Statistics (Chapter VII), 
 135-168; classification of, 137 
 (See also Ton-Mile, Train-Mile, 
 etc.). 
 
 Train Frequency, 160. 
 
 Train-Mile, 151-154. 
 
 Train Resistance, 161-162. 
 
 Transportation, Cost of Conduct- 
 ing, 209-213. 
 
 Trunk Line: definition of, 45. 
 
 Trust Agreement, Voting, 19. 
 
 Trust, Deed of, 33. 
 
 Tunnels, 120. 
 
 "Turnover," 214. 
 
 Union Pacific R. R.: control of St. 
 Joseph & Grand Island R. R., 
 
 27; control of Southern Pacific, 
 49, 50, n.; 75; location of lines, 
 74-75; large investment in- 
 come, 224-225; investments 
 from accumulated surplus, 273. 
 
 Virginian R. R., 99. 
 
 Voting Trust Agreement, 19-20. 
 
 W 
 
 Wabash R. R. Co.: illustrates the- 
 ory of decreasing returns, 109- 
 110; location of lines, 72. 
 
 Wages, 212-213. 
 
 Way and Structures (See Main- 
 tenance). 
 
 Webb, W. L., quoted, 82. 
 
 Wellington, A. M., quoted, 121, 
 195 n. 
 
 White, J. G. Company: extract 
 from a report of, 89. 
 
 Working Assets, 244. 
 
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