APPENDIXES

APPENDIX A

Excerpt from an address before the Chamber of Commerce, Kansas City, Mo., November 13, 1935, by Ralph Budd, President of the Chicago, Burlington & Quincy Railroad Co.

CONSOLIDATION HOLDS MOST PROMISE

The second of the Coordinator's possible courses, that of extensive consolidations, appeals to me as being the one which holds the most promise of really substantial economies and operating advantages, as well as opportunity to improve the service. In that way, and only in that way, can the best use be made of the existing railway plant of the Nation. To maintain as many lines as now are maintained between practically all of the important cities obviously is more expensive than limiting operation to the most efficient routes. Reducing the number of railways from 866 operating companies to about 20 would eliminate a tremendous amount of overhead organization, would enable the traffic to be concentrated on the most favorable routes, using the best parts of the several lines as they now exist, and would automatically bring about the most desirable type of coordination of terminals, namely, coordination under a few strong ownerships. Competition would be preserved, and, indeed, the desirable features of competition from the public point of view would be enhanced because the lesser number of strong roads, able as well as willing to give good service, would insure a higher quality of competition than can be obtained from too many lines competing with each other, and weakening each other by the excessive competition. All of the indispensable advantages of private operation would be preserved.

As I have said before, a substantial increase in volume of railway traffic would go a long way toward reviving their failing credit, but in view of all of the forces that have been at work, and are at work to reduce the volume of traffic that will move by rail, it is clear that too many railway companies and organizations are being maintained, as well as too many miles of railway, to carry economically the present and prospective volume of traffic. The very fast freight schedules necessitate the running of more small trains than would be necessary with large railway systems, each of which would embrace several existing lines. It would be practicable then to handle the minimum number of small fast trains. Some of the less urgent traffic would be moved in larger trains and thus the ton-mile cost of transportation would be reduced. Probably the lightening and speeding up of freight trains has become the most serious deterrent to reduction in railway transportation costs. We may as well face the fact that the fundamental of getting low ton-mile costs has not been successfully supplanted by any new ideas and no agency for reducing unit transportation cost has ever equaled the heavy freight train. By heavy freight train I mean the train that carries heavy tonnage of pay freight. The recent advancements in metallurgy and the use of high tensile strength alloys will make it possible to build lighter cars that will carry heavier loads. These are features that fit into any and all plans for economical railroading because they are fundamentally sound and are along the same line of progress as grade and curve reduction, larger and more efficient locomotives, etc.

If it may be granted that railway consolidations under proper safeguards to the public and to the employees would be desirable, it is most important to try to find ways and means for bringing them about. The definite policy of private ownership and operation of the railways should be reaffirmed, and en

actments made which would encourage and perhaps eventually enforce consolidations. It seems to me that the same calibre of statesmanship which resulted in the passage of the Transportation Act, 1920, if applied to the problem of determining how to accomplish what is desired, could produce an effective plan of procedure.

Such a plan was carried out successfully in England following the World War, and there, the policy having been decided upon, public tribunals were set up which carried out the task of appraising the values of securities on the existing roads, and the equivalent of securities in the new companies for which the old would be exchanged. In this way 120 railways were amalgamated into 4 without any long delay or serious litigation. The rights of employees were protected, and the result, as authoritatively reported, is that the railways of England are operated much more effectively and economically now than they could possibly be if all of the old companies were maintained.

There is, of course, ample precedent in this country for the consolidation of railways. All large systems are made up of a multitude of smaller companies. The Burlington, for example, comprises what were 200 or more companies, and the same is true of other roads of comparable size. Certainly no one would argue that it would be an improvement to disintegrate our present large systems into the many small units.

Having concluded to consolidate certain mileage, there would remain two great obstacles to be overcome. The first is what to do with railroad labor, and the second is, what to do with regard to the owners of securities which are outstanding against the existing properties. I have great respect for the rights of both parties here involved. Discussing first the question of the securities, it would seem that there should be available in this country the necessary individuals who could qualify as to ability and integrity, to whom could be assigned the duty of appraising the values of securities for purposes of amalgamation as was done in England. Of course, appropriate legal machinery would have to be set up to deal justly with dissatisfied security owners, and provision made for hearing those who question the proposed disposal of their properties.

EMPLOYEES SHOULD BE PROTECTED

The law should state the principles for determining the rights of railway employees to compensation on account of their services no longer being needed. Proceeding upon these principles it should not be impossible to determine upon a fair settlement, and, here again, a tribunal composed of those qualified to do so should be able to adjudicate any disputes which could not be composed by the parties according to principles in the law.

The settlement with the employees for claims arising out of consolidations would, of course, be a serious burden for some years, and during that period would prevent the realization of the ultimate economies. Just what period would be required to liquidate these claims is problematical, but through the natural course of events, that is, by transfer to other work, death, disability, resignation, etc., the burden would be lightened gradually. The probable rise in the volume of traffic would absorb some, so the period of transition probably would be well over within 7 years. The cost during that 7 years, if paid currently, would prevent realization of the economies. But if consolidation should be adopted as the ultimate governmental policy toward the railways, it would seem to be an entirely appropriate function of government to encourage the movement by providing the funds for these liquidations and permitting the repayment by the railways to be postponed until some time later. Extensive expenditures incident to the physical consolidations and adjustments in operation will occupy the managements, and will also provide substantial employment probably for 2 or 3 years.

These suggestions may not seem practical at present. Perhaps the burden of capital expenditures which would be incident to consolidations, and the compensation of employees who no longer would be required, would operate to prevent wholesale consolidations. The idea seems, at least, to be worth considering. In any event the evident and admitted advantages justify encouraging consolidations of roads in a more positive and affirmative way by the enactment of laws which would make them easier of accomplishment. It seems quite certain that if a few of the larger systems could be unified, that would tend to influence others to do likewise, and the compulsory feature might not be necessary.

APPENDIX B

THE ECONOMIES OF RAILWAY POOLING BY C. E. R. SHERRINGTON

(Published in "Railway Accounts and Finance" July 1935)

The whole conception of the earning power of a railway system, whether State or company-owned, has been revolutionized during the last 15 years. During the first 80 years of railway history it had been customary to regard rail transport as a controlled monopoly of land transport, and although the construction of parallel lines was not encouraged owing to the duplication of capital expenditure, nevertheless competition in its widest sense was encouraged in most countries, whether in the form of alternative routes between main centers of population and production or in the more indefinite sphere of market competition.

The rise of motor transport, which provided a powerful and, until very recently, entirely unregulated competitor for passenger movements and the transport of all but the bulkiest forms of freight, forced railway regulatory bodies and, indeed, the legislative bodies as a whole, to reorient their views and come to grips with the fundamental economic questions involved in the problems of rail transport.

The rapid rise of road competition has occurred during the existence of unparalleled trade depression, national and international, and rail traffic receipts in most countries have slumped 30 percent to 50 percent below the previous peak figures during the last 5 years. With their large proportion of expenditure which cannot be varied proportionately to the traffic handled, railways have proved particularly vulnerable to this combined onslaught of reduced trade and growing competition, but it may be noted in passing that those items of expense which the older school of transport economists, notably Acworth, had always regarded as nonvariable with traffic, have, under present conditions, proved the most amenable to reductions, namely, maintenance-ofway and structures and maintenance of rolling stock, while the supposedly variable expenses, often collectively termed traffic expenses, have proved largely fixed. Changes in conditions during the last 40 years have accounted for this change in facts. Traffic expenses consist largely of labor costs, and with the growth of organization in the ranks of labor, such costs cannot be varied as they used to be. On the other hand, enormous progress has been made in the organization of work in the engineering departments, both mechanical and civil, as for instance, in the reorganization of repair shops and a more rapid output, the technical improvements now embodied in the new rolling stock itself and the development of mechanical appliances for track maintenance. Acworth was doubtless right concerning the conditions at the time he wrote, but today conditions have wholly changed, and in no sphere has the alteration been greater than the change-over from a competitive outlook toward an outlook best expressed by the word "coordinated."

Railway finances are now so inextricably connected with the finances of governments that the latter can no longer afford to regard with equanimity a national railway system which has to appeal, or is in danger of having to appeal, to the Government at regular intervals for financial aid.

In those countries where the railways have not been consolidated into one or more large concerns, it has become customary to suggest amalgamation as the first and natural step to reduce the so-called wasteful competition which in most cases has been fostered with such diligence by the self-same legislators during the previous 50 years. Unfortunately, there are limits as well as difficulties to be met with in following this path, which has so abruptly changed its direction. One of the limits is set by geographical size and the creation of an organization sufficiently efficient to control the proposed amalgamated undertakings. In Great Britain it is generally recognized that the London Midland & Scottish and the London & North Eastern Railways closely approximate to the maximum size which a railway, under British conditions, should take if it is to be as efficiently operated as a smaller line might well be. Similarly, in the United States the great Pennsylvania Railroad is regarded by many best qualified to judge as having already reached a size which, if extended materially, would create immense internal organization difficulties. With cen

tralization a railway is apt to lose personal and local contacts which are so essential if road competition, strongly characterized by these attributes, is to be met on an equal basis. In Canada the proposal to amalgamate the wideflung Canadian National Railway and the almost equally widespread Canadian Pacific Railway, if it ever eventuated, which seems improbable in view of the inherent difficulties of amalgamating company- and Government-owned properties, will necessitate the solution of organization problems as difficult as any which have had to be faced in the history of railways. That the problem of achieving interrailway economy without wholesale amalgamation is a worldwide one may be seen from the fact that in Argentina the President, in a recent decree, stated that "it is an universally acknowledged principle that competition between railways is not beneficial for the community, inasmuch as it results in an unnecessary duplication of services, with the consequent loss of efficiency which might be applied to more advantageous purposes."

Fortunately, a useful medium course is available which avoids the organization difficulties of wholesale amalgamation and yet would appear to achieve most of the advantages of the latter. At any rate, whatever advantages of amalgamation are lost are largely offset by alternative advantages which, under many sets of conditions, may be claimed to be equally important. This medium course is known as "pooling", and it is with a feeling of some pride that it may be claimed that the British railways are gradually building up a model which other national railway systems are likely to follow in the more or less immediate future. Pooling is not new any more than is the use of containers, which dates back to the Liverpool & Manchester Railway, in 1831 and even earlier, but its use, also like that of containers, has been revived, and the modern revival may be regarded as an important step in the history of railway transport.

Pooling was common in the United States in the seventies, a typical case being that agreed between the Burlington, Rock Island, and North Western railroads between Omaha and Chicago in 1870; this pool was in reality the ancestor of the Western Freight Association of 1884, and by 1887 pooling agreements had become regular features of the various traffic associations. In 1887, however, they were declared illegal, and remained so until 1920; their revival has been slow, but there are signs that it is likely to receive an impetus in the near future, both in the United States and elsewhere. As an example of the pooling of passenger services, one might quote the Chicago & North WesternSoo Line agreement in the Duluth, Milwaukee, St. Paul & Chicago area, or the Montreal-Portland case of the Boston & Maine, Canadian Pacific, and Canadian National Railways, where receipts and services are pooled. The Northern Pacific, the Great Northern, and the Union Pacific operate a pooled passengertrain service between Portland, Oreg., and Seattle, and in this case also the receipts are subject to division on a prearranged basis. Ore traffic from the iron ranges to the docks at Ashland and other ports on Lake Superior has recently been the subject of extensive pooling agreements. The Chicago, Milwaukee, St. Paul & Pacific-Chicago & North Western pooling agreement for the Menominee-Escanaba traffic saves about $200,000 per annum. In Spain the two large railways, the Norte and the Madrid, Saragossa & Alicante Railway have worked out plans for the elimination of wasteful competition, and the agreement reached comes well within the definition of a pool.

Pooling of certain important passenger-train services by the Canadian National and Canadian Pacific Railways, originally started in 1933, was materially extended in 1934 and now covers an area stretching from Quebec to Toronto and Ottawa, where the fall in traffic had rendered certain fast services redundant. The pool saves approximately 1,000,000 train-miles and $1,000,000 in a year. Other instances of important pooling agreements might be quoted, for example, that which is in operation between the Paris-Orleans and the Etat Railways of France for the otherwise competitive Bordeaux-Paris traffic, but sufficient has been stated to show the world-wide nature of the practice.

It should be noted that pools may be of two kinds, a division of either traffic or receipts. In the case of iron ore pooling agreements in the Menominee iron range both the tonnage and the earnings are divided, but in the British revival of pooling the basis is invariably a pool of receipts, and one may now turn to a more detailed explanation of recent developments in this respect on the home railways.

BRITISH RAILWAY POOLING

Prior to 1932 there were several pools in existence for competitive railway traffic, but they were all more or less limited in regard to the geographical area covered. Most of these pools were set up between about 1905 and 1914. As examples of these pools, mention may be made of that between the Caledonian and North British Railways, now respectively part of the London Midland & Scottish and London & North Eastern Railways: This pool covered virtually all local Scottish traffic between places for which routes of both companies were available; it did not extend to traffic between Scotland and England and there was still, therefore, a substantial measure of competition between these two companies. Another pool to which reference may be made is that between the London & South Western, now merged into the Southern Railway, and the Great Western Railway; this pool covered all traffic for which the two railways concerned used formerly to compete, for instance, traffic between London and Weymouth, London and Exeter and London and Plymouth.

Under section 19 of the Railways Act of 1921, any pools established after the railway amalgamation under that act required the consent of the Minister of Transport. When therefore the London Midland & Scottish and London & North Eastern Railways proposed in 1932 to pool all competitive traffic the matter was referred to the Minister of Transport. The Minister set up a committee composed of three members of the Railway Rates Tribunal to inquire into the question, and public hearings were held. The committee eventually reported in favor of the scheme and the Minister accordingly gave his consent in August of that year.

In September 1932 the consent of the Minister was sought for a similar pool in respect of traffic in which the London Midland & Scottish, London & North Eastern, and Great Western Railways were interested. Exactly similar procedure was followed to that adopted in the case of the London Midland & Scottish and London & North Eastern pool. The consent of the Minister was obtained in April 1933. The three pools just referred to, namely, the London Midland & Scottish-London & North Eastern pool, the London Midland & Scottish-London & North Eastern-Great Western pool, and the London Midland & Scottish-Great Western pool, would be deemed to have come into operation on the 1st of July 1932. Identical principles are followed in each case. Before the receipts are pooled it is provided that each company shall make the following deductions:

1. Terminals (station, service, and collection and/or delivery); the amounts to be deducted are to be calculated in accordance with the methods used in connection with through traffic between the two railways which involves the division of receipts.

2. Working expenses; deductions are to be at rates to be agreed, which will "as nearly as possible equate the factors of train-operating cost which vary with the volume of traffic hauled."

Each of the pools is subdivided under the following eight heads:

1. Passengers (excluding journeys in London Passenger Transport Area). 2. Parcels and excess luggage.

3. Other merchandise by passenger trains.

4. Parcels post, excluding mails.

5. Merchandise, except classes 1 to 6.

6. Merchandise and minerals, classes 1 to 6.

7. Coal, coke, and patent fuel.

8. Livestock.

NOTE. Classes 1 to 6 represent the lower-rated classes of the British railway freight classification.

The division of the pool receipts is on the basis of the receipts of the companies concerned for the years 1928, 1929, and 1930. For the purpose of calculating the proportions into which the pool was to be divided, it was necessary to analyze and abstract the figures of receipts for all traffic between any two stations served by competitive routes. Under British conditions this amounted to several hundred sets of figures in the case of the London Midland and Scottish-London and North Eastern pool alone for the 3 years 1928, 1929, and 1930. It proved of considerable importance to fix the right allowances for operating costs because if they were fixed too high there was little incentive to economize by pooling, and if fixed too low there was no incentive left to