Discarding From Weakness

I

IN the spring of 1939 the Reconstruction Finance Corporation agreed to finance the reorganization of the Minneapolis & St. Louis Railway on condition that some 547 miles of unprofitable trackage be set aside in a separate corporation and none of the borrowed funds be spent upon its maintenance or improvement. In the spring of 1939, also, United States District Judge Carroll C. Hincks directed the trustees of the New Haven Railroad to cancel the lease on the 455 miles of the Old Colony Railroad which the New Haven had operated for fortyseven years, and in the fall of 1939 he directed the trustees to take the necessary steps for abandoning operation. Application for this abandonment is now being heard by the Interstate Commerce Commission. Thus last year the United States Government, acting through two different agencies, called for the abandonment of a substantial portion of the mileage of two widely separated railroad systems. These separate and unrelated actions throw into high relief the fact that there is a lot of railroad mileage in this country which does not earn its keep.

The first and normal cause for unprofitable railroad mileage is exhaustion of natural resources which a particular line was designed to tap. Government owned and operated railroads can compel traffic to come to them, but privately owned and operated railroads build to points where they can originate traffic. Hence, in a rapidly growing country such as America has been for decades past, it was inevitable that much railroad mileage would be built to open up naval stores, timber, oil, coal, or mineral resources. With the exhaustion of these resources, it became a question of whether or not the succeeding phase of development would generate enough traffic to support the railroad lines originally built. For instance, after many of our forests were opened up and the lumber exhausted, no adequate volume of industry or agriculture followed. This caused the abandoning of considerable railroad mileage which no longer had economic utility.

Today, however, exhaustion of natural resources is a minor cause of unprofitable railroad mileage. If motor transport had been in existence thirty or forty years ago, many thousands of miles of railroad main and branch line would never have been built. At that time this country had woefully poor roads, and the travel range of horsedrawn vehicles was limited to a relatively few miles. Railroad stations were built only four or five miles apart, based on convenient radius of access by horse and wagon. The underlying conditions which justified the construction and operation of railroad trackage on that basis have radically changed. A very substantial contraction of railroad mileage is now made inevitable by our system of good roads.

Experience of the past thirty years, in Europe as well as in the United States, is writing a new chapter in railway economics. This recognizes for the first time that in the earlier stages of development the railways, in addition to their prime function of being the most economical mass transporters, also perform a secondary function: they provide the initial, continuous, integrated, hard-surface highway system. Long before this country possessed even the rudiments of a national highway system, the railroads had leveled it to within the limits of a two per cent grade and, in considerable part, to within the limits of a one per cent grade. They had bored tunnels, built bridges, and established ferries. Neither persons nor freight could move any great distance in any reasonable length of time except by railroad. But since 1900 the development of our present public highway system has been gradually reducing this secondary function in this country and remanding our railroads to their primary function — namely, the production of mass transportation.

Here confusion of thought can be saved by a little reflection. Originally our railroads were among the foremost supporters of the good-roads movement, but, with the development of the automobile, highway expenditures far outran the railway conception of good roads as helpful in getting commodities and people to and from railway stations. For many years those primarily benefited by these expenditures paid a very small part of them. Ultimately, the expenditures grew so large that high license fees and high gasoline taxes levied on highway users were required. Distribution of this cost burden is not yet fully equitable, but certainly today it is more equitable than it was twenty years ago. In my judgment the railroads have a legitimate grievance against the undue burden thrown on them in at least the earlier stages of our present highway development — a burden not confined to contributing taxes toward a partially competitive transportation system, but also involving large nonproductive investment in the separation of grade crossings and increased operating expenses in protecting an ever-increasing number of crossings at grade.

II

Just though this grievance is, it should not becloud the fact that, once started, this extensive highway development was inevitable. The task remains for us to make it also salutary. One way to do this is to discard, and stop paying taxes on, railroad investment where it cannot get the traffic required to produce mass transportation, and then to throw the transportation burden of light traffic territory upon the new public highway system.

Few realize the possible extent of this readjustment. Testifying before the United States Senate in 1932, Mr. L. F. Loree, then president of the Delaware & Hudson Company, presented a freighttraffic density chart of the American railroad system based on the freight traffic of 1930. It indicated that 26,000 miles, or a little more than 10 per cent of the total mileage, turned out slightly more than half of the total net ton miles of freight. The next 148,000 miles, constituting about 60 per cent of the total mileage, turned out over 48 per cent of the total ton miles, while the remaining 73,000 miles, or nearly 30 per cent of the total mileage, turned out less than 2 per cent of the net ton miles. In other words, about 10 per cent of the mileage did 50 per cent of the line-haul business; about 60 per cent of the mileage did 48 per cent of the line-haul business; while the remaining 30 per cent of the mileage did less than 2 per cent of the line-haul business.

Under the Emergency Transportation Act of 1933, the Honorable Joseph B. Eastman, long a valued member of the Interstate Commerce Commission, was appointed Federal Coördinator of Railroads. He and his staff issued a series of studies on the main problems confronting our railroads. One of these studies is entitled The Problem of Thin Traffic Branch Lines, published in August 1937. It defined a branch line as ‘a continuous section of railway over which a through freight or passenger train is not regularly operated each business day.’ The study was based on the traffic of 1932. In that year 75,957 miles, or about 31 per cent, were branch lines as defined above. Of this branch-line mileage, only 8630 miles had a sufficient traffic density to pay their own way. The average traffic density per mile of the remaining 67,327 miles of track was only 89,785 ton miles. At an average freight rate of one cent per ton mile, this meant an average annual revenue of about $900 per mile. When one realizes that track maintenance costs are around $800 per mile year in and year out, and taxes are at least $300 to $400 a mile, it is clear that the line haul of this mileage could not pay its own way.

These calculations, of course, cover a period of very low traffic; yet, if traffic density were 50 per cent higher, it would still average only about 145,000 ton miles per mile of track annually, and still be too low to pay expenses. In 1932 Mr. Loree took 250,000 ton miles annually per mile of track as the lowest traffic density that could support railroad investment. Labor and material costs have since risen, and high taxes are certain for many years to come. Therefore the minimum required traffic density today is naturally higher than it was in 1932. Without attempting to imply that any hard-and-fast yardstick can be applied to the widely varying conditions in the United States, yet there is certainly little prospect that the traffic of tomorrow will restore profit to much of this economically weak mileage.

It is also not generally recognized that the cost of operation of this low-traffic branch-line mileage is about three times per ton mile what it is on the main line — in New England about four times. These higher unit costs, of course, in part reflect the low traffic density. Again taking New England as an example, if its main-line trackage, with a traffic density of 1,118,727 ton miles per mile of road, had difficulty in making a satisfactory profit, what could be expected from its 2433 miles of branch line with an average traffic density in the same year of only 89,074 ton miles per mile?

Whether we judge from Mr. Loree’s analysis of 1932 or from the Federal Coördinator’s analysis of 1937, it appears that there are about 70,000 miles of railway in the United States whose line-haul service does not pay its own way, all costs included.

If line haul were the only criterion, the issue would be simple. But we must also take into consideration the service of some of this mileage in originating traffic, the bulk of whose line haul takes place on the main portion of the railroad and not on the branch line where it originated. Examples of this are to be found among branches tapping the fruit sections of California and Florida, or the wheat sections of the North and Middle West. For forty-odd weeks their traffic may be negligible, but during the balance of the year they may each originate several trainloads of freight on which the main-line haul may be a hundred times the distance traveled on the line of origination. There are also cases where a substantial tonnage is originated or delivered a few miles off the main line, but where, by reason of the shortness of distance, the number of ton miles of line haul produced remain inadequate, and yet the facilities may be important as a convenience for a profitable line haul. Elsewhere there may be enough traffic to support one line but not two, and the withdrawal of the less desirable line would enable the other to live. With due allowance for all these exceptions, however, it is difficult to see how they can require the retention of more than half of the trackage whose line haul is insufficient to support its operation. This, then, would leave some 35,000 miles of railway branch line as marked for ultimate retirement.

III

The branch-line mileage described above is not the sole measure of unprofitable railroad mileage in this country. For many generations our public policy encouraged competition at any cost. This policy viewed unnecessary parallel and competing trackage not as economic waste, but as a boon to the shipper and a method of playing one railroad off against another.

Hence, even in main-line mileage, over tracks on which through trains are regularly operated each business day, there is unnecessary duplication of mileage. For instance, six different railways exist for getting from Chicago to Omaha, and some of these ways parallel each other for part of the distance. There are two routes to the Black Hills of South Dakota. There are two lines — decidedly lean — out of Chicago to Wyoming. In the East, for seventy-five miles two railroads nearly push each other off the banks of the same small river. There was considerable duplicate mileage between Philadelphia and the Jersey Shore until the Pennsylvania Railroad and the Reading Railroad established a joint seashore service. This kind of duplicate and unnecessary mileage is probably not less than five thousand miles.

Under present conditions, therefore, about 185,000 miles could do all the essential railroad business of the country, and 40,000 miles could be dispensed with. This essential 185,000 miles of railroad contains practically all the second, third, and fourth main track in the country, and the total miles of trackage would be much greater than the route mileage indicated above. On the other hand, the dispensable 40,000 miles is almost entirely single track.

At the beginning of 1940, 77,418 miles of railroad were in the hands of receivers or trustees, mostly distributed as follows: —

Without pressing the above comparison too closely, is it not obvious that there is some fundamental relationship between the existence of unprofitable railroad mileage and the extent of railroad financial difficulties? Can general financial health be expected in the railroad industry again until there has been a general ‘discard from weakness’?

At $30,000 per mile, this non-paying trackage represents an investment of about a billion and a quarter dollars. At 5 per cent, the carrying charges on this investment are about sixty million dollars per annum. At an average of $300 per mile, the tax cost of carrying these facilities is about twelve million dollars a year. Cost of merely keeping eight thousand stations open must exceed eight million dollars a year. Road-haul, collection, and delivery services on this mileage are probably more than seventy million dollars a year, even under conditions of abnormally low traffic. Hence, the annual cost of carrying this unproductive mileage is something like a hundred and fifty million dollars.

This is not all. Capable railroad men know that the greatest single method of restoring profit is by intensifying the use of facilities. In the April Atlantic I tried to outline some of the extraordinary results produced by this means through the past twenty-five years. Equally, intensification will be increased by radically reducing mileage which is incapable of intense utilization. Up to some point not yet reached, every step of progress along the line of intensification leads to unpredictable economies and, likewise, to increases in the quality and effectiveness of supervision and management.

Any experienced business man knows that it may take as much time, expense, and effort to liquidate an unwisely accumulated inventory of a million dollars as it takes to sell ten million dollars’ worth of new business. Yet an enlivening and inspiring release comes to an organization when it has buried its dead horses and can concentrate its energies with clearness and intensity on the future. One reason why the personnel of our air lines and truck and bus companies generally make a favorable impression on the public is that those organizations concern themselves almost wholly with the present and the future. In these highly competitive days, it is unwise to continue handicapping the personnel of the railroad industry with an excessive concern for the past.

No record of the abandonment of railroad track exists prior to 1917. From 1917 through 1931, 10,384 miles were abandoned, an average of 742 miles a year. In the eight years 1932 to 1939 inclusive, 13,508 miles were abandoned, an average of 1688 miles per year. The highest rate was 1995 miles in 1934, while abandonments last year were 1783 miles.

Contrary to popular impression, railroad managements have been anything but ruthless in pressing for the abandonment of non-paying property. They have sought every conceivable method of reducing the cost of maintaining lowtraffic-density mileage and have continued to nurse much of this mileage even after hope for its profitable operation had almost completely disappeared. When a railroad management today applies for the abandonment of track, it should be prima facie evidence to every intelligent citizen that this stretch has lost its economic usefulness.

Inevitably, however, a large portion of these abandonment applications are vigorously, although not cannily, opposed by residents of the communities affected. There is truth in the timehonored joke about the smart railroad lawyer who, at the beginning of each abandonment hearing, asks the persons who have traveled to the hearing by railroad to stand — and generally gets no response, the objectors all having arrived in their own automobiles.

The railroads’ function as the greatest single taxpayer in many counties is a decisive factor in these protests — local opposition to abandonments is mainly fear of loss of taxes. But what can be said for the sportsmanship of communities who no longer will themselves support property in profitable operation, but try to push off on others the cost of maintaining what they themselves try only to tax?

There is also fear of loss of property values and impairment of business. But where railway traffic has already declined to an unprofitable point, whatever the result might have been twenty years ago, it is quite unlikely that removal of the railway will be followed by widespread loss. The National Highway Users Conference has done a constructive piece of work in surveying what actually happened in the localities affected by ten railroad abandonments in Nebraska, California, Colorado, Oregon, Tennessee, North Carolina, Arkansas, West Virginia, and Vermont.¹ The abandonments, including mining as well as agricultural areas, covered 377 miles of railroad; seven of the ten took place between 1933 and 1937. In some cases there was little net difference; yet, in one instance a real-estate development went forward successfully; in another, grain elevators did not have to close, but continued in successful operation; in another, mines expanded production; in another, the output of natural gas and oil increased; and in another a long downward trend of population was reversed. Since motor transport is not as economical as the railroad in its use of man-power, there was generally some increase in employment. Automobile license fees, truck taxes, and gasoline taxes all increased, and in many cases amounted to more than the former railroad taxes, although of course these regions were put to greater public expense in maintaining the highway facilities necessary for exclusive reliance on motor transport. But none of these communities was remotely ruined, or even worsened. Now that public authority has accepted the responsibility of providing hard-surfaced, all-weather highways at public expense, if any community which cannot support railway facilities suffers for lack of transportation isn’t it high time its complaints were removed from the railroad and directed at the state and county governments involved ?

Perhaps the greatest obstacle to more rapid abandonment is the local emotion generated from a fundamentally wrong approach. Abandonment has been looked on in most cases as a negative move and as constituting a reflection on somebody.

Precisely the contrary is true. Abandonment of unprofitable mileage is a constructive — not a destructive — move. The business of the modern railroad is the production of mass transportation. Its economies in this field are its fundamental justification; but wherever the distance to be traveled or the amount of traffic to be moved does not economically justify the investment in the mass-production facilities of the railroad, then that locality should be abandoned to motor transport.

IV

Under the Transportation Act of 1920, construction of new railway mileage requires a certificate of public convenience and necessity from the Interstate Commerce Commission. Likewise, the tearing up or abandoning of operation of existing railway mileage requires the affirmative consent of the Commission. Some of the earlier decisions of the Commission give the impression that it also looked upon any abandonment as unfortunate, to be avoided if humanly possible. Thus, in the Boston & Maine case of 1925, the Commission said: —

The evidence seems to be conclusive that not a few of the lines which it is now proposed to abandon should never have been built. Under present conditions they would not be built. . . .

But irrespective of the origin of an existing line, people gather about it and create for themselves an interest in and a dependence upon it. Under these circumstances abandonment brings about the kind of hardships with which it is so difficult to deal. . . . Benefits to the system of particular abandonments must be weighed against the inconvenience and losses which these abandonments will inflict upon the communities immediately affected.

What if there need be no serious hardships? What if the apprehensions are largely groundless? Then do not public convenience and necessity require the strengthening of the essential railroad structure by relieving it of its burden of carrying an unprofitable capital investment and wasting revenue every year on operating losses and taxes? And if this be so, is not the real requirement of public convenience and necessity that our railroad system today should be permitted to readjust itself as though it had been planned and built originally with reference to the existence of motor transport?

Perhaps the thought of the Commission is moving along the above lines. In any event, seven years after the Boston & Maine decision it made one of the clearest and most common-sense statements of the problem that can be found anywhere. In authorizing the abandonment of the Sumpter Valley Railroad Company in 1932, the Commission said: —

This is another in a long series of abandonment cases which should serve as an illustration and as a warning. That every community is entitled to use those means of transportation that it prefers cannot be questioned by anyone, we think. . . . However, when a community has at its disposal, as many or most communities have, several means of transportation and it has exercised its choice in the form of patronage, it must realize that those means of transportation which its choice has eliminated from patronage may not be able to continue without such patronage and that abandonment must follow as a last resort. A community which can support every known means of transportation is unquestionably entitled to them; but a community which can support only one cannot insist upon the retention of two if the patronage accorded to the least favored one is not sufficient to enable it to live.

In other words, patronage granted to one form of transportation and withheld from another constitutes a more telling vote than any cast in the ballot box; and the income account reveals a great deal more of the truth of a situation than all the petitions and protests of an aroused citizenry.

Whenever a complete line is abandoned, the financial problem is simple. Tear up the track, realize the salvage value of rail, equipment, and other property, and liquidate the corporation. When, however, the track to be abandoned is the property of a Class I railroad and covered by a mortgage, the problem is complex. Cost of abandonment may be charged against the profitand-loss surplus on the balance sheet; but in some cases that surplus is not sufficient to withstand the charge. To meet this situation Mr. Jesse H. Jones, Chief Federal Loan Officer and formerly Chairman of the Reconstruction Finance Corporation, has recently suggested that in all reorganizations the unprofitable mileage be segregated in the hands of a second corporation without capitalization. This would simplify the problem of abandonments from some points of view. It apparently contemplates charging off the cost of unprofitable properly as one of the losses of a receivership or trusteeship.

Whether or not Mr. Jones’s suggestion is adopted, the question arises if the time has not come to establish a substantial depreciation charge annually against all mileage which is not earning its way. Although net operating income might be somewhat lowered for a time, the railroad cash position would rise, because no taxes on income or net earnings would have to be paid on depreciation accruals. These in turn could be used — at least in part — to retire bonds repurchased below par, and thus fixed charges could be gradually reduced and the profit-andloss surplus increased by the difference between par and the purchase price of the retired bonds. Certainly some plan can be worked out whereby the railroads could gain relief from the losses involved in owning and operating unprofitable mileage, strengthen their financial structures, and increase their net earnings.

It will, of course, be understood that the present railroad managements of the United States are not responsible for the unprofitable mileage existing today. They inherited it from a former day when radically different conditions and requirements existed. It will also be understood that the abandonment of unprofitable railway mileage is not the only constructive step required for the improvement of railroad transportation, and that the retirement by the railroads from unprofitable competition with motor transport at various points does not absolve our government or our citizenship from the necessity of establishing a fair and sensible national transportation policy. In point of timeliness, however, the abandonment question is unusually important now because the current railroad receiverships and trusteeships provide a fortunate opportunity for ‘discarding from weakness’ in the forthcoming reorganizations. The greatest obstacle to this is the opposition of public opinion arising from the fears which thrive on ignorance, and the reluctance of our common human nature to accept change, even when the need for change is obvious.