railroads to their owners," qualified the demand for such return by adding, "under such regulations as will insure sound credit and adequate service."

But as this recommendation comes from the men who have for years dictated the policies of the railroads, it is well to bear in mind that there has never been a time since the first railroad charter was granted when legislators have not attempted to impose such regulations, with the further purpose of protecting the interests of the public; and that there has been no time since the first charter was granted when every effort and device conceivable has not been resorted to by "the owners" of the railroads to prevent the enactment and enforcement of such regulations. The demand of the investment bankers therefore suggests no new policy, or attitude different from that which the public has maintained and attempted to enforce from the beginning; and there is no reason whatever for assuming that if the railroads were to be returned "to their owners" there would not be the same opposition by the private managers to the enforcement of restraining legislation.

The attitude of the private managers toward attempts at regulation by the public has been too plainly declared to be open to question. About ten years ago Mr. Harriman gave out an interview which was published in the New York Times. In it he said: "In all the laws propounded by the states there is the question of Constitutionality. But one thing is obvious, and that is that the railroads have got to fight these measures as they come along." Even more instructive is the statement which was made by Mr. Shouts about the same time in a public address which was printed in pamphlet form and widely circulated and which under the circumstances may be fairly accepted as the attitude of the Wall Street managers. That which called for this address was that prior to 1910 the railroad companies had the right to establish freight rates and put them in force, and the only redress offered shippers was through appeals to the Interstate Commerce Commission. In such appeals the issue was as to whether a particular rate on a particular commodity between specified terminals was reasonable; and upon the shipper was placed the burden of proving the negative of the proposition. As no rate was ever based upon the actual cost of the transportation

of a particular commodity between designated terminals, but upon the adequacy of the railroad's income from all sources the evidence was in the hands of the railroads and difficult of access to the shippers. The remedy allowed the shipper was so costly and inadequate as to be in fact a denial of justice. In 1908 the companies were about to put in force a large horizontal increase of rates. The shippers appealed to Congress to grant the Interstate Commerce Commission the power to suspend proposed increases pending an inquiry by it as to their reasonableness. This request met the bitter opposition of the railroad managers. It was while this bill was pending that Mr. Shouts, then president of the Clover Leaf, said:

We still have hope that we are going to be let alone and allowed to run our own business. This is a period of governmental control and interference. In this period of business depression the railroads should be preparing for the return of industrial activity. But not a mile of new track is being laid, nor is any equipment being purchased that is not absolutely essential to the present needs of the roads. Improvements involving hundreds of millions have been abandoned because of the vengeful spirit that has temporarily possessed the minds of men whose duty it is to carefully consider proposed legislation.

Notwithstanding the attitude of the railroad managers Congress granted the relief asked by the shipping interests. And the facts that ever since the enactment of this law the railroad interests have fought to secure its repeal, and failing in this have allowed equipment to deteriorate and have discontinued the construction of new lines, sufficiently disclose the attitude of the Wall Street financiers toward governmental regulation and their ability to enforce the policy toward the public indicated by Mr. Shouts. Under these circumstances the demand of the Investment Bankers Association of America for "the return of the railroads to their owners," under regulation to be imposed by the government is not entitled to serious consideration.

Bearing in mind the relation actually sustained toward our railroad transportation system by New York financial interests, the question before us becomes the simple one of whether public interests will be better served if this department of the public service is operated and its policies dictated by a group of Wall Street financiers for the profit of a few or by the government, not for profit but, as is done by the Post Office Department, for

the benefit of all the people. And in my opinion we are limited in our choice to the one or the other.

But it must always be borne in mind that even government operation whether by the system now applied to all its other departments or by the so-called “democratization" of the transportation department asked by the railway employes-to be free from the temptation to exploit the people as a whole for the benefit of a particular group or class must exclude all opportunity to do this. If the cost to the people may include a profit to be divided among the members of any groups or class there will inevitably be the temptation to make the cost include such profit, which in the case of the transportation of the necessaries of life adds to the cost of living, which tax falls most heavily on those of every community least able to bear it.

But government operation, however applied, would be unnecessarily costly and unsatisfactory without the ownership of all the instrumentalities, and there would still remain the demoralizing element of selfish interests seeking always to increase their profits. To make this department most efficient and economical and of the greatest benefit to the public, the government should be the sole owner of all the railroads, of their equipment, and of all other property now owned or controlled by the railroad companies.

IN

The Advantages of National Operation

By JOSEPH B. EASTMAN

Member of Interstate Commerce Commission

N considering possible solutions of the railroad problem, the fundamental purpose to be achieved is clear. As stated by the Interstate Commerce Commission, it is "to secure transportation systems that will be adequate for the nation's need, even in time of national stress or peril, and that will furnish to the public safe, adequate and efficient transportation at the lowest cost consistent with that service." Implied in this definition is the need for credit, so that adequate supplies of capital may be secured at minimum cost; the need for efficient management; the need for the best utilization of facilities, regardless of ownership; the need for relations with labor which will avoid disastrous interruptions of service and ensure whole-hearted, willing work. Having in mind these ultimate ends, I have been brought to the conclusion that they can best be attained if the roads continue in the possession and control of the nation.

CREDIT AND CAPITAL

One of the impelling reasons for this belief is the matter of credit. It is a vital phase of the problem, upon which much stress has for some time been laid by financiers. Our railroads are never finished, or at least ought not to be, and require a steady inflow of capital. Without it they cannot long furnish good service. The amount required each year runs into very large sums, and half a billion dollars is a conservative estimate, for many have set the figure higher.

With national operation the credit of the United States is squarely behind the roads, and capital can be obtained at low cost, as and where needed and without underwriting syndicates, commissions, or bankers' profits. It has been suggested that the nation's own interest rates would rise if it should continue in this field, but while this might be true in some degree it is impossible to believe that the Government would ever have to pay as much for its money as private enterprise. The total demand

for capital would in no way be increased and the elements of speculation and risk which add to interest charges would be removed, so far as railroad investments were concerned.

Under private operation the average cost of capital will be higher and not a few companies will find difficulty in securing capital at all. In the last analysis, the credit of private railroad corporations depends upon ability to issue common stock. Most of our roads are already heavily bonded, and unless they can market new stock, none of their securities will long attract investors. Inevitably this means high capital cost and the need for very large earnings. Before the war, carriers asserted that new stock could not be sold without income sufficient to pay at least 6 per cent dividends, with a protective margin of 3 per cent on par value each year for reserve purposes. Under present conditions, with the great demand for capital all over the world and prevailing high interest rates, there is little doubt but that 6 per cent will fall short of making railroad common or even preferred stock an attractive investment. Certain recent issues of railroad bonds bearing this rate of interest have sold below par. Financiers are now claiming that to ensure good credit net income must equal at least 125 per cent of the amount necessary to pay interest and such dividends, however great, as may be required to market new stock.

The situation is complicated by the so-called "weak" roads, which, either because of overcapitalization, poor location, mismanagement or improvident investments, are unable to produce necessary earnings on stock at a level of freight and passenger rates entirely adequate for other roads in the same general territory. To maintain credit upon a sound basis and enable the carriers generally to attract capital in accordance with their needs, private operation will, I fear,-unless there are extensive reorganizations require either a government guaranty or, in the alternative, the raising of rates to an unreasonably high and excessive level.

A government guaranty coupled with private management is unsound in principle and will not meet with public approval. A guaranty of a minimum return is likely to impair rather than improve credit, because of the fear that the minimum in practice will tend to become the maximum. A guaranty of a larger