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BUSINESS--A PROFESSION Chapter 16
THE NEW ENGLAND TRANSPORTATION MONOPOLY
An address delivered before the New England Dry Goods Association at Boston, February 11, 1908.
Mr. President and Gentlemen of the New England Dry Goods Association:—
The proposed merger presents for the decision of the people of Massachusetts the most important question which has arisen in this Commonwealth since the Civil War. I regret deeply, therefore, that the eminent counsel of the New York, New Haven and Hartford Railroad Company should have declined the invitation of your association to present an argument in favor of the merger. His refusal to discuss the question, following many like refusals of invitations extended by other associations to President Mellen and Vice-President Byrnes, is obviously in pursuance of a definite policy, and the policy appears to be this: Having actually acquired the large block of stock in the Boston and Maine Railroad secretly and without authority under the laws of Massachusetts—"the less said about it, the better." Against this Standard Oil policy of "Secrecy and Silence," the opponents of the merger vigorously protest.
Let us define what the merger question really is, and recall the circumstances under which it has arisen in Massachusetts.
The merger question is this: Shall the New York, New Haven and Hartford Railroad Company be permitted to acquire, through control of the Boston and Maine, a substantial monopoly of all transportation within New England and from New England to the South and West—a monopoly including alike steam railroads, trolleys and steamboat lines?
The circumstances under which this question arises are as follows:
For more than a generation the statutes of Massachusetts have declared that no railroad company shall acquire the stock of any other railroad company or of any street railway company without the express authority of our legislature. This has been the law of Massachusetts during all the time that the New York, New Haven and Hartford has operated any railroad in this Commonwealth.
THE NEW HAVEN DEFIANCE OF MASSACHUSETTS LAWS
With this law on the statute books, the New Haven Company, without seeking permission from our legislature, acquired within three years prior to June, 1906, nearly five hundred miles of trolleys in central and western Massachusetts. These trolley purchases threatened to extend into the Boston and Maine territory. The Boston and Maine had carefully obeyed the Massachusetts law which prohibited it from making trolley purchases; and it sought in 1905 authority from our legislature to do with the legislature's permission what the New Haven undertook to do in spite of legislative prohibition. The proposed change in the long-established policy of the Commonwealth was strenuously opposed. The question was referred to the Recess Committee of the legislature of 1905; and the question was again considered by the legislature of 1906, which refused to grant the permission asked.
Governor Guild then called attention to the situation in a memorable special message to the legislature (June 23, 1906) in which he said:
"I congratulate you on the defeat of a measure that would have sanctioned the possible consolidation of all transportation in Massachusetts under the control of a single corporation. The present railroad situation, however, is most unjust and inequitable. Our steam railroad system is forbidden to meet the competition of electric street car lines by purchase or control of their stock, but another controlled by men who are not citizens of Massachusetts is not only permitted to exercise that privilege, but is exerting it to-day to such an extent that healthy competition in western Massachusetts is already throttled.
"Slowly, surely, the control of our own railroads, the control of the passage to market of every Massachusetts product, the control of the transportation to and from his work of every Massachusetts citizen is passing from our hands to those of aliens.
"I therefore urge upon you with all the strength that is in me the passage of some legislation giving relief from this grave injustice. Let Massachusetts announce that transportation within her borders is in the future to be controlled by the people of Massachusetts, and not by men beyond the reach of her law and the inspiration of her ideals."
The message was immediately referred to the joint Committee on Railroads and Street Railways. It was then late in June. The session had already lasted nearly six months. All other legislative business had been disposed of. It was urged that consideration of a subject so important should not then be entered upon. The New Haven Company insisted that it had no intention of violating the laws of Massachusetts; that it had been advised that, while the Massachusetts statute controlled Massachusetts corporations, like the Boston and Maine, the New Haven Company, having a Connecticut charter and operating through a subsidiary company, could legally purchase railroads and street railways in this State, regardless of the prohibition contained in the Massachusetts statute. It invited the Attorney General to bring proceedings to test the legal validity of its action. The New Haven Company asserted, furthermore, that it had no intent or desire to act contrary to what Massachusetts might declare to be its own policy in this respect.
THE NEW HAVEN BREACH OF FAITH
It was naturally suggested that this attitude on the part of the New Haven was assumed in order to delay legislation, so that meanwhile it might have the opportunity of continuing unhampered its purchases of Massachusetts properties. To meet this objection the following assurance was given to the legislative committee by the counsel of the New Haven Company:
June 27, 1906
Representative Joseph Walker, Esq.
My Dear Mr. Walker—
I have communicated with Mr. Mellen by telephone and got from him the following:
"Mr. Mellen authorizes Mr. Choate to state to the Legislature that he will not enter upon further acquisitions in Massachusetts other than those already contracted for, or build any trolley lines except such as are now under actual construction, until such time as the merger question has been settled.
"Mr. Mellen is willing, if the Committee desires it, to furnish a list of properties already contracted for or under construction, to avoid any future misunderstanding."
(Signed) CHARLES F. CHOATE, JR.
The list of Massachusetts trolley properties in which the New Haven was then interested was asked for and was furnished by Mr. Mellen. After that the legislature refused to pass any act dealing with this subject, and adjourned. Proceedings were then begun by the Attorney General to test the validity of the New Haven's position. While these proceedings were pending, the New Haven Company, regardless of the promise which had been given by Mr. Mellen on its behalf, proceeded with its purchases of Massachusetts trolleys. It bought the Milford, Attleborough, and Woonsocket Street Railway Company; it bought the Hartford and Worcester, the Uxbridge and Blackstone and the Worcester and Holden Street Railway Companies. It acquired still other Massachusetts trackage through the Providence Securities Company.
And it did more. It acquired, without application to the legislature, and without notice in any way to the public, a large block of stock of the Boston and Maine Railroad—109,948 shares out of a total of 295,096 outstanding in the hands of the public.
The great merger issue, the most important question which has arisen in Massachusetts in more than a generation, is thus brought before us by conduct on the part of the New Haven, which is not only in defiance of the settled policy of Massachusetts, as expressed in its statute law, but in defiance also of the promise solemnly given to the legislature of the Commonwealth and relied upon by it.
THE PROPOSED TRANSPORTATION MONOPOLY
Now, let us pass to the question of the merger itself and what it involves:
The possible advantages of a merger have not been made clear; but the objections, I submit, are clear, and they are insuperable.
First. The merger would result inevitably in a complete monopoly of transportation in New England.
It would mean control by the New Haven, not only of the Boston and Maine and the Maine Central systems, but of all railroads extending into New England, except the Grand Trunk and the Canadian Pacific. Outside the New Haven, the Boston and Maine and the Canadian systems, there is now no important railroad in New England, except the Boston and Albany and the Bangor and Aroostook. The Boston and Albany is already closely allied with the New Haven through a traffic arrangement. It will inevitably fall into the New Haven's grasp if the Boston and Maine does. So also will the Bangor and Aroostook and the small outlying roads.
But the merger means far more than a monopoly of the railroads. The New Haven has pursued relentlessly in each community to which its railroads extend the policy of suppressing all competition whatsoever, existing or potential—suppressing, at whatever cost, the competition not only of railroads but of steamship lines and of trolley lines as well. What it has already done in Connecticut and Rhode Island would inevitably be repeated in Massachusetts and in northern New England.
See how the New Haven has suppressed all competition between Boston and New York:
The New York and New England Railroad was designed to give us an independent all-rail line to New York. The New Haven induced the Connecticut legislature to refuse authority to construct the missing link. The New York and New England, however, actually gave us an independent rail and water line to New York via Norwich and a freight line via the Hudson River. The New York and New England passed into the hands of receivers and was purchased by the New Haven.
The Central New England Railroad intended (in connection with the Boston and Albany) to give us an independent line to the Pennsylvania coal fields, and another freight line to New York via the Hudson River. It met persistent obstruction in the legislature and in the courts of Connecticut. Its securities suffered, and it passed into the control of the New Haven.
A few years ago we had four rail and water lines to New York via the Sound—the Fall River Line, the Providence Line, the Stonington Line and the Norwich Line. All of these have passed into the hands of the New Haven; and another rail and water line to New York—the New Bedford Line—belongs also to the New Haven. Later a new competitor—the Joy Line—arose; but soon it also passed into New Haven control.
Finally the Enterprise Transportation Company was started, with boats running from New York to Fall River and to Providence, and with good promise of success. The New Haven, under secret cover of the Neptune Line and of the Joy Line, entered into fierce competition with the Enterprise Transportation Company. Last October the Enterprise Transportation Company succumbed. It passed into the hands of a receiver, and shortly after the New Haven purchased the Kennebec, one of its best boats.
Not a single independent line of steamboats exists between Massachusetts and New York except the Metropolitan Line; and now that, like other competitors of the New Haven, has passed into receivers' hands. May we not expect to see, as the next step, its fine steam-ships, the Harvard and the Yale, flying the New Haven flag, and the last vestige of steamship competition disappear?
A few years ago we heard promises of independent trolley lines from Boston to New York. The key to such a line was a franchise east from New York City. Two franchises were given—the New York, Westchester, and Boston Railway Company and the New York and Port Chester Railroad Company—both given with the understanding that they should provide competition with the New Haven. The New Haven, at huge expense, acquired both franchises, and suppressed the nascent competition.
The policy of suppressing competition at any cost, pursued with respect to through lines between Boston and New York, has been followed by the New Haven throughout its territory. Under that policy the New Haven has acquired in all about fifteen hundred miles of trolley tracks—substantially all the trolleys in Connecticut and in Rhode Island, and nearly six hundred miles of line in central and western Massachusetts. It has even extended its lines into Vermont and northern New York.
No competitor was too large to be overcome, and none so insignificant as to be tolerated. Thus the New Haven acquired the lesser steam-boat lines from New York to Connecticut and to Rhode Island ports—the Bridgeport Line, the New Haven Line, the Hartford Line and the Block Island Line. And with this nearer field covered, it undertook to extend its acquisitions to more distant ports, far beyond the present territory of its rail lines. It purchased, at large cost, a line from New York to Portland, Maine. It purchased a line from Boston to Philadelphia; and then, in connection with that purchase, it acquired a substantially controlling interest in the Merchants & Miners Transportation Company, with lines from Boston to Philadelphia, to Baltimore and to Norfolk.
If the New Haven secures the Boston and Maine system, it appears inevitable that the control which the New Haven has already acquired over the Boston and Albany through a traffic agreement will become practically absolute, that the New Haven's policy of acquiring trolleys will be further extended, and that soon all means of transportation by steam, by trolleys or by established steamship lines within New England, or from New England south and west, will be absolutely under New Haven control. The only other outlet for the people and products of Massachusetts will be across the Atlantic or to Canada.
AN ALIEN MONOPOLY
Second. This monopoly by the New Haven in transportation within New England and from New England south and west would be controlled by persons alien to Massachusetts, not only in their financial interests, but in their traditions and aspirations. How little the voice of Massachusetts would be heeded in the management may be inferred from the present conditions.
Although more than one-half of the stockholders of the New Haven are residents of Massachusetts, and although they owned, June 30, 1907, $35,000,000 out of $97,000,000 of New Haven stock outstanding in the hands of the public, as well as a larger part of its outstanding bonds and notes, Massachusetts has to-day upon the board of directors of the New Haven only two members out of twenty-three. It had one other member, making up the full board of twenty-four, but Mr. Charles F. Choate, long a member of the New Haven board, resigned recently.
Apparently the influence of the Massachusetts members in the board has been proportionate to their number.
Third. This monopoly in transportation would not only be controlled by non-residents of Massachusetts, but, as the New Haven's transportation lines would extend into at least six other States, the management, though intending to act with entire fairness to Massachusetts, might deem it proper to postpone the interests of Massachusetts to those of some other State or States. It might seem best to the management of this transportation monopoly to favor New York, or New London, or Providence, or Portland, as against Boston, not from any malevolent motive, but solely in the supposed interests of the company.
Yet we of Massachusetts have the solemn obligation of protecting and advancing our own welfare. We must not intrust the determination as to what our welfare demands to the decision of persons who may be influenced by considerations other than the interests of Massachusetts.
Fourth. The very size of the proposed consolidated system and the diversity of its interests would be such as to impair its efficiency. The company would not be merely a large railroad company, but an aggregation of trolley companies, of steamship companies, of gas companies and power companies, an electric light company and a water-supply company. For thus comprehensive are the varying activities of the New Haven.
For every business concern there must be a limit of greatest efficiency. What that limit is differs under varying conditions; but it is clear that an organization may be too large for efficient and economical management, as well as too small. The disadvantages attendant upon size may outweigh the advantages. Man's works have outgrown the capacity of the individual man. No matter what the organization, the capacity of the individual man must determine the success of a particular enterprise, not only financially to the owners, but in service to the community. Organization can do much to make possible larger efficient concerns; but organization can never be a substitute for initiative and for judgment. These must be supplied by the chief executive officers, and nature sets a limit to their possible accomplishment. Any transportation system which is called upon not merely to operate, but to develop its facilities, makes heavy demands upon its executive officers for initiative and for the exercise of sound judgment. And New England needs most emphatically development of its transportation facilities. To aid in this development we need more minds, not less.
Massachusetts has had and is having a lesson on the evils of too large units which should not readily be overlooked, namely the wretched service of the Boston and Albany Railroad. Even in mere operation that railroad has failed egregiously as compared with its condition prior to its lease to the New York Central. And what is the cause of this failure? Not, I submit, intentional neglect, on the part of the officials of the New York Central, of the interest of Massachusetts or the comfort of its patrons; not any purpose on the part of the management to prefer other communities to our own. The wretched service is due, in the main at least, to the fact that the New York Central System is greater than the administrative capacity of its executive officers. From that overgrowth its finances, its service and its patrons have alike suffered. And we may be sure that if we spread the ability of the New Haven management over a larger field we shall get, not better, but worse, service throughout the whole territory.
Fifth. The political dangers surrounding a monster corporation controlling all transportation facilities of New England are too obvious to require comment, particularly in the case of a corporation having the political traditions which surround the New Haven.
IMPOSSIBLE TO "SAFEGUARD" MONOPOLY
Sixth. It has been suggested that we accept the proposed monopoly in transportation, but provide safeguards.
This would be like surrendering liberty and substituting despotism with safeguards. There is no way in which to safeguard people from despotism except to prevent despotism. There is no way to safeguard the people from the evils of a private transportation monopoly except to prevent the monopoly. The objections to despotism and to monopoly are fundamental in human nature. They rest upon the innate and ineradicable selfishness of man. They rest upon the fact that absolute power inevitably leads to abuse. They rest upon the fact that progress flows only from struggle.
Furthermore, the most carefully devised safeguards are in many respects futile. The legislation authorizing the Boston and Albany lease was surrounded by all safeguards which an able governor, the legislature and our business organizations could devise. Have these safeguarding provisions reduced or made more tolerable the wretched service which we have received?
FALSE ANALOGY OF SOME LOCAL MONOPOLIES
Seventh. The analogy sometimes urged in favor of existing well-operated local monopolies in lighting, or gas, or street railways is delusive. In the first place a local gas company may have a monopoly of gas, but it has not a monopoly of lighting. It has the competition of electric light and the competition of oil.
But there is furthermore this marked difference: A local monopoly, like a gas company, or an electric light company or a street railway company, is but a creature, a servant of the State, wholly subject to the control of the State within which it is situated, wholly dependent for its prosperity upon the particular community which it serves; and in Massachusetts subject at all times to being terminated by the authority which created it.
The street railways of Massachusetts and the gas and electric light companies of Massachusetts, so far as they are monopolies, are performing practically, as agents of the State, public functions during good behavior. If they do not properly serve the community, the community may at any time terminate their franchises without even paying compensation. The right to run street railways in our public streets, the right to lay gas pipes or electric light wires, is a license merely, and is subject at all times to termination by the State and the municipal authorities. There is no resemblance between such a monopoly of service covering a specific agency and the proposed New Haven monopoly of all transportation, a monopoly which claims rights under the laws of other States, and has asserted, though operating also in Massachusetts, that it is free from the restrictions imposed by the Massachusetts law. And yet even in respect to these local service monopolies, Massachusetts recognized as early as 1894 that legislation was necessary to protect our people from the abuses incident to their being controlled by foreign corporations.
THE DANGERS OF A HOLDING COMPANY
Eighth. Furthermore, it must be remembered that the New Haven Company is not a transportation company merely. It is a huge holding company. Its freedom in the issue of its own securities and its broad charter powers to hold securities of other companies expose us to the same conditions which have made Harriman a menace to America. The primal cause of Harriman's power has been his ability to use the treasury and credit of the Union Pacific for practically any purpose. The Union Pacific was once a corporation with power to construct and operate a railroad within given limits. It has become a corporation with almost universal powers. And these large powers have been exercised practically by one individual, instead of being subject to the action of the stockholders.
Precisely similar operations may be pursued by the New Haven management, particularly since it secured its new Connecticut charter. Indeed its act in taking over this large interest in the Boston and Maine stock without action on the part of its own stockholders shows the extraordinary power heretofore exercised by the New Haven management. And the position for the future is even more dangerous than it has been in the past.
THE NEW HAVEN'S FINANCIAL CONDITION
Ninth. The above objections to the merger would exist even if the New Haven were to-day the financially strong and conservatively managed railroad which it was for many years prior to the advent of Mr. Mellen. But its financial condition is vastly changed. Once financially the strongest railroad company in America, it has by excessive expansion become perilously weak. The burdens which it has assumed must for many years greatly hamper its ability to serve the Commonwealth. Its impaired credit will prevent it from making further large improvements. The excessive prices paid to suppress trolley and steamboat competition create a permanent heavy charge upon all future traffic. How it will be able to bear the burdens thus created will, for some time, remain a question. But it is clear that the burdens already assumed have taxed to the uttermost, not only the ability of the managers, but the financial resources of the company itself. There is no surplus of ability or of credit which is available for extending its operations to another great system with a railroad mileage larger than its own. (This subject was discussed elaborately by Mr. Brandeis in a pamphlet entitled: "Financial Condition of the New York, New Haven & Hartford Railroad Company and of the Boston and Maine Railroad," published in December, 1907.)
THE BOSTON AND MAINE
Tenth. And the Boston and Maine system is a great system. Its physical condition ought undoubtedly to be much improved. Additional facilities should be added and developed. But it possesses a solid foundation upon which to rest such development. The Boston and Maine is one of America's leading railroad systems. Including leased lines and railroads controlled but operated separately, it has 3,559.52 miles of line, and a total trackage of 5,817.71 miles. For the year ending June 30, 1907, the gross earnings of the system from operation were $50,986,553.60. Of the 852 operating companies in the United States, with an aggregate mileage of 220,028 miles, reporting to the Interstate Commerce Commission for the year ending June 30, 1906, only thirteen had gross earnings as large as that.
The miles of line owned or leased by the Boston and Maine Railroad are 2,232.25 as compared with 2,006.23 owned and leased by the New Haven. The freight tonnage carried one mile on these lines by the Boston and Maine Railroad in the year ending June 30, 1907, was 2,296,970,964 as compared with 1,927,686,950 tons carried by the New Haven.
In the six years ending June 30, 1907, it increased its gross earnings 34.41 per cent, while the increase of its capitalization was only 21.4 per cent, and the fixed charges increased only 2.72 per cent.
It is for Massachusetts to build up this distinctly Massachusetts railroad so that it shall be worthy of Massachusetts; and the capital required for making it meet all the demands of Massachusetts for proper transportation facilities can be and should be had. Massachusetts now recognizes the serious error which it committed in leasing the Boston and Albany to the New York Central. It should not commit the infinitely greater mistake of surrendering the Boston and Maine and its own prosperity to the New Haven Company.
IMMEDIATE LEGISLATION NECESSARY
Eleventh. The public did not discover until May, 1907, that the New Haven Company had secretly acquired this large block of stock in the Boston and Maine Railroad. It was then too late in the legislative session adequately and definitely to consider the subject. The legislature, with a view to providing for such consideration, passed a temporary restraining act by which the New Haven was prohibited until July 1, 1908, from attempting to vote on stock already acquired, or otherwise exercising control over the Boston and Maine Railroad, and from acquiring any additional stock in that company.
As this act expires July 1, 1908, and the New Haven Company, through the possession of nearly forty per cent of the Boston and Maine stock, has an interest so large that it may easily be converted into a working majority, the merger of the two systems will be practically complete on July 1, 1908, unless at the present session further legislation is enacted which shall not only compel the New Haven Company to dispose of the stock already acquired by it without authority under the laws of Massachusetts, but shall also prohibit it from in any way undertaking to exercise control over the Boston and Maine Railroad.
The control by the New Haven of the Boston and Maine through stock ownership would be the most dangerous form of merger—a merger with full power and with no responsibility.
Governor Guild wisely said:
"I therefore urge upon you with all the strength that is in me the passage of some legislation giving relief from thus grave injustice. Let Massachusetts announce that transportation within her borders is in the future to be controlled by the people of Massachusetts, and not by men beyond the reach of her law and the inspiration of her ideals."
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