A statement before the (Hadley) Railroad Securities Commission, March 6,1911. Published in "Engineering Magazine," October, 1911.

The decision of the Interstate Commerce Commission having established that there shall be no general advance in railroad freight rates, the attention of the public should now be directed toward encouraging improvements in service and in operating conditions and to the development of transportation facilities. To this end greater efficiency in management, and an ample supply of capital, are necessary.

Railroading being a private business, the corporations must, in order to secure capital as well as ability and zeal in management, offer the ordinary incentives incident to successful private businesses, namely, liberal money rewards. Capital or property will yield vastly differing returns according to the degree of judgment and efficiency applied in management. In order to secure efficient administration of railroads, we must make the rewards proportional to the efficiency. The establishment, therefore, of any rule fixing a maximum return on capital invested in railroads would tend to prevent efficiency by placing a limit on achievement.

To-day even though no fixed maximum return is definitely adopted, efficiency in management is in danger of being punished; whereas it should be rewarded. Efficiency is naturally reflected in large net earnings; and as no ready means exists for determining whether larger net earnings are due to greater efficiency in management or to higher rates, large earnings are frequently accepted as evidence that rates are too high and lead to demands for reduction; when, in fact, the large earnings may be due wholly to better management. To take from railroad corporations the natural fruits of efficiency—that is, greater money rewards—must create a sense of injustice suffered, which paralyzes effort, invites inefficiency and produces slip-shod management. The public interest, as well as justice, demands, therefore, the due appreciation of greater efficiency in management, and the granting of adequate rewards. In other words, private capital embarked in a quasi-public business ought to receive compensation on a sliding scale; so that the greater the service to the public, the greater the profit to those furnishing that service.

Boston applied the sliding-scale system to the production and sale of gas. There the dividend to the stockholders rises as the selling price to the public is reduced; and that system has proved eminently satisfactory both to the public and to the investor. The problem presented in the gas business was so simple that it was possible to apply the principle and make it operate automatically. The problem in railroading is infinitely more difficult, owing to the complexities arising from multitudinous rates, varying conditions and degrees of service and interstate relations. But if the principle of the sliding scale is once definitely recognized by the Interstate Commerce Commission, State railroad commissions and the people, as properly controlling the relations between the public and railroad corporations, methods will undoubtedly be worked out in time by which it can be safely applied.

The first step in applying the principle of the sliding scale must be, however, to devise means of determining degrees of efficiency,—and that involves determining the unit cost of each operation on each railroad. Unless costs are so ascertained, no true measure of efficiency can be arrived at. The knowledge that the average annual cost per locomotive for repairs, renewals and depreciation on one railroad is $3832.37 and on another is $2709.27 would be a very unsafe ground for determining the relative economy of operation on the two railroads. The conditions on the two railroads and the standards of renewal and depreciation may vary so greatly that the company expending the greater sum may actually have conducted its locomotive use and repair more economically and efficiently than the railroad expending less. We must reduce each operation to its ultimate unit and ascertain the cost of that before a proper basis of comparison can be secured. We must learn not merely the cost of turning a wheel of a standard size and character, the cost of laying a tie or a rail under standard conditions; but even these relatively simple operations must be again analyzed and separated into their component elements before a safe basis of relative costs can be arrived at.

The fact that railroads are subject in their accounting to the orders of the Interstate Commerce Commission makes it possible to require that each company should ascertain and report to the commission the ultimate unit costs of each operation in each department of the railroad. The further fact that the railroad business is largely non-competitive, makes it proper to publish these costs and to give to each railroad the benefit of knowing the lowest unit cost of each operation attained by any railroad and how it was attained.

To aid in this work the Interstate Commerce Commission should establish a Bureau of Railroad Costs by which the ascertainment of costs may be supervised and the results analyzed, classified and compared. Knowledge of the best methods would thus become the common property of railroad men. That alone would lead directly to great advances in efficiency and economy. But the adoption of the best existing methods would be merely the beginning of the great advance. The ascertainment of the lowest existing costs would inevitably be followed by widespread striving to eliminate further waste of time, effort and material and to find ever better methods. With the introduction of exact tests of efficiency, with the establishment of dependable standards of comparison, railroad operation would soon develop into a recognized profession; and those who pursue it would be stimulated like scientists and engineers to ever higher achievements.

There should be established also an Experiment Station in Railroad Efficiency. Such a station could be conducted similarly to the Agricultural experiment stations and the Office of Roads in the Department of Agriculture. The former has been potent in raising the standard in agriculture; the latter has advanced road-building throughout the United States. The cooperation of the government in furthering railroad efficiency would be no less effective. The Bureau would undoubtedly develop valuable inventions and discoveries in its own laboratories, as the various experiment stations of the Agricultural Department have done. But it would be of even greater service in testing the inventions made and methods suggested by others; and it could bring those of especial value to the attention of the railroads. Hundreds of inventions, hundreds of new methods which, if adopted, would enhance the efficiency of railroad operation, and introduce economies of wide scope, have remained unused, because they are not known to the operating men. Many of these inventions are not now in use merely because no single railroad was willing to give the time or incur the expense of testing their value; many because the inventor or discoverer was unable to secure a hearing or a fair test. There are undoubtedly also a large number of devices and methods in use in foreign countries of which our railway managers have either no knowledge or have but inadequate information.

It is a proper function of our government to make such investigations and to give to the railroads the benefit thereof. The railroads are the greatest single industry in the United States next to agriculture. The interest of the general public to secure efficient and economical transportation is so great that the government would be fully justified in incurring any reasonable expense to aid in increasing railroad efficiency. And in view of the obligations already assumed by the government in the regulation of railroad rates and service, it should proceed now to thus lend its aid to the railroads, securing to them greater justice by permitting them to enjoy earnings on capital in proportion to the efficiency of their management.

Go to next chapter.

Return to the table of contents.