FOOTNOTES:
[29] Quarterly Journal of Economics, XXII, 1908, p. 364 et. seq.
[30] U. S. Statistics of Railways, 1908, p. 165 (and annually thereafter), gives an outline of these expense accounts for all railways over five hundred miles long.
[31] Treated in vol. II, chap. XV. Begins in U. S. Statistics of Railways, 1909, p. 76.
[32] Changes in accounting rules in 1907 prevent its continuation to date; but the data for 1909 under the new system are reproduced alongside.
[33] U. S. Statistics of Railways, 1908, p. 165, and annually thereafter gives data for all large roads.
[34] The sharp decline in traffic in 1911, especially after the suspended advance of rates, as affecting maintenance expenditures per mile of road, is shown as follows:
| 1911 | 1910 | |
|---|---|---|
| Baltimore & Ohio | $5931 | $6336 |
| Union Pacific | 3296 | 3363 |
| Great Northern | 2375 | 2653 |
| New York Central | 8681 | 8087 |
| Northern Pacific | 2451 | 3413 |
| Pennsylvania | 9088 | 9792 |
Multiplying these differences into thousands of miles of line shows the great economy resulting.
[35] Cf. pp. [259] and [422], infra.
[36] The provision of plant and equipment to carry the "peak of the load" is often a serious handicap.
[37] For an instance of detailed analysis of cost, the general investigation of soft coal rates to the lakes in 1912 is highly suggestive. Two-thirds of revenue went for operation and maintenance, one-third for return upon plant. This was the first attempt to justify an advance in rates for a large volume of traffic on the ground that it did not contribute its proportionate share of earnings. 22 I.C.C. Rep., 604.
[38] From Railroad Operating Costs; by Suffern & Co., New York, 1911.
[39] Lorenz in Quarterly Journal of Economics, XXI, pp. 283-292, is suggestive.
[40] Change of accounting methods vitiates further comparisons of operating costs after 1907.
[41] From Railroad Operating Costs, by Suffern & Co., New York, 1911.
[42] Cf. Yale Review, 1910, pp. 268—288; with reference to the rate advances of that year.
[43] Cf. the Free Cartage case, 167 U.S., 633.
[44] Quarterly Journal of Economics, V, 1891, pp. 438-465.
[45] Two important qualifications of this law, however, are set forth at p. [265], infra.
[46] Cf. our Railway Problems, rev. ed., circa pp. 684, 706.
[47] The first successful attempt, as to soft coal rates to the lakes, is in 22 I.C.C. Rep., 613. Cf. 13 Idem, 423.
[48] Wisconsin Railroad Commission Report, 1907, p. 101. Compare also Woodlock, p. 91; U. S. Statistics of Railways, 1894, p. 70; Yale Review, 1908, p. 382; and Record, Cincinnati Freight Bureau Case, II, p. 941.
[49] 13 I.C.C. Rep., 423. Compare 9 Idem, 423; and Yale Review, 1908, p. 287.
CHAPTER III
THE THEORY OF RAILROAD RATES (Cont'd)
The law of increasing returns, [71].—Applied to declining traffic, [73].—Illustrated by the panic of 1907, [75].—Peculiarly intensified on railroads, [76].
Growth of mileage and traffic in the United States since 1889, [77].—Increase of earnings, [79].—Operating expenses, gross and net income, [80].—Comparison with earlier decades, [85].—Density of traffic, [86].—Increase of train loads, [88].—Limitations upon their economy, [92].—Heavier rails, [93].—Larger locomotives, [94].—Bigger cars, [95].—Net result of improvements upon efficiency and earning power, [97].
The law of increasing returns due to financial rather than operating factors, [99].
A railroad theoretically presents a clear example of an industry subject to the law of increasing returns—that is to say, an industry in which the cost of operation grows less rapidly than the volume of business done. Each ton of freight added to the existing traffic costs relatively less to haul. From this it follows, obviously, that the net returns increase more than proportionately with the expansion of traffic. This may be demonstrated by a simple calculation. It has already been shown that only about two-thirds of the total expenditures of a railroad are applied to operation, the remaining third being devoted to capital account. Moreover, of these two-thirds of the total applied to operating outlay, only about one-half responds to any change in the tonnage, the other half being constant up to a certain point. Otherwise expressed, an increase of one per cent, in traffic and, therefore, of revenue, produces an increase in expense of only one-half of two-thirds of one per cent.[50] Two-thirds of the entire increment of revenue goes to profit. Carry this increase further and the effect is more striking. Suppose traffic to grow tenfold. The former outlay being $100 for a given volume of business, would be divided according to our rule as follows: one-third for fixed charges, one-third for constant operating outlay and one-third for variable expenses. With ten times as much traffic, only the last group of outgoes will expand. One thousand dollars revenue would therefore become available under the new conditions, to pay the same fixed charges as well as constant operating costs. The total outgo would thus become $33 plus $33 plus $330, or $396 in all. Almost two-thirds of the increment of revenue still remains as profit. It might well happen that such an expansion could not ensue without large increases in the capital and plant, as has already been noted; but up to that point this calculation would hold good. The following statement varying but slightly from our foregoing assumptions, illustrates the principle.[51] Let the distribution of expenditures for given conditions, producing $100 of revenue, be these, viz.:
| Operating expenses | $ 67 |
| Fixed charges | $ 28 |
| $ 95 | |
| Profits for dividends | $ 5 |
| $100 |
Now assume an increase of ten per cent. in the traffic and consequently in the revenue; but assume also that the average extra cost per unit, of the new business, is only forty per cent. as much as for the preëxisting tonnage. Were the added cost of each ton mile as great as before, the operating expenses would rise by the full ten per cent. of $67. But on Webb's assumption, they will rise by only forty per cent. of ten per cent. The new account would then stand thus:
| Operating expenses ($67 plus forty per cent. of ten per cent. of $67) | $ 69.68 |
| Fixed charges as before | $ 28.00 |
| $ 97.68 | |
| Income, increased by ten per cent. | $110.00 |
| Balance for profit or dividends | $ 12.32 |
By an increase of ten per cent. in tonnage, balance for dividends has more than doubled.
In this connection it will be noted that a constant rate of return per unit of business newly acquired has been assumed. Attempts were made on behalf of the railroads, during the long period of decline of ton mile revenue down to 1900, by Newcomb and others, to show that this is an unreasonable assumption; in that increased traffic is presumably to be had only by a progressive lowering of the rates charged. This contention has been effectively demolished by the steady and remarkable growth of traffic since 1900, even in the face of a substantial rise of rates all along the line. A necessary corollary to our proposition, beside that of the maintenance of a constant scale of charges, is, of course, also of the continuance of a given grade of service and of costs of operation. If more luxuriously appointed passenger trains or quicker freight service have to be given in order to produce the growth of business, the added costs of operation must, naturally, be taken into consideration. If widespread rise of wages follows an increase in the general cost of living, that too is an entirely extraneous factor. But with a given grade of service, constant rates and steady wage scales, there can be no question, up to the point of full utilization of the existing plant, that the operation of railroads affords clear demonstration of the law of increasing returns.
The obverse side of the law of increasing returns is also of great importance. For the same reason that when traffic increases, only a portion of the expenses are affected, it follows that, when business declines, only a part of the costs can be lopped off. In other words, a reduction in the volume of traffic does not in itself alone lead to a corresponding reduction in the operating expenses. Of course, many of these latter may, as we have seen, be temporarily postponed, as they were in 1893-1897, especially in the group of maintenance-of-way expenses. In such an event they must ultimately be made good by extraordinary outlay at some later time. But, unless they be thus postponed and unless the rates charged for service be reduced in order to stimulate traffic, it is inevitable that the margin of profit will drop as rapidly as it tends to rise with increased volume of business. This may be illustrated by the following computation.[52] Assume the total revenue from a given business to be $100, and assume it to be distributed as before, viz.:
| Operating expenses | $ 67 |
| Fixed charges | $ 28 |
| $ 95 | |
| Leaving profit | $ 5 |
| Total | $100 |
A positive decline of ten per cent, in the tonnage, if the cost for operation per unit of the portion lost was the same as the rest, would obviously reduce the operating expenses also by ten per cent. Let it next be assumed, as was done previously, that the average extra cost per unit of the latest increment of business was only forty per cent. as much as for the remainder of the tonnage. How closely this will approximate the facts in any particular instance will depend upon the density of traffic attained in relation to the capacity of the existing plant. If the addition of the last ten per cent. of business did not increase the large proportion of fixed expenses at all, and only added forty per cent. per unit more to the variable expenses; per contra, the loss of it would merely reduce the variable expenses and still leave the constant outlay the same. On this assumption, by the loss of ten per cent. of business the total amount of operating expenses under the new conditions would be lessened, not by ten per cent. of $67, but by only forty per cent. of ten per cent. of $67. The income would, however, decline by the full amount of ten per cent. The account, after a loss of ten per cent. of business, would then stand somewhat as follows:
| Operating expenses ($67 less forty per cent. of ten per cent. of $67) | $64.32 |
| Fixed charges, as before | $28.00 |
| $92.32 | |
| Income, reduced by ten per cent. | $90.00 |
| Leaving a deficit of | $2.32 |
Or, in other words, a decline of ten per cent. in tonnage has transmuted a five per cent. dividend condition into one involving an actual deficit nearly half as great as the former profit. The sudden reversal from apparent prosperity to very real distress, such as occurred during the fall of 1907, is thus explained. Its suddenness may be shown by the following table of monthly gross and net earnings, promulgated by the Interstate Commerce Commission.[53] The acute panic occurred during October, but its effect was not apparent until the following month. The total mileage included is shown by the first column:
| Earnings—per mile— | ||||
|---|---|---|---|---|
| Mileage | Gross | Net | ||
| 1907 | July | 223,900 | $1,022 | $304 |
| 1907 | August | 224,100 | $1,079 | $345 |
| 1907 | September | 224,300 | $1,045 | $314 |
| 1907 | October | 224,700 | $1,116 | $337 |
| 1907 | November | 224,800 | $981 | $261 |
| 1907 | December | 224,400 | $861 | $197 |
| 1908 | January | 198,700 | $746 | $148 |
This table shows that whereas under full prosperity, up to and including the month of October, the net revenue was about thirty per cent. of gross; after the sharp decline in traffic, it dropped in November to twenty-six per cent., and progressively thereafter to twenty per cent. in January. In other words, a decline of about one-fourth in the gross revenue within four months, entailed a loss of over fifty per cent. in net earnings. Higher operating expenses in the winter may have exaggerated this tendency, but, on the other hand, drastic economies were put into effect, which would more than offset the difference.
The urgent need of at once meeting any loss of business by prompt reduction of operating expenses is apparent. But there is comfort to be found at this point in the fact that each one per cent. saved in operation at any given time, results in saving two per cent. for the net earnings. According to our estimates, and as a rule practically, operating expenses equal about two-thirds of gross revenue, leaving one-third to meet charges and pay dividends. Every reduction from this two-thirds of gross revenue, therefore, transferred to the balance, increases the latter proportionately twice as much. This fact in turn explains the urgent pressure always brought to bear at such times to effect economies all along the line. These are too often indiscriminately made.[54] Such paring down of expenses should always be made with an eye to their ultimate effect upon the operating efficiency of the property in the long run. To postpone much-needed repairs of equipment during a period of depression, like that of 1907-1908, when repair shop costs are at a low ebb, only to hamper operations and to effect repairs under pressure when business revives, is an instance of such wasteful economy.
The qualification of the law of increasing returns as applied to railroads, arising from the distinction between long and short term production of its commodity—transportation—as above described, is of course by no means confined to carriers alone. It holds good of a factory or mercantile establishment as well. But in the case of railways, it is emphasized by the abruptness with which the condition of congestion of plant arises. The limit of full working capacity in a factory is elastic, by reason of the fact that under the "peak of load"—in busy seasons—it may prolong operations beyond the daylight hours or, at worst, work all night by double shifts. But a railroad, customarily working by night as well as by day and thus distributing its operations over the entire twenty-four hours, enjoys no such expansible limits upon utilization of its plant. When such full utilization is attained, the end comes suddenly. No postponement to a more favorable time for raising funds for better terminals or four tracking the main line is possible; nor does its character as a public servant permit a railroad to curtail service. The dead wall of congestion cannot be gotten around by either path. A crisis is presented, calling for the most heroic measures. This, of course, still further emphasizes the need for a long look ahead into the future with respect to railroad finance; not for the management alone, but for the government as well, charged as it is at present with control over rates for service.
The application of the law of increasing returns to railroads in actual practice is beset with difficulties. In order to make these clear, it will be necessary first to describe the phenomenal development of this country which has taken place during the last two decades.
The freight service of the railroads of the United States, measured by weight, in 1910, amounted to 1,026,000,000 tons. Only since 1899 when the corresponding figure given by the Interstate Commerce Commission was 501,000,000 tons, have accurate data been obtainable. This would indicate a growth in ten years of about one hundred per cent. But this figure takes no account of the distance each ton of freight travels. This factor is included in what is known as ton mileage—that is to say, the equivalent of the number of tons of freight carried one mile. Obviously, so far as the amount of service rendered is concerned, one ton carried a hundred miles is the equivalent of one hundred tons transported one mile. Every carrier totalizes in this way each ton of freight movement by multiplying it into the distance transported. For the United States as a whole, this ton mileage in 1910 was 255,016,000,000—that is to say, the service rendered would be represented by the carriage of that number of tons one mile. The appended diagram shows the phenomenal rapidity with which this transportation service has grown since 1899. The scale on the left hand side of the chart serves this purpose. The right hand scale indicates the miles of line in operation.
Relative Growth of Mileage and Traffic
The rapid growth up to 1893 was suddenly interrupted by panic and subsequent industrial depression lasting for about four years. Recovery began in 1897, since which time the freight movement has increased by leaps and bounds from about 95,000,000,000 ton miles to 255,016,000,000 ton miles in 1910. It is obvious that the growth of transportation in any country is bound to be more rapid than the increase either in population or in wealth. It appears, indeed, almost as if the volume of transportation in the United States increased more nearly as the square of population than in direct proportion. It has been estimated that we forward two and a half times as much freight per capita as some of the leading European countries like France. Our domestic population from 1890 to 1910 increased about fifty per cent. The railroad mileage grew at about the same rate. Yet the freight service surpassed this rate of growth more than six times over; and the passenger service augmented nearly as much. Both alike in 1910 were practically three times as great in volume as twenty years before. The diagram on page [78] is intended to illustrate the relative rapidity of this development. While population and mileage increased about one half, the railroads in 1910 hauled the equivalent of three times the volume of freight traffic handled in 1890. At the beginning of this period, the railroads had to seek the freight. Now it appears that traffic normally will seek the railroads. At times, even, as in 1906-1907, the railroads have actually sought to escape the flood of business presented.
The magnitude and importance of the growth of tonnage, as above described, is revealed by the rapid increase in railroad earnings. The course of these is shown by the succeeding chart on page [82]. Gross revenues of American railroads in 1889 were about one billion dollars. In 1910 they amounted to $2,750,000,000. Thus it appears that gross earnings almost equalled three times the amount of twenty years ago. The net income available for dividends has grown even faster. The increase was, roughly speaking, about five fold; namely, from 101 millions in 1889 to 515 millions in 1910. Nearly three and one-half times as much money went annually to the owners of railroad securities as dividends and interest, besides leaving surplus earnings for 1910 of about 222 millions available for improvements and surplus. But the limit of utilization seems to have been about reached on many roads in 1906; and an era of extensive new capital outlay to increase the existing plants and facilities ensued. Indications are not lacking to show that at the height of activity before the industrial collapse of 1907-1908, such a point of saturation had been reached, especially in trunk line territory and on the northern transcontinental lines.[55] On the Northern Pacific, for instance, the ton mileage increased from 2.2 billions to 5.2 billions between 1900 and 1906. The Northwest was suddenly confronted at that time with the new issue of enlarging facilities, which had been slowly becoming apparent elsewhere in the country during the preceding decade. Grain actually rotted on the ground, and an acute coal famine occurred, because of sheer inability of the roads to care for the new traffic. Changes in methods of business also somewhat exaggerated this strain upon the carriers. Merchants now expect quick delivery to order. They object to stocking up months ahead, even when conditions are auspicious; therefore, business, when especially stimulated, comes with an irresistible rush. All these causes, coupled with undiscriminating attempts by inadequately bedded roads to imitate the methods of progressive ones by prematurely increasing their train loads, led to a practical breakdown of the transportation business of the country in the autumn of 1906. To the student of transportation, this congestion denoted the attainment of a point of saturation for the then-existing physical plant. The analogy to the case of the Pennsylvania Railroad, previously described, is obvious. Such a predicament is bound to arise in the development of any carrier in a rapidly growing country. Its fiscal significance will appear in due time.
A comparison of the growth of business and of operating expenses for the entire railroad system of the United States over a series of years is given in the following table. The results are expressed by means of index numbers based upon the year 1880, taken as 100.[56]
Relative Increase in Traffic Items, Operating Expenses And Revenue From 1880 To 1906, Inclusive
| Items | 1880 | —Average, from and inclusive— | ||||
|---|---|---|---|---|---|---|
| 1881 to 1885 | 1886 to 1890 | 1891 to 1895 | 1896 to 1898 | 1904 to 1906 | ||
| Ton miles of freight | 100 | 134.36 | 203.23 | 264.90 | 313.81 | 595.0 |
| Passenger miles of passengers. | 100 | 138.12 | 189.46 | 233.15 | 224.65 | 412.0 |
| Operating expenses | 100 | 132.75 | 174.39 | 215.30 | 221.42 | 394.0 |
| Gross income from operation | 100 | — | — | 183.0 | 190.0 | 346.0 |
From this table it appears that between 1880 and 1906 the ton mileage of freight increased about six fold, and the passenger business more than four fold. Operating expenses, on the other hand, were in 1906 less than four times as great as in 1880. Increasing returns are quite evident. The period from 1880 down to 1896-1898, before the recent general increases in prices and wages took place, shows this even more strikingly. In order to transport more than three times as much freight and two and one-quarter times as many passengers, it required a direct outlay for operation of little more than twice as much money.[57] On the other hand, owing to the rapid rise of all operating costs since 1898, a comparison of expenditures confined to the last ten years by themselves, affords an apparent contradiction. The results for this period have already been given, classified in greater detail. And yet, despite this disturbing factor and the one earlier mentioned that these later operating expenses have been heavily loaded with improvement expenditures, it appears by comparison of 1895 with 1905, that passenger business has more than doubled, and freight business is two and a half times as great, while operating expenses in 1905 were not much over twice their amount ten years before.
EARNINGS & EXPENSES
A comparison of the movement of gross earnings with operating expenses introduces still another disturbing factor, namely, the changes from year to year in the level of freight rates as well as in the character of the traffic handled. The effect of fluctuating costs of production of transportation having just been considered, we may now turn to the fiscal returns as affected by the price obtainable for the service given. Any long-time comparison of results reflects the influence of the steady decline of freight rates during the generation prior to 1900. Thus comparing 1880 with 1898, as shown by the preceding table, operating expenses grew in the ratio of 100 to 221, while gross income grew from 100 to only 190. Three fold the freight business produced less than twice the revenue. Pushing the comparison later, down to 1906, operating expenses grew after 1880 from 100 to 394, while gross income rose to only 346. This reflects the influence during the last few years of the rapid rise in prices and wages.
According to the opposite diagram, comparing 1890 with 1910, both operating expenses and gross income from operation seem to have moved together; the curve of gross revenue rising proportionately only a little faster than that for operating expenses. The latter have risen from a general figure of about $800,000,000 before the depression of 1893-1897, to $1,822,000,000 in 1910; the former from about $1,200,000,000 to over $2,750,000,000. Both alike somewhat more than doubled, therefore, in twenty years. At times, especially during the rapid revival of business after 1897, before rising prices began to affect costs of operation, extraordinary increases in earnings appeared, outstripping the growth of expenditures. Comparing the year 1899 with 1895 we find that the gross earnings of the railroads of the United States increased by twenty-two per cent. This involved an increased expense of operation, however, of only eighteen per cent. Similar comparison year by year, there having been an enormous expansion of business, shows an increase in gross earnings somewhat more rapid than the growth of operating expenses. This differential advantage has progressively lessened since 1902, and especially since the let-up in 1907. The official returns for 1911 with the marked decline in gross, show an even more distinct drop in net earnings. Whether the need of an increase of rates commensurate with the augmented operating costs is imperative, can only be ascertained after a return to more normal business conditions.
These relationships would be the more striking could we exclude the enormous expenditures for betterments which have been charged to operating expenses during these years. Comparisons of net earnings are vitiated by uncertainty upon this point. Working over these results by comparison per mile of line, it appears that the rate of increase in earnings per mile of line for five years prior to 1900, was approximately double the rate of increase of operating expenses per mile of line. The greatly lessened cost of performing additional business becomes at once apparent. But these latter conclusions, as has been said, cover only a brief period of time. Judging by the results over many years, it appears that changes both in the level of freight rates and of wages and prices have operated to leave the railroads not much better off than they were some time ago. The only thing which has saved them whole in the face of rising prices and wages since 1900, and especially since 1907, has been the rise of freight rates and the enforced improvements in operation. With the methods of transportation, such as size of cars and locomotives and train loads, as they were a decade ago, very real distress would be more widely apparent than it is. On the whole, the public seems to have shared in the benefits of these improvements to a considerable degree. This statement, however true for the entire railroad system of the country as a whole, does not by any means represent the facts for any single system. Moreover, it is not by any means clear how fully the railroad system of the country has been enlarged and improved out of surplus earnings. There is reason to think that foundations in some cases—the Pennsylvania road, for example—have been laid during these prosperous years, for largely increased tonnage in the immediate future without a corresponding growth of expenses chargeable to plant; in other words, that the transition to a distinctly higher grade of operation has been effected out of surplus earnings.
The comparison of gross and net earnings from operation, if expenditures have grown almost as fast as gross income, confirms the preceding conclusions. Surveying the chart for the period since 1890, it appears that net earnings for the railroads of the United States have more nearly trebled than doubled; the increase having been 177 per cent. up to 1910. This takes no account whatever of the immense volume of new capital added to the system. The entirely distinct question of the relative rate of return upon the investment will engage our attention at a later time. Examination of the years of rapid revival after 1897 by themselves, however, especially for individual companies, shows striking results. This is especially true of roads, not then developed up to a fair working capacity for their plants.
An interesting comparison with the previous decade, 1870 to 1880, exemplifies this relation still further. The gross earnings of the trunk lines of the United States decreased very greatly per mile of line from $7,211 in fact to $6,636 during the decade; but at the same time the net earnings steadily increased. This was due primarily to the great volume of business developed,—the ton mileage increasing more than three fold during these ten years. It happened despite the fact that the miles of line during the same period had more than doubled. The following decade, 1880 to 1890, was represented by an increase of only 82.7 per cent. in mileage, while the number of tons of freight hauled one mile increased by 132 per cent. Density increasing in this way, a corresponding ability to carry at a lower rate per ton was a necessary result. So indisputably has this law—that an expanding volume of business up to a certain point, may profitably be carried at a continually lowered cost—been proved, that it is estimated by so competent an authority as the Engineering Review that, provided sufficient tonnage be available for 2,000-ton freight train loads, a cost of one mill per ton mile can be attained. Its significance may be realized from the fact that the lowest revenue per ton mile reported for the United States is 2.21 mills per ton mile for the long haul soft coal business of the Chesapeake & Ohio.[58] This, of course, does not imply that any railroad in actual operation, carrying all kinds of freight including a large proportion of local traffic, can in the immediate future hope to attain this result. It is intended only to show that, provided the volume of traffic be large enough, the cost of operation tends to decline as a matter of course, until a condition of congestion for the existing plant has been reached. At this point a new cycle of costs of operation and of profits makes its appearance.
The most important single factor in the production of increasing returns upon a railroad is the density of traffic; that is to say, the amount of business which can be conducted with a given set of rails, terminals and rolling stock. In other words, it is the degree of effective utilization of the plant and equipment. It is too obvious to need demonstration, after what has been set forth concerning the nature of railroad expenditures, that economy of operation and, consequently, profits are more or less directly dependent upon this fact. Such effective utilization of the property may be secured in two ways: either by a large tonnage per mile of its line, or else by a concentration of such traffic as it may have into large train loads, which can individually be transported at low cost. The first of these economizes the fixed expenses for roadway and line which respond but slowly to enlargement of traffic, by distributing them thinly over a large tonnage; the second economizes the mere movement expenses which tend to grow less rapidly than the size of the trains. For neither fuel consumption nor wages of train crews expands pari passu with the paying load. Fortunate the lot of the railroad which enjoys both these advantages, of density of traffic per mile of line and of tonnage capable of such concentration in heavy train units.
Traffic density—the tons of freight carried one mile per mile of line—is readily computed. The ton mileage, representing the total transportation service, is merely divided by the number of miles of line operated. The following graded table illustrates the wide range of this figure, according to the location of different companies and the nature of their business, as well as the change in the last few years.[59]
| 1902-3 | 1910 | ||||
|---|---|---|---|---|---|
| Traffic density | —Percentage of tonnage— | Traffic density | |||
| Agric'l products | Products of mines | Manufactures | |||
| Rock Island Company. | 428,116 | 25 | 29 | 14 | 581,000 |
| C. M. & St. P. | 605,139 | 23 | 24 | 17 | 709,000 |
| Great Northern | 657,102 | — | — | — | 814,700 |
| N. Y., N. H. & H. | 802,954 | — | — | — | 1,057,000 |
| Wabash | 885,208 | 24 | 32 | 9 | 1,322,000 |
| Baltimore & Ohio | 2,181,518 | 6 | 62 | 8 | 2,711,000 |
| New York Central | 2,163,000 | 16 | 44 | 12 | 2,548,000 |
| Lake Shore ('05) | 3,355,209 | — | — | — | 3,911,000 |
| Penn'a Railroad ('05) | 6,337,625 | — | — | — | 5,139,000 |
The first of these companies operates in a sparsely settled agricultural territory. The St. Paul system lies nearer Chicago, but is still largely dependent upon a local and rural constituency. The Great Northern—a great transcontinental trunk line—despite its sparsely settled western area, exchanges a large volume of through freight for the Pacific Coast for lumber and other bulky products carried east. The New Haven serves perhaps the most densely settled area in the United States, but much of its traffic is on branch lines and is of a retail character. The Wabash lies in well settled territory and hauls a heavy tonnage of low-grade freight. The last two are not only great trunk lines to the seaboard, but also tap the coal and iron fields. Much of their tonnage is consequently of low grade. The Pennsylvania enjoys a still further advantage, super-adding a rich local traffic in manufactures and merchandise. As compared with its rival trunk line, the New York Central, it hauls relatively little grain; but, on the other hand, the New York Central has a much smaller coal and iron business. Some one has aptly characterized the difference between the two roads, describing the New York Central as "operating between good points, but not through a good country" so far as local business is concerned. On the one, through traffic is supplementary to local business, while on the other it is the reverse. The high density of trunk line traffic is such that about two-thirds of all the tonnage of the United States is transported east of the Mississippi and north of the Ohio river.
Traffic density has enormously increased during the last two decades, as a result of the filling up of the country and the relative cessation of new construction. This is manifested by the growth since 1890. In that year the density was less than 500,000 ton miles per mile of line, and during the depression of 1893 it fell well below that figure. The total of 1,053,000 reported for 1911 represents, therefore, more than a doubling of the density in twenty years. This growth during 1898 and 1905-'06 was notable. The latter period, especially, was a time when congestion upon all the roads of the country occasioned much distress. The fact is evident that the country has well grown up to the measure of its existing transportation facilities.
The second measure of effective operation for the production of increasing returns, is concentration in the trainload. This is regarded by many as the supreme test of efficiency in management. Great progress has been made during the past years in this regard in the United States—an improvement which has largely enabled the carriers to bear up under an increasing burden of expenditure. The trainload is generally adopted today as the unit of operation, measuring the cost of service.[60] It is a fact that, within certain limits, the cost of handling a train does not vary greatly with its capacity. Since the first application of air-brakes to freight trains in 1887, a train crew sufficient to handle fifteen cars can care for thirty about as well in long haul wholesale business. Fuel cost, also, as has been shown, lags well behind the rate of increase of the load. Eaton in his Railroad Operations, concludes that from thirty to fifty per cent. of cost is independent of the trainload. The effect is that any increment in the paying load very materially decreases the cost of operation per ton.
Progress in the United States in increasing the average train load is shown by the lowest curve on the diagram on page [97]. The scale applicable is along the left hand side of the chart. From 175 tons per train in 1890 to an average figure of 383.10 in 1911 is certainly a remarkable showing. The most rapid increase seems to have occurred after 1897, with the first resumption of general prosperity. As for individual roads, the following table of average train loads is suggestive, as showing the gradation between roads of different type, as well as progress from year to year:
Average Number of Tons of Freight Per Train (Tons per Train Mile)
| Road (Fiscal Years) | 1901 | 1905 | 1910 |
|---|---|---|---|
| Pennsylvania Railroad (East of Pittsburg) | 478 | 498 | 649 |
| Pennsylvania Company (West of Pittsburg) | 382 | 420 | 511 |
| Pennsylvania System (Both) | 454 | 476 | 607 |
| Chesapeake & Ohio | 511 | 557 | 701 |
| Great Northern | 347 | 541 | 520 |
| Erie Railroad | 379 | 416 | 497 |
| New York Central & Hudson River | 365 | 381 | 413 |
| Northern Pacific | 324 | 367 | 429 |
| Atchison, Topeka & Santa Fe | 238 | 265 | 298 |
| Chicago & Northwestern | 255 | 259 | 261 |
| New Haven | 208 | 222 | 293 |
| Southern | 190 | 194 | 237 |
The great coal and iron roads, the trunk lines and the transcontinental lines all concentrate their business; while the granger roads, like the Atchison and North Western, the roads with much local business like the New Haven or the Southern, operating in sparsely settled regions, all have of necessity smaller trainloads. But all alike betray remarkable progress in this regard. In 1870 the average for the best roads was little above 100 tons,—such as 103 tons reported for the New York Central and 137 tons on the Lake Shore. From this level to results of 400 or 500 tons on the average represents a notable achievement. The Lake Shore for 1911 reports a revenue train load of 635 tons. It should be observed, however, that such results come from longer trains, not, apparently, so much from larger cars. To raise the average trainload on the Wabash from 196 tons in 1890 to 386 tons in 1908 is also worthy of note. The significance of these recent figures can be realized from the fact that the London & North Western, one of the leading railroads in Great Britain, reports recently an average freight train load of only 68 tons. This represents probably a fair average for European railroads as a whole, although in England the general practice of privately owned cars, of light locomotives, short freight sidings, etc., may reduce the figure slightly below the continental average. Statistics not only show the notable improvement in recent years; they at the same time show how the trainload performance is affected by trade conditions. For nearly every road the trainloads for 1904 were distinctly lower than in the preceding years. This was a year of acute business depression. The movement of great staple commodities, such as iron ore, coal, steel and iron and lumber, was greatly curtailed. All business was conducted on a narrower basis. Smaller trainloads were an almost inevitable consequence. The revival in the following year, however, immediately improved the conditions of operation, as the figures indicate.
It will be noted that the figures for the American roads above given represent averages. These are compounded from local and through traffic taken together. It is apparent at once that local trains must average far lighter loads than are customary upon long hauls without breaking bulk. Thus New England railroads report for 1906 an average trainload of only 220 tons, while other parts of the country, such as the North Central group, report 426 tons of paying load. Only by separation of local from through business can we adequately appreciate the enormous advances which have taken place in railroad operation in the United States, with corresponding reductions in the cost of transportation. While the New York Central at one time reported an average trainload of 322 tons, the average load of its through trains on the main line rose as high as 750 tons. More than twice this figure is attained upon the Pittsburg, Bessemer & Lake Erie road in hauling ore from the lakes to the furnaces at Pittsburg. The Illinois Central, for its low grade and long haul to the Gulf, has recently built locomotives capable of hauling 2,000 tons of net paying load. A standard grain train on the Lake Shore in 1903 consisted of fifty cars holding forty tons each. Even this figure has recently been surpassed by the New York Central, which, with its monster new "mogul" engines, hauls eighty loaded 30-ton cars, giving 2,400 tons of revenue freight. The Mallet locomotives with a tractive effort of 100,000 lbs., at present seem to have reached the limit of size and weight. Seventy-five grain cars holding 1,000 bushels apiece are equivalent to the production of twenty bushels per acre of an area of six square miles. This is an ordinary trainload. It is not infrequent to transport a fifth more than this. Eighty and even one hundred cars in a train since 1900 often bring the load up to 3,600 and even 4,000 tons of freight. Such a train is over four-fifths of a mile long. From these figures it certainly appears that trainloads for long haul are standardized at not less than 2,000 tons, a figure which would have seemed absolutely impossible to railroad managers of fifteen or twenty years ago. The maximum trainload in Germany on coal traffic, which, of course, greatly exceeds any general average for trains of all classes, is about five hundred tons. It has been regarded as a notable achievement that this represents an increase of about one hundred tons in the last decade.
On the other hand, the extravagant promises of economy from large trainloads have been considerably abated of late. It has been effectively demonstrated that there is a limit to such growth. Only low-grade and long haul carload traffic can profitably be concentrated. In 1903, for instance, a general decrease in trainloads followed a reduction in the relative amounts of low as compared with high grade tonnage. Less iron, coal, and raw materials and more merchandise and manufactures offered for carriage, necessitated a positive reduction in the trainloads as already mentioned. Nor can local business in less than carload lots profitably be concentrated beyond a certain point. Grades must be uniform to attain such economy. The trainload must not exceed the traction power on the heaviest inclines, or else expensive pusher engines or breaking up of trains will offset all other savings. Moreover, too great trainloads even on the best roadbeds involve slower speeds. Not only is other traffic thus impeded, but the economy in wages vanishes after a certain point with such slower movement. The fashion had been set by James J. Hill, the master mind in the transcontinental field. His notable results, due to a careful working out of every detail, led to a frenzied imitation on all sides. Many roads then discovered to their loss that while they had provided rolling stock for heavy loading, ampler terminals, longer sidings and heavier bridges also were a necessary accompaniment. Part of the congestion of traffic in 1906-1907, already mentioned, and a portion of the financial embarrassments of recent years, were undoubtedly due to too great haste in seeking economies of this sort in rolling stock, without at the same time making provisions for enlargement of other portions of the plant. A more discriminating policy has consequently resulted of late. Traffic is being sorted according to its availability for concentration. The best utilization of the rails and terminals is being more considered. Business demands for quick delivery also enter into the calculation. Instead of a few huge slow-moving leviathans blocking other trains, the line may perhaps better be kept full of many smaller trains moving more nearly together. Such are certain of the details now being worked out. None of them, however, weaken the main proposition that a discriminating concentration of traffic conduces very greatly to economy of operation.
This concentration of traffic units is largely due to technical improvements of various kinds. Foremost among these has been the development of the steel rail. In 1880 more than seven-tenths of our mileage was still equipped with iron rails. Rapid progress ensued during the next ten years, upward of eighty per cent. being in steel rails by 1890. At the present time, the proportion is above ninety-eight per cent. In fact, no iron rails have been made for many years, except for repairs and on insignificant branch lines in remote parts of the country. A steady increase in the weight of the rails has ensued. The standard rail for main lines until the Civil War weighed fifty-six pounds to the yard. In the seventies this was increased to sixty-three and above; in the latter eighties the best practice was to use seventy-five pound sections. Since 1900, they frequently run as high as one hundred pounds, in regions of dense traffic. Few main lines of track now average less than seventy-five pounds. It is this increase in the use and size of steel rails which has permitted improvements in rolling stock. But, on the other hand, grave dissatisfaction with the quality of the rails manufactured of late years, particularly since the establishment of practical monopoly under the United States Steel Corporation has become manifest. Numerous accidents due to breakage of rails, especially since 1905, have revealed either defects in manufacture or an undue load imposed by heavier rolling stock, too high speed, or both. The matter has become steadily worse. In 1902 the Interstate Commerce Commission ascribed seventy-eight accidents to broken rails. Nine years later the number had risen to 249. The need of improvement is now fully recognized on all sides.
The power and efficiency of locomotives has increased, perhaps, more since 1890, and particularly since 1895, than in any previous period. Superior materials particularly have contributed to this result, such as the substitution of cast steel for cast iron and of nickel steel for wrought iron in axles, crank pins, etc. Some of the improvements which may be mentioned are, for instance, an increase in the average heating surface from 2,000 in 1890 to nearly 3,000 square feet at the present time, and an increase in the average steam pressure from 160 pounds to 210 pounds per square inch in the same period. The maximum weight has also increased very rapidly. The average weight of a locomotive at the close of the Civil War was approximately 90,000 pounds. This has increased in somewhat the following proportions: To 1881, 102,000 lbs.; to 1893, 135,000 lbs.; to 1895, 148,000 lbs.; to 1898, 230,000 lbs.; rising in 1900 to 250,000 lbs. Passenger locomotives since 1892 have almost doubled in weight, and freight engines have more than done so. Compound and double or Mallet locomotives are also supplanting those of simpler type for peculiarly heavy service. The first compound engine was built in 1899, only one being constructed in that year. In 1900 a single locomotive works turned out 500—a number constituting two-thirds of the entire output of that company—for use in the United States. Such locomotives cost more in first instance; but the greater weight and steam capacity, together with the considerable saving in fuel, amounting to perhaps twenty per cent., more than offset this objection. The traction efficiency of these improved locomotives may be shown by the statement that in 1885 the decapod Baldwin locomotives, made to haul 3,600 tons on a level, represented the maximum capacity. Five years later the same company built locomotives to haul 4,000 tons, not only on a level, but on any ordinary grade. As indicative of late advances in locomotive construction, we may instance those built about 1900 for the Illinois Central and the Union Railroad at Pittsburg, both low-grade roads, carrying exceedingly heavy train loads. The first of these weighed, including its tender, 365,000 lbs., the Union Railroad consolidation engines weighing 334,000 lbs. Such locomotives are stated to be twice as powerful as the best which were manufactured twenty-five years ago. This record is surpassed by engines which have just been built for pusher service on the soft-coal Virginian Railway. They are of the Mallet type, weighing 540,000 pounds; with a train capacity of 4,230 tons. The evaporative surface is 6,760 square feet. As summarizing the increased efficiency of American locomotives, we may instance the figures of the Interstate Commerce Commission, showing the average performance of locomotives for the United States. Whereas in 1894 the average number of tons of freight carried per locomotive was about 32,000 tons, this rose to 46,000 tons in 1899, and to 54,600 tons in 1906. At the same time the number of tons of freight hauled one mile for each freight locomotive in the United States increased from 4,000,000 in 1894 to approximately 6,000,000 in 1899, and to 7,300,000 in 1910. In other words, the average performance of each freight locomotive in the United States has increased by more than fifty per cent. in the last decade.
The economy of large freight cars has been amply demonstrated. Marked advances in the average capacity have taken place in the last few years. In the sixties a 15,000 pound freight car represented about the normal capacity. This has increased, as measured by maximum load, to 28,000 pounds in 1873; to 40,000 pounds in 1875; to 60,000 pounds in 1885; to 70,000 pounds in 1895; while at the present time 80,000 to 100,000 pound cars are in everyday use. Cars of this latter type, built to carry forty to fifty tons, are necessarily of pressed steel construction, and are mainly useful for the carriage of coal and ore and similar low-grade commodities. It seems to be questionable whether a maximum capacity has not been about reached, in view of the exceedingly great wear and tear imposed upon track, bridges, etc. Up to this point the economy of heavy loading is indisputably proved. Increased size of cars far more than proportionately increases the paying load. Thus, for instance, an 18,000-pound car will carry 20,000 pounds load, while a 22,000-pound car will carry a load twice as great. It is stated on good authority, for example, that a car of forty tons capacity can be built which will weigh but 3,000 pounds more than a thirty-ton car, and cost hardly fifty dollars more. This is undoubtedly the reason why at the present time the average load per car is at least one hundred per cent. greater than the maximum which was possible twenty years ago.
A steady increase in the freight performance of American equipment is shown by official data of the Interstate Commerce Commission. Whereas in 1894 it required on an average 1,888 freight cars for every 1,000,000 tons of freight transported their capacity has so increased that the same amount of traffic in 1906 was carried by only 1,127 cars. In other words, an enormous increase in the freight service had been attained. On the other hand, the actual mileage performance of much of this equipment is extraordinarily low. It averages only about 9,000 miles annually or an equivalent of thirty miles a day. At a speed of fifteen miles an hour, this means that actual movement under a paying load, allowing for one-third of its journeyings empty, occupies but little over an hour and a quarter a day. The actual performance is, however, not quite as poor as appears. For, of course, this average includes the non-movement of all cars in bad order (sometimes one-tenth of the total); and also all idle equipment. This latter consideration is of great moment. Special cars, suitable only for seasonal business; and especially demurrage delays, often forty-eight hours or more, adversely affect the result. Where separate mileage records of "foreign" cars are kept, as on the Wabash system, it appears that their mileage is twice as high as for "home" cars. The difference is due to the fact that cars off their own rails, mainly are in actual demand and are kept moving. Probably the daily performance of loaded cars is not less than 150 miles. But a journey of this length, with two days' delay at each end at terminals, would bring the average down to about thirty miles. The public does not always appreciate these facts; and is often querulous. It is certain that the problem how to secure greater efficiency in the use of this equipment is as yet imperfectly solved.[61]
Revenue and Cost Per Train Mile.
The discussion of the nature of railroad expenditure may be concluded by a comparison of the net effects of the developments of the last few years; that is to say, of steadily expanding costs of operation and of slowly and tardily rising rates chargeable for service on the one hand, as over against the results obtained by mechanical improvements and increasing economy of operation coupled with growth of tonnage, on the other. The average cost of transportation has greatly increased. This, according to the statistics of the Interstate Commerce Commission, is shown upon the diagram herewith by the middle curve.[62] The average cost of running all trains per mile, which had fallen from 96 cents in 1891 to 91.8 cents in 1895, rose to $1.07 in 1900, and in 1911 increased by more than one-third, to $1.54 per mile. Against this should be set the fact that while the trains thus cost more to haul per mile, their paying load has increased in somewhat smaller proportion. This is shown by the upper curve on the diagram above mentioned. For freight trains the increase has been from $1.65 to $2.89 per mile. Passenger revenues per train mile have increased less rapidly. This follows from the well-known fact that freight rates have been increased, while passenger rates have not changed for the better during this period; and also that economies in concentration of traffic are necessarily confined to the carriage of freight. The immense gain in trainloads has probably been the main element, among these, as already observed.
Among other things this diagram also brings out the effect upon revenue of the substantial rate increases after 1900, coupled with the elimination of rebate losses. It will be observed how sharply the upper curve of revenue per train mile slants upward after 1899, by comparison with the lower line denoting cost. The same thing apparently occurs again after the set-back of 1907.
The interrelation between these various factors may be more readily shown by confining our attention to the period during which a practically uninterrupted development of business ensued, thus eliminating the confusion due to the four years of depression after 1893. The data on our various charts for the years 1898-1906 demonstrate that during this period the ton mileage, measuring the freight traffic handled, has practically doubled. To transport this doubled tonnage, a growth in freight train mileage of only eighteen per cent. was necessary. This was due, of course, to the notable concentration of train loading, already described, as well as to a density of traffic per mile of line almost sixty per cent. greater. As a consequence of these economies in operation, the revenue per freight train mile has increased by about fifty per cent.; while the average cost of running all trains per mile has grown less rapidly, namely, by 42 per cent. Had we data for freight trains alone it would surely be lower than this. In the meantime during this period of eight years, the rate of return in revenue per ton mile received, remained practically unchanged.[63] From all of which it would appear that even despite all these confusing factors, the law of increasing returns, so far at least as 1898-'06 was concerned, was making itself appreciably felt.
Attentive consideration of the available figures, especially as shown by diagram on page [97], shows apparently that the various economies in operation, heavier trainloads and the like, have not since 1906 yielded any greater profit from mere operation, with the ever increasing volume of business. In other words, the increase in the margin between cost of operation and revenue per train mile,—measuring profitableness per unit of movement—has not kept pace with the augmentation of the size of that unit,—the trainload. Thus it follows, as one would expect, even making allowance for all changes in rates, wages and other expenses, that the law of increasing returns as applied to railroads, does not arise primarily from economic considerations as to mere physical operation. The law originates primarily in the fiscal conditions attaching to the heavy capital investment,—the fact, namely, that fixed charges up to a given point of saturation tend to remain constant, absolutely; but become proportionately less, therefore, as the volume of business expands. From this fact, therefore, rather than because of any marked economies of large-scale production, may it be affirmed that railroads offer a notable example of the law of increasing returns. The important bearing of this distinction will appear in due time in connection with the problem of the determination of reasonable rates. Added significance, also, is given to the relation between the cost of new capital, measured by the rates of interest on bonds and dividends on stocks, and the supply necessary to provide adequate extensions and improvements in future.
Appendix:
The subjoined chart, reproduced by the Railway Age Gazette from a bulletin of the Bureau of Railway Economics, brings out forcibly the manner in which, within the short time limits of full utilization of plant, a large increase of business can take place without a commensurate growth of expenses. The phenomenon for railroads is of course cyclical. Annually, as here indicated for 1911, the second half of the year is marked by a much heavier movement of traffic, principally, of course, the crops. But expenses never rise in proportion. This is most evident for the eastern group of roads, as here shown. This causes the net revenue curve, also, to vary much more than in proportion to the volume of traffic, in consequence.
Monthly Revenues and Expenses per Mile of Line from 1911 and 1912.