In 1901 the net capitalization of our railroads was, in round figures, $11,700,000,000. Six years later, or at the end of the greatest period of material prosperity that the United States has ever known, this capitalization had increased to $16,100,000,000—approximately thirty-seven per cent.
A great deal has been written about railroad capitalization—a great deal without knowledge of the real facts in the case, and a great deal more with knowledge but also with malicious intent. These figures speak for themselves. Translated, they represent the expenditures of the railroads for permanent improvements and expansions during that busy seven-year period. At first glance an expenditure of more than $4,000,000,000 is staggering. Yet what are the facts? The facts are that hardly one of these roads expended enough that memorable season to keep pace with the vast demands of the freight and passenger traffic—particularly the freight—upon them. We experienced great railroad congestions during the winters of 1903, 1905, 1906, and 1907. And the loss to the large users of railroad facilities because of these earlier congestions is no vague thing; it can be figured high in the millions of dollars. And furthermore it can be said that there is no period of expansion in recent American commercial history that has not been both limited and hampered by the lack of transportation facilities. What a commentary this, on our so-called national efficiency!
Today we are just crossing the threshold of what seems to be an even greater period in the industrial expansion of the nation.[1] Yet how are our railroads prepared to meet their great problem? In 1901, as we have already seen, they met it by an expansion of their physical facilities. But in 1901 the railroads had credit. In 1916 the credit of many of them had become a rather doubtful matter. And this, of course, has been a serious detriment to their expansion—to put it mildly.
An analysis of the service, both freight and passenger, of the railroads in the year 1907, the last of the “big years” in railroad traffic, compared with that of 1914—the most recent year whose figures are available—is illuminating in estimating railroad credit today, or the lack of it. The passenger-mile—representing the progress of one train over one mile of track—is the unit of that form of traffic. In 1914 the total passenger-miles had increased to 35,100,000,000 from the total of 27,700,000,000 in 1907—or 25.7 per cent. Similarly the ton-mile is the unit of freight transportation. As the name indicates, it represents the carrying of one ton of goods of any description for a mile. In 1914 the ton-miles had grown to 288,700,000,000 from 236,600,000,000—or twenty-two per cent.
But, as the traffic grew, it was necessary that the railroad should grow. Despite supreme difficulties in finding credit it did manage to invest some $4,042,000,000 in property expansions and reconstructions during the seven years from 1907 to 1914. Yet this very money must be paid for, and, in view of the gradually impaired credit, paid for rather generously. At five per cent, this expenditure represents an added annual interest charge of $202,101,000 to the railroads of the United States, a figure whose great size may be the better appreciated when one realizes that it is considerably more than half a million dollars a day.
Against this increased outgo one must measure increased revenues for 1914 over 1907, of $452,188,000—one deals in large figures when one speaks of the earnings and expenses of more than a quarter of a million miles of railroad. Yet even increased earnings of more than $400,000,000 are not so impressive when one finds that operating expenses and taxes in 1914 were $506,888,000 higher than in 1907. And both operating expenses and taxes are far higher in 1916 than they were in 1914.
Hold this picture up to the light. I have begun to develop the huge plate for you. Now study its details for yourself. An investment of $4,000,000,000—more than ten times the cost of the Panama Canal—produced, at the end of a seven-year cycle, increased transportation earnings of more than $450,000,000; yet it required $500,000,000, or an excess in a single year of more than $50,000,000, to meet the pay-roll, material tax, and other costs of operating the railroads. And in this figure we have not taken account of that annual interest charge of more than half a million dollars a day for the huge $4,000,000,000 investment fund.
That interest charge cannot be ignored. Bankers demand their pay. Add the deficit in a single year—a normal year, if you please. Here it is—$54,698,000 plus $202,100,000—and you have a total deficit of $256,798,000. And this is but a single year. The years that preceded it were no better.
The money that went to meet these deficits was provided from some source. Where did it come from? Most of the big railroaders know. They will tell you, without much mincing of words, that it came from previous accumulations of surplus, or else from money withheld from the upkeep of the physical property of the railroads. Of this last, much more in due course. For the present moment, consider that great $4,000,000,000 expenditure between 1908 and 1914 for additions and betterments. It was none too much—not even enough when one comes to consider it beside the great expansions in service as represented by the showings of passenger-miles and ton-miles. And yet today, as we shall see in due course, the railroads stand in need of far greater development and expansion than ever before in their history. Five or six years ago that supreme railroader, James J. Hill, estimated that the railroads of America would need a further expenditure of $1,100,000,000 a year upon their properties before they would be in shape even to decently handle the traffic that would be coming to them before the end of the present decade. Hill was a master railroader who stood not only close to his properties but close to the great territory which they serve. He knew that the states of the Union which are west of the Mississippi River had been developed to only twenty-seven per cent of their ultimate possibilities. It would be hard to state the lack of development of the railroads of that territory in exact percentage. It certainly would be a figure far less than twenty-seven.