The preceding considerations hold good not alone of increased facilities, but of their curtailment as well. This point is often neglected in respect of capital outlay, which once made cannot be recalled. Rotting of ties we have held to be a constant expense of operation. It goes on steadily, whether traffic conditions be good or bad. But, on the other hand, those ties, if they be under a third or fourth track, would never have been laid had not there been a promise of business sufficient to render the added investment profitable. As Lorenz observes, "the question is not, What expenditures would disappear if a certain proportion of the traffic should be discontinued? but What expenditure would not now be incurred if that traffic had never been called forth?" Viewed in this way, even the necessary replacement of ties under a (temporarily) little used extra track, is an expense determined at some time, even if not always, by the volume of the business. In the long run, therefore, the percentage of total cost which we may assign to an increase in the volume of traffic, is higher than appears from a cross-section of expenses, taken, as was at first had, in a given year. Lorenz has illustrated this steady expansion of all groups of expenditure in relation to expansion of traffic by the following table, in which the actual figures for each year [brought down to date] are replaced by an index number based upon 100 for the year 1895. It would have been highly suggestive to continue all of this data alike to the present time; but, as noted on the table, certain items have been so modified by changes in accounting practice, that this could not be done.
| Gross earnings from operation | Ton miles | Passenger miles | Total operating expenses | Maint. of way & structures | Maintenance of equipment | Conducting transportation | Gen'l expenses | |
|---|---|---|---|---|---|---|---|---|
| 1895 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 |
| 1896 | 107 | 111.8 | 107 | 106 | 111.2 | 117.9 | 103.1 | 99.4 |
| 1897 | 104 | 111.6 | 100.5 | 103 | 108.5 | 106.4 | 99.8 | 98.4 |
| 1898 | 116 | 133.8 | 109.7 | 113 | 120.4 | 124.9 | 109.1 | 101.1 |
| 1899 | 122 | 145.1 | 119.7 | 118 | 126.8 | 134.6 | 115.6 | 110.0 |
| 1900 | 138 | 166.1 | 131.5 | 132 | 150.4 | 164.2 | 126.9 | 112.7 |
| 1901 | 147 | 172.5 | 142.3 | 142 | 164.6 | 173.2 | 135.5 | 121.8 |
| 1902 | 160 | 184.5 | 161.5 | 154 | 185.2 | 200.2 | 151.7 | 131.4 |
| 1903 | 176 | 203.2 | 171.6 | 173 | 198.6 | 225.6 | 174.7 | 142.1 |
| 1904 | 184 | 204 | 179.8 | 184 | 194.8 | 250.7 | 188.6 | 153.5 |
| 1905 | 193 | 219 | 195 | 191 | 191 | 253 | 179 | 154 |
| 1906 | 216 | 254 | 206.5 | 212 | 216 | 288.8 | 194 | 166 |
| 1907 | 240 | 277 | 227 | 241 | —[40] | —[40] | —[40] | —[40] |
| 1908 | 222 | 256 | 238 | 230 | — | — | — | — |
| 1909 | 224 | 256 | 238 | 220 | — | — | — | — |
| 1910 | 256 | 300 | 265 | 251 | — | — | — | — |
According to this showing, maintenance of equipment, which we held in our analysis to be about one-half a constant expense and independent of traffic, especially after 1900, appears to have actually outrun the expansion of ton-mileage and passenger business. How largely this is due to actual purchases for the sake of future growth is not determinable. And maintenance of way outlay—one of our largely constant expenses—has increased, in fact, more rapidly than conducting transportation, which we held to be mainly variable. But these figures are confused by the failure to differentiate in the accounts, mere maintenance from actual improvements and additions to plant. Expenditures for these latter purposes, charged to operating expenses rather than to capital account, have been so enormous during these years of prosperity that they confuse the true facts utterly. It is to be hoped that now with the revised statistics since 1906, which will permit a clearer definition of these expenditures in detail, an analysis covering a series of years will bring out the real relationships. Equally important is the fact that these years have been characterized by rapid and extensive rises, both of prices and wages. Had our table covered a longer series of years the results would have been more clear. Until such an analysis be made, it will suffice for our purpose, viz., the analysis of the principles of railroad rate making, that we adhere to our first general conclusion, namely—that of the total expenditures of a railroad at any given time about two-thirds of them are constant, while only one-third vary with the ups and downs of the volume of traffic. Comprehending in survey a long period of years, it might happen, as Acworth concludes, that nearly one-half of the total expenditures were entirely fixed in character, leaving the other half as dependent upon the amount of transportation effected.
The manner in which heavy capital outlay for maintenance accompanies as well as partly accounts for a decline in the cost of conducting transportation on American roads, is graphically shown by the diagram on the next page.[41] During ten years a steady decline in direct operating costs has accompanied an equally marked upward tendency in expense of maintenance. The bearing of this on the problem of rate advances in future is direct. Profitableness results from two separate sources; economical operation such as longer trains and better loading, and also from far heavier capital investment in plant, by which such operation is rendered possible.[42] Both alike, however, attend upon increased volume of business. Heavy capital investment may lessen immediate maintenance charges,—lower grades and straighter alignment naturally wearing less; but, on the other hand, the burden of interest and other fixed expenses steadily grows. How will they stand toward one another by 1925 on the eastern trunk lines? Will growth of business bring lower rates or not? A fine field for further analysis is as yet unworked.
RATIO OF MAINTENANCE OF PROPERTY AND CONDUCTING TRANSPORTATION TO TOTAL OPERATING EXPENSE.
One final relation between operating and fixed expenses is left for consideration. It is so well put by J. Shirley Eaton in an unpublished paper, that it can best be stated in his own words:
"It is impossible to have an absolute and universal line of demarcation between the direct and the fixed expense, that shall be the same on all roads. One road chooses to reduce a grade and thereby increase the capital account in order to save in the current expense of a helper at a hill or the lost margin of efficiency of the loaded train on the level. The relation between a current expense and the annual charge of the capitalized cost on a fixed plant that performed the same service, was well illustrated in a case arbitrated by Mr. Blanchard in New Orleans. One road which did not have access to the heart of the city undertook to compensate its disadvantage by trucking to and from its depot. The hire of a public truckman to perform the service for its patrons was very soon commuted to the practice of paying the amount of the truck expense to the consignee by deducting it from the freight bill rendered, the consignee or shipper performing the service. This, known as 'drayage equalization,' was claimed by competitors to be in the nature of a rebate to secure business. The arbitrator decided that the first roads had elected to buy their right of way into the heart of the city; and the road that had not built into the city elected to pay the expense of the same service in the shape of a current drayage bill instead of in the shape of interest on money invested in right of way. Therefore he decided there was no cause for complaint."[43]
Railroad expenditures, as Taussig clearly pointed out a number of years ago,[44] afford a prime illustration of the production of several commodities by a single great plant simultaneously at joint and indistinguishable cost. The classic economists illustrated this law by the joint production of wool and mutton and of gas and coke. In both of these instances neither commodity could conceivably be produced alone. Nor was either one, so to speak, a by-product of the other. So nearly of equal importance are the two, in fact, that the cost of production for each may approximately be determined by dividing the total cost according to the relative worths of the two or more products. The law of joint cost with reference to the production of transportation is somewhat different. Compare, for instance, the carriage by a railroad of thousands of passengers and different commodities in every direction, under varying conditions, singly or by wholesale, slowly or by express, over a given set of rails every day; with the operation of a great refinery producing simultaneously kerosene, gasoline, lubricating oils and greases as well as various odd chemicals. Both are examples of production at joint cost, but with various important contrasts. In the refinery all the costs are joint. All the processes are interlocked. Every increase in the output of kerosene produces pari passu an increase of the other commodities. On the railroad not all, but only a part of the costs are joint, in such manner as has been shown. For, from the joint portion of its plant—roadway rails and locomotives—the railroad may produce transportation of different sorts quite independently. It may choose to especially cultivate its passenger traffic, or its cotton or coal business. After a certain point of congestion is reached, the various sorts of traffic on the railroad may even become actually competitive with one another so far as the joint use of the plant is concerned. It is plain that this could never happen in the refinery. The use of more stills for making kerosene would automatically produce more by-products of every sort. But on a railroad it might well happen that the coal and passenger business might come to interfere with one another. A choice of emphasis as between fast refrigerator beef or fruit traffic, and limited express service, may have to be made on a long single track line. Nevertheless, in spite of these peculiarities of transportation, the general law of joint costs holds good, in that it is a demand for each service rather than its cost which finally determines the chargeable rate.[45] This must be so, because of the fact that the cost of each shipment is so largely joint and indeterminate, and that a large part of the entire plant is indistinguishably devoted to the general production of transportation without reference to particular units of business. One concrete example may serve to illustrate this point.