| 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.