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.