adopted to secure this result. At one time all new issues of stock were sold at auction to the highest bidder. At another time, the public service commission fixed the price below which new stock could not be issued. If the commission fixed too low a price, valuable "rights" accrued to stockholders. All these methods were aimed at securing the necessary funds for railroads at the lowest cost to the community, and scant attention was paid to claims of stockholders that they should be allowed to make their own investments on their own terms.

The bait to the investing public was twofold-the somewhat shadowy protection of the fifth amendment to the Constitution of the United States, and the selfinterest of the public that nothing would be done to discourage further investments when needed. At the present time, neither of these has sufficient force to induce investments in new issues of railroad shares, and loaning money through the purchase of bonds is becoming more hazardous.

But to go back to the functions of the railroad corporation. The appointment of the management of the operations of the road was delegated to the stockholders, as it seemed only just that the persons who furnished the money should control those to whom they were to look for the return on their investment; but the managements, that is the presidents and boards of directors, are none the less public officers though privately appointed. Mr. Adams insists on this, saying, "they are essentially trustees,' not only for the security holders to secure a return on the investment, but also for the public to see that it gets the efficient service so necessary to its welfare. This doctrine of trusteeship does not rest on Mr. Adams alone. The Supreme Court of Massachusetts has on various occasions considered the relations of the railroads to the public. Chief Justice Shaw remarked, in one opinion: "It is true that the real and personal property necessary to the establishment and management of the railroad is vested in the corporation; but it is in trust for the public. The company have not the general power of disposal incident to the absolute right of property; they are obliged to use it in a

particular manner, and for the accomplishment of a well-defined public object." Chief Justice Taft used similar language in the recent "recapture" decision.

A trustee holds the legal title to property for management, but the real owner is his beneficiary for whom he manages it. The railroad corporation is a governmental device to secure the necessary money with which to build and equip the railroads, and is a convenient intermediary between the general and the investing public. Nowadays it performs the additional function of holding off government ownership with the attendant evils of political interference, although even that function is near the vanishing point, and whether political or labor union interference is the most harmful may be an open question. The combination is most deadly.

At the present time, and with most railroads, the stockholders have, in practice, no control of the management. The Pennsylvania Railroad, for example, reports that nearly one half of its stockholders are women, holding one third of the stock, with an average holding of forty-seven shares. Of the one hundred and forty thousand stockholders the average holding is only seventy shares. It is manifestly out of the question for this vast number of people with small individual interests to unite in any concerted movement, and boards of directors are usually self-perpetuating. As a recent writer has said, "authority to act is largely delegated to executive committees, and the entire directorate meets only at stated intervals and then pretty largely to felicitate the officers and employees and to approve the work of the management.” The stockholders are a pitiably helpless lot, and it has long been a financial axiom that a minority of a third, or even less, can always control the election of directors. This minority is not infrequently controlled by banking interests, and necessarily and properly so. The great body of stockholders cannot or, at least, do not provide the money for extension and expansion, and such money is, and must be, under existing conditions raised from the investing public through bankers who purchase, or underwrite, new issues of securities and place them with the public,

who take them, in many cases, through their confidence in the knowledge and good judgment of the bankers who offer them.

From the nature of the case the bankers are selfishly interested to see that their customers are not disappointed in their investments, and to that end the banker seeks representation on, and is interested in the choice of, the boards of directors, and frequently dictates their financial policies. A few years ago the bankers who raised the money for the Chesapeake and Ohio Railroad stipulated as a condition that no dividend should be paid for a term of years so that all net earnings should be reinvested in the improvement of the road, thus increasing the earning power without increasing the amount of securities upon which a return must be paid.

Bankers, as a rule, are not trained railroad men, and the main function of a board of directors is to select a competent president and support him in his policies and appointment of subordinates. Managerial ability is rare and competition for it is keen, and the public must expect to pay for it. The railroad problem to-day is largely a question of management, and, as the president of the General Electric Company has recently stated, the conflict to-day, and particularly with railroads, is not so much between labor and capital, as between labor and the management, where management is as much an employee as labor itself. The active management rarely has any substantial holding of stock. The executives, being, as has been pointed out, public officers privately appointed, have a double obligation and allegiance. It is their duty to use their utmost exertions to see that the investors in the railroad securities, both bonds and stock, secure an adequate, or the stipulated, return, and they also owe a duty to the public whose road they are operating to furnish cheap and efficient service. The time is now past, if indeed it ever existed, when railroad corporations could pay dividends commensurate with those paid by wholly private enterprises. It must not be forgotten that, however profitable the operations of a railroad may be, the stockholders can only share therein through the declaration of dividends, and surplus earnings may be abVOL. LXXVII.—7

sorbed by further investment in plant or by increased wages of operatives or, under the Transportation Act, to improve transportation on less fortunate railroads.

The wage problem has been too long neglected by the public, who still do not seem to realize that the wages are paid from public taxation just as directly as the wages of the post-office employees. The management resists increases in wages if the effect of such increases is to imperil the payment of dividends, but if the dividend is assured, there is little incentive to the management to oppose wage increases in the absence of strong popular support. Controversies with employees are never agreeable, and it is only human nature to avoid them.

The public is vitally interested in its every-day life in efficient service and low rates, and so far as rates represent excessive returns to capital or abnormal wages to labor, self-interest is opposed to both. Selfishly it is its interest to pay no more to capital than is necessary to secure further needed supplies. Altruistically it seems to desire that railroad labor should receive a return sufficient to secure that shadowy and illusive thing known as the American standard of living, and in that altruistic spirit it is ready to close its eyes to all sorts of excessive demands. It awakens no general interest to be told that Rule 60 of the national agreements with the Federated Shop Crafts, issued when the roads were under federal control, requiring the roads to pay their employees for an hour a week extra for punching the time clock "regardless of the number of hours worked during the week," cost the Boston and Maine Railroad some one hundred and fifty thousand dollars in a single year. It is of no personal interest that the United States Labor Board awarded an employee of a Western railroad thirty-four dollars and eighty-four cents for one hour's work when he travelled to an outside terminal, slept there, did his hour's work, and travelled back. His claim under "the rules" was for time and a half and double time for overtime for the period of his absence from his home station. Truly the rules emulate certain well-advertised pillsthey work while you sleep. These illustrations were taken quite at random from

editorial articles in the Boston Herald some two years ago, but the readers could not be induced to comprehend that these absurdities were paid for by the public and every one paid his share, minute in each instance, but colossal in their sum total. There still persists a feeling that these payments are the spoils of a war between capital and labor and represent justifiable loot from rapacious capital in which the public as a whole has no interest except to cheer on the victor. The time may, nay must, come when the public worm will turn and the railroad labor unions will find this elaborate structure of absurd and selfish rules toppling about them like a house of cards.

The disinclination to controversy over wages has been heightened by the attitude of the National Government, particularly during the war-time administration. The Adamson Act and the action of the director general in encouraging and approving agreements with the various labor unions have fettered the hands of the railroad executives to such an extent that there is left little incentive to resist further encroachment by the unions. Now that these agreements have been turned back to the managements and unions to readjust, the unions show little inclination to surrender the advantages they have gained. The provisions of the Transportation Act tend to make these conditions permanent. The attitude of the unions is that of the famous remark about the public attributed to Commodore Vanderbilt.

One alarming condition is the insistence of the unions on the right of promotion by seniority. It is true that the agreements provide that, ability and merit being equal, seniority shall prevail in promotions in the classified service, but the management is no longer allowed to settle questions of ability and merit, as all decisions are ultimately appealable to the Labor Board, sitting in Chicago, who frequently upset the judgment of the executive officers, laying down as a principle that "the intent of this rule is to establish seniority as the first consideration in selecting the successful applicant for a bulletined position." Vacancies must be posted upon the local bulletin boards.

Some curious cases occur. The man

agement of a transcontinental railroad appointed a man, not an employee of the railroad, to have charge of the shipping of wool at Miles City, Mont., as that point was sharply competitive and the appointee was personally acquainted with the shippers of wool and could attract business. The wool-shipping season is short, so that the office was open only fifty-five days and the appointment was necessarily temporary. An employee of the road, who was entitled to the place on the basis of seniority, applied therefor and was rejected because the position was temporary, he was already employed, and he had no personal acquaintance with the district. On appeal, the Labor Board declared him entitled to the job and, as the office had long since been closed for the season, ordered the railroad to pay him the difference between the salary he had received in his regular job and what he would have received had he obtained the desired place.

The deadening thing about this application of the seniority principle is that it puts upon the railroads much the same burden that encumbers the army, where a second lieutenant has been reasonably sure of becoming a colonel, and perhaps a general, if he lived long enough. In time of peace that may do no harm, but General Pershing's main task in France was weeding out the incompetents and replacing them with men of energy, capacity, and leadership. The railroads sorely need all three of these qualities, and the public authorities should take steps to see that the railroad managements secure them.

The American Telephone and Telegraph Company, a rival in magnitude and capitalization of any railroad system, annually sends its agents to colleges to interest young men of promise in telephony as a career. The General Electric Company and the larger New York banks also make special efforts to enlist brains and enterprise, but we do not hear of the railroads making any such advances. Educated young men of promise are not entering the service of our railroads and, what is even more disheartening, are not encouraged to do so by the active managements. This somewhat rigid doctrine of seniority interferes with holding out inducements to such men, as, in the very

necessary years of apprenticeship, promotions in the ranks by merit are so difficult as to be practically impossible. If the railroads leave it to other lines of business to attract to their service young men of energy and capacity, they are doomed to the class of second or third rate enterprises, and that whether there is government or private management-not ownership. The public cannot afford to have its most important public function poorly managed. Mr. Plumb did not succeed in convincing the public that the employees can either supply capable management or attract needed new capital, but his thesis was that any one with a certain amount of practical experience could manage a great railway system.

The late E. H. Harriman, while president of the Union Pacific Railroad, initiated a plan by which a three-years' course of practical training in the various departments of operation could be given young men to prepare them for promotion to executive positions, but the plan had to be abandoned owing to the opposition of the employees. If a young man seeks to learn the railroad business and starts at the bottom of any department and desires to shift to another department to gain wider experience, he finds himself at the bottom of the list in that department, and his experience in other departments counts for nothing when he seeks promotion, no matter how far he may have progressed therein.

If the thesis has been demonstrated that the railroads belong to the public and railroad securities to the investors, that rates are exactions in the nature of taxes levied on the community, then important corollaries necessarily and logically follow.

Railroad employees are as much employees of the public as are the postal employees, and a strike of such is a strike against the public welfare and is unthinkable. The Supreme Court in upholding the Adamson Law indicated this view in intimating that compulsory arbitration might be applied to the railroads. That the telephone service, except in New England, is so free from strikes bespeaks the absence of the labor union. While the seniority rule has its merits, it must not be allowed to trammel harmfully superior

officers in the exercise of that human quality known as judgment of men. Outside of firemen, the railroad employees do not even have anything approaching the civil service examinations of postal employees as a basis for promotion.

That rates, or taxes, should be kept at the lowest point, it is essential that the management, meaning thereby the executive officers, should be of high capacity and ability. The present tendency is toward mediocrity and to "men of routine."

The management cannot furnish efficient service without money both for transportation expenses and for extensions to meet increased demands for service. The public must see, as they are not now doing, that the rates are sufficient not only adequately to maintain the condition of road-bed and rolling stock but to offer a return on the invested capital. New money cannot be attracted unless satisfactory return is assured. At the present time, the source of new money through the issue of additional stock is dried up. It is poor policy to club a man with one hand while with the other you are beckoning him to make a further investment. There is a limit also to the amount of money that can be borrowed through the issue of bonds, and the time is likely to come, and may come soon, when interest charges cannot be met and that source will also dry up. When that point is reached the public will be faced either with government management of the railroads under labor union domination, for the present elaborate system cannot easily be changed, or governmental aid through advances from the public treasury in the form of permanent loans. This stage has already been reached in the case of New England roads, where the national government has loaned a huge sum which must necessarily be a permanent investment so long as bonds of these roads in the hands of the public are selling at less than fifty per cent of the amount originally loaned thereupon. Government management is now on trial on the Boston elevated railroad system.

There are certain other considerations not well understood by the public. As has been pointed out above, the States and municipalities have been permitted to help themselves out of the railroad

receipts by what is usually referred to as taxes. The extent of this local plundering has been but little appreciated. The Railway Age recently said:

"It seems now to have become standard practice for the taxes of the railways to exceed the dividends paid to their stockholders. In 1913 their dividends were $322,300,000, while their taxes were $118,400,000. In 1920 their taxes for the first time slightly exceeded their dividends. In 1922 their taxes amounted to $304,885,000, while the total dividends paid by them amounted to only $271,577,000. In 1913 it took one-eighth of the net earnings of the railroads to pay their taxes. In the first six months of 1923 it took one-fourth of their net earnings to pay their taxes. Those who clamor loudest for reductions of rates are also among the most active in causing the increases in taxes which contribute largely to making reductions of rates impossible."

Appreciation of this situation led Senator Borah to warn the Senate that "it will be very difficult to reduce freight rates if we continue in this country to increase taxes upon the railroads as we have for the last four years.' This robbing Peter to pay Paul must have some limit, and localities must be compelled to pay their own bills from their own resources.

The public have not been wholly to blame for the existing situation of their railroads. Certain notorious stock jobbing operations, which did not necessarily affect the roads themselves, whatever losses or profits may have accrued to the holders of railroad securities, have brought railroad management into a certain amount of disrepute. Perhaps in consequence the managers have neglected opportunities to enlist the financial interest of employees and patrons. The stock of the Massachusetts railroads was at one time held, to a large extent, by riders and shippers. Every well-to-do family along the line of the old Fitchburg Railroad owned one or more shares of stock to secure the privilege of a free ride to Boston on annual meeting day. Massachusetts towns had substantial holdings of stock, such towns, not the cities, having voted aid to the railroads of more than two and a quarter million dollars. The State of Massachusetts at one time owned

seventy per cent of the capitalization of what is now the Boston and Albany Railroad.

The roads of the great West, however, were largely the pioneers in developing the country, and there was no local capital to be drawn upon. Seemingly as a result, the roads have not attempted to emulate some of the other great public utilities. The Southern California Edison Company, with gross earnings of twenty million dollars a year, reports that of its "more than sixty-two thousand stockholders over ninety-five per cent are consumers and of more than five thousand employees over ninety-two per cent are stockholders."

The American Telephone and Telegraph Company, with its two hundred and sixtyfive thousand stockholders, has one hundred and forty thousand employees who have bought stock or are buying it on the instalment plan.

The Great Northern Railroad has recently inaugurated a campaign to induce its employees to become stockholders, with, it is reported, fair success, but that the unions as a whole will consent to release their strangle-hold on the earnings of the railroads for highly uncertain dividends seems unlikely. Still, the railroad managers have an open field with both employees and patrons and one that has been only too little cultivated, although the present prospects of enlisting the interest of either employees or patrons are not particularly bright.

The railroads need a greater appreciation on the part of the rate-paying public that they own them and that investors, both large and small, have been induced to invest their savings in railroad securities in the expectation of a return equal to what the same money invested in other equivalent ways would give. Unless that expectation can be realized, this source of railroad capital must cease. The defects of government ownership are avoided by leaving the selection of the management to the investors, but that management cannot render efficient service unless untrammelled by laws and rules preventing, or hindering, them in having the same control as management in other lines of business. Unless the public can be made to get this point of view, railroad service is headed for the rocks.