Alumni Oration

"The Alumni Oration" Brunswickan 43, 7 (May 1924): 248-258. (UA Case 67a, Box 1)

The Transportation Situation in Canada and the United States was the subject of the Alumni Oration delivered by William J. Cunningham, Professor of Transportation, Harvard University. He said:

"There be three things which make a country great and prosperous—fertile soil, busy workshops, and easy means of conveyance of men and things from one place to another."

Thus wrote Francis Bacon, who lived in a period long antedating the advent of canals and railroads. The "conveyance of men and things" at that time was confined to the highways, the rivers and the seas.

Measured by Bacon's formula, Canada is conspicuously strong in each of the three elements essential to greatness and prosperity. It has immense natural resources in fertile soil, rich minerals, and extensive forests. In proportion to population it has a wealth of busy workshops, and it is well supplied with natural and modern agencies of transportation.

It is not my purpose to discuss the first two factors of agriculture and industry, except as they have a bearing on my main subject—the factor of transportation. The three are inter-related and inter-dependent. When the immediate and latent after-effects of the World War have spent themselves, and when something akin to order replaces the present economic and political chaos in Europe, the former volume of emigration will resume. With it will come further and substantial development in agriculture, and increased activity and expansion in industry. Such development and expansion will bring new and heavier demands in transportation. In the respect that Canada is now well equipped to meet these demands, the country is in a favorable and somewhat unique position, as in other parts of the world railroad expansion has not generally kept pace with the normal growth of traffic.

The Canadian Railways

Endowed by nature with easy access to two oceans and the Hudson Bay, the Canadian Provinces, early in the last century, adopted a far-sighted policy of adapting the inland waterways to the needs of internal communication. The principal transportation emphasis, up to the time of the Confederacy, was placed upon the waterways, but before then the importance of railroads as supplementary agencies was recognized. That recognition was written into the articles of Confederation. Out of it emerged the building of the Intercolonial, which linked the Maritime Provinces with Upper Canada, and, later the construction of the great Canadian Pacific. Its rails now form unbroken steel band from the Atlantic to the Pacific, and its fleet of steamships encircle the globe.

With an uncommon boldness of vision, Canada has so extended and amplified its natural avenues of transportation by a comprehensive system of railroads, that no other country now exceeds it in miles of railroad per unit of population. On that basis Canada has nearly one and one-half times as many miles of railroad as the United States, five times as many as France, seven times as many as Germany, and nearly eight times as many as Great Britain and Ireland.

This wealth of transportation facilities has its embarrassments. To those who look at the situation solely from the viewpoint of the present Canada would seem to be "railroad poor." It has more railroads than it needs and can easily support under existing economic conditions. In the light of what has happened, there is ground for criticizing the vision and the abounding optimism of those who promoted many of the new transportation enterprises in the decade or two preceding the war. The construction cost of certain lines was greater than was justified by the traffic immediately in sight.

Yet we must remember that most of the great strides in economic development have been preceded and made possible only by the assumption of great risks. The risks in these cases were deliberately taken because of profound faith in the future of the country. Fundamentally that faith was and is well founded. The catastrophe of the World War could not be foreseen. Its economic consequences could not be foretold. The anticipated growth in population, agriculture and industry, with their greater transportation demand, has not been realized. Hence substantial portions of the new lines have not only failed to support themselves but they have been a heavy burden upon the taxpayer.

Railroad Accomplishments In War

There is one aspect of the situation which has a vital bearing on military accomplishments while the war was in progress. We are now likely to forget the important part that the Canadian railroads played in so efficiently meeting the heavy transportation demands at that time. If the railroads, now held to have been constructed too far in advance of peace-time needs, had not then been available for the purposes of war transportation, the efficiency of the whole transportation machine might have been lower. In the United States there was no such excess of railroad lines. Because of unfavorable net earnings during the decade preceding the war, railroad expansion had practically stopped. The heavy burden of war traffic in materials and supplies for the Allies in 1916, and the greater burdens when the United States entered the conflict in 1917, finally were greater than the railroads could carry with reasonable dispatch. The latter part of 1917 witnessed a serious traffic congestion on the lines serving the eastern seaboard. It is not proper to attribute the congestion wholly to lack of railroad expansion, as other causes had large play, but it is plain that if the United States had been as well equipped as Canada in surplus railroad trackage and equipment, the emergency which precipitated Federal control might have been averted.

A calm forward-looking view of the railroad situation in Canada reveals elements which are reassuring. There is no real cause for serious apprehension. The economic distress of reconstruction is still with us, but it is diminishing in severity. When it passes, as it should pass, in the near future, there will be an agricultural and industrial revival which will carry the volumes of production to high levels and require all available transportation facilities. The faith
of those who built for the future will then be justified, and their vision will take shape in reality. The forehanded policy of providing transportation capacity in advance of demand will expedite economic expansion. Then the railroads will become self-supporting instead of a national burden. The national policy of actively encouraging railroad building for the future, and of assuming a part of the burden of projects which failed, will be vindicated.

Policy of Public Regulation

Except in the one important particular that Canada at the present moment is over-supplied with railroads, its transportation problem is not unlike that of the United States. From the earliest days of my oldest auditor there has always been a railroad problem. First it was how to get railroads—how to encourage their promotion and construction. Then, after a few decades of construction and development, the problem was how to control the railroads in public interest. As the authority of the Government from time to time was extended, until it had complete control over rates and wide powers over finance, accounting and operating administration, a new problem arose. The policy of public regulation, tending as it did to reduce rates or to hold them stationary, coincided with the burden of rising wages and other higher operating costs. Railroad net income began to suffer, and signs of acute financial distress began to appear. The new problem was how to continue the policy of protecting the public against unreasonable rates and yet permit the carriers to earn enough to insure their solvency and to give adequate public service.

Speaking with special reference to the United States, the crisis in railroad finance which appeared imminent in 1915 was averted in 1916 by an unexpected flood of war traffic. That traffic grew in volume when the United States entered the war in 1917. In 1918 the railroads were taken over and for two years and two months were operated as a unified system by the Federal Government. Following the armistice, Congress devoted more than a year to the consideration of plans for post-bellum railroad control. Responding to an overwhelming public opinion against the continuation of Federal operation, or the adoption of any form of nationalization, the final decision was to turn the roads back to their owners for private operation under a somewhat broader policy of public regulation.

Your solution of consolidation is unique. Here you have frankly recognized the principle that inasmuch as the construction of the weak roads was encouraged and subsidized by the Government, the Government owes both to the railroads and the communities dependent upon them for service, some measure of protection. To insure adequate transportation service, and to preserve the properties until the future growth of traffic will enable them to support themselves, you have put these roads together into a national system to be operated for the Government by a board of directors and a president. If need be, the transportation service is to be furnished at the partial expense of the public at large. At the same time you recognize the inherent soundness of the policy of private management under public regulation, and you have not interfered with the organization of the Canadian Pacific, one of the best managed and strongest railroad companies in the world.

Two Great Railway Systems

Disregarding, if we may, the few small Canadian railroads which are now independent but which eventually will probably find their way into one or the other of the two large systems, Canada has two railroads of approximately equal mileage, although the traffic of the Canadian National is less than that of the Canadian Pacific. One is an old and well-established system, operated with marked efficiency and with a commendable appreciation of its obligations to the public. The other has been newly created as a national system. As a system it has not yet found itself. Many large opportunities for co-ordination and welding together have not yet been fully developed. It began its existence as a system with a heavy load of deficits and an inheritance of confusion and distrust from a troubled past. Yet it is already showing signs of system consciousness. It is reducing its deficits and is living down the discredit of former years. It is justifying public confidence in the character of its management. The outlook for the future is promising.

The new law, known as the Transportation Act of 1920, continued and strengthened all of the powers previously invested in the Interstate Commerce Commission, but it also recognized the sound principle that the power to regulate should be accompanied by a certain degree of responsibility for the results of regulation. For the first time the law affirmatively stated that the railroads as a whole are entitled to the fair return on the value of the property devoted to public use. The Commission was given a mandate to establish the scale of rates with that end in view. The determination of the rate of return was left to the Commission, and it is now set at 5 ¾ per cent.

This is commonly, but erroneously referred to as a guarantee. It is not a guarantee, inasmuch as the railroads have no means of collecting the deficiency if the rate actually earned is less than 5 ¾ per cent. As a matter of fact, the actual earnings in 1921, 1922 and 1923 were substantially less than that rate. Moreover, the mandate applies to the railroads as a whole, not to individual carriers. Even the roads collectively earn an average of 5 ¾ per cent, some of the individuals will earn more and some will earn less than that rate. Those which earn less are without remedy; those which earn more must share the excess over 6 per cent, equally with the Government.

Weakness of Rate Regulation

The weak road is the greatest obstacle in the path of rate regulation. On competitive traffic, the rates charged by the several competing carriers are necessarily the same. If the rate scale is held so as to yield a reasonable return only to the strong, the weak, will earn nothing. If the scale is set to yield a fair rate to the weak, earnings of the strong will be excessive. In practice the Commission aims to set the scale between the two extremes, but it is a safe generalization to say that the Commission is more likely to lean to the side of curbing the strong than of nourishing the weak.

To meet the problem of the weak road, and to make easier the task of rate regulation, the Transportation Act provides for railroad consolidation on a comprehensive scale. The Interstate Commerce Commission was directed to prepare a plan for combining all of the roads in the United States into a limited number of large systems so that each system, under uniform competitive rates and efficient management, may earn substantially the same rate of return on the value of its properties. In the grouping of the individual roads, each region, the Commission was directed to preserve competition as fully as possible and to cause the minimum of disturbance in the usual channels of trade and commerce. In 1922, two years after the passage of that Act, the Commission published its tentative report as a basis for discussion. The hearings were concluded during the past winter, and the Commission is now engaged on the large task of formulating its final plan.

It should be noted that the Commission is without power to enforce the adoption of its recommendations, but no voluntary consolidations may be made by the railroads on their own initiative without prior approval of the Commission. There are serious differences in opinion, both as to the broad principle and as to the details of the proposed groupings. The greatest objections come from the prosperous roads and from communities of sections which fear that they may be injuriously affected by changes. It is almost certain that one of the strong roads will take the issue to the Supreme Court, contesting the power of Congress to dilute its strength by enforced adoption of one or more weak companies, but if we may venture a guess, the court will uphold the principle of consolidation. The so-called "recapture clause," under which an individual road must give up one-half of excess net income over 6 per cent, has already been upheld by the Supreme Court. The decision declared, in effect, that earnings in excess of a fair return may be held by a carrier only until the Government directs how that excess shall be disposed of. Under the theory of consolidation that excess is to be devoted to the sustenance
of the weak roads.

The Remedy Adopted In Canada

While this is going on in the United States it may be interesting to compare its problem with that of Canada, and to comment upon the differences between the solution now being worked out across the border and that already effective here. The principal difference between the two situations is that in Canada there is a much clearer line of demarcation between the weak and the strong carriers. Here you have but one strong road of substantial size—the Canadian Pacific. The earlier strength of the Grand Trunk has been lost in its too rapid expansion. The natural step was to recognize but two systems—one superlatively strong, the other a combination of practically all of the weak lines. The strong system was left undisturbed to compete with the weaker system taken under the protection of the Government.

In the United States there is no such clear and easy alignment. The fifteen to twenty conspicuously strong systems constitute the greater part of the total mileage. The weak roads, much greater in number but smaller in mileage, are widely scattered and are not, as a rule, physically connected. Besides, there is the great middle group which is neither strong nor conspicuously weak. It would be impracticable to piece together two great systems, or two sets of systems, the one weak and the other strong, and accord them different treatment. Instead of such grouping, Congress has declared that the weak individually shall be absorbed by the strong according to the ability of the latter to stand dilution of strength. The proposed 19 systems, averaging less than 14,000 miles per system, will each have one or more strong lines as the nucleus, to which will be added a number of weak lines so connecting physically with the strong as to fit in well with traffic and operating co-ordination. The ideal is to create a group of large systems of fairly equal financial strength and earning power, and to preserve a reasonable degree of competition in each region.

An Enlightened Policy

As I see it, the degree of success already achieved is the reflex of an enlightened policy in adapting the strongest features of private management with the protecting and stabilizing features of nationalization. The inherent weakness of nationalization lies in the danger of harmful political interference with sound business management. This danger, in the case of the Canadian National, is minimized by its form of organization. The operation of the property is entrusted to a non-partisan board of directors, appointed by the Government to represent the whole country—territorially and economically. Thus far it has given a business, not a political administration.

You have been particularly fortunate in your choice of a chief executive. When Mr. Thornton (now Sir Henry Thornton) was connected with the Pennsylvania System, it was my privilege to know him slightly, and I am well acquainted with many who were intimately associated with him in his railroad service in the United States. He is held in high regard by the railroad fraternity of that country. Of his conspicuous success as general manager of the Great Eastern of England, and his invaluable war service, I need not speak, as you are familiar with the facts. His present task is greater and more difficult than any he has heretofore undertaken, but he is acquitting himself in a manner which is as pleasing to his former associates in the United States as it must be gratifying to those in Canada who were responsible for the selection.

When we consider that he is the active administrator of a railroad system of about 20,000 miles, made up of many heretofore separate units as yet but loosely knit together, that he is the chief of an army of 100,000 employees spread out at the rate of five per mile from ocean to ocean, and that he has inherited a multitude of difficult problems of operating co-ordination, traffic development, financial rehabilitation, and the creation of public confidence, we may form a faint idea of the immensity and complexity of his task. His policies are bearing fruit in an improved morale in the working forces, and from what I can learn in my detached position as a somewhat distant observer, it seems to me that Sir Henry is meriting and commanding the respect and confidence of the Canadian public.

Effect of Political Pressure

Thus far he has not been seriously embarrassed by political pressure. The hardest part of his task will be to get cordial co-operation and support from politicians, particularly from those of narrow vision who cannot or will not look beyond personal or sectional interests to the common national good. Politicians, however, both large and small, are keenly sensitive to the views of their constituents, and with the Canadian public as a whole will rest the responsibility if Sir Henry is not permitted to work out his national problems untrammeled by harmful political interference. By this I do not mean that it is not proper for individuals or parties to criticize. Such criticism is desirable and acts as a spur to keep the administration keyed up to a high conception of its responsibilities. It is only when criticism and pressure exceeds constructive limits, and prevents sound business administration, that it becomes harmful and destructive. Sound business administration means that projects for extension and improvements, rate and service adjustments, wage rates and working rules, and the like, should be approached from the viewpoint of national economic justification, rather than from the viewpoint of sectional advantage or political expediency.

As I view the situation, Canada has taken a forward step in the solution of its transportation problems. There is abundant evidence that the alignment of your railroads into two great competing systems, one national and the other private, will tend to develop the elements of strength and to neutralize the elements of weakness in both. Thus far the Canadian National has been organized and managed in such manner as to give the advantage of state ownership without the traditional disadvantage of hampering and uneconomic political interference. From the financial viewpoint substantial improvements have been made. The net operating revenue of about three million dollars in 1922 grew into twenty million in 1923. The prospects are that in 1924 it will expand to thirty millions. Even though the figure last named will little more than meet one-half of the interest and other fixed charges, it means that the former burden on the tax-payer will be very substantially reduced. Moreover, my observation is that the quality of service has improved and that the relations with the public are marked by an increasing degree of good-will and understanding. Likewise, the relations between management and men are marked by a growing degree of cordiality and co-operation. The administration is committed to the constructive policy of humanizing the service.

A Note of Warning

At this point it may not be out of place for an outside observer who is keenly interested in the continued success of your national transportation policy to suggest a note of warning bearing upon the efforts of the administration of the Canadian National and the Government to make the Canadian National a self-supporting system. If one system is built up at the expense of the other system, there may be no net gain. Indeed there may be a net loss if the damage to the strong is greater than the benefit to the weak. The Canadian Pacific so to speak, is "on its own." It now receives no financial assistance from the Government. If the competition to which it may be exposed by the system under Government protection exceeds reasonable bounds in uneconomic service or diversion of traffic from the Canadian Pacific merely to reduce the net deficit of the Canadian National, the effect will be extremely harmful and against real public interest. True transportation progress consists of making two ton miles where one grew before, but if the second ton mile is taken from another system, which although privately managed is as much a part of Canada as the system under the wing of Government protection, there is no national economic gain.

The 1923 annual report of the Canadian Pacific indicates its inherent strength and its great transportation achievement. The company justifies public confidence and support. It stands for the best that there is in private management and, if not subjected to unfair competition at home, it bids fair to maintain its primacy among the great transportation systems of the world. Canada has abundant reason to be proud of that primacy. The remarkable record of the Canadian Pacific in years past, under the executive guidance of such outstanding leaders as Sir William Van Horne and Lord Shaughnessy, continues unimpaired under the able management of President Beatty. It has an organization which is nowhere excelled in progressive effectiveness, and its branch offices in every quarter of the globe are symbols of the greatness of Canada.

In this final word concerning the transportation situation in Canada, may I repeat that the present promising state of affairs can maintain and develop favorably only if the present enlightened attitude of the people and the Government continues. If that attitude changes, if sectional differences or political expediency are allowed to interfere with the business management of the Canadian National, or to cripple the Canadian Pacific, the ultimate effect will be more than disappointing. It will be humiliating. My hope is that the present enlightened attitude will continue, and that Canada's experience with her railroads in the promising years before us will prove to be a conspicuous exception to the generalization, heretofore true, that nationalization has never been and cannot be successful under a democratic form of Government.