The Great Railroad Revolution

by Christian Wolmar

  Behind the scenes, the government tried to spur the railroads into action. A bizarre scheme to prioritize military cargoes went spectacularly wrong when government agents dispatched around the country to put preference tags on cars needed for the war effort handed them out so indiscriminately that the Pennsylvania reported that as many as 85 percent of its cars were tagged. The average daily distance moved by a freight car declined further during the year from twenty-six miles to just twenty-one, which suggested that an already inefficient system had gotten worse.

  There was therefore no choice but for the government to take the unprecedented step of nationalizing the railroads in late December 1917 under the control of the United States Railroad Administration, headed by the well-respected William McAdoo, the secretary of the Treasury in Wilson’s government. McAdoo took a very active role, replacing several railroad bosses with federal appointees and, crucially, ensuring the nation’s stock of locomotives and cars was pooled, so that their use could be maximized. For the railroad companies, it was a humiliating experience that they would work hard to ensure would not recur when America entered another world war a quarter of a century later.

  In the land of free enterprise and raw capitalism, it was a source of great shame for the railroad companies that it took government control to sort out their problems, and they complained they were given a raw deal under the nationalization arrangements. The government leased the railroads as a profitable business, guaranteeing that they would receive the same income as the average of the past three years. However, since that included the year to July 1, 1915, a remarkably bad period for the industry, the average was reduced well below the receipts of the two most recent profitable years. Worse, in order to buy off any strikes or industrial-relations problems, the government immediately granted a raise of twenty dollars per month to all those earning less than forty-six dollars per month. This was a necessity, since wages were rising because of a shortage of labor caused by loss of men to the armed forces and also to the well-paid armaments industry. Ironically, the government also gave the railroads the increase in rates that had been turned down on numerous occasions in the past couple of decades by the Interstate Commerce Commission, which was put into abeyance during this period. Martin sums it up succinctly: “This episode reveals that sometimes the much put-upon businessman’s best haven from a government agency is another government agency.”27

  The railroads were essential to the war effort and were intensively used, both to carry troops and for war matériel. There was, effectively, no other form of long-distance inland transport, and the railroads catered to all needs, from taking the troops and freight to ports to organizing ambulance trains to care for the wounded. Under nationalization, the companies were obliged to send freight by the shortest route and to accept tickets from rival railroads and were no longer subject to antitrust legislation.

  Although the nationalization was successful in improving productivity, with fewer empty cars having to be carried around and circuitous routes to avoid traveling over a rival’s tracks curtailed, there were structural barriers to efficiency. The ingrained habits of cutthroat competition could not be cast aside instantly. For some companies, it was a long-awaited opportunity to do over their rivals. A casual remark by a New York Central executive said it all: “I’ve always wanted to issue orders to the Pennsylvania Railroad and now I have my chance.”28

  Moreover, many locomotives could not travel too far from their home bases because they were of a specific type that had to be maintained by their parent company, which had both the expertise and the spare parts to repair them. In fact, standardization of equipment was a prerequisite of a truly integrated national operation, and consequently the government ordered two thousand new locomotives of a standardized design and fifty thousand freight cars to make up for the chronic shortage of equipment. The relative success of the federal government’s takeover of the railroads inevitably led to questions about their future after the end of the conflict. It was a shame that this debate on the future of the American railroads was finally being held just as they began to face their greatest threat, the spread of motorized transportation supported by the improvement of America’s highways. As ever, the policies that resulted from this debate harked back to past issues rather than attempting to tackle future ones.

  10

  THE ROOTS OF DECLINE

  The First World War left the railroads in a parlous state.1 They had been overused and starved of investment funds, a situation that had close parallels with other countries involved in the conflict, notably the United Kingdom. Financially, too, they were struggling. The wage raises imposed by the government and the sharp increases in operating costs from the rapid rate of inflation and shortages of material were not fully compensated by the rises in freight rates and fares that they had been allowed. To make matters worse, the boom created by the war ended abruptly when peace returned in 1918, causing revenues from freight—though not immediately from passengers—to plummet. The profit margins of the railroad companies were therefore being squeezed, and many were losing money, a state of affairs that was viable only as long as they remained under federal control. And things would get worse. In the interwar period, a combination of public demand, technological developments in the automobile industry, incoherent regulation, government policies, and subsidies favoring rival modes of transportation conspired to begin the shift from a national rail-based transportation system to one dependent on the roads, a process that would take place within little more than a generation.

  The rot started in the 1920s when the federal government dithered over what to do with the railroads that they controlled. As in the UK, there was a debate on the future ownership of the railroads in which some support was expressed for leaving them in government hands, but not from the Republican-controlled Congress. Another suggestion was to consolidate the railroads into a series of major companies, rather than the seven hundred in existence before the war. Again, this sort of thinking was paralleled in the UK, where in 1923 the nearly two hundred private companies were molded into just four. The thinking behind consolidation was that combining profitable and loss-making railroads would ensure that most lines would be able to survive. As the debate raged, the railroad companies were left in a state of limbo, run by a federal government that seemed to be at a loss as to what to do with them. At the heart of the debate was the age-old question: What were the railroads for? Were they simply private enterprises, like any other, whose fate should be dictated by market forces, with the weak being allowed to go to the wall with no government intervention on their behalf? Or did they have a wider social function that meant that regulation was needed both to ensure they provided a decent service and also to protect the public against monopoly exploitation? The free-market logic that suggests loss-making railroads should simply be allowed to founder ignores the fact that railroads are a capital-intensive business with huge fixed assets that are valueless when the trains stop running. A weak railroad can, with temporary government help or a change in local or national economic circumstances, become strong again. Railroads are a long-term business that play a crucial role in the areas they serve and therefore cannot be allowed to flourish or founder solely on the basis of unfettered market forces. Convincing American politicians of the strength of this argument would always be an uphill task.

  It might, for a time, have seemed that the political climate was ripe for such a profound departure from the usual American way. This was a radical period when soldiers returning from the conflict were not in the mood to settle for low wages and poor services, and all sorts of grievances were bubbling under the surface. Hostility to big business, already prevalent before the war, had intensified. Events abroad showed that change was afoot: in Russia, the Bolshevik Revolution was in full flow, and there was unrest in many European countries following the end of the war. Even in America, with its long tradition of hostility to the power of the federal government, the notion that the railroads should be o
wned by the state was not so farfetched. After all, as historian Richard Saunders Jr. asks rhetorically, given that the government was about to fund and build a huge highway system across the country—the first of two such networks that would be built over the next fifty years—”why should it be so natural that the government build and operate highways, but not railroads?” Elsewhere in the world, this was a time when governments were nationalizing or rationalizing their railroads, but America was reluctant to follow suit. The radical elements in the population were still a minority, and support for nationalization was undermined by a series of “Red Scares” promulgated widely in the media. It was not long before the proposal for rail nationalization, which had been promoted by a labor lawyer, Glenn Plumb, was being portrayed as a left-wing plot smacking of bolshevism and consequently far too dangerous to be considered. As Saunders says, “The railroad plans of other democracies underscored, even at this early date, how isolated the United States was in its rigid defense of the right of capital alone to make decisions that affected everyone.”2 The failure to recognize the right of the public to have a say in the control of the railroads would fundamentally undermine US passenger rail services after the Second World War.

  Despite American suspicions of government interference, there was no appetite for a return to the preregulated days of the nineteenth century: hostility toward the big railroad companies was almost as strong as the fear of communism. The result was a compromise, created largely by Albert Cummins, a senator and former governor of Iowa, where back in the 1890s he had pushed through a series of laws that imposed strong controls on the local railroads. As a member of the Interstate Commerce Commission, he had been one of the strongest voices against allowing the railroads to increase their rates and had become something of a hated figure in the industry. Nevertheless, after the war he was widely recognized as the most rail-savvy politician, and he put forward a plan to control the railroads— which remained at the time the second-largest industry in the United States—while still giving them the space to flourish. A more powerful and proactive Interstate Commerce Commission was to be created that would set the rates and fares at a level that would produce a return of 6 percent on the capital value of the railroads. However, this was to apply not to each individual railroad company but rather to the totality. Any excess earnings from the most profitable railroads would go into a pool that would be shared between those lines that were not managing to reach the 6 percent threshold. The idea was classic railroad economics: the weak would be supported by the strong, this cross-subsidy ensuring the retention of a much larger network than would be the case if market forces alone were allowed to prevail. Given the near impossibility of trying to allocate costs of running a railroad system accurately in such a complex industry and the desire of railroad managers to retain as large a network as possible, cross-subsidy has become established practice on most railroad networks across the world.

  The commission, too, set minimum rates in an effort to prevent uncompetitive price reductions, and this would prove to be greatly troublesome to the rail companies, particularly after the Second World War. This measure was designed partly to prevent ruinous competition among railroads, but was also intended to protect the fledgling trucking industry against unfair pricing by the railroads. In the event, the legislation removed flexibility from the railroads in the face of the ever-expanding road-haulage industry and gave the truckers an advantage because they could simply undercut the rates of the railroads—which they had to publish—an almost identical situation to the UK, where the Big Four interwar companies were hamstrung in the same way.

  The crucial omission in the Transportation Act that was eventually passed in 1920 was compulsion. Cummins had wanted the railroad companies to be forced to join together to create unified companies, but this notion was rejected by Congress, which decreed it should be voluntary. That effectively killed the plan, although the Interstate Commerce Commission was by law required to work up a scheme and, in so doing, frightened the companies into improving their behavior. The commission’s plan went through numerous versions and eventually settled on a scheme, drawn up by an economist, William Z. Ripley, to consolidate the railroads into twenty-one companies. However, the Ripley plan was doomed from the outset by its voluntary nature, since those who might lose out through the consolidation were able to impose a veto. The large and profitable railroad companies did not want to be encumbered by having to take on the loss makers.

  The Pennsylvania Railroad’s reaction to the plan is a good illustration of the wider attitude of the railroads. The Pennsy, as it was known, was the leading railroad of the age and saw itself as a cut above the others, a view encapsulated by its calling itself the “Standard Railway of the World.” There was no question of its allowing through any consolidation plan that did not confirm its primacy among the competing railroads of the East. The Pennsy was blessed, unlike most of the industry, with an articulate spokesman for its cause, Albert J. County, who was officially only a vice president but as its chief negotiator had the power to ensure that any consolidation would have to put the interests of his railroad first. He was “the rock upon which the plans of the planners and the dreams of the underdogs crashed.”3 Up to 1929, the Pennsy simply kept expanding by buying a series of railroads, including the New Haven and the Boston & Maine, which allowed it to rationalize services and consolidate its advantageous position. These acquisitions were paid for with shares, which was fine during the bull market of the mid-1920s but left the owners of the subsidiaries out of pocket after the stock market crash of 1929. As this example suggests, voluntary consolidations tended to work to the advantage of the larger railroad companies, who were able to benefit from economies of scale.

  Having kept compulsory consolidation out of the legislation, the key measure that they opposed, the railroad companies were relatively pleased with the deal. Nevertheless, the discussions and wrangles over the ICC’s consolidation plan lasted through much of the 1920s. Despite the uncertainty this created, these were, in many respects, good years for the rail industry. Ridership and freight carriage for the most part held up, and the railroads invested considerably in capital equipment, especially track improvements and locomotives. By 1930, nearly a quarter of locomotives were postwar models that were far more efficient than their predecessors. The manufacturers battled hard to resist the new technologies of electricity and diesel by offering improved models of steam engines. The railroads themselves were hesitant about making the change, since they had invested huge amounts of capital into steam technology, and, consequently, for the time being, the industry stuck with steam. There was no major expansion of electrification in the 1920s, and plans to double-track certain key routes, such as the western sections of the Pennsylvania and the Baltimore & Ohio, were delayed. Martin is in no doubt that the railroads suffered in this period from overregulation that limited their ability to renew themselves and prevented them from being adventurous in the choice of traction: “Developments like the diesel locomotive were delayed twenty years even though the steam locomotive had passed its peak by 1914.” As we have seen, there were significant enhancements to steam locomotive technology after 1914, allowing faster and more efficient running, but Martin is right to say that diesels should have been considered as an alternative far earlier. In fact, it was not until the 1930s that diesel locomotives, which had numerous advantages over steam, became widespread, spearheading the railroads’ belated attempt to modernize.

  Before the decline of the railroads gathered pace in the 1930s, there was time for one new pair of railroad barons to emerge, even as the debate in the commission over consolidation continued. These were the Van Sweringen brothers, property developers from Cleveland, Ohio, who entered the railroad business accidentally when they built a suburb called Shaker Heights in their hometown and needed to provide a rail line to enable residents to reach downtown easily. Oris Paxton Van Sweringen and Mantis James Van Sweringen, or the Vans, as they became known, were undoubted
ly the strangest of the railroad barons. Born two years apart, the reclusive bachelor brothers not only gave their very rare interviews together but also shared a bedroom in a vast mansion called Daisy Hill. They were a mix of extreme aggression and boldness in their business dealings, while in person they were modest and retiring. They were as inseparable in death as they were in life, dying, only in their fifties, within a year of each other— Mantis in December 1935 and Oris in November 1936. The Vans had bought their first railroad, the New York, Chicago & St. Louis Railroad (known as the Nickel Plate Road) from the New York Central purely to provide a rapid-transit route from Shaker Heights to downtown Cleveland. The Nickel Plate Road was an interesting example of a “nuisance” railroad, a five-hundred-mile line built by speculators to take business away from the Central’s profitable Lake Shore route between Buffalo and Chicago. Soon after its completion in 1882, it was bought at a good price by the Vanderbilts, as the investors had hoped, but following the outbreak of the First World War, it was sold to the Van Sweringens out of fear that retaining it would result in an antitrust prosecution. Although the Vans had originally been interested only in a small part of the railroad, the acquisition inspired them to build up a massive railroad empire that, at its height, before the 1929 Wall Street crash, had a paper value of $3 billion and stretched across thirty thousand miles. Their holdings, controlled through a complex web of companies that made it uncertain as to precisely how much money they invested personally and how much consisted of what are now known as junk bonds, included the Erie Railroad, the largely coal-carrying Chesapeake & Ohio Railway, and the Pere Marquette Railway, which had a series of lines in the Great Lakes area of the Midwest. Since the commission was debating the future structure of the industry and therefore few railroads attempted any consolidation, the short-lived empire built up by the Vans was the only new major railroad company allowed by the ICC to be established during the 1920s. However, there were immediate doubts about its solvency, which were quickly confirmed once shares started plummeting during the crash. The Vans lost their fortune even more quickly than it had been built up, and they disappeared from public view, dying in apparent poverty.