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Government Ownership of Railroads, and War Taxation

OTTO H. KAHN

AN ADDRESS BEFORE THE NATIONAL INDUSTRIAL CONFERENCE BOARD NEW YORK, OCTOBER 10, 1918

Paternalistic control, even when entirely benevolent in intent, is generally harmful in effect. It is apt to be doubly so when, as sometimes occurs, it is punitive in intent.

The history of our railroads in the last ten years is a case in point.

In their early youth our railroads were allowed to grow up like spoiled, wilful, untamed children. They were given pretty nearly everything they asked for, and what they were not given freely they were apt to get somehow, anyhow. They fought amongst themselves and in doing so were liable to do harm to persons and objects in the neighborhood. They were overbearing and inconsiderate and did not show proper respect to their parent, i. e., the people.

But the fond parent, seeing how strong and sturdy they were and on the whole, how hustling and effective in their work, and how, with all their faults of temper and demeanor, they made themselves so useful around the house that he could not really get along without them, only smiled complacently at their occasional mischief or looked the other way. Moreover, he was really too busy with other matters to give proper attention to their education and upbringing.

As the railroads grew towards man's estate and married and begot other railroads, they gradually sloughed off the roughness and objectionable ways of their early youth, and though they did not sprout wings, and though once in a while they still did shock the community, they were amazingly capable at their work and really rendered service of inestimable value.

But meanwhile, for various reasons and owing to sundry influences, the father had grown testy and rather sour on them. He cut their allowance, he restrained them in various ways, some wise, some less so, he changed his will in their disfavor, he showed marked preference to other children of his. And one fine day, partly because he was annoyed at the discovery of some wrongdoing in which, despite his repeated warnings, a few of the railroads had indulged and partly at the prompting of plausible self-seekers or well-meaning specialists in the improvement of everybody and everything--one fine day he lost his temper and with it his sense of proportion. He struck blindly at the railroads, he appointed guardians to whom they would have to report daily, who would prescribe certain rigid rules of conduct for them, who would henceforth determine their allowance and supervise their method of spending it, etc.

And these commissions, naturally wishing to act in the spirit of the parent who had designated them, but actually being, as guardians are liable to be, more harsh and severe and unrelenting than he would have been or really meant to be, put the railroads on a starvation diet and otherwise so exercised their functions, with good intent, doubtless, in most cases, that after a while those railroads, formerly so vigorous and capable, became quite emaciated and several of them succumbed under the strain of the regime imposed upon them. And then, seeing their condition and having need, owing to special emergencies, of railroad services which required great physical strength and endurance, one fine morning the parent determined upon the drastic step of taking things into his own hands. And so forth....

To drop the style of story-telling: Individual enterprise has given us what is admittedly the most efficient railroad system in the world. It has done so whilst making our average capitalization per mile of road less, the scale of wages higher, the average rates lower, the service and conveniences offered to the shipper and the traveler greater than in any other of the principal countries.

It must be admitted that in the pioneer period of railroad development, and for some years thereafter, numerous things were done, and although generally known to be done, were tolerated by the Government and the public, which should never have been permitted. But during the second administration and upon the courageous initiative of President Roosevelt these evils and abuses were resolutely tackled and a definite and effective stop put to most of them. Means were provided by salutary legislation, fortified by decisions of the Supreme Court, for adequate supervision and regulation of railroads.

The railroads promptly fell in line with the countrywide summons for a more exacting standard of business ethics. The spirit and practices of railroad administration became standardized, so to speak, at a moral level certainly not inferior to that of any other calling. It is true, certain regrettable abuses and incidents of misconduct still came to light in subsequent years, but these were sporadic instances, by no means characteristic of railroading methods and practices in general, condemned by the great body of those responsible for the conduct of our railroads, no less than by the public at large, and entirely capable of being dealt with by the existing law, possibly amended in nonessential features, and by the force of public opinion.

Unfortunately, the law enacted under President Roosevelt's administration was not allowed to stand for a sufficient length of time to test its effects. The enactment of new railroad legislation in 1909, largely shaped by Congressmen and Senators of very radical tendencies and hostile to the railroads, and acquiesced in by President Taft with ill-advised and opportunist complacency, established, for the first time in America, paternalistic control over the railroads. It was an unscientific and ill-devised statute, gravely defective in important respects and bearing evidence of having been shaped in heat, hurry and anger. Mr. Taft himself, it seems, has since recognized its faultiness, for he has repeatedly and publicly protested against the over-regulation, the starvation and the oppression of the railroad which were the inevitable and easy-to-be-foreseen consequences of its enactment.

The States, to extent that they had not already anticipated it, were not slow to follow the precedent set by the Federal Government. The resulting structure of Federal and State laws under which the railroads were compelled to carry on their business, was little short of a legislative monstrosity.

You all know the result. The spirit of enterprise in railroading was killed. Subjected to an obsolete and incongruous national policy, hampered, confined, harassed by multifarious, minute, narrow, and sometimes flatly contradictory regulations and restrictions, State and Federal, starved as to rates in the face of steadily mounting costs of labor and materials--that great industry began to fall away. Initiative on the part of those in charge became chilled, the free flow of investment capital was halted, creative ability was stopped, growth was stifled, credit was crippled.

The theory of governmental regulation and supervision was entirely right. No fair-minded man would quarrel with that. The railroads had exercised great, and in certain respects undoubtedly excessive power for a long time, and all power tends to breed abuses and requires limitations and restraints. But the practical application of that theory was wholly at fault and in defiance of both economic law and common sense. It was bound to lead to a crisis.

It is not the railroads that have broken down, it is our railroad legislation and commissions which have broken down.

And now the Government, in the emergency of war, probably wisely and, in view of the prevailing circumstances, necessarily, has assumed the operation of the railroads.

The Director General of Railroads, rightly and courageously, proceeded to do immediately that which the railroads for years had again and again asked in vain to be permitted to do--only more so.

Freight rates were raised twenty-five per cent., passenger rates in varying degrees up to fifty per cent. Many wasteful and needless practices heretofore compulsorily imposed were done away with.

Passenger train service, for the abolition of some of which the railroads had petitioned unsuccessfully for years, was cut to the extent of an aggregate train mileage of over 47,000,000.

The system of pooling for which since years many of the railroads had in vain endeavored to obtain legal sanction was promptly adopted with the natural result of greater simplicity and directness of service and of considerable savings.

The whole theory under which intelligent, effective and systematic co-operation between the different railways had been made impossible formerly, was thrown into the scrap heap.

Incidentally, certain services and conveniences were abolished, of which the railroad managements would never have sought to deprive the public, and the very suggestion of the abrogation of which would have led to indignant and quickly effective protest had it been attempted in the days of private control.

Lest this remark might be misunderstood, let me say that I have no word of criticism against Mr. McAdoo's administration of the railroads, as far as I have been able to observe it.

I think, on the contrary, that he is entitled to great praise and that he has handled the formidable and complex task confided to him with a high degree of ability, fine courage, indefatigable energy, and with the evident determination to keep the running of the railroads clear of politics and to make them above all things effective instruments in our war effort.

For a concise statement of the results accomplished elsewhere under government ownership I would recommend you to obtain from the Public Printer, and to read, a short pamphlet entitled "Historical Sketch of Government Ownership of Railroads in Foreign Countries," presented to the Joint Committee of Congress on Interstate Commerce by the great English authority, Mr. W. M. Acworth. It will well repay you the half hour spent in its perusal. You will learn from it that, prior to the war, about fifty per cent. of the railways in Europe were state railways; that in practically every case of the substitution of government for private operation the service deteriorated, the discipline and consequently the punctuality and safety of train service diminished, politics came to be a factor in the administration and the cost of operations increased vastly. He quotes the eminent French economist, Leroy-Beaulieu, as follows:

"One may readily see how dangerous to the liberty of citizens the extension of the industrial regime of the State would be, where the number of functionaries would be indefinitely multiplied.... From all points of view the experience of State railways in France is unfavorable as was foreseen by all those who had reflected upon the bad results given by the other industrial undertakings of the State.... The State, above all, under an elective government, cannot be a good commercial manager.... The experience which we have recently gained has provoked a very lively movement, not only against acquisition of the railways by the State, but against all extension of State industry. I hope ... that not only we, but our neighbors also may profit by the lesson of these facts."

I may add, as a fact within my own knowledge, that shortly before the outbreak of the war the Belgian Government was studying the question of returning its state railways to private enterprise and management.

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