The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface
• Translator's Note
• Where and Why Public Ownership Has Failed
• Book I: Public and Private Trading Operations
• Chapter I: Two Precepts
• Chapter II: The Three Mainsprings of Human Action
• Chapter III: Determining Motives of Private As Against Public Enterprises
• Chapter IV: Government and Municipal Trading Operations
• Book II: Financial Results of Government and Municipal Ownership
• Chapter I: Bookkeeping In State and Municipal Trading Enterprises
• Chapter II: The Belgian State Railroads
• Chapter III: Prussian Railroads
• Chapter IV: State Railways of Austria and Hungary
• Chapter V: Italian Railways
• Chapter VII: Railways of New Zealand
• Chapter VIII: Government Railroads In France
• Chapter IX: Public Vs. Private Operation
• Chapter X: The Holy Cities of Municipal Operation
• Chapter XI: Operation of Gas and Electricity In the United Kingdom
• Chapter XII: Tramways In Great Britain
• Chapter XIII: Housing of the Working Classes and Public Ownership In Great Britain
• Chapter XIV: Housing of the Working Classes On the Continent
• Chapter XV: Government Control of Food Supplies
• Chapter XVI: Victims of Government Ownership
• Chapter XVII: Charges, Debts and Credit
• Chapter XVIII: Fictitious Profits
• Chapter XIX: Fiscal Monopolies
• Chapter XX: The Alcohol Monopoly In Switzerland and Russia
• Chapter XXI: Financial Disorder
• Chapter XXII: The Purchase Price
• Chapter XXIII: Delusions of Profit and the Life Insurance Monopoly In Italy
• Chapter XXIV: The Fiscal Mines of the Saar District
• Chapter XXV: Public Versus Private Enterprise
• Book III: Administrative Results
• Chapter I: Administrative Results
• Chapter II: The Safety of Travelers Upon State and Private Railway Lines
• Chapter III: Disorders, Delays and Errors
• Chapter IV: Official Conservatism
• Chapter V: Labor
• Chapter VI: The Consumer
• Chapter VII: Programs of Organization and Regulation
• Book IV: Political and Social Consequences of Public Operation
• Chapter I: Socialist Programs and the Facts
• Chapter II: Bluff
• Chapter III: Results of Experience
• Chapter IV: The State a Dishonest Man
• Chapter V: Corruption
• Chapter VI: Nationalization of Public Utilities and the Foundation of Great Fortunes
• Chapter VII: Disintegrating Character of Public Operation
• Appendix %u201ca%u201d: Alcoholism In Russia
• Appendix %u201cb%u201d: the Financial Year In Australia
• Appendix %u201cc%u201d: the Shortcomings of the Telephone In England

CHAPTER III

PRUSSIAN RAILROADS

1. In Germany, as everywhere else, the railroads inspired mistrust in the various state governments. There, also as everywhere else, the credit for their initial construction belongs to individuals. Up to 1843 the railroads received no subsidy whatever from any of the federal states. General state aid was withheld until about 1845, when a policy of government railways was introduced. In 1850 a number of states took over certain lines which were struggling under pecuniary embarrassment.

In 1874, amid an utter confusion of state and private roads, Bismarck conceived the idea of organizing an imperial system, of which the lines of Alsace-Lorraine, which had been already declared imperial, were to form the point of departure. In the desire, however, to prevent such a system of national railway lines, the southern states hastened to buy up the independent lines within their borders.

Bismarck then proceeded to concentrate all his efforts upon nationalizing the Prussian railways, trampling the private companies, which at that time possessed 44.5 per cent. of the system, unscrupulously under foot. As a result, there are to-day in Germany independent railways, state lines and lines belonging jointly to two or more states. The only imperial lines are those of Alsace-Lorraine. Private companies now possess only lines of secondary importance.

Bismarck had all sorts of reasons for acquiring the railways of Prussia. For example, he hoped to render himself more independent of the Prussian Diet it he had the railroad receipts at his disposal. The government had already begun a military line, but was encountering political difficulties in completing it. Bismarck's proposed state system was one way of putting an end to opposition of precisely this character. Finally, railway rates are an excellent protectionist instrument, actually serving the German government in that capacity. Rates are raised on importations and lowered on exportations.

It has been asserted frequently that the profits on Prussian railroads have been as follows:

The lowest percentage was 4.68 per cent. in 1883, but the operating expenses included no capital charges on the railway debt. If interest at 3 per cent. were included, and, if a small sum for a sinking fund were added, the profits would fall, for the period 1881–1895, to 2 per cent., and for 1897–1906 to 3.75 per cent. German government railways are exempt from all general taxation and are taxed locally only to the amount of 1,100 francs per mile, whereas, in Great Britain, the local taxation is more than 5,250 francs per mile.

The cost of construction of German railways has not been very heavy. The north of Germany is entirely flat. Not a single tunnel is to be found there. The cost per mile in 1907 was about 277,121 marks, while the average cost in Europe was 336,000 marks.

2. It is customary to speak very glibly in France of the harmony existing in Germany between railways and waterways.

An article which appeared in the Revue des Deux Mondes, in 1902, entitled Les Voies Navigables de l' Allemagne, by Alfred Mange, and two articles entitled Le Rhin Allemand, published by Paul Léon, in the Revue de Paris, on the first and fifteenth of February, 1903, show that the facts completely contradict these assertions.

In the first place, in Germany, even more than in France, both the railway lines and the waterways follow a north and south course. It is not alone from this point of view, however, that traffic disputes may arise. Nearly every one of these rivers crosses several states whose interests are frequently diametrically opposed. The lower Rhine competes with the Prussian railways; but the railways of Baden, of the Palatinate, and of Alsace, says M. Mange, favor navigation on the upper Rhine by greatly reduced rates of transshipment and transit, in order that shipping may be diverted from the Prussian lines. The same condition of affairs exists in the case of the Elbe. In its lower course it competes with the Prussian lines, and in its upper course it is favored by the railways of Bohemia.

When railways thus favor ports of transshipment, they are not moved by an altruistic sympathy for the ship companies, but entirely by their conception of their own interests. The government railways of Prussia have established rates to fight such private companies as still manage to exist. When the Rhine was navigable only as far as Mannheim, the Baden government established there a port of transshipment, opened in 1875, for the purpose of diverting, in its own interest, Prussian and Alsatian traffic toward Switzerland. The Bavarian government made use of the Main to bring its railroads into connection with the ports of the North Sea, and to avoid making use of Prussian railways. The ports of Riesa and Dresden were established at the expense of the railroads of Saxony, that of Aussig at the expense of the railroad from Aussig to Teplitz; that of Tetschen and Lauda at the expense of the Austrian North West railroad; in each and every case to divert traffic from Prussian railroads.

M. Léon has outlined the complicated struggle of the Prussian railroads against the navigation of the Rhine. The differential tariffs established in 1863 are still employed by the state, and not tacitly, but openly. A circular, on the 30th of October, 1884, established the theory. The end in view, it says, is to “facilitate the importation of first-class material and the exportation of the products of national industry, as well as to protect the commerce of German ports against the ports of Holland.” In order to divert from Rotterdam products of the iron and steel industry the government does not hesitate even to be incoherent.

“The Prussian railway,” says M. Léon, has not contented itself with opening the Westphalian markets to its maritime ports by rate reductions, but it has closed them to Rhenish ports by raising the transshipment rates upon those lines which lead to them.

In order to divert from Rotterdam to Bremen the cottons destined for Derendorf, 6 kilometers from Düsseldorf, the railway charges 10 marks 50, or 17 pfennigs per ton kilometer. To divert the iron of Westphalia from Rotterdam a ten-ton load pays from Hagen to Hamburg, a distance of 388 kilometers, 72 marks, or 1.8 pfennigs per ton kilometer. From Hagen to Düsseldorf, or 59 kilometers, the railway charge is 31 marks 50, or 5,3 pfennigs, per ton kilometer.

Is patriotism the sole motive which drives the Prussian railroads to struggle in this way against the navigation of the Rhine? Then why do they weaken the effect of such an argument by favoring importation into Holland if use is made of their cars? From Rotterdam to Bochum, 23 kilometers, a car of 10 tons pays 35 marks, or 1.5 pfennigs, per ton kilometer. By way of the Rhine only 13 marks is paid as far as Ruhrort, or .8 pfenning per ton kilometer, but for the 35 kilometers from Ruhrort to Bochum the railroad charges 16 marks 50, or 4.7 pfennigs, per ton kilometer.

The Prussian railways favor navigation on the Holland canals for the transportation of the coal that they deliver to the frontier. At the same time, in order to put obstacles in the way of mixed transportation, partly by rail and partly by water, as well as for the purpose of deflecting traffic from Baden railways, they grant to Mainz and to Frankfort transshipping rates that they refuse to Ruhrort or to Düsseldorf. Then there are mineral rates for Bavaria, iron and steel rates for Switzerland, petroleum rates for Württemberg, sulphur rates for Nüremburg, etc.

The exceptional tariffs of the Prussian system affect 63 per cent. of the total kilometric tonnage and 46 per cent. of the total receipts of the Prussian state. Their average rate is 2.6 pfennigs, instead of 5.11 pfennigs, the regular tariff figure.

The chambers of commerce of the Rhenish cities protested against such discrimination, and the chamber of commerce of Duisburg scored the policy of the Prussian railways in the following terms:

“We admit that every group pursues with energy the defense of its own interests; we do not admit that such a policy may hide behind the fig-leaf of national interest.”

Such, when examined in detail, are the facts which utterly contradict the legend of harmony between the Prussian state railways and the waterways.

3. In the Journal of Political Economy, of Chicago, Hugo Meyer has cited a fact which shows how accommodating it is possible for a government railroad to be. The rate upon milk had been so established as to prevent any shipment of milk to Berlin from a distance greater than 75 miles. As a result of this tariff the milk supply for the capital was concentrated within an average radius of 50 miles. This rate was established in the interest of the Berliner Milch Central, founded by members of the Association of Farmers (Bund der Landwirte), one of the most powerful political leagues of Germany. In order to conciliate this organization, the government remained deaf to the complaints of the retail merchants. A plan was formed to bring milk to Berlin from Denmark by tank cars. The government declared, however, that milk was not among those articles for which transportation in tank cars had been provided; and it imposed such conditions and such formalities that the originators of the scheme were compelled to give up the attempt.

The Prussian government acts upon the principle that it is not necessary to obviate “the natural disadvantages of the distant producers.” According to this rule, in the interest of the market gardeners of Paris and its suburbs, Parisians should be forbidden to consume, or at least should be made to pay exorbitantly for, the fruits and vegetables coming from the south or from Algeria.

The Prussian railways have a fourth class, lacking in almost every comfort; although the average length of travel in the third and fourth class is from 20 to 24 kilometers (13 to 15 miles). In 1907, during a temporary embarrassment of the budget, the government laid a duty upon railway tickets and abolished return tickets on all German roads.

In the discussion over the budget of 1911–1912 the minister of Finance described the effect of these innovations on the Prussian railroads. They had produced a reduction in the amount of first-class travel, the total receipts having fallen from 23,250,000 francs, in 1905, to 20,125,000 francs, in 1909, while, in the way of normal development of traffic, an increase equal to this reduction of 3,125,000 francs might have been looked for. There was also a reduction in the amount of second and third class travel, and a drop from the third class into the fourth class, which is exempt from taxation. Third-class passengers were paying a rate 50 per cent. higher than the fourth class, while first-class passengers were paying 300 times more.

In Belgium and Germany, since 1907, the railways have not carried any free baggage. During a journey in Germany my traveling companion and myself had each to pay in round numbers 180 francs for our tickets; but to this sum must be added nearly 60 francs for the 40 kilos (88 lbs.) of baggage of my traveling companion, and more than 72 francs for my 50 kilos (110 lbs.). This additional charge raised the cost of transportation in my friend's case 33 per cent., and in mine 40 per cent. When the price of tickets upon German lines is compared with those upon French lines it is necessary to take into account the 30 kilograms (66 lbs.) of exempt baggage allowed the traveler on the latter.

The charge on all checked baggage has another inconvenient aspect. It drives the traveler to carry by hand as much baggage as possible. Such a practice, of course, crowds the carriages and incommodes the passengers. This condition has made necessary a new rule, applied with rigor in Switzerland, forbidding a passenger to bring into railway carriages baggage exceeding specified weights and dimensions. Edwin Pratt1 quotes a letter, which appeared in the Daily Telegraph, of February 22, 1908, signed by an Englishman, Mr. W. A. Briggs, who had lived in Germany:

“The service is only half as frequent as ours and the fares only a trifle lower. They have been raised twice during the last few years. If anyone thinks that a government runs railways for the benefit of the public he is much mistaken. Goods (freight) trains are both infrequent and notoriously slow. Urgent goods are not recognized unless one pays double freight. Cheap excursions are unknown.

“Finally, the red tape is atrocious. Any unfortunate wight who rides past his station is mulcted in the difference and fined 6 shillings on the spot. No excuses are available. If you overload a goods wagon you are fined pounds for a few hundredweight put in on a dark winter evening to empty a rulley. Demurrage is relentlessly enforced and you are made to feel that you are dealing with permanent government officials who do not give a straw for your convenience. I once had a parcel of 1 cwt. sent from Strassfurt to Hamburg and when it arrived the note was stamped and countersigned by no fewer than 22 different persons.”

On February 23, 1912, the Prussian railway administration decided to refuse all parcels during several days. The administration has relieved itself of all details of commerce. Goods must be delivered in bulk and removed as such. There is no interval of grace allowed either at departure or at arrival.1

By express the transportation of merchandise requires one day for shipping formalities, and one day to transport it 300 kilometers (187½ miles), or any part thereof, however small the fraction. That is to say, it would take three days to transport a package from Paris to Laval, a distance of 301 kilometers (188 miles).

Special tariffs are the rule in Germany. They form a collection of 915 volumes, which cost from 5 pfennigs to 6 marks each. Seven hundred and eight are devoted to merchandise, 120 to live stock, 367 to coal. This great variety of rates drives the shipper to commission houses and insurance agents for information and protection.

Ordinary merchandise is not considered as wrapped unless it is contained in strong wooden boxes, or very solid hampers. Unless he complies with these conditions the German shipper is forced to sign a declaration that his packages are either not wrapped, or are insufficiently wrapped, in order to relieve the railroads from all responsibility.

Although by slow freight the ton kilometer of merchandise pays to the Prussian state railways an average rate of 4.59 centimes, while in France it is 4.57 centimes, do not be deceived by the .02 centime difference, which is due in part to the bulk and long hauls of heavy and cheap commodities; and also to a custom of grouping which brings together merchandise of various sorts and ships it in full cars, thus saving the railroad department expenses of handling. The department disclaims any responsibility whatever, the shipper having to insure himself with some company. Moreover, in order to discourage future claims, the department imposes a tax of 1 mark on each complaint.

When British and German railway rates are compared it is usual to forget the short distances covered by the British rate, an average of 35 to 40 miles.

Edwin Pratt is my authority for the following typical example of the tactics employed by the partisans of railway nationalization in Great Britain.

Mr. William Field, a member of the Railway Nationalization Society, founded in 1907 in the United Kingdom, published, during the same year, a pamphlet entitled, The Nationalization of Irish Railways; Defects of the Present System. In it he has reproduced a little table previously published in a tract of the Fabian Society in 1899, and borrowed originally from a work by Sir Bernard Samuelson, published in 1886. Yet the fallacies on which Sir Bernard Samuelson's report was mainly based had already been thoroughly exposed in the same year in which it was issued by the late Mr. J. Grierson, general manager of the Great Western Railway, in the appendix of his book, Railway Rates, English and Foreign.

Grierson says:

“Sir B. Samuelson's report contains many errors of detail. Comparisons throughout have been made without due regard to the conditions attaching to the rates, or to the different circumstances under which the traffic is carried.... In almost every instance Sir B. Samuelson has taken the lowest rates in Germany, Belgium, and Holland, which are applicable only to full truck loads of 5 and 10 tons, and, in some cases, viz., Belgium, to a minimum weight of 8 cwt. These he has used for the purposes of comparison with English rates for any quantities over 500 lbs.... In some instances Sir B. Samuelson has not included in the foreign rates the charge for loading and unloading.... Such are some examples of the errors vitiating the comparison.”

Now, even though accurate, 22-year-old rates would have no value. When they are applied to transportation operated under conditions altogether different they are used either in ignorance or bad faith.

Lord Avebury, in his book, On Municipal and National Trading, says of the German railroads:

“It is a mania to harp on the cheapness of German rates. Dr. Benmer, editor of Stahl und Eisen, has calculated that the transportation charges in England are 10 per cent. of the total cost of producing iron, as against 23 per cent. in Germany.”

M. Kaufman, in his remarkable work upon the Politique Français en Matière de Chemins de Fer, opposed to the refusal of the Prussian government to lower the rates of transportation, “because of the financial situation of Prussia,” the reduction upon express rates accomplished in France in 1892.1

In 1909 the German Centralverband, numbering representatives of the largest industries of Germany, expressed its discontent with the fact that, while private companies were reducing rates, the Prussian government lines were raising them. In the discussion over the budget of 1911–1912 Deputy Mano said:

“For forty years I have followed the fluctuations in the rates on merchandise. During prosperous years, when industry and the railroads are thriving, the department says: 'Your business is all right, therefore you have no need of rate reductions.' In times of depression it answers: 'Business is as bad for the railroads as for you; therefore we cannot reduce the rates.'”

To the above criticism the minister of Railroads contented himself with the reply that, as the increase in the capacity of the cars introduced within late years had sensibly diminished the net cost of transportation, the time had not yet come to consider a general reduction of freight rates. In any case, “Rate reductions ought not to be based upon financial results favorable to operation. Rate reductions can be considered only when the annual revenues shall have reached such a sound basis as to offer a sufficient guaranty against unfavorable years.”

Let us see what this sound basis of annual revenues is: The profits of the railways were formerly used to pay the interest on the government debt, of which 88.4 per cent. in 1899, 82.38 per cent. in 1905, 74.72 per cent. in 1909 was caused by the railroads.

Up to 1910 the Prussian general budget received nearly the entire net earnings of the railways, with insecurity, instability, and trouble in the whole budget situation as a result. In 1907 the net earnings fell below the preliminary budget estimate by 96,000,000 francs and in 1908, 190,000,000 francs. For 1909 on the contrary, following a pressure of freight traffic, the receipts improved by 130,000,000 francs. This improvement was due, in part, to an actual saving of 25,000,000 francs.

According to a report for the preceding year the increase of traffic during the period between the first of April and the end of November, 1910, was 5.97 per cent. for passenger traffic, and 7.34 per cent. for freight, or an average for all traffic of 6.66 per cent.

Railway receipts are dependent upon the economic activity of the country. As a compensation for this contingent and disturbing element in the Prussian budget it was decided, at the beginning of 1910, that out of the profits available after paying for interest and the amortization of the railroad debt there should be devoted: first, to the special budget of the railroads, 1.15 per cent. at least upon the reported capital of the system, or actually 150,000,000 francs ($28,500,000); second, to the general state budget, in order to make up its deficits, 2.10 per cent. of this same capital, or 275,000,000 francs ($52,250,000).

The surplus was to be devoted to a regulation (or compensation) fund destined to complete the payments to the general budget in the bad years, when the net income would not be sufficient to meet fully the above-mentioned payment of 2.10 per cent. to the general state budget.

M. Friedberg (a National Liberal), before the Chamber of Deputies, and M. de Gwinner, director of the German Bank, criticized this reform before the upper chamber. Looking at the situation from the point of view of a state budget with a deficit, obliged to have recourse to a loan, probably to a tax, they demanded why so important a special railroad budget should be constituted at all. The Minister of Finance, M. Lentze, observed that every year the railroads demand reconstruction, improvements, additions, rolling stock, transformation of secondary lines, etc. Either the railways must live on their resources or they must have recourse to a loan. The state budget will be protected from excessive fluctuations in receiving 2.10 per cent. of the capital in support of the general budget. For 1910 it was due to receive 35,000,000 francs ($6,650,000).

The ministerial plan was adopted.

The operating ratio was 61 per cent. in 1900; it rose to 74.62 per cent. in 1908. M. Lentze considered it a triumph when it fell to 68.99 per cent. in 1909, to 68.50 per cent. in 1910. It was computed at 68.63 per cent. for 1911. The Minister of Railways asserted that, in face of growing demands on the part of employees and of traffic, another rise must be anticipated.

Despite the high operating ratio certain economies have been criticized. Naturally the department has been reproached with not having treated its employees fairly. Its answer has been that 60 per cent. of the total expenditures of the railroad are absorbed by employees. Thirty-seven thousand employees, or 12.3 per cent. of the total number, are earning from 1,875 francs to 2,250 francs a year, and 86,000, or 29.2 per cent., are earning from 1,500 francs to 1,875 francs. Six thousand new positions were created in 1912.

In Prussia the administration is strong and Parliament is weak. Therefore it is the minister who says: “Our action will continue to be energetic with regard to those groups trying to foment agitation.” The Department of Railways jealously guards its employees from any spirit of disorder capable of bringing about a strike. As for the employees they are bound by the clauses in their contracts, which each man reads and signs, to hold themselves aloof from all agitation hostile to order.

[1]Railways and Nationalization.

[1]Report on Railways in Germany, by C. H. Pearson and Nicholas Reyntiens, for the Board of Trade Conference, June 7, 1909 (Cd. 4677).

See for the series of discussions concerning the Prussian railways the collection of Marche Financier, by Arthur Raffalovich, and the Revue Générale des Chemins de Fer, among others, the number for November, 1911.

[1]See Yves Guyot, Trois Ans au Ministère des Travaux Publics.