The Online Library of Liberty

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• 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 V

ITALIAN RAILWAYS

At the outset Italy was induced by political motives to become a railroad proprietor. Before 1860 the lines were only local. After the adoption of the constitution of the kingdom, the state bought up the stock which was owned by Austria in the northern railways, and took over the issue of the preferred stock to continue the construction of them. But the government had no capital at its disposal, and had pressing financial needs. In 1865, therefore, a law directed the sale of the state lines to private companies. Two hundred million lire ($38,000,000) was realized by the state from the sale.

The existing system was distributed among four companies, known respectively as the West, the East, the North and the South, but the division of territory between them was ill defined, and they were at odds and enemies. Moreover, the railways of upper Italy proved to have been handed over to two companies with neither resources nor credit. These lines were therefore repurchased by the state in 1875–1876 for political reasons, and the state took possession in 1878. The proprietors of the southern lines became known as the Adriatic Company in 1885. For a time these lines were not interfered with.

In 1878 3,000 kilometers of the 5,100 kilometers of railroad in Italy belonged to the state. The ministers (Minghetti and Spaventa) who had negotiated the purchase, had intended that the state railways should be operated by private companies acting as government agents. In 1878 a new ministry appointed an investigating commission which, at the end of three years of work, submitted a monumental report (1881) containing the recommendation that the state railways be leased to private companies for a fixed period. The commission declared most emphatically that the state ought not to operate them itself:

• 1.° Because the state performs very few functions with greater efficiency or at a lower cost than private enterprise is able to do.
• 2.° Operation of railways by a state is more difficult than by private companies, a conclusion clearly established by the investigations made by the commission.
• 3.° The state is far more apt than are private companies to force changes in industry rather than to foster natural development by offering more efficient service.
• 4.° The danger of political interference in the administration of the railroads is very great.

The secretary of the commission above referred to, who became Minister of Public Works in 1884, leased the state lines to three companies, the Mediterranean, the Adriatic, and the Sicilian, for twenty years, with a possible extension of the lease. Of the 10,066 kilometers of railways in Italy at that time, 9,364 kilometers were thus allotted. In 1905 the system covered 12,827 kilometers (8,017 miles).

The companies had paid the state 275,000,000 lire ($52,250,000) for their equipment, but on condition that at the expiration of the lease this equipment should be repurchased from them. They guaranteed to devote the 5 per cent. which the state had been paying on the original loan toward the upkeep of the equipment. The ordinary expenses were to be borne by the state, the extraordinary expenses by the company. This distinction provoked numberless discussions.

A division of profits between the companies and the state was arranged for, and a reserve fund established as a provision for extraordinary works. But, after 1884, in place of an increase in receipts, there was a deficit. Hence the government, instead of taking in, was obliged to pay out.

In doubt as to the future action of the state regarding them the companies were working under the worst possible conditions in a country deficient in agricultural and industrial products. The taxes were heavy and the returns small. Then among other causes for the decreasing receipts was the rate reduction imposed by the state upon the companies, although theoretically it had no legal right to propose such a step. In the end it was required to make up the difference which resulted. Transportation had been thus ruined and at the expense of the taxpayers. Moreover, by continuing its intervention in the fear of a strike among the railroad employees, the government proceeded to impose new burdens upon the companies, and incidentally introduced a spirit of insubordination among the men.

Conditions were now ripe for the Socialists in Parliament, and they passed without much discussion the law of the 22nd of April, 1905, ordering the immediate return of the railroads to direct operation by the state. This law had been prepared by a commission appointed in 1898, whose report, in nine volumes, had appeared in 1904–1905. A law of 1907 now provided for the purchase of 2,300 kilometers (1,438 miles) of the southern system.

The total cost of the railroads in Italy had reached, in 1907, more than 6,000,000,000 lire. In order to rehabilitate the system thoroughly, Parliament voted a further sum of 910,000,000 lire, which had to be spent in Italy before 1911. This made a total of 6,910,000,000 lire ($1,312,900,000). These Italian lines, for each 100,000 square miles of territory, had a length of 4.19 miles in 1875; 5.8 in 1885; 8.8 in 1900, and 9.3 in 1907–08, when Great Britain had 19.06. For every 10,000 inhabitants there were 1.7 miles of Italian railway in 1875, 2.17 in 1885, 2.9 in 1895, and 3.16 in 1907, in which year, in the United Kingdom, the figure was 5.58.

From the very outset the disadvantages of state operation made themselves felt. The roads were never free from unwarrantable political influence and the equipment was woefully defective for lack of proper supervision.1

It had been expressly declared at the time of purchase that the state system should have a management entirely free from governmental and parliamentary interference. L'Italia, on the 28th of May of the same year, observed that Bianchi, general manager of the state railways, manifested the utmost skepticism regarding the possibility of organizing state railway operation in any effective and positive manner in Italy.

His fears proved well grounded. Among other reforms the department was anxious to introduce a code of discipline among the workmen in its shops. The deputies, however, murmured. They took their grievance to the Minister of the Interior, who referred it to his colleague, the Minister of Public Works. Ultimately M. Bianchi was informed that it would be necessary to revoke such measures as he had already taken. Naturally, feeling themselves thus supported, the workmen redoubled their insubordination, which spread also among the mechanics and the other employees.

At the end of a year M. Bianchi stated that the affairs of the railroad were worse than they had been in the beginning. Instead of being held to account for the good of the service, he was completely under the thumb of all those whose interests were opposed to the real interests of the railroad, provided they had sufficient influence in Parliament.

The net returns of the state railways, passing over the year 1905–1906, when conditions were abnormal, are as follows:

The increase from 1908–1909 to 1909–1910 is to be credited to bookkeeping artifices designed to conceal the real condition of affairs.

Have the improvements been proportionate to the expenditures since the passage of the law authorizing the purchase?

The purchase was coincident with several years of economic activity. Operating receipts increased 29 per cent. in 1905–1906 over 1900–1901; 11 per cent. in 1906–1907 over 1905–1906; 11.5 per cent. in 1907–1908 over 1906–1907. But this increase in receipts was completely absorbed by the increase in expenditures.

Before 1905, when a reduction was made in the rate of taxation, the companies were paying to the government 65,000,000 lire. To-day they would be paying 80,000,000.

The law of 1909 exempted the state railways from certain expenses, which, according to Engineer Ancona, who is also a deputy, amounted to a relief of 24,000,000 lire. This makes it necessary to reduce the 37,000,000 lire—the last figure in the above table—to 13,000,000 lire. A further lessening of the expenses for 1909–1910 comes from a reduction in the charges for renewal of equipment of from 4 per cent. of the gross receipts to 2 ½ per cent. This makes another reduction of from 8,000,000 to 10,000,000 lire, which, added to the 24,000,000 mentioned above, amounts to a reduction of from 32,000,000 to 34,000,000 lire. There were similar reductions in the expenses during 1910–1911.

The state has received no revenue from its capital of 6,000,000,000 lire expended for construction, purchase, and restocking the railroads. To this sum must be added, also, 1,000,000,000 advanced by the Treasury for their benefit. The railroads have been paying interest and sinking fund charges on the loan, but the department intends to be relieved from this responsibility. It has recently demanded 30,000,000 lire a year for the purpose of doubling its lines.

The law governing the operation of Italian railroads recognizes very distinctly that the fundamental duty of state operation is to furnish work for the national foundries and lumber yards. Naturally, the Railway department must fulfill this duty rather than consult the real needs and resources of the railways.

Contractors bring all possible influence to bear upon the deputies, who care for nothing but public opinion. If there are no orders there is no work for the employees for whom the state is bound to furnish work. Moreover, shutting down shops means ruin for the manufacturers. Therefore, the minister orders rolling stock without troubling himself to provide sidings. Whereas, in 1899, the companies possessed an average of 62 meters of siding per empty car, the state, in 1909–1910, lowered the proportion to 25.1 meters, although 50 meters had been considered indispensable for each of the 9,000 cars forming the reserve. Quantities of cars were falling to pieces on the tracks for lack of use; nevertheless, the department contracted for an annual delivery of 5,000 cars. The manufacturers persuaded Minister Luzzatti to raise this order to 8,000 cars. The general budget committee, however, had the courage to reduce it to 4,000 cars, costing 29,000,000 lire ($5,510,000).

Experts have estimated that all this expense might have been spared by a more rational use and better care of the existing cars; 15 per cent. of the freight cars are constantly under repair, and 33 per cent. of the passenger cars.

The Italian taxpayers pay a full third more for their rolling stock than if they bought it abroad. Moreover, there is no redress for delays in construction and other errors on the part of the contractors, because political influence returns all the fines provided for in the contract. The law says that orders are to be divided as equitably as possible among the various manufacturers of the same product. As a consequence of this provision we find a legally organized trust, although such coalitions are forbidden. Naturally, this trust is not interested in insuring an economical expenditure of the state finances.

Here are some facts which have never been denied in parliamentary debates: Old locomotives repainted are bought for new. Concrete ties, which break at the passing of trains, and soft spruce ties, the objects of useless attempts at reënforcement with the aid of injections of creosote, are bought by the tens of thousands. Orders of 15,000 kilograms (33,000 lbs.) of gum arabic, 200 kilometers (218,733 yards) of red velvet, a million straps, etc., are recorded, and so on.1

Of course, labor plays an important rôle in the increase of expenses, and in Italy, as in France, the Railway department congratulates itself upon this state of affairs, an excuse being thus presented for ever new demands on its part. The report for the fiscal year 1910–1911 says:

“During the period 1902–3–4 there was an average of 104,833 employees, both regular and special, earning an average of 1,360 lire a year, while in 1910–1911 we have had, on an average, 143,295 employees, including those engaged in repair work but excluding those on the navigation service lines in operation on the 16th of July, 1910, with an average outlay for each of 1,622 lire. If the employees in 1910–11 had been paid at the same rate as in 1902–4 the expenditures would have been lessened by 37,700,000 lire ($7,163,000).”

This might be a regrettable state of affairs, from the point of view of the railroad employees, but less so from the point of view of the taxpayers.

The operating ratio has fluctuated as follows: 1885, 67 per cent.; 1890, 68 per cent.; 1895, 75 per cent.; 1903, 68 per cent.; 1906–1907, 73 per cent.; 1908–09, 78 per cent. For distances up to 150 kilometers (94 miles) passenger rates, per kilometer, according to the revision of 1906, are (in lire):

Over 150 kilometers the rate is established by zones. In the case of slow freight the rate has undergone few changes since 1885, and rather in the way of an increase.1

Italian railways make all sorts of rebates to shippers, according to the amount of political influence which the latter can bring to bear. Seven hundred and seventy-six special tariffs have been promulgated, and 1,509 regulating clauses in favor of special firms.1 As for deputies and senators they have a right to free transportation for themselves, plus eighteen complimentary tickets a year, twelve of which are sent them without their even having to take the trouble to ask for them.

There are free tickets of every kind and every color, destined for functionaries, great and small, civil and military. Still others, of a special color, are reserved for journalists and for people who find it convenient to claim that title when traveling.

The law of 1905 established an independent staff for the ministry of Public Works, composed of a general manager and a council, consisting at first of six members, but later increased to eight. Five of these latter are attached to the department and three represent the citizens. Members of Parliament are not permitted to be members of this council. The Minister of Public Works can annul the decisions and acts of the council, but he cannot substitute his own initiative.

According to the nationalizing party it had “placed the government railways outside of politics.” But a subsequent law of 1907 provided for a superior committee of control, composed of six senators and six deputies, active members of the two chambers of Parliament, a proceeding which places the minister in a singular political situation.

In 1907 M. Giolitti nominated a committee of vigilance, which was perhaps vigilant, but which did not accelerate the speed of either passenger or freight trains. In a response to a Parliamentary interpellation he assumed entire responsibility for the unsatisfactory condition of the railway system. Parliament did not want him to resign; therefore, the majority endorsed his administration. Hence, we have the following peculiar state of affairs:

If a minister is so satisfactory to the majority in Parliament that it desires to keep him in office it must endorse all the shortcomings of his administration. If, on the other hand, it has a mind to overthrow a minister, it may cause his downfall for a delay of five minutes.

CHAPTER VI

THE RAILWAYS OF THE SWISS FEDERATION.1

The promoters of the existing Swiss railroad monopoly declared most emphatically that the new régime was not expected, primarily at least, to yield financial results, but rather advantages for passengers and shippers. The actual purchase, however, was limited to the four great systems, the government passing over the lines of secondary importance, which were less productive. Thus two classes of railway service were established: a first class, consisting of patrons of the more important roads and a second class, composed of users of the small roads, which could be safely neglected. The purchase price of the four great systems was estimated at 964,000,000 francs ($183,160,000). The Confederation has actually paid 1,195,000,000 francs, or 231,000,000 francs more than the figure first quoted.

On December 31, 1912, the general construction account amounted to 1,472,000,000 francs, to which must be added 45,824,000 francs representing divers expenses, reduced by sinking funds to 28,177,000 francs. The total amount of capital sunk is therefore 1,500,469,000 francs ($285,089,000). This does not include, however, the cost of the St. Gothard line.

Excluding the St. Gothard line, the profit and loss accounts are shown in the following table:

The cost of the St. Gothard line has exceeded by 34,000,000 francs ($6,460,000) the provisions of the estimate of 1897. The expenses for completed works and new acquisitions, which on December 31, 1909, already amounted to 218,000,000 francs, had jumped in 1912 to 292,000,000 francs, or 74,000,000 francs more, and at that time there still remained unfinished works to the extent of 69,000,000 francs, while expenses in the near future for other lines are in sight, amounting to almost 100,000,000 francs. In their report to the budget of 1912 the board of managers of the Federal railroads stated that they were anxious to reduce the yearly expenses by 24,000,000 francs, but such a reduction is out of the question.

The capital stock of the four old companies was 280,000,000 francs ($53,000,000). The dividends paid to stockholders had been reduced, or altogether discontinued, during the losing years, in order that the interest upon the outstanding debt might be paid.

In the case of the state railways there is only one stockholder, the state; and, if its railways lose, it is the state, that is to say, the taxpayers as a whole, who must make up the deficit.

In 1903 the consolidated debt was 1,075,152,000 francs. In 1909 it had risen to 1,344,221,000 francs. On December 31, 1912, it had again increased 399,000,000 francs, or 37 per cent. The interest on the debt, which was 36,000,000 francs in 1903, amounted to 54,000,000 francs in 1912. Sinking fund charges on the capital invested in the enterprise rose from 4,300,000 francs in 1903 to 7,840,000 francs in 1912.

The surplus should have been transferred, at least in part, to a surplus fund. But the department, considering the unreliability of future operations, has refused to put in force the provisions of the law governing the purchase, and has simply carried it over. Some special expenses, represented by no actual value, such as abandoned installations, etc., were still carried on December 31,1912, to the amount of 28,000,000 francs ($5,320,000). As long as this balance is not disposed of, it is out of the question to talk about surplus of receipts.

The annual appropriation of special funds, to defray the expenses of maintenance and renewals not already covered by operation in 1906, was 7,084,000 francs. In 1912 it was 9,325,000 francs.

There has been no miscalculation in regard to receipts. They were estimated on the basis of an average annual increase of 3 per cent. The increase has been 4.8 per cent. for passengers and 4.5 per cent. for freight.

During the last three years the gross earnings have jumped from 174,000,000 francs, in 1909, to 206,000,000 francs, in 1912, or 18 per cent. But these earnings will be reduced after the opening of the Loetschberg line, and as a result of the St. Gothard agreement, which has just been accepted.

Moreover, the expenses of operation have increased on an average of 6.2 per cent., consequently at a proportion greater than the receipts, up to 1908. Since 1909 this proportion has decreased. The operating ratio appears as follows:

During the same period the highest operating ratio of the Paris-Lyon-Mediterranean line of France (operated by a private company) was 53.5 per cent.

In 1909 the secretary of the department observed that, taking into account the increase of interest, extensions, and all those charges which, at the beginning of 1912, bore so heavily upon the railway, the annual increase in expenditures would ultimately reach 20,000,000 francs. This year (1913) it has been 11,270,000 francs.

After 1906, following an average rise in wages, together with an increase in the number of employees, the ordinary labor expenses of the railroad exceeded by 4,280,000 francs the figure of the preceding year.

Beginning with April 1, 1912, a new law concerning salaries went into effect, which has brought about an annual increase of 8,200,000 francs in the expenses, without counting supplementary payments to be made in the way of pensions and sick and other benefits established on the basis of full pay. Nor does it include the increase in the salaries of laborers paid by the day. The total increase is estimated at 10,000,000 francs.

From 1904 to 1910 the increase in labor expenses was 14,370,000 francs, or 51 per cent. For all other expenses the increase was only 36 per cent. In 1902 there were 23,030 employees; in 1907 the number had risen to 31,300. On the 1st of April the tri-yearly rise in salary took effect, as provided for by a law fixing higher maximums. This law has increased the annual expenses by 10,000,000 francs.

With the object of balancing the expenses in favor of the employees, certain economies were effected at the expense of passengers and shippers, such as withdrawal of reduced fares on holidays, decreased inspection of the road, fewer trains, speed of freight trains lessened, a certain number of improvements postponed, and resistance to demands for improvements which were not too urgent. Finally the department determined to increase the rates when the industry and commerce of Switzerland are already paying internal transportation taxes double those in force in neighboring countries.

The nationalizing of the Swiss railways has certainly proved of advantage to the employees. But, are state operations carried on for the benefit of employees or for the public? Present conditions justify the following prophecy of Numa Droz:

“Through this purchase our railroad policy is in course of stiffening into a set of rigid regulations prescribed by a poverty stricken department incapable of solving the great problems of the future for lack of resources.”

[1]See The Economist, November 4, 1911.

[1]The Economist.

[1]Railway Transportation, by Charles Lee Raper, 1912, G. P. Putnam's Sons, New York.

[1]The Economist.

[1]See Journal des Économistes, Dec. 15, 1910, article by M. Favarger, Nov., 1912. The Latest Accounts of the Federal Railways, July, 1913. The Revised Accounts of 1912.