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 VIII

GOVERNMENT RAILROADS IN FRANCE

1. In Book I, Chapter 2, I referred to the political motives underlying the purchase of the Western Railway of France. In order to do a good turn to the Socialists, Georges Clemenceau socialized this system.

The Minister of Public Works, Louis Barthou, saw in the purchase a double advantage. It would be a sop to the Radicals and Radical Socialists, for one thing, and, in addition, it might serve to cover the deficits of the so-called old government system, that is to say the lines already under public management. The deficits were not to be hidden, however. Therefore, Minister Barthou, who had at first repudiated the charge that such deficits existed, openly demanded that the sum of 26,600,000 francs be set aside for the benefit of the old system from the special treasury account established by the law of December 18, 1908.

In November, 1906, the government introduced a bill for the purchase of the Western Railway, although it confessed “that no papers relating to such a project were on file in the office of the Minister of Public Works,” a provision required by law. Nevertheless, the government demanded that a law authorizing the transaction be passed by the Senate and the Chamber of Deputies, before the end of the year, in order to prevent the Western company, which had had a profitable year, from increasing its net profit.

The Senate, however, refused to be intimidated by threats. Its committee, through the secretary, M. Prevet, who assigned the strongest possible reasons for such action, rejected the purchase bill, although it had already passed the Chamber of Deputies, by 364 votes against 187, 76 out of the 80 deputies from the districts touched by the Western road having voted against the purchase. Out of 46 senators, 44 were emphatically against the bill. Nearly all the chambers of commerce in France were also opposed.

The argument advanced in favor of the purchase was that the Western company would never be able to repay the advances that had been made it under the name of guaranty of interest, that thus it was running on government money, and hence it was neither more nor less than a state department engaged in an unprofitable operation.

Yet the results of its operation indicated that the company was making the greatest possible effort to extricate itself from the crisis of 1901. The receipts, net profits and interest guaranties for 1901, 1904 and 1906 were as follows (in francs):

But the charge was made that the company had obtained its reduction in expenses only at the cost of its employees. I give below the number of employees and the increase in their salaries:

Thus we see that the number of employees had increased, as well as the individual salaries, in spite of the difficulties facing the company. Moreover, during this same period, the sick and other benefits, bounties and allowances of various kinds had grown from 2,188,000 francs to 3,580,000 francs, or an increase of 1,392,000 francs.

The other argument, harped on ad nauseam by partisans of the purchase, was that on December 31,1905, the Western railway's debt to the state amounted to 302,569,000 francs, and the interest on it to 117,300,000 francs, a total of 419,869,000 francs.

But the Western company had equipment estimated at 350,000,000 francs. By forcing it to submit to a deduction of 30 per cent. the price the government would then have to pay for the road would be 245,000,000 francs. The difference between 419,869,000 and 245,000,000—or 174,000,000 francs—was the clinching argument on the part of the advocates of the purchase to hasten action in order to safeguard the interest of the state.

And how did this purchase safeguard the interests of the state? The government took over the road at once; but it increased its investment in the Western company. The guaranty of interest to the stockholders would come to an end in 1935 if the company continued to operate the road, while, in case of purchase by the state, it would continue to the end of the franchise, in 1956. As a result the chief beneficiaries by the purchase of the Western road were the stockholders. On the day when the road changed hands its stock was quoted at 830 francs. It subsequently fell to 810 francs, but the Cote de la Bourse et de la Banque, the Moniteur des Intérêts Matérièls, and I myself immediately pointed out that the advantages resulting from the purchase would raise the value of the stock to more than 1,100 francs. At the present time, June 17, 1913, it is quoted at 870 francs.

What did the purchase cost the state? The official in charge of the financial end of the purchase (Directeur Général du Mouvement des Fonds) declared that “it was not possible to determine it even approximately.” Yet the Minister of Public Works declared that the whole transaction could be called an “opération blanche.” That is to say, it would cost the state nothing.

We have already referred to the fact that the Senate rejected the bill authorizing the purchase of the Western line. But the Clemenceau ministry brought so much pressure to bear upon the senators that the purchase was finally voted by a majority of three. Thus the state found itself charged with the duty of furnishing service on a system of 9,000 kilometers (5,625 miles). In the drafts and reports of the committee in charge of the purchase, various settlements of the points at issue between the government and the company were discussed, but these were all summarily eliminated by the law of July 13, 1908, which ratified an agreement with the Western company. The guaranty of interest, which was to expire in 1935, was extended to 1951.

The remainder of the sums due from the company upon bonds, certificates and guaranties of interest was fixed by law at the sum of 7,122,000 francs ($1,353,180). There was no discussion of the 419,869,000 francs, nor even the 174,000,000 francs. The real amount of the sums due the company is determined by annual estimates. The sum total amounts to 4,972,334,000 francs ($944,743,000).

2. What are the expenses resulting from the operation of the system by the state?

The state took over the Western Railway January 1, 1909. During the five years of its operation by the company, from 1904 through 1908, the average annual net profit was 78,540,000 francs. In 1909, the first year of state operation, this net profit fell to 69,970,600 francs; in 1910 to 57,169,200 francs; in 1911, to 30,180,900 francs; in 1912, to 21,932,900 francs. From this last figure a forecast may be made of what the profit of 1913 will be. Therefore, and taking into consideration the probabilities of 1913, we have an annual average of 41,071,000 francs for the net profit from state operation, instead of the 78,540,000 francs from operation by the company.

In a statement outlining the special features of the budget of 1912, M. Klotz estimated that the deficit on the operation of the Western Railroad would not exceed 24,000,000 francs ($4,560,000).

On the other hand M. Chéron's report upon the application for supplemental credits in favor of state railways, submitted March 29, 1912, declares:

“The demand for supplemental credits, which we are about to examine, constitutes a confirmation of the estimates of the budget of 1912. It was, as we see now, anticipated. The figures are none the less very disturbing.”

It was not anticipated in the explanatory statement of the budget of 1912. Some lines further on M. Chéron adds:

“Progress has already been made in bringing order into this department. It only remains now to control the conduct of the enterprise with such vigilance and severity as will reduce the truly exorbitant deficit in the profits of operation.

The Honorable Secretary states that the supplemental credits granted in 1912 have decreased the net profits of the old system by 3,813,400 francs and increased the deficit of the Western line to 23,389,900 francs.

Following the reduction effected by the commission in the ordinary expenses of the Western line, the increase in the deficiency of the profits of the system affecting the budget of the ministry of Public Works is discovered to be 22,389,900 francs instead of 24,529,900 francs. The total deficit in the profits from the operation of the system will thus be found to be for 1912, and, including the original provisions, 81,535,900 francs, instead of 83,675,900 francs allowed by the government. If the deficit on partial operation be added, or 739,000 francs, we have a total deficiency for 1912 of 82,874,900 francs.”

M. Chéron is basing his comparison on the year 1908, the last year of the company, with the present condition of the state railway. But the purchase had been voted by the Chamber of Deputies in December, 1906. The company had no more authority over its employees, and its condition was altogether abnormal. Moreover, during the fiscal year 1908 expenses had to be met which, if the purchase had not been made, would normally have been carried over into the year 1909.

The unfortunate situation of the Western company serves rather to bring out more clearly the seriousness of the increase in the expenses of the system after its purchase by the state.

It should be noted further that the actual deficit of the company in 1908 was only 28,522,675 francs 68, to which M. Chéron adds 3,300,000 francs, representing additional charges resulting from the agreement regulating the sums due annually on the purchase.

As far as the old government railway system is concerned, we can speak only of the receipts and expenditures of operation, since the costs of construction have not yet been determined. Since 1908 the net profit of operation has considerably diminished.

The receipts thus rose 8,000,000 francs, while the expenses increased 15,000,000 francs. Thus the same condition is reached as in the case of the Western line.

M. Chéron, after having reported an annual increase in the receipts of 3.50 per cent. “as merely satisfactory,” remarks: “The progressive increase of expenses is the true cause of the decrease in the net profit of operation.”

The following table presents the expenses of operation:

These figures drew the following criticism from the secretary:

“It would be regrettable if the results of the public operation of the Western line did not convince the department of the necessity of keeping down the general expenses of the old system. We are anxious in this case also to reach, or rather to return, to a more favorable net profit. Outside of justifiable improvements in the position of the employees, there are expenses which could be reduced or checked.

3. “Moreover, we would say that, in the case of the old system, as in that of the Western line, the extraordinary works which for some years have been in course of construction (involving an outlay of more than 21,000,000 francs since 1909, together with the 31,000,000 francs demanded, and with the same excuse, in 1912), ought to result in a development of traffic, and, as a direct consequence, a corresponding increase in the net profit.”

From the foregoing extracts it would appear that the greater part of the increase in expenses came from the raising of the wages and salaries of an enlarged working force. The proportion varies for the two state railway systems from 72 to 73 per cent. of the total increase in expenditures. On the newly acquired Western line, the improvements in the situation of the employees and the regulations governing promotion represent together more than two-thirds of the total increase in labor expenses.

While operating expenses from 1908 to 1912 have increased 72,304,000 francs the gross receipts have risen from 217,645,000 francs to 244,335,000 francs—a gain of only 26,690,000 francs. The difference is at least 45,614,000 francs.

Moreover this deficit must continue to increase, because this year the state railways have just issued 300,000,000 francs ($57,000,000) of 4 per cent. bonds, on which the state must pay interest in the future.

Foreseeing this bond issue M. Rouvier observed, in a speech on the 26th of January, 1904:

“You will have to create a special issue that you will probably term 'railroad' or 'public works' bonds: and, in spite of your delusion that, because you are going to call it by another name, this new issue will be sold on the market under the same conditions as are private bonds, you will have made a serious attack upon the credit of the state.”

The prophecy has been realized. The Minister of Finance did issue the 4 per cent. bonds. The 3 per cent. rentes fell immediately to 92.65. In October they were quoted under 91 francs. To-day (June 18, 1913) they are 83. The amount of depreciation thus forced upon the 3 per cent. rentes has been greater than the 300,000,000 francs borrowed by the state for the railroad.

Optimists prophesied that these state railway bonds would pull up the rentes; they have been pulled, but they have been pulled down.

The question has been asked: How can a bond issue of 300,000,000 francs have any influence upon a market of 22,000,000,000 francs? But there are not 22,000,000,000 francs in circulation. A portion of this sum is tied up in savings banks, insurance companies, benevolent associations, the property of minors, etc. There is only a limited amount left to bear the entire weight of this issue of state railway bonds. The 4 per cent. bonds, issued at 503 francs, have remained at about this figure.

Some improvements have been made in the Western line; but in five years, from 1909 to 1913, the cost of construction has been 718,000,000 francs ($136,000,000). According to the partisans of the purchase, “this is the fault of the Western company, which delivered a system in poor shape.”

But at the end of 1911 M. Colson, formerly Director of Railroads in the ministry of Public Works, and now councillor of state, declared:

“According to such information as we are able to gather from engineers, whether those of the late Western company or in our own service, it is clearly apparent that, down to the final day on which it remained in the hands of the company, the whole system was in excellent shape.”

While his final statement could not well be more explicit:

“The state of the roads at the time of purchase would neither endanger the safety of travelers nor impose abnormal financial charges upon the new management.”

Whereas, the net profit per train kilometer varied in the case of the private companies from 1 franc 75 to 2 francs 71, it was only 0 franc 53 upon the Western (state) line, and 0 franc 44 on the old system. In other words, the state was operating its new purchase at a figure four times higher than the operating cost of private lines, and its old system at a figure five times higher.

From 1909 to 1912, that is to say, in three years, the decrease in net profit upon the Western line has been 66 per cent., and the operating ratio has increased to 91 per cent. This is bad enough, but the situation is even worse on the old system. During the same period the decrease in the net profit was 73 per cent., while the operating ratio reached the enormous figure of 95 per cent.

Conclusions

• 1. The purchase of the Western Railway was a political measure, designed to conciliate the Socialists.
• 2. Presented in the light of an operation that would cost the state nothing, an “opération blanche,” it has wrought serious harm to the state. The sole beneficiaries have been the stockholders of the Western company.
• 3. The employees of the state railway instituted a strike, and their exactions have resulted in increased expenses, which have not been offset by improvements in the service.
• 4. The issue of state railway bonds at 4 per cent. has caused a fall in 3 per cent. rentes.
• 5. The operating costs are even higher on the old state system than on the newly acquired Western line.