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

BOOK II

FINANCIAL RESULTS OF GOVERNMENT AND MUNICIPAL OWNERSHIP

CHAPTER I

BOOKKEEPING IN STATE AND MUNICIPAL TRADING ENTERPRISES

1. I have already quoted from the report to the International Statistical Institute, compiled by Gustave Schelle, former minister of Public Works, wherein he discusses the financial situation of the various state and municipal trading enterprises, from which he has received reports, with all the authority of his official position, and with a mind which has remained both alert and independent throughout his administrative career. The difficulties in the way of estimating and comparing the value of such enterprises are very great.

In Denmark, for example, railway outlays for pensions and general administration and inspection costs are borne by the railroads themselves. For other enterprises such costs are met by the general budget.

Before 1904 and 1905 the postoffice and the telegraph yielded no net proceeds. In 1908–1909 this was also true of the mint.

No report is made regarding the interest charges upon loans for the establishment of such enterprises.

In 1908–1909 the results of municipal operation of gas, electricity and water were as follows:

In Holland, according to information furnished by M. Methorst, director-in-chief of the Central Bureau of Statistics, the cost of constructing the postoffice, telegraph and telephone systems amounted, on January 11, 1909, to 24,854,000 florins ($9,941,000). This capital bears an interest charge in favor of the public treasury of 3½ per cent., for the systems were established by means of public funds. Repayments are made periodically at a rate varying from 1 to 12½ per cent. The enterprise has a special double entry system, and no account is taken, in reckoning up receipts, of either free railroad transportation or official correspondence.

The funds for the operation of the Wilhelmina and Emma mines are supplied by the budget.

No information is given in the report concerning the financial results of municipal enterprises in Italy.

2. I quote literally the observations of M. Schelle concerning France:

A. Receipts and Expenses of Operation:

“In the case of the mints, the National Printing Office and the state railroads, the receipts and expenses of operation are placed opposite each other in budgets annexed to the general budget, and the difference in gain or loss is indicated only in this latter budget. The records of expenditures, however, as well as of receipts, are incomplete.

“In the case of the fiscal monopolies, the postal service and the official journal, the receipts of operation are included in the general receipts of the general budget, while the expenses are charged to the department under whose jurisdiction the enterprise may happen to be, without any comparison being made between receipts and expenditures.

“As for the other and less important industrial enterprises, the provisions of the general budget furnish no indication whatever of their condition. Tentative receipts are mixed with the receipts of other enterprises under different headings.

“Sometimes the expenses are deducted from the gross receipts, and the net proceeds alone figure in the budget; sometimes they are included in the expenditures of the department concerned, now and then without being in evidence. Information on the subject of these enterprises is impossible except in the final accounts.”

B. Costs of Construction:

“The costs of construction, in the case of certain enterprises, are so mixed in the accounts with other expenses as to make it utterly impossible to disentangle them. Even where enterprises have been made the subject matter of the budgets called annexes, the budget documents and the final accounts for each year indicate only the increase in the expenses to be incurred during the year under consideration, without regard to the expenses of former years. In order to get at the amount of capital employed, it is necessary to examine the final accounts of all the years. The resulting labor sometimes recalls that of the Benedictines, and, moreover, is far from always yielding satisfactory results, whether by reason of the antiquity of the expenses or the impossibility of disentangling them.”

C. Receipts and Expenses Outside of the Budget:

“Government undertakings keep no daily record of the requisitions made on them by other departments, so that important financial transactions do not appear.

“Certain utilities profit gratuitously from services rendered them by other public or quasi-public enterprises; thus the postal and telegraph departments pay the railroads for but a small share of the services which they receive from them.

“Public enterprises do not pay rent for the use of government property, for the real estate they occupy, nor are they charged with the materials they use. On the other hand, the National Printing Office includes among its receipts, at a rate which is generally considered high, the amount of work which it does for other departments. It does not include among its expenses, however, the interest on the capital sunk in the buildings in which it is installed.

“The postal and telegraph facilities granted to ministers and various public departments do not figure among the receipts of the postal enterprises.

Finally, among the annual expenses of the post and telegraph offices are included the subsidies paid to packet boats prompted, at least in part, by considerations altogether foreign to the mail service.”

D. Special Accounts:

“When an enterprise possesses a technical equipment or a stock of merchandise, no document ever shows the true value of such equipment.

“Exceptions to the above are the special accounts published at the close of each fiscal year: 1st, in the match and tobacco monopolies; 2d, in the case of the state railroads. However the value assigned in these special accounts to stock and equipment is not a commercial value. It is a simple difference between the expenses of purchase and manufacture and the proceeds of actual sales.

“Moreover, the fixed capital, buildings, real estate, etc., of the enterprises enter into these accounts in the same manner as the stock of manufactured products, so that it is impossible to get at the capital really involved.

“Finally, the amount realized from sales of real estate, when there are any, is not deducted from the capital, such sales being made by the Government Lands Department.

“The accounts of the Government Railroad Department published each year are no more satisfying. Statements as to the costs of construction are to be found among them, but these include only those expenses contracted directly by the department, and no mention is made of the very considerable expenditures which are covered by the budget of the ministry of Public Works.

“The Statistique des Chemins de Fer is the only document which gives an approximate idea of the actual costs of construction of the state railroads and that of the small line of Saint Georges de Commiers à La Mure.”

E. Capital Charges:

“It is not sufficient to know the amount of actual capital invested in an industrial enterprise in order to be able to form a correct judgment as to its management. It is also necessary to be informed as to the capital charges. Exact computation is impossible unless the expenses relative to each enterprise have been covered by special loans. We must be content, therefore, with an approximation difficult to make at this late day, because no care has been taken to make such an estimate each year since the enterprises were established. In order to make any progress, it would be necessary to estimate the applicable rates based on the price of government bonds or of bonds guaranteed by the government at the time when the various construction expenses were incurred. Expenses for building materials, etc., and for the installation and equipment of the various government enterprises have been a burden upon the Treasury since that date. This is evident in the case of the costs of construction defrayed with funds from loans not yet paid off. But it is true also of expenses paid for in this or that year out of the ordinary resources of the budget. These expenses may not be considered as paid off while a perpetual public debt exists, even though resources are at hand which might have been employed toward their extinction.”

3. The municipalization of public utilities has considerably increased the expenses and debts of British local governments. M. Schelle declares, however, that he has been unable to obtain the data necessary to a compilation of statistics as accurate in character as the purposes of the International Institute would naturally require.

A portion of his report is devoted to the financial condition of the Belgian state railroad, of which we will speak later in detail.

In Sweden the principal state operations are the postal, telegraph and telephone services and the government railways. The receipts from the railways represent 1.30 per cent. of the average annual capital.

The City of Paris municipalized the service of burying the dead in 1905. In 1906 the receipts were 5,242,000 francs ($995,980), while the labor and equipment expenses were respectively 2,500,000 francs ($475,000) and 2,135,000 francs ($405,650), or a total of 4,635,000 francs ($880,650).

In 1910 the receipts were 4,660,000 francs ($885,400). The labor expenses had risen to 2,760,000 francs ($524,400) while those for equipment had been reduced to 1,765,000 francs ($335,350). At the same time there was an outstanding loan of 348,000 francs ($66,120)—a total expense of 4,873,000 francs ($925,870).

In the case of the quarry operated by the City of Paris the results are still more unsatisfactory, according to a report to the Municipal Council in 1908. The labor expenses are very much higher than in neighboring quarries.

4. An important part of the report is devoted to Austria, and is based upon a previous report drawn up under the direction of J. G. Grüber, by Dr. Rudolph Riemer, secretary of the Central Bureau of Statistics.

Outside the usual monopolies the Austrian government owns docks and mines and operates lotteries.

In most of these enterprises the costs of construction and of equipment are indicated separately in the final accounting, but only those expenditures made during any one year are to be found there, regardless of those of the preceding years. The items for determining how much of the original debt has been paid off are lacking. Interest and sinking fund charges on loans contracted in view of government operation do not figure in the final accounting in the chapter especially devoted to the particular industry concerned, but in a chapter issued by the ministry of Finance under the heading, Public Debt and Administration of the Public Debt. Special information in regard to the auditing of the public debt may be found in the annual report of the special committee (Commission de Contrôle) managing the debt. But in this report the information touching interest and sinking fund charges does not inform us as to the actual application of the loan.

The same conditions prevail in the case of the public debt contracted for the benefit of the railroads. Our information covers only interest and sinking fund charges on the amortizable debt. But even that portion of the debt does not represent all the loans contracted for the benefit of the railroads.

According to the Statistique des Finances de la Haute-Autriche et de Salzburg (8th annual report) the expenses of all the towns of Upper Austria arising from the operation of their utilities amount to 4.44 per cent. of all their expenses. The costs of construction are quoted en bloc in a special chapter.

The result of M. Schelle's investigation proves that almost everywhere the data necessary in order to determine exactly the profits or losses upon state or municipal industrial operations are insufficient.

“Whatever be the end in view when states or municipalities organize industrial enterprises—whether the object be fiscal or economic, for the sake of the consumer or even in the exclusive interest of employees—it is indispensable to know whether these enterprises are actually resulting in profits or losses, and the amount of each.

“As far as the essential functions of the state are concerned, such as providing for public safety, public highways, etc., the establishment of special accounts would be impossible and without much value, inasmuch as these services provide no opportunity for direct payment on the part of consumers. Such services derive no receipts, properly so-called, nor can they be abolished. When it is expedient to know whether the management of these activities is not too extravagant, it is necessary to proceed by contrasting one year with another, or by comparing certain items of expense with similar items in other countries, or in other localities.

“Public industrial enterprises are almost never essential, since they may be intrusted to private operation. They resemble private enterprises and provide opportunity for special receipts. It should, therefore, be possible to furnish to the taxpayers, in whatever concerns them, means of knowing the amount of income, just as opportunities for such information are afforded to the stockholders or creditors of any private concern. To pretend that the financial side of state or municipal enterprises should be neglected because such undertakings are created for the public interest is only an effort to side-track possible criticism. Public management, like any other, can be good or bad. If it is directed toward securing advantages, justly or unjustly, to this or that class of people, whether consumers or employees, it is at least necessary that those who are to foot the bills, that is to say, taxpayers, should know, personally or through their representatives, whether the contributions demanded are not exorbitant. Such a requirement should not be questioned in any country.

“From another point of view, how can the pretention be sustained that, in certain cases, the state or municipality can serve the public to better advantage than private companies when such states or municipalities do not furnish the public with adequate information concerning their administration.

Conclusions

5. “In fact,” concludes M. Schelle, “the efforts made to organize special accounts for state and municipal industrial enterprises have failed. Public documents sometimes furnish precise enough information as to receipts or expenses of operation, but it is nearly always difficult to discover the amount of the costs of construction, and it is impossible to get any adequate idea of capital charges, interest and amortization.” His observations, in regard to Denmark, Holland, France, and Austria, prove that in no respect do the accounts ever bring out the real gains or losses of state enterprises.

The difficulties encountered arise from the fact that a state or a municipality cannot have more than one budget. Moreover all the receipts should be entered on one side, all the expenses on the other. In this respect at least public organizations should be managed like private corporations. If these latter fail their creditors demand the amount of their claims at so many cents on the dollar. A well-organized state should have only one purse, nor should any distinction be made between its various loans. All should be secured upon one single guaranty—its credit.

Without a unified budget sound finance is out of the question. A special account for a state or municipal industrial enterprise can have only a fictitious value.

In other words, sane budget regulations and public management of trading enterprises are contradictions in terms.

CHAPTER II

THE BELGIAN STATE RAILROADS

1. Railroads are the most important industrial enterprises undertaken by a state. What, then, are the financial results of their public operation?

The Belgian state railway was established by the organic law of June 1, 1834. By reason of the length of time it has been in operation it has a right of precedence.

Marcel Peschaud has published in the May and June numbers of the Revue Politique et Parlementaire a remarkable study of the Belgian railways, but his analysis would lead us too far astray. I must confine myself, therefore, to a résumé of what M. Schelle has to say on the subject in his report to the International Statistical Institute.

The law of 1834 provided that a complete account of the operations of the railways be presented to the Chambers annually, by which account are understood the receipts and expenditures, together with the use of the funds for the construction of lines placed at the disposal of the new department. The accounts thus rendered soon proved to be altogether inadequate.

In 1845 estimates of interest and sinking fund charges were added to the previous requirements. Controversies arose over these estimates, and it became necessary to change the system several times in order to settle the rate question. At the close of 1878 it was decided that the management of the railroads should make up a balance sheet in the form of commercial balance sheets. This was done, but capital charges were computed at a uniform rate based on a period of retirement of ninety years.

Moreover, according to M. Nicolai (Government Railways of Belgium, 1885) the cost of replacements and reconstructions was charged to the construction accounts without deductions for renewals and repairs. On the other hand, the annual payments for the purchase of lines which should have been charged to construction were charged to operation.

“Never,” says the minister of Public Works (Report for the year 1905), “have the railway accounts, that is to say, the accounts prescribed by law, been found other than defective. On the contrary, the statements of conditions, the statistics, the estimates and reports, relating in part to such items as interest, sinking funds, pensions, etc. (which are not within the legal powers of the railroad department to pass upon), have never ceased to be the subject of the most lively discussions. Charges have been made in turn, or sometimes simultaneously, that the profits were swelled and concealed, that there was too much red tape, even to the point of disregarding the essential rules of a business enterprise, or that there was not enough control, because the accounts were separate from those of the Treasury. The subject has furnished an inexhaustible theme of argument.”

Of late years it has been decided that the data contained in the annual reports ought to be kept with the Treasury accounts, and that the balance sheets should be made up between the department of Public Works and that of Finance. The accounts for 1905 and the years following have been established upon this new basis.

As for capital charges met by enlarging the public debt, a rate of issue was adopted, which varied from 4.90 per cent. to 3.11 per cent. Then the government proceeded to publish, under the title of “annexes” to the financial report: 1”. A general balance sheet for the year ending December 31, showing on the credit side construction costs since the beginning of the undertaking and the gross operating receipts and on the debit side the capital already retired and remaining to be retired, the amount of charges upon this capital, the dues and rents paid by the state railway system to other railroad enterprises, operating expenses and the profit and loss balance. 2”. A separate account of operating receipts and expenditures for the preceding year. 3”. A provisional account of operations for the current year, and of profit and loss, comprising, on the one hand, operating expenses, pensions charged to the general budget, fixed charges, including yearly installments, and the portion of receipts due to companies whose lines are operated by the government; and, on the other hand, the profits of operation, properly so-called, together with various other profits. 4”. A table recapitulating the financial results since the establishment of the system (1835) setting forth the annual balances in profits or in losses. 5”. A table of interest and sinking fund charges from the beginning. Finally, tables of operating statistics.

As a result of the new system adopted the profit shown in a large number of the previous reports was transformed into a deficit.

The report for the year 1909 gives the following results, computed in francs:

Interest and sinking fund charges were computed, for 1908, at 94,015,000 francs and, for 1909, at 97,020,000 francs.

“To sum up,” concludes M. Schelle, “if, from the very beginning, we compare the positive with the negative balance of each year, and add the sum, we find in 1908 a final net profit of 30,966,000 francs and in 1909 one of 24,938,000 francs.”

The maximum net gains were 44,975,000 francs in 1910, and the maximum net losses 73,998,000 francs in 1886. During many years the summaries which now show deficits would have shown profits in the years previous to 1885.

The fancy that the state budget can ever be repaid for its outlay through the profits of the railroads no longer exists in Belgium.

M. Helleputte, minister of Railways, says in his preliminary note to the operating report of 1908:

“The operation of Belgian railways has undergone various fortunes. Since 1835—74 years—the balance has shown a deficit 36 times and 38 times a profit. Since the beginning of these operations the total profits exceed the total deficits only by the small sum of 31,274,000 francs, or an annual average of 422,600 francs for an average active capital of 778,733,000 francs, or .05 per cent., all of which amounts to saying that, up to the present day, the railroad has operated at cost.”

The report goes on:

“If we take into consideration the accumulated interest upon the deficits, the amount of which had to be borrowed from the Treasury, and, if we deduct the debit balances, the apparent surplus gives place to a deficit of 86,836,000 francs, or an average annual loss of 1,173,000 francs—0.11 per cent. of the average working capital.”1

During the great convention of Belgian manufacturers and merchants, on November 29, 1911, M. Cannon-Legrand said:2

“The Belgian government acknowledged a loss of 6,965,000 francs in 1907, more than 7 millions in 1908, and 6 millions in 1909. In 1910 we were promised a profit of 4,500,000 francs, which has now dropped to 2,790,000 francs.

“On the other hand, the capital investment has reached 2,731,000,000 francs, showing an average increase for the last three years of 50,000 francs per kilometer for the whole system (4,329 kilometers—2,706 miles).

“Thus, during the year 1910, the capital invested by the government in its railways realized exactly 0.10 per cent. This was an absolutely exceptional year, both in volume of traffic and in freight and passenger receipts. It brought into the coffers of the railroads 27,725,000 francs more than in 1909, in which year the system had earned approximately 12,230,000 francs more than in 1908.”

We are thus justified in concluding that the budget of the Belgian government has derived no advantage from the operation of railways.

2. But does not such operation redound greatly to the advantage of travelers and shippers?

The partisans of ownership and operation of railroads by the state are constantly harping upon the cheap rates of state railways, as opposed to the high rates established by private companies.

By an order issued on the 25th of October, 1911, the minister of the Belgian Railway department raised the rates on pit coal on the strength of a law of 1910, which, in its turn, found support in another law, passed April 12, 1835, which says:

“Temporarily, and while waiting for experience to guide to a final adjustment of the rates to be levied by the aforesaid road, in conformity with Article 5 of the law of May 1, 1834, these rates shall be regulated by a royal decree.”

Now, Article 5, of the law of May 1, 1834, under which the Belgian system was established, reads: “The profits of the road accrue from the rates which are to be regulated annually by law.” Thus, the law of 1835 is only a temporary expedient, which must be renewed at certain dates. Although this experiment has lasted since 1835, the ministry considered that it needed a new lease of life.

Freight rates for pit coal were increased from 1 to 2 centimes per ton kilometer by tariff No. 61, which replaced tariff No. 31. The convention of Belgian manufacturers, on November 29, 1911, entered a protest against this increase in a series of resolutions from which we quote the following:

“The state is managing its railway lines from the sole point of view of making them serve as purveyors to its insufficient resources. It is operating in defiance of rules essential to the prosperity of all commercial enterprise, without any rational accounts of such a nature as will tend to keep it fully informed as to net cost.”

In view of this resolution, toward the close of 1911, the conclusions in the 1907 report of M. Hubert, committee reporter of the railway budget for the third time, are evidently as true to-day as they were then:

“The management of the Belgian state railways has committed itself to a policy of political expediency which is sacrificing the general interest to interests purely local and electoral.”

“The personnel is too large, ill paid, unwisely selected, and works overtime.”

“Passenger service is both lacking in comfort and very slow.”

“From the standpoint of rates, passenger service is favored at the expense of the shippers. The department repudiates all responsibility for the acts of its employees or the failure of its equipment.”

“Far from trying to meet its patrons half way, the Railroad department maintains rates which are purely arbitrary, and shows itself violently opposed to any possible competition.”

Finally, as spokesman of the Central Railway Division, M. Hubert concludes:

“It will become necessary to do what has been done in Holland,—viz., lease the railways, with conditions attached to the lease safeguarding the rights of employees and the interests of passengers. And it is certain that private enterprise would derive far better results from our immense railway resources than the government has been able to do. It is advisable that this outcome be seriously considered, since future possibilities indicate that such a course is unavoidable, if expenses continue to increase at the same rate.”

Yet French engineers are unanimous in praise of the skill with which the Belgian lines are managed by the minister of Railroads and his distinguished co-workers.

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.

CHAPTER IV

STATE RAILWAYS OF AUSTRIA AND HUNGARY

1. The policy of Austria in regard to the railways has undergone many variations. In 1850 the government owned 61.38 per cent. of the railway lines. In 1855, however, imitating the example of France, which came to terms with the important companies, and, having need of resources, it sold its railways. Hence in 1860 it owned not more than 0.44 per cent., and in 1870 only 0.21 per cent. The economic development of Austria was slow; the railroads not very prosperous. The crisis of 1873 drove the government to constructing railroads. In 1880 it owned 17.23 per cent. of the lines; in 1890, 43.51 per cent.; and, in 1906, 67.95 per cent., or 21,600 kilometers (13,500 miles).

The operation of railways has been a serious drain on the state. In 1906 they yielded 2.85 per cent., and, in 1907, 3.01 per cent. But this sum includes neither interest nor sinking fund charges. In fact, operation of the state railways has not paid expenses, and has been a burden upon the Treasury. The lack of receipts is chiefly due to low freight rates.

Charles Lee Raper says:

“They (the freight rates) have been much higher than in the United States, though the character of the traffic of the two countries has had much in common. Both have had a large volume of the low grade commodities. It would, therefore, seem to be fair to say that the Austrian state service has not been notably successful in its cheapness.”

The superiority of private enterprises in Austria has been established by an investigation conducted by the British Board of Trade. Four private companies have never had to resort to a guaranteed reserve fund. During the period 1902–1906 one of them did not earn dividends on its capital; the second earned from 4 per cent. to 5.25 per cent., the third from 5.4 per cent. to 6.6 per cent, while the fourth earned from 11 per cent. to 12 per cent. And all these companies pay taxes to the state.

2. In 1889 Minister Baross established the zone system in Hungary. Bitter adversaries of the mileage (paliers) system were enthusiastic over the idea of introducing the zone system. The zones are only more extended units of distance than the 10 kilometer (6 miles) section of the Paris-Lyons-Mediterranean railway line of France—a privately owned line. The introduction of the system was simply a political move, for the real object was to attract to Budapest those Hungarians who lived in the far corners of the land, in order to make them admire the capital, and thus give them an exalted idea of the greatness of their country. In 1896, at the time of the Millennial Exposition, the railroads carried for nothing, and, I understand, lodged and fed entire families at Budapest. However, as a species of compensation for its complaisance in thus accommodating the country-folk, the railroad had increased the price of tickets for short distance traffic during the preceding year.

In 1903 other changes took place. As it has failed to yield the anticipated results, Hungary recently, in large measure at least, has abandoned the system introduced by Baross.

The average receipts per passenger per kilometer in six European states have been: (One heller equals $0.002.)

Financial returns upon the Hungarian state railroads were as follows (in 1,000 crowns; 1 crown equals 20 cents):

The service upon the state lines of Hungary during late years has given rise to numberless complaints: lack of comfort, insufficient rolling stock, too frequent delays, and numerous accidents.1

The former secretary of the ministry of Commerce, Joseph Szterenyi, in an address delivered before the Chamber of Deputies in 1912, stated that from 1890 to 1909 the number of passengers on the railways had increased about 300 per cent. During this period there have been years in which the increase of traffic has corresponded to the increase in the number of cars in the following ratios: 9.5 per cent., as against 2.5 per cent.; 8 per cent., as against 4 per cent.; 10.6 per cent., against 0.5 per cent.; 9 per cent., against 0.5 per cent., and even 11 per cent. against 0.1 per cent.

The available number of locomotives is even less satisfying. While the volume of traffic has increased about 51 per cent. the number of locomotives has increased only about 21 per cent. In 1909 it was estimated that 606 more locomotives would be necessary, in order to take care of the normal traffic. A number of locomotives then in use were over 35 years old. Although passenger traffic has increased in Budapest, at the eastern terminal about 550 per cent. and at the western terminal about 900 per cent., and although freight traffic has grown approximately 100 per cent., it is only recently that any particular effort has been made to improve the conditions mentioned.

From 1865 to 1907 the operating ratio increased from 55 to 77 per cent., and amounted to 80.6 per cent. in 1908.

Beginning with 1893 the cost of labor has increased by leaps and bounds. In 1904 the employees went on strike and stopped the trains, asserting that the increase of salary voted by the Chamber of Deputies was too small. Two separate awards of an increase in salary, the one in 1904 the other in 1908, have brought the total amount to 22,000,000 crowns.

Following changes in the locomotive service in 1906 there has been an increase in the consumption of coal of about 13 per cent., representing 4,000,000 crowns, and equaling a work increase of 30 per cent.

Maintenance expenses of locomotives and cars give the following figures: per locomotive, in 1905, 3,003 crowns, and, in 1909, 4,530 crowns; per passenger coach, from 640 to 820 crowns; per freight car, from 96 to 134 crowns. The working efficiency of the average car has fallen from 48 per cent. to 37 per cent.

In 1909 the excess of receipts over expenditures was less by 43,000,000 crowns than the sum necessary for interest and sinking fund charges. The zone system has recently been altered, in the hope of realizing more than 15,260,000 crowns.1

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.”

CHAPTER VII

RAILWAYS OF NEW ZEALAND

In 1860 the first railway of New Zealand was constructed by the provincial government of Canterbury, to connect the town of Christchurch with the port of Lyttelton, separated from it by a chain of high hills. In 1863 the provincial council of Auckland and Drury conceived the idea of extending the line to Wellington.

The capital then and subsequently sunk in the railways of New Zealand, amounting, according to the accounts, to £27,762,592 ($135,203,823), on the first of March, 1909, is far from representing the whole expense of the project. £1,289,840 ($6,281,520), the cost of lines not yet opened on the 31st of March, 1909, should have been added to this sum. The total amount would thus reach £29,052,432 ($141,485,343). Moreover, no account was taken of the interest paid on the capital sunk in lines not operated during the thirty-nine previous years.

Before 1882 the amount of the deficits can only be surmised; since that date they have aggregated £4,500,000 ($21,915,000). The total capital invested from 1870 to 1909 has been about £40,000,000 ($194,800,000), of which £23,305,009 ($113,495,000) was paid out of borrowed money. The rest has been raised by the sale of public land, and, above all, by the aid of taxes—direct or indirect.

Since 1895 the capital cost per mile of open line has risen from £7,703 to £10,351. This increase is due in part to improvements upon the roadbeds. In order to explain further such an increase in cost it is said that the country of New Zealand presents unusual difficulties—that it is situated far from the industrial centers of the world, and that construction is on a small scale. We might add that railway construction is considered as a species of national workshop, designed to give employment to laborers out of work; that none of the modern mechanical methods are employed; and, finally, that “the work is done by the government and not by private contractors.”1

The gross earnings of the railways increased from £1,150,851 in 1895 to £2,929,526 in 1908–1909. But the expenses rose in even greater proportion. They increased from £732,160 in 1894–1895 to £2,114,815 in 1908–1909. And, if there had not been a reduction of the rate of interest on government loans, the deficit of 1909, based on the “capital cost” of the open lines, would have been £323,555, instead of £212,468.

The railway statement, presented annually to Parliament by the Minister of Railways, always shows a “net working profit,” without any indication that this profit is always insufficient to pay the interest upon the cost of construction at the average rate of interest paid by the government upon the public debt.

During the year ending March 31, 1909, the railways earned a “net profit” of 2.93 per cent. on a capital of £27,762,592 ($135,203,823), the cost of construction of the open lines. But, since the average rate of interest paid on the public debt was 3.7 per cent., the “net profit” is absorbed in interest payments, and a deficit amounting to £212,468 ($1,034,719) emerges, if interest is reckoned on the cost of the open lines only. But real cost of construction includes the cost of the unopened lines, making a total of £29,052,432 ($141,485,343), reducing the “net profit” to 2.80 per cent., and increasing the deficit by £262,760 ($1,279,641). If the interest upon the open lines only is considered the total deficit from 1882 to 1909, in round numbers, is £4,500,000 ($21,915,000).

But as a matter of fact, according to the conditions of its investment, interest at the rate of 4 per cent. should have been paid on the railway debt. In such case the deficit in 1908–1909 would have been for both classes of lines £347,386 ($1,691,769); while the total deficit since 1881–1882 would probably amount to at least £8,000,000 ($35,160,000), and perhaps £10,000,000 ($48,700,000).

The deficit is due, above all, to the principal line of the South Island, 1,299 miles long. The political influence of this part of New Zealand, formerly much greater than it is to-day, contributed to the unprofitable railway