The Canadian Railway Problem

THE CANADIAN RAILWAY PROBLEM JOHN L. MCDOUGALL 1. T HIS article will attempt to show what the railway problem of the country now is and to indicate some of the more important things that may be done about it. It will argue that the extreme seriousness of the :financial situation is not in its essence a railway . probJem at all: it is merely another index of the gravity of the current depression and can be reduced to manage.:. able proportions only by a restoration of traffic and revenues. The problem is a financial problem, not a problem of practical operation. It is certainly bad enough as it is; but if the railways were unable to move l . readily the traffic offered them, then the money losses to, .and the partia) disorganization of, the commercial community wou1d .make our present difficulties look very puny indeed. The experience of this country is not unique. I t is of the nature of railway operations, wherever carried on, that expenses cannot be reduced as rapidly as revenues fall. Conversely, a very large part of any increase in revenues can be converted into net profit. Part of the costs are constant and therefore appear as increasing unit costs in declining traffic and as decreaslug unit costs when traffic increases. The paint can, perhaps, be brought home most clearly by the following simple comparative table showing in condens'ed form the earnings of all railways in Canada in 1928 and 1933: 219 THE UNIVERSITY OF TORONTO . QUARTER~Y TABLE I.-Income Account-Steam Railways of Canada.1 1928 $ (000 omitted) Gross earnings, including outside operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582,363 Railway operating expenses, 'including outside 1933 $ (000 omitted) 281,075 operating expenses. . . . . . . . . . . . . . . . . . . . . . 457,654 242,520 ----~~----------~--124 ,709 38,555 Other deductions, net....... .. .............. ._____--'2,"'-9_46 __________ 1_8~,2_0_5_ Balance available for the payment of interest and dividends, and for reserves ... .' ... .. . . .. . . 121,763 20,350 In other words, while gross earnings fell by some 52 per cent., the balance available for security holders almost vanished even though the. most drastic economies were made.2 Table I raises two questions: What was the experjence in past depressions? By how much did revenues fall in such periods? A partial answer is given by table II. TABLE II.-Cyclical Decline and Recovery in Canadian Railway Gross . Earnings.3 Percentage Year in Percentage High year Subsequent decline in which excess over to date low gross previous peak that earnings is exceeded previous peak 1875 1877 3.3 1878 5.4 1878 1879 2.9 1880 14.8 1884 1885 3.6 1887 16.2 1893 1895 10.1 1898 14.1 1908 1909 1.3 1910 18.4 1913 1915 22.1 1916 2.0 1920 1922 10.4 19:26 0.3 1923 1924 6.8 1926 3.2 1928 1933 52.1 lSlalis/itS oj Steam Railways of Canada, 1933, Ottawa, Dominion Bureau ·of Statistics~ 1934, pp. 14-5. 2Those economies included reductions in maintenance expenditures to levels which are, in aU probability, not permanently tenable. See a comparison of certain maintenance expenditures in "The Report of the Duff Commission" to appear shortly in the Canadian Journal of Economics and Political Science, vol. I, no. 1. 220 THE CANADIAN RAILWAY PROBLEM A measurement of this ki,nd is not exact, but it gives some indication of the impact of past depressions on the railway structure, and supports certain broad generalizations . The first is that past business depressions have been r:elatively short. In every case cited, with two exceptions , bottom has been reached in the first or sec~nd year, and the' previous peak exceeded in the third. The exceptions are the very deep depression of the .18907S, which rea~hed bottom in 1895 but harted on the recovery 'in 1896 and 1897) making its decisive upward move in 1898; and the indicated six years, 1920-26, before the previous high was surpassed. This latter is an apparent rather than a rea] exception. In the readjustments after the '1919-20 boom, both railway rates and wages were cut sharply. Ton mileage, which is the best single indication of physical work done, touched its low in 1921 and was 6.8...