From the end of WW II until probably the passage of the Staggers Act, it seems railroads were on a downward glidepath. Was the decent gradual, or was there an event or change, that caused the people in the industry to feel railroads were headed for the point of no return?
I don’t think it was any one thing but there was one series of things–the idea that one can do vacations in the form of road trips for one. And the OTR sector, the other–
I know that north of here, London ON, in the case of Palmerston ON, the ‘disinvesting’ of CN in their division points up in the Huron,Grey and Bruce county region. Inroads being made by trucking industry the issue here—the only extent shortline left up in that vicinity—The Goderich-Exeter RR.
To throw out a clue to the answer, books have been written on the subject and even more are on the way. I suspect that a small group of historians could come up with a list of 50 different events occurring within your time frame with consequences adverse to railroads. And it would probably not take them very long. On the other hand, if they started the process ten years ago, they would still be arguing over which event had the biggest impact.
I would say that as early as 1948 there were a few leaders in the rail industry that began to have a sense that things would have to change if the industry was to survive. I am sure that some felt that changing the way the rails did business would work. But as you know, there were others who established holding companies and began to diversify their companies into other businesses. The latter strategy has been seen as one that would leave something for the shareholders when the railroad business went in the tank.
I think it is fair to say that during the decade of the 1960’s top railroad managers were starting to see the handwriting on the wall, but it probably was not until the Penn Central bankruptcy that the majority realized just how bad thingss were getting. Even at that point, there were some who thought that their railroads could work out of the problems.
I don’t think there was one reason that really stands out – but several reasons, some of which had nothing to do with railroad management. Things that we take for granted today, buy 2 get one free, K-Mart blue light specials, contracts for guaranteed service, etc., were all illegal for the railroads to implement. Railroads were prohibited to discount volume shippers, one boxcar, 36,000 boxcars, the price had to be the same. Railroad A could not not gaurantee to customer B that his shipment would get there on time. Just in time deliveries could not exist because railroads were prohibited to do so. Rates for containers had to have the same rate as a boxcar, even tho the costs were lower. I could go on and on over this, but railroads were not allowed to compete the same way other businesses could. It was all illegal.
It was not until deregulation in th early 80’s that made stack trains, coal contracts, and just in time deliveries possible. Imagine a utility that could not negotiate a contract for coal delivery. The neighborhood mom and pop coal company paid the same per carload as Commonwealth Edison, and no one could sign a rate or delivery contract, and therefore, the utility could not predict their electric rates very well. If a railroad wanted to lower it’s rates, you had to apply to the ICC. The ICC would then hold hearings, and if truckers objected to strongly, the rate reduction was rejected. This generally took years.
Everyone knows of the present day grain hoppers. I remember when they first appeared, it was Southern’s Big John. It took the ICC over a decade to reduce chicken feed rates on this car, increasing feed costs for everyone – because the truckers objected. Did anyone ever notice what happened when the government took over Amtrak and Conrail? Before Amtrak, GN ran the Empire Builder and the Western Star to Seattle. The NP ran the No
I’d say more gradual - like the proverbial increasingly steep ‘slippery slope’ - with some notable drops along the way. Those would include the Interstate highway network for trucks and cars, the rise of the jet aircraft and passenger airports, the exit of Pullman from the operation of its sleeping and other cars, and several passenger car builders as well from the business, cancellation of US Mail by rail, the several big United Mine Workers strikes during that time which effectively discouraged what little was left of the northeastern US domestic coal market, the mid-1970s recession that at least started and more likely accelerated the decline of heavy industry in the northeast and midwest US - that’s when I first heard/ saw the term ‘Rust Belt’, and of course when it started to go into ‘free-fall’ - the multiple early 1970s bankruptcies of Penn Central and the other railroads that eventually made up ConRail, etc.
In the same region, note that several regional railroads were displaying significant signs of distress and even terminal illness during the 1960s. For example: in the late 1950s the rural NYO&W abandoned after many years of bankruptcy; circa 1961 the coal-hauling L&NE voluntarily abandoned itself while it was still salvageable; in the middle 1960s the coal-hauling portions of the LV and CNJ combined their parallel Pennsylvania Lines; circa 1972 the CNJ either abandoned or so
Yes, it probably was a culmination of a lot of small influences over a long period of time, but the one “BIG THING” that hit hardest was the interstate highway system. I remember reading many years ago that the opening of the New York State Thruway cut NYC’s passenger revenue in half, literally overnight. More importantly, the new highways gave truckers a competitive edge that fixed route railroads never could meet.
And if the interstates were the first of a one-two punch combo, the second was the rise of the jet plane. Mail contracts were lost to the airlines as well as time-sensitive freight. And of course passengers found a new mode of travel, even while railroads were forced to continue offering money losing passenger service.
The late 1950s were devastating for railroads.
Tipping point was 1906. Gross traffic continued to grow but market share peaked, major construction ceased, profitability peaked. Following factors were key:
- Regulation was given teeth with the Hepburn and Elkins Acts.
- The country was settled-out; all the arable land and natural resources were in full market exploitation.
- Previously inexhaustible supply of immigrant labor peaked and labor began becoming more expensive.
It’s tough to see the peak at the peak, but if you look at how the money flowed, you can see the money starting to flow out of railroads beginning at this time, and finding other things to invest in.
RWM
Several simple points: increase in use of autombiles followed by the Eisenhower Highway Trust; increase in air travel; end of WWII increased emigration to suburbs; increase of oil and gas over coal for heating; the opening of the St. Lawrence Seaway taking a lot away from east coast ports; aging Northeast industries closing and moving south and west. The political and social reasons and powers behind these events have been talked to death on several other threads.
RWM is correct, it was 1906 and the Elkins Act when the carriers lost “control” of their pricing to the ICC. In the Adamson Act they lost “control” of labor costs. With the creation of the Bureau of Roads they gained the competition of busses and trucks operating on taxpayer funded rights of ways.
The wonder is not that the railroads had problems, the wonder is that they survived.
The best single telling of this sorry tale, excluding the Bureau of Roads, is “Enterprise Denied” by Albro Martin.
Mac
This is like most things in life that I feel I have a basic understanding - I don’t.
In 1906, the growth era of railroads appears to have ended. After that, was the investment more a case of investing in a mature industry, hoping for fair return on the money, verses getting in on the groundfloor and hoping for a windfall?
More a case of no investment at all – the companies re-invested their free cash flow for productivity improvements, but there was no longer new money flowing in from equity purchasers. Look at the stock prices and market capitalization – that will tell the tale. I’m on the road and thus no Moody’s or annual reports ready at hand, but that would be where I’d start. (Ed, you out there?)
A more illustrative way of seeing what’s going on is to simply look at the whos of who is investing in railroads at any given time. Circa 1897, it’s people like J.P. Morgan and E.H. Harriman, long-term, big-time money kings who could command immense resources and were pumping capital into the railways in order to modernize for a rapidly industrializing nation. Circa 1927, it’s the Van Swearingen brothers, who were basically running a slow-motion Ponzi scheme of also-ran Class 1s financed by naive small investors who were thinking it was still 1897 and they were buying into the groundfloor of the new new Pennsy. Circa 1967, the small investors have now wised up and the capital flow is net out into all the various “Industries” schemes and diversification schemes. Circa 1987, the money flow starts to break even as the P. Anschutz’s of the world deduce that the pendulum has swung so far in the negative direction that the properties were worth substantially more than the market capitalization – in some cases, the market cap was less than the cash on hand and receivables. Circa 2009, it’s the Warren Buffets and now big, new money is again flowing in. We have almost come full circle back to 1897. So far the new investment is more like the hands-off, long-term, Boston investors who preceeded Morgan and Harriman, and not quite yet the activist manager-investors that they were.
Don’t be fooled by the constant background noise of this chairman out to make a name for himself or that minor market raider looking to make a short-term killing. Look at the big, long-te
I am here. So are the Moody’s.
RWM, got anything in particular you want culled? I am limited to 1972 edition and later.
ed
How about total market cap for all rail equities 1897-present, by year? That in a table anywhere?
RWM
Will check and let you know. How are we going to account for inflationary pressures?
ed
I was mulling over the same question. I think the answer is, “we sort of don’t.” It gets too fine-grained to try to zero out the inflation each year because it’s volatile and the method by which inflation is calculated is not uniform. Instead, let’s take an average inflation rate for the entire period, graph it as a slope. We overlay the annual railroad total market cap, with its own y axis scale, subtract out the distance between each of those points and the slope, and the net difference becomes our annual market “net inflow or outflow of capital compared to inflation.” It isn’t very good for accurately seeing what happened in any individual year but we are looking for broad trends, so smoothing out the bumps is good. If my hypothesis is correct, we’ll see the railroad market cap sloping upwards faster than inflation until 1906 +/-, then drop down below it, and tick upward again circa 2003 +/-
RWM
Ok, while the Moody’s contains considerable industrial data in it’s blue section, it does not contain market cap information for the industry. However, that is not to say there is not valuable information such as:
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Principal income statements (for all railroads) from 1900 - 1969
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All railroads, mileage 1900 - 1969
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Intercity freight handled by rail, motor, water, pipeline from 1939-1971
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Annual carloadings 1920 - 1971
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Rates of return 1911 - 1971
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And probably the closest to what we will find…common stock prices, earnings, dividends, PE ratios from 1929-1971. This is broken down to the following categories:
Composite, Industrials, Rails, Utilities, NYC banks, and Property/casualty insurance.
What is interesting of this data is comparing the stock prices (consider these to be stock indices, such as the S&P 500, Dow Jones, Nasd, Russell 2000, etc.) by category over time. For instance:
Year Composite Industrial Rail
1929 $86 $65 $110
1939 $33 &
[quote user=“MP173”]
What is interesting of this data is comparing the stock prices (consider these to be stock indices, such as the S&P 500, Dow Jones, Nasd, Russell 2000, etc.) by category over time. For instance:
Year Composite Industrial Rail
1929 $86 $65 $110
1939 $33 $34 $21
1949 $46 $46 $28
1959 $163 $186 $74
1965 &n
Not sure what you mean by “about the commodities in the data?” Do you mean a price index of commodities during the period? or the tonnage of commodities such as coal, grain, etc. handled?
ed
If there is a way of getting at both great! There is a bit of both I’m curious about–[bow]
One of the more interesting tables (and graph) falls under “estimated volume and percentage distribution of intercity freight in ton-miles by kinds of transport agency, 1939-71”.
The railroads in 1944 handled 746billion ton miles of freight in 1944 and 744billion in 1971. Now, granted, 1944 was the peak year of freight handled during WW2, but I find it amazing of the lack of growth by the industry while motor carriers, inland waterways, and oil pipelines exploded.
For instance…
In 1950 railroads handled 596billion ton miles of freight, by the end of the decade the amount had dropped to 582 billion tons. Market share from 56% to 45%, while motor carrier freight went from 172billion ton miles to 288 billion ton miles (16 to 22%). Waterways held steady around 16% while pipelines increased from 12% to 17%. Total ton miles for all increased from 1062billion ton miles to 1295 billion ton miles.
During the decade, operating ratios moved higher…74.42 in 1950 to 78.32 in 1959.
The nation was growing, expanding after WW2, but the rails were not participating in the growth…only hanging on.
ed