in future effect a considerable change in rates and costs, just as the development of new features in the steam locomotive has done in the past. Unfortunately we cannot easily apply any statistical test to this dynamic factor of advance in the art of transportation. We may, however, safely assume that in the future new inventions and methods, as well as the further consolidation and integration of the transportation industry, will permit a further general decline in average transportation costs and rates— though probably at a much slower rate than in the past.

CHAPTER XI

THE LAW OF INCREASING RETURNS IN THE LIFEHISTORY OF THE AVERAGE RAILROAD

THE life-history of the typical railroad may be roughly divided into the following periods for the purpose of studying the application of the law of increasing returns:

1. The period immediately following construction, when joint cost will remain nearly fixed, and the average unit cost of transportation will decline rapidly with every increase in traffic. The law of increasing returns applies with particular force to this period. 2. The early stages of system-building, during which the rapidly growing road will find itself in alternate periods of under-capacity and over-capacity. When traffic exceeds capacity, efficiency will decrease and direct costs of operation will increase rapidly, so that there will be a short period of decreasing returns. As soon as the road can secure new capital on favorable terms, however, it will double its track or eliminate curves and reduce grades, in order to speed up the service. In double-tracking there will be a considerable saving in cost of land, filling and cutting, etc., as compared with original cost. In many cases, also, no additional right-of-way need be purchased. There will be some increase in the joint cost, but a net gain will result because of the reduction in direct costs, and the road will again enter a period of increasing returns. Perhaps it now finds that it has excess main-line capacity, and will buy up extensions, feeders, or branch lines in order to acquire more "through" traffic. Soon it will again reach and pass through a period of decreasing returns and so on in a series of cycles.

3. When the road reaches a certain size and becomes a "system," its development becomes less spasmodic and more uniform. Growth is, of course, still dependent on industrial and financial conditions, but there are no radical changes in the whole system comparable to the double-tracking of the road in its early history. Since capacity can be better regulated to equal available traffic, the trend of decreasing costs will be slowly but steadily upward, instead of alternating in zigzag fashion with periods of increasing costs. During this period (and from time to time in the second period) such factors as the following bring about decreasing costs:

a. Greater traffic density, resulting in improved
train-loading, more efficient schedules, etc.
b. Development of bulky low-grade traffic, such as
coal, bringing about large economies in loading,
switching, and unloading cars, as well as in train
operation.

c. Development of long-haul and "through" traffic
to distributing gateways or export points, such
traffic being obtained from feeders in much the
same way that a great river gathers its waters
from tributary sources.

d. Rapid advance in the art of transportation, due to the constant flood of new inventions. Pressure has also been exerted by Government bodies for the adoption of safety or efficiency devices, such as the automatic coupler.

e. Uniformity in operating methods and coöperation between roads, effected by numerous railroad societies (now numbering about two hundred in this country), as well as by the connections between financial interests controlling the roads.

f. A higher degree of executive efficiency brought

about by centralized administration and selection of officials on the basis of fitness.

g. Economies in purchasing, due to large-scale buying.

h. Obtaining new capital on better terms, due to growth and stabilized credit.

i. Development of "good-will" as a traffic factor, through advertising, inaugurating special services, establishing records for service or safety, etc.

4. A long period of increasing returns is frequently succeeded by one in which a reversal of form appears, and the road encounters decreasing returns. While this phase is not a necessary part of railroad evolution, it is typical of the actual history of so many large systems as to be worthy of careful analysis. When this period begins, the road can usually live on its credit and resources for a time, but unless retrenchment measures are effected, the road will enter receivership eventually. Causes which may operate to bring about this period of decreasing returns are:

a. Nepotism or favoritism in selection of executive officials, with consequent rapid decline in administrative efficiency.

b. Lack of esprit de corps, and decline in the morale of employees.

c. Loss of traffic due to competition or changes in industry and commerce.

d. Inefficiency due to over-centralization of operating management.

e. Unwise or over-rapid system-building, or entering into fields other than railroad transportation. The break-up of the Gould system is traceable to the former policy, and the difficulties of New Haven largely to the latter.

f. Decline of credit due to stock-market manipulation of securities.

g. Terminal or yard congestion, and the high cost

of land for needed expansion of facilities. Congestion checks the normal increase in trainloading and hampers car movements.

h. Rises in wages, material costs, etc., without any corresponding rise in the general level of rates. These forces affect all roads alike and may force already-weakened roads to the wall.

i. “Skimping” of maintenance to continue dividend or interest payments.

5. As an outgrowth of period four, the road passes into receivership. During this period, which may last as long as five years or more, dividends and a considerable portion of interest charges are not paid, and the funds thus obtained are devoted to increased maintenance, additions, and betterments, and the general restoration of the property to a condition of efficient operation. Needed capital may also be acquired by the issuance of receiver's certificates, which rank ahead of all other securities.

6. The successfully reorganized railroad, with new working capital supplied by assessment of stockholders, finally emerges from receivership. The mistakes of the past have been ameliorated by scaling down its debt and fixed charges - sometimes as much as one-half; its physical property has been largely rebuilt, and its administration reorganized; while its dividend policy will probably remain for 1 Perhaps the period of receivership should not be included as a stage in the normal evolution of a railroad system. A study of such figures as are available, however, indicates that nearly two-thirds of the present railroad mileage in the United States has passed under receivership since 1880 alone, and over one half has been sold under foreclosure since that date. (This takes no account of abandoned mileage, for which no figures are available, or of duplication due to the same mileage going under receivership twice, which two factors would perhaps about offset each other in the calculation.)