TABLE VII.-Distribution of commercial intercity passenger traffic in the United States,1 1930, 1940, 1943, 1946, and 1949 to 1952

TABLE VIII.—Employees and compensation, railways of class I in the United

TABLE IX.-Index of average unit prices of railroad fuel, material and supplies. and composite index of unit prices and wage rates

TABLE X.—Ratio of wages and salaries to value of sales—Railroads and

manufacturing industries

1 Railroads: Ratios computed from reports of the Interstate Commerce Commission. Manufacturing: Computed from data of U. S. Department of Commerce, wages and salaries from National Income Supplement to Survey of Current Business, 1951 edition, pp. 160-161, and July 1953 Survey of Current Business, p. 16; value of sales from Industry Survey, September 1951, p. 13, and December 1953 Survey of Current Business, p. 22.

Mr. GETTY. Summarizing my statement, the railroad industry is not in a financial position to meet the increased costs which would be brought about by enactment of H. R. 7840.

Mr. Ettenger told you yesterday that by reason of the proposed increase in taxable earnings from the present $300 per employee per month to $350, the total payroll taxes paid by the railroads would be increased by approximately $54 million annually.

As this committee well knows, the railroad industry is one in which low earnings prevail, even in the periods of great industrial prosperity. Largely because of wartime conditions, which maintained traffe at levels not to be expected in time of peace, the railroad industry has managed in the past 15 years to earn a rate of return of about 4 percent on its property investment, and to get by and I emphasize that 'get by" on such meager earnings.

However, the industry has not been able to lay anything aside in this extended period of general business prosperity for the leaner traffic years which now appear to lie ahead. This is shown in table 1 where an historical record of railroad earnings is shown over a period of years. I, also, invite your attention to table 4 which gives a comparison of railroad earnings with the earnings of other industries in the United States. The statistics in table 4 are on a somewhat different basis than those in table 1.

The reason for the difference is that we cannot readily obtain figures for industries other than the railroads on the basis of earnings on property investment. The statistics in table 4, therefore, are on the basis of the ratio of net income to net assets, sometimes referred to as net worth. That is the only basis on which we can make a comparison of the earnings of the railroads with earnings of other industries.

I invite your attention to that table because I think it is highly important.

Railroads operate on such a narrow margin of profit that they are highly vulnerable to even short periods of economic recession. I refer particularly here to tables 2 and 3 of my presentation. The present situation is a case in point. In the latest 3-month period for which statistics are available, November and December of 1953 and January of 1954, railroad net income declined by 432 percent. The decreases by months are November 32.6 percent, December 39.5 percent and January 68.4 percent.

Unfavorable carloadings in February indicate a similar situation with respect to earnings in that month.

Aside from the decline in traffic, another serious financial problem faces the industry at the present time. Agreements have been signed within the last 3 months with 3 of the railroad operating brotherhoods, increasing wage rates by 5 cents per hour, effective December 16, 1953, and granting a third week of vacation with pay after 15 years of service.

Negotiations with representatives of other railroad labor organizations are still under way. If the above described settlement is made with all of them, railroad operating costs will be increased by about $192 million annually. In this connection, I may point out that between the years 1939 and 1952, railroad wage rates have increased by more than 150 percent. The prices which the railroads pay for fuel, material, and supplies increased in this same period by more than 120 percent, compared with increases of only 52 percent in the average revenue received by the railroads for performing 1-ton mile of service and of 45 percent in the average revenue per-passenger mile.

The competitive situation is still another problem facing the railroad industry today. In 1929, railroads performed about 75 percent of all intercity freight and passenger services in the United States. Today, by reason of the tremendous growth in the past quarter of a century, in subsidized agencies of transport, the railroad portion of the Nation's total traffic has fallen to about 50 percent. These statistics for freight traffic and for passenger traffic are shown in tables 6 and 7.

The downward trend in the statistics there shown through the year 1952 shows no signs of slackening, and undoubtedly the continuation of that trend will have an unfavorable effect on railroad earnings in 1954 and possibly later years.

In view of these conditions, Mr. Chairman, it seems to us highly undesirable to burden the railroad industry at this time with additional annual costs of $54 million as contemplated by H. R. 7840. The retirement and unemployment benefits now being paid to railroad employees exceed those being paid under the social-security system by a considerable margin. In the interest of equity to all workers, and to all industries, it would seem desirable to permit the social-security system to catch up with the railroad system before additional benefits are imposed on the latter.

That concludes my presentation, Mr. Chairman.

The CHAIRMAN. Are there any questions, gentlemen?

Mr. DOLLIVER. I am interested by your statement as to the small profits that have been made by the railroads during the period to which you allude, but I have no disposition to question your statement. I merely want to get some more light on the subject. I remember a number of years ago there was a bill passed to secure a fair valuation of the railroads. That is a good many years past now. Mr. GETTY. That is correct.

Mr. DOLLIVER. That later was abandoned, I think. Now, the question I have in mind is to ask if there is a uniform system of accounting in all the railroad industry by which you arrive at these percentages of profit.

Mr. GETTY. There is a very difinite uniform system of accounting. It is prescribed by the Interstate Commerce Commission and is policed by the Interstate Commerce Commission.

Now, you spoke in the first part of your comments on this question of valuation. The Commission does still make those valuations of railroad properties for ratemaking purposes. Their valuation of railroad properties, as I recall, is about 7 or 8 percent below the book figures which I used in my calculations.

Now, there is a reason for the difference. The principal reasons, I believe, are the fact that the original valuations by the Commission were made as of a specific date, somewhere around 1913. It is based on the prices prevailing at that particular date, whereas the railroad. book investment figures go back to whatever time the property was put into service.

The second principal difference between the figures is the matter of working capital. The Commission does not allow the railroads as much working capital in this valuation figure as the books of the carriers show. However, the matter is one largely of academic interest inasmuch as on any basis you want to select, railroad earnings are inadequate and low. The Commission has so found in recent freight rate cases.

Mr. DOLLIVER. The fact is that these figures which you have provided us are based upon the railroads system of valuation rather than the Interstate Commerce Commission basis?

Mr. GETTY. That is correct.

Now, a publication came out yesterday from the Commission in which they computed the rates of return earned by the railroads in 1952 and 1953 on their valuation. The rates for those years, as I recall it, was 4.54 percent in 1952 and 4.55 percent in 1953. It is slightly higher than the rates computed on our basis, the book investment.

Mr. DOLLIVER. There is one other segment of your testimony to which I want to allude. You made a statement that percentagewise, the railroads are not carrying as much of the traffic of the country now as they did in 1929?

Mr. GETTY. That is correct, or in any other prior year, for that

matter.

Mr. DOLLIVER. In other words, competing forms of transportation have made inroads into the percentage, at least, of traffic carried by the railroads?

Mr. GETTY. That is right, and we think that is due in considerable measure to the fact that those competing agencies of transport are subsidized in a number of ways.

Mr. DOLLIVER. What is the fact as to the actual amount of traffic carried by the railroads, regardless of the percentage of the total traffic carried? Has that increased or decreased actually?

Mr. GETTY. Well, the present volume, of course, is considerably less than the volume handled by the railroads during World War II. Mr. DOLLIVER. That is to be expected.

Mr. GETTY. However, as compared to 1929, it is somewhat greater. As I recall the figures, in 1929 the railroads handled about 450 billion ton-miles of freight and in 1953 they handled just about 600 billion, so there has been an increase of about one-third in the total volume under present economic conditions.

Mr. DOLLIVER. That represents the large increase of volume of traffic of which the railroads have had a part, but a large portion of which has gone to competing forms of transportation?

Mr. GETTY. Yes, that is correct. If the railroads had continued to have secured the same share of the traffic which they received in 1929, they would have handled in 1953 very much more traffic. In that same connection, Mr. Dolliver, I would like to point out that notwithstanding this greater volume of traffic handled in 1953, as compared with 1929, approximately one-third more, the railroads earned less, a smaller net railway operating income and a smaller net income.

Mr. DOLLIVER. That is now as compared to previously?

Mr. GETTY. Yes, compared to 1929 or any time in the late 1920's. Mr. DOLLIVER. That large return was on a smaller volume of traffic?

Mr. GETTY. Yes, back in 1929, the 5-year period ended with 1929, the railroads earned about 5 percent, a little more than 5 percent, on their property investment. Today, with a much higher volume of traffic, they are only able to earn about 4 percent. That was in 1953. Of course, under present conditions, since the Korean war came to an end, our traffic has fallen and is falling very rapidly, and our traffic is off between 10 and 15 percent in recent months, whereas our net earnings are off three times as much, relatively, 30 percent, 40 percent, or 50 percent, and in January they were off more than two-thirds. That is a serious blow.

Mr. DOLLIVER. I have one other line of questions. The railroads during the past period, since 1942, have spent an enormous amount of money in improving their facilities and rolling stock.

Mr. GETTY. In the past postwar years, 1946 to 1953, they have spent more than $9 billion for that purpose.