The Railway Problem

W. A. IRWIN December 15 1931

The Railway Problem

W. A. IRWIN December 15 1931

The Railway Problem

An answer to the question: What’s the matter with our railways?

W. A. IRWIN

IN THE midst of a world caught in the vortex of universal economic crisis, Canadians suddenly have become conscious of a new cloud in their financial sky.

The name of this cloud is The Railway Problem.

Its shadow, once a mere dot on the horizon of the country’s economic well-being, almost overnight, it seems, has assumed proportions that have given rise to a fever of questionings.

In scores of newspapers across the country the scribes are viewing it with alarm. The political platform already gives signs of a flood of oratory soon to come. Behind the scenes in mahogany-panelled offices where sit the controllers of our financial destinies, grave-faced men wrestle with railway traffic returns and ponder over railway interest charges. A Royal Commission is searching for the answer to a problem that on all sides is described as the nation’s most urgent.

Small wonder that the taxpayer and the railway user, ultimate bearers of the railway burden, look on in bewilderment and ask, Why all the excitement? What is this railway problem, anyway? Where did it come from?

Such is the way of men. Our railway problem is as old as our railways. Look back through Canadian history since first the Iron Horse got into its stride and always you will see its shadow, a cloud in the sky marking the march of the steel. Never static, always changing, assuming many shapes, now waning with the dawn of prosperity, now waxing with the coming of adversity, it is the one cloud that we in our material advance as a nation have never been able fully to dissipate.

At times it has dwindled and receded so far into the distance that even the wise men in high places have seemed unaware of its existence. At times it has rolled up storms that have washed great corporations into the limbo of the forgotten, thrown parliaments into the depths of gloom, engulfed governments. But most of the time, dazzled by the physical achievements of ninety-five years of railway building, we have either ignored it or forgotten it.

And small wonder; for in the matter of railway building Canadian enterprise literally has worked wonders.

Spanning a continent, spanning it again and yet again; conquering massive mountain barriers, flinging networks of civilizing steel over the trackless wilderness, penetrating rocky wastes in search of mineral treasure, unlocking the frozen places of the North; gathering wealth, distributing wealth, creating wealth, the railway builders have made

possible the welding of a group of isolated colonial communities into a nation.

No mere truism is it to say that the making of railways has been the making of Canada.

But—and this is the biggest “but” in our current vocabulary—with our railways we still have The Railway Problem.

Further Railway Loans Questioned

FUNDAMENTALLY, the problem is a question of economics, complicated as are all major economic questions, and yet essentially simple.

Railways, like all other utilities are built mainly with borrowed money, money loaned by bondholders or debenture holders; money advanced by individuals who take in return a share of ownership in the property ; money advanced by the state which, as in the case of the Canadian National, may assume complete ownership.

Year by year the railways have to pay for the use of this money. The chief source from which they derive the funds to pay for this money is the revenue they get from the sale of transportation. If they can sell enough transportation and sell it at a price high enough to pay the out-of-pocket cost of providing that transportation, plus the amounts due to the lenders, then all’s well and there is no railway problem.

At least, not that kind of a railway problem.

Our particular trouble at the moment is that, taking the railway machine as a whole, it is not selling enough transportation to pay the yearly return due to the lenders of the borrowed money that built it. Some of the units of the machine are not even selling enough transportation to pay out-of-pocket expenses. Others are showing a surplus from operations, as the jargon of the counting-house has it, but even the best of them are having difficulties in meeting obligations due to borrowed, or invested, capital.

So acute has this condition become that, some weeks ago when overtures were made to lenders in the United States with a view to securing further loans for railway purposes, they were met with the reply that conditions then current were not favorable to the obtaining of such loans at a rate of interest which would be regarded as reasonable.

General conditions in the world’s money markets undoubtedly had something to do with this attitude; certain motives associated with political considerations in the United States, motives not directly connected with the railway situation, may have been involved, but there is good reason for believing that the potential lenders felt that Canada’s borrowings against the security of that part of her railway system which is nationally owned had approached their economic limit.

This opinion, right or wrong, indicates the kernel of our railway problem. Has our enterprise as railway builders caused us to overborrow? If it has, then obviously the situation calls for drastic remedies.

What are the facts of the case?

Railway Debt Mote Than $4,100,000,000

THIRST, some figures indicating the position of our railway

system as a whole:

At the end of 1930 the railways of the Dominion were operating 42,165 miles of line. Only two countries in the world, the United States with 261,000 miles and Russia with 48,000, operate greater mileages. We have more railway than Great Britain, France or Germany; apart from Russia and the United States the only other country whose mileage approaches ours is India.

On the basis of relative population density we fall short of being the world’s champion railway builders by only a narrow margin. That honor belongs to Australia—which is in a condition euphoniously described as “in serious difficulties.”

We have 235 people per mile of railway, 235 people to furnish freight and passenger traffic for each mile of road and to pay for each mile of road. Australia has 211. The United States has 470; France, 1,227; Germany, 1,630; Great Britain, 1,991; India, 8.359.

Canada’s place in this scale may be regarded in either of two lights: as an indication of our progressiveness in providing transportation facilities for the carrying on of our national business, or as an indication of the enormous burden we have assumed in providing those facilities. In passing, perhaps it should be noted that there is a direct connection between the expansion of our railway system and our expansion as a trading nation. Without a sufficient and efficient railway system we could not have prospered

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The Railway Problem

Continued from page 19

as international traders; and it must be added to the credit side of the railway account that, despite our less than 10,000,000 of population, we have reached fifth place among the trading nations of the world. One of the troubles of the moment, to anticipate a little, is that our foreign trade is declining and the railways, like the horse in the stable, are eating their heads off because they haven't enough to do.

When we turn from mileage to the monetary side of the problem, the figures assume proportions that are little short of staggering. As reported by the Dominion Bureau of Statistics, the gross capital liability of all our railways at the end of 1930 was $4,101,124,842—more than twice the amount of our share of the cost of the Great War, or a billion and a half dollars more than the total national debt as it stood at March, 1930.

Reduced to a per capita basis, this means a railway debt of $413 per person, l'he corresponding figure for the United 'rates is $197.

Some authorities argue that the aggregate figure of four billion, one hundred million odd should not be accepted as indicating the true financial liabilities of the railways inasmuch as it includes some $604,000,000 that we as owners of the Canadian National owe to ourselves as citizens of Canada, not to mention another $322,000,000 of interest that we owe to ourselves but have not paid; also some $260,000,000 of capital stock of the original components of the Canadian National which represents no actual investment in physical property. Such authorities argue that the $604,000,000 is proprietorship money and is therefore not a debt on which interest charges must be met. Such a contention overlooks the fact that some of the amount was borrowed by the Government and therefore bears interest which must be met out of national revenue, and that the remainder was provided by taxes which otherwise might have been used to reduce the national interest-bearing debt.

The fact of the matter is that were a gentleman from Mars examining our railways with a view to discovering the extent of their indebtedness he could not exclude our involved left-hand, right-hand financial gymnastics from the picture. Money borrowed is money borrowed, whatever its source; and money spent is money spent, be the spending hand right or left.

Also the gentleman would most certainly enquire as to what has been done with all this money. In reply we would have to admit that, as provisionally estimated by the statisticians at December 31, 1930, only $3,228,000,000 has actually been invested in railway plant and equipment. The balance of some $873,000,000 is made up of miscellaneous investments, working capital, adjustments of surplus and the accumulated deficits on the operation of the Canadian National since the government took it over, which year by year have simply been added to the C.N.R’s capital liability.

All of which inevitably would lead the gentleman from Mars to make pertinent enquiry: How in the world do you expect to go borrowing more money on your railroads when on your own admission all your borrowing to date has not enabled you to overtake your losses, and you are so far in the hole that a considerable proportion of your present liability represents debt that cannot possibly pay its way because there is no physical property behind it?

That is a question that will take some answering.

Selling Transportation at a Loss

AS A matter of fact, even in the best of -4V times Canadian railways as a whole never have paid their way out of direct revenue from the sale of transportation. We as a people have resorted to all sorts of subterfuges to avoid paying the whole of the cost of carrying our goods and our persons about the country in direct railway tolls. At one stage of the game we paid a

part of our transportation costs in land. At one time or another we have given the railways 47,000,000 acres, an area about three-quarters the size of the present area sown to crops in the whole of Canada. When land ran short we resorted to government subsidies, federal, provincial and municipal, which now total $225,000,000. When subsidies went out of fashion we resorted to government guarantees on railway bonds and debentures which have reached a total of $926,000,000. Then when everything else had failed and half the privately owned roads of the country were sunk in a morass of debt, we took over all their debts and went into the railway business ourselves. Since then the roads we tried to rescue, together with the roads originally built by the Government, have failed to pay their way by $605,000,000. Part of that loss we chose to ignore; the rest of it we paid in taxes or in money borrowed by the Government.

Everybody knows that in this year cf depression the railways are not paying their way. But everybody doesn’t realize that even in the best of times our railway machine as at present constituted has never fully paid its way out of revenue from the sale of transportation. The best year in our history from the railroader’s viewpoint was 1928. In that year the gross earnings of all the roads in the country were $563,732,000. That’s a lot of money, but it wasn't enough. Net earnings available for interest, including special income of the Canadian Pacific Railway from non-railway operations, were $122,500,000. Payment of five per cent on the capital invested in road and equipment at this date would have taken $150,000,000 payment of five per cent on the total capital liability $185,000,000.

If we are optimists we can say that in its best year since the war our railway system taken as a whole failed to earn interest on its investment by $27,500,000; if we are pessimists, that it showed an economic loss of $62,500,000. What it will do in the worst year remains for the record of 1931 to disclose. Including accruals of interest on debt to the Government, the Canadian National alone is likely to put us in the hole to the extent of $90,000,000.

One of the remarkable features of the record is that it is no worse than it is, for we as a nation enjoy railway freight rates among the lowest in the world. Excepting only Poland and the United States, rail freight rates in other countries in a similar stage of development run anywhere from 50 to 250 per cent higher. The fact that we have been able to get along as well as we have under those circumstances speaks volumes for the technical skill of our railway operators.

“A Mire of Debt”

ALL of which brings us logically to the 4L peculiar position of the Government road. There are those who attribute the whole railway fiasco to the fact that rather more than half the mileage has been under public ownership during the past twelve years. Such a view is scarcely reasonable. The Canadian National came into being because its constituent roads had been sunk so deep in a mire of debt under a regime of politically supported private ownership that they could not possibly crawl out without going into bankruptcy. Embalmed on the debit side of its balance sheet are the results of all the mismanagement, all the extravagance, a’,i the insane rivalries of three decades of frenzied railway building. Judged by any ordinary standards it was bankrupt at birth; judged by the same standards it is bankrupt today, but that is no proof that it was bankrupted by public ownership. The Canadian National management must shoulder its share of the blame for any mistakes that have been made during the past ten years, but to load it with the responsibility of the mistakes of the previous thirty would be to blame the child for the sins of the father.

Had there been no war in progress when the several units now composing the C. N. R. collapsed, they probably would have been allowed to go into bankruptcy, their capital would have been written down to a figure based on their earning power, the original investors would have taken their losses as did some of the investors in the Grand Trunk and we as taxpayers would have been saved a lot of grief. As it is, we are still paying through the nose for the mistakes of thirty years ago and the liabilities of the C. N. R. have been mounting with a speed that is little short of fantastic.

During the years 1919 to 1930 the book long-term debt of all the roads now incorporated in the C. N. R. system increased by $1,117,000,000. This figure is based on the reports of the Bureau of Statistics. It cannot be taken as literally accurate to the last dollar or even to the last million, since the accounts of some of the roads during the transition period between private and complete government control are in such a condition that any aggregate is at best an approximation. For the purpos^of a general survey, however, it can be accepted as an index of our mounting railway liabilities.

Of this amount some $605,000,000 represents accumulated deficits, including deficits on the debt owed to the Government, during the twelve years ending 1930. Capital expenditure during the same period was approximately $549,000,000, the difference in the sum of these two items and the total being explained by the transfer of some direct government liabilities in and out of the accounts.

As a result of these increases the total long term debt of the C. N. R. at the end of 1930 stood at $2,498,600,000, exclusive of $270,000,000 of capital stock still standing in the names of the old Grand Trunk and the Canadian Northern. Of this amount $1,168,600,000 represents debt due to private investors. The balance $1,330,000,000 is debt due to the Government of Canada.

Thanks to a species of myopia in keeping with our traditional attitude toward the railway question, many of us have acquired the habit of almost ignoring the governmental portion of this debt. We talk about the C. N. earning its interest, meaning by that, interest on the debt due to private investors, forgetting that more than a billion of the governmental debt represents not paper losses but actual cash taken out of the national revenue or borrowed on the general credit of the Dominion.

The specific figures are as follows:

Expenditure on Canadian Government railways, that is, on the Intercolonial and the National Transcontinental running from Winnipeg to Moncton, and a number of smaller ventures, $403,400,000.

Loans and advances to the Canadian Northern, the Grand Trunk, the Grand Trunk Pacific and the Canadian National $604,400,000.

Unpaid simple interest on the latter amount, $322,200,000.

Paradoxically enough, the Government and the railway do not agree in their attitude toward this interest item. It is shown on the books of the railway but is not carried on the books of the Minister of Finance. The Government gets around the difficulty by labelling the loans themselves as a “nonactive asset,” which in the light of the circumstances would seem to be a fairly apt description. Debtor and creditor, however, are unanimous in their attitude toward the four hundred and three millions invested in the old government roads. Nobody has ever tried to charge interest on that.

When it comes to measuring the road’s ability to meet the cost of carrying this agglomeration of capital, we can be Pollyannas and think only of the debt due to private investors or we can swallow the whale and do our measuring in terms of the gross debt. As already stated, the twelve-

year deficit on the latter basis approximated $605,000,000. On the private capital basis it was $283,000,000. In other words, to put the matter in the best possible light, during the past twelve years we as taxpayers have had to make good an actual cash loss of $283,000,000. Some $66,000,000 of this was used to keep the road going during the first three years of the twelve when it was not earning out-of-pocket expenses; the remainder has gone to the private investors. The worst year, 1920, showed an out-ofpocket loss of $35,000,000 and an interest deficit of $31,000,000, or a total for the year of $66,000,000, not including obligations to the Government. The best year, 1928, showed a profit of $3,186,000 after payment of all interest due to private capital, leaving a balance still owing to the Government of $29,321,000. One other year, 1926, also showed a small profit, using the word in the sense defined above.

During the period immediately preceding the crash of 1929, when our economic goose was hanging high, it almost seemed that the road was getting itself into the position where it would be able to meet its annual obligations to private investors indefinitely. Up until 1928 the trend of revenue was steadily upward and the trend of losses downward. Since then revenue has tobogganed to new lows and deficits have mounted accordingly. In 1929 the loss after payment of interest to private capital was $12,000,000; in 1930 it was $35,500,000. This year it will probably be more than $50,000,000, which means that the road will make a worse showing in 1931 than it did in 1921. The rapidity of the decline can be gauged from the fact that gross revenue of $312,286,000 in 1928 had declined to $250,968,000 in 1930 and will this year not exceed $200,000,000 and probably will be less.

Another index that perhaps should not be overlooked is the percentage return earned on the system’s property investment. Typical figures are: 1923, .7 per cent; 1928, 2.23 per cent; 1930, .72 per cent, the total investment in plant and equipment at the end of 1930 being $2,172,200,000.

One of the most disturbing features of the whole picture is the fact that the decline since 1928 has taken place in the face of large capital expenditures on new plant and equipment which have materially increased the system’s mechanical operating efficiency. In 1921 the C. N. R. was a patchwork of disjointed lines; today it is a unified transportation machine with modern equipment. A graphic instance of the effect of the change is the fact that in 1928 the road handled 31.5 per cent more traffic than in 1920 with 220 fewer locomotives and 3,370 fewer cars. Old locomotives have been replaced with new, wooden cars have been replaced with steel cars. Speed of trains has been increased. Fuel consumption has gone down. In 1920 one pound of coal burned in a locomotive would move one ton 1.7 miles; in 1930 a pound would move a ton 3.2 miles.

Such figures spe^ik for themselves, but during the ten years 1921 to 1930 these and other improvements together with expansion of plant and investments in acquired properties have taken $483,000,000 of new capital. This means that interest charges have gone up accordingly, the only offsetting factor being a capital write-off of $17,230,000, and it is a question just how much of this new capital is paying for itself.

In this connection the following comparison between the operating results of 1924 and 1930, two years of almost identical revenue, deserves attention:

1924 1930

(In dollars, 000’s omitted)

Operating revenue......... 247,977 250,968

Operating expenses......... 228,920 228,802

Net revenue from railway

operations.............. 19,057 22,166

Net available for interest.. . 14,475 15,790

Interest on funded debt due

to public............... 38,901 51,317

Net loss (excluding obligations to Government) . 24,426 35,527

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The point of the comparison is that whereas $3,000,000 more revenue was earned in 1930 than in 1924, the net loss was greater by $11,000,000, interest charges in the meantime having gone up by more than $12,000,000. It may be that traffic and other conditions were such in 1930 as to prevent full utilization of more efficient plant, but those also are figures that speak for themselves.

The C. P R.’s Position

TURNING from the Government system to its rival, the Canadian Pacific, the general picture becomes more reassuring, but even the world-famed C. P. R. is having its troubles. These, naturally, have been reflected in a decline in the market price of its common stock, which fell from a high of $265 a share in 1929 to a low of $44 (New York price) in 1931, allowing for a split of four for one. Early in 1931 the common dividend which had been maintained at a rate of ten per cent since 1911 was cut to five per cent, thus putting the earning power of the share capital back where it was in the period 1899 to 1902.

Dividends at the ten per cent rate were maintained during 1930 only by virtue of the withdrawal of some $6,500,000 from the surplus of the Allan Line Steamship Company upon the liquidation of that company, and at the moment of writing there is every indication that the maintenance of the five per cent rate during 1931 will involve withdrawals from accumulated surplus.

The seriousness of these declines in relation to the railway problem as a whole is reflected by the fact that for years foreign investors have regarded “C. P. R. common” as an index of the standing of Canadian credit. That factor has added to the difficulties of financing the Canadian National even as the position of the Canadian National has added to the difficulties of the privately owned road.

Any explanation of the C. P. R.’s position in regard to earnings must be prefáced by the'statement that the C. P. R., in addition to being a railroad, is a huge industrial organization drawing revenue from timber and agricultural lands, lumbering operations, coal mining, coal, oil and natural gas leases and heavy metal mining. Revenue from these sources is not incorporated in the company’s statement of railway earnings but is listed under “special income,” which item also includes earnings from hotels, telegraphs and ocean steamships. During the past ten years special income as thus defined has ranged from a low of $10,000,000 in 1924 to a high of $15,200,000 in 1929. The figure for 1930 was $20,000,000 but this includes the appropriations from the Allan Line account which cannot be regarded as recurrent income.

Restricting the picture to railroad operations proper, the trend of the past twelve years is indicated by fluctuations in gross revenue which rose from $176,900,000 in 1919 to $229,000,000 in 1928 and declined to

$180,900,000 in 1930. Revenue for the first eight months of 1931 was $93,600,000 as compared with $115,800,000 for the similar period of the previous year, and if that ratio is maintained the gross for this year will not exceed $160,000,000.

Thanks to drastic economies and improved efficiency in operations, net earnings have not declined in proportion, the figure for 1930 being $38,200,000 as compared with $51,700,000 in 1928. This year it is certain to be under the $30,000,000 mark by a considerable margin. The effects of economies and improved efficiencies over the twelve-year period are illustrated by the fact that 1,895 miles more road were operated and ten per cent more freight was handled in 1930 than in 1919 with 1,330 fewer employees and 211 fewer locomotives. Fuel consumption per ton-mile during the same period dropped twenty-five per cent and total operating expenses in 1930 were actually $6,600,000 less than they were in 1919.

Here again, however, one of the difficulties is the fact that the decline in earnings has taken place in the face of increases in capital liability and in direct and indirect investment in plant, the former having grown from $620,600,000 in 1919 to $911,200,000 in 1930 and the latter having increased during the ten years 1921 to 1930 by $393,217,000 to $1,138,801,000.

Between the beginning of 1924 and the end of 1930 the total of funded debt, preference and common stock issued, increased by $287,000,000. Having in mind this increase it is interesting to compare the operating results for 1924 and 1930 as was done in the case of the C. N. R. The figures are as follows:

1924 1930

(In dollars, 000’s omitted)

Gross earnings from railway

operations.............. 182,500 180,900

Operating expenses......... 145,300 142,700

Net revenue from railway

operations.............. 37,200 38,200

Special income (current). . . . 10,000 13,500

Total current income....... 47,200 51,700

Appropriations from Allan Line Steamship surplus

added to special income . 6,500

Total income.............. 47,200 58,200

Fixed charges and dividends 44,600 58,100

Surplus................... 2,600 100

These figures reveal the fact that whereas net railway revenue increased by $1,000,000 in the face of a decline in gross railway earnings of $1,600,000, and total current income increased by $4.500,000 in 1930 as over 1924, the amount necessary for the payment of fixed charges and dividends advanced by $13,500,000. There was no change in the dividend rate during the period: hence the increase in the latter item was attributable entirely to capital expenditure. Had it not been for the appropriation from the Allan Line surplus, there would have been a loss on current operations in 1930 of $6,400,000 as compared with a surplus in 1924 of $2,600,000.

Owing to differences in the accounting

systems used by the C. P. R. and the C. N. R., it is extremely difficult to devise a percentage comparison of the capital expenditures of the two roads during the past ten years, but a rough idea of their relative positions may be secured from a comparison on a mileage basis. Eliminating expenditures on ocean steamships, figures work out as follows:

Capital Expenditure

Expenditure Mileage at per mile of ten years, end of 1930 road

1921-30

C.P.R. $305,611,000 16,793 $18,198

(excluding (including conocean steamtrolled and ships) leased lines in Canada)

C.N.R. $483,174,000 23,767 $20,329

The figures under “Expenditure per mile of road” are not to be taken as indicating that the systems actually spent these amounts of money on each mile of track. The gross totals include outlay on right of way, rolling stock, terminals, hotels, telegraphs, investments in subsidiaries and a great number of other items. The per mile figure, therefore, is merely an index based on a yardstick common to both systems.

Relative expenditures aside, however, the question that now confronts both roads is: Can this new capital be made to pay for itself on the basis of the volume of business that may reasonably be anticipated?

Apart from rail operations proper, there are a number of items in the capital set-up of both railways that at the moment are not productive of any great joy.

Hotels and Steamships

HOTELS operated by the Canadian National showed a net operating loss in 1930 of $125,000 on a capital expenditure of $26,355,000. If interest at five per cent is added the deficit was $1,442,750, not including any allowance for depreciation. During the ten-year period the increase in the capital expenditure was $16,000,000 and the road is committed to further outlay of some $9,000,000 on hotels at Charlottetown, Saskatoon and Vancouver.

The Canadian Pacific has never published its total investment in hotel property, but a summary of capital expenditures for the ten-year period lists “additions to office buildings and hotels” at $48,300,000. Of this amount $47,955,000 has gone into hotels. This, I am informed, includes the cost of improvements added to the Chateau Frontenac at Quebec, and the Banff and Lake Louise hotels following the fires which occurred at these points, as well as the cost of the Royal York at Toronto and additions made to the Palliser at Calgary and the Empress at Victoria. During the past eight years earnings have fluctuated from a low of $600,000 in 1923 to a high of $1,601,000 in 1929. During the five years 1926 to 1930 the annual return on the average investment for the period was 2.1 per cent. Last year’s net operating revenue was $682,037, which was not sufficient to pay the carrying charges on the Royal York, let alone the charges on the other sixteen hotels in the chain.

Steamships have been another cause of trouble. During the ten years 1921-1930 the Canadian Pacific increased its investment in ocean and coastal vessels by $70,000,000, the total at the end of the period being $114,135,000. The net earnings on this amount last year were $1,332,000, which on the basis of a five per cent return on capital indicates a loss of some $4,300,000, not including depreciation. Between 1921 and 1923 the rate earned on the investment rose from 4.93 per cent to 7.15 per cent; the average for the five years 1926 to 1930 was 5.2 per cent. In 1930 the return was 1.16 per cent.

Results of the Canadian National’s voyaging at sea have been even more unfortunate. The Canadian Government Merchant Marine, which is not a part of the National system but is operated by it for the Government, showed in 1930 an actual operating loss of $834,000. Adding interest and depreciation, the gross deficit for the year was $5,844,000. The total loss since the fleet was put into operation during the war stands at more than $57,000,000, including operating deficits, depreciation, and interest due to the Government.

Two other steamship services, Canadian National Steamships (Pacific Services), an integral part of the C. N. R. system, and Canadian National (West Indies) Steamships, operated by the C. N. R. for the Government, have also been adding their quotas to the deficit column. In 1930 the Pacific Lines, which are all coastal, showed a loss before interest and depreciation of $440,000 on a capital investment of some $8,176,000. The West Indies service in the same year turned in an operating loss of $523,136 on a capital investment of $9,800,000. The latter service is something of a classic example of deficit-producing capacity. It has been in operation two years and during that time it has rolled up a gross loss of $2,480,552 on a capital of less than ten millions.

In all fairness it should be noted that the Canadian National management can scarcely be held responsible for the losses incurred by the Merchant Marine and the West Indies service. The former is a legacy of the war and the latter is in effect a government-subsidized trade route. Operation of both services is a question of government policy and not a question of C. N. R. policy.

Questions of responsibility aside, however, the figures are cogent reminders of the fact that we are still up to our old game of refusing to pay our transportation costs out of revenue from the sale of that transportation.

Maybe the game is worth the candle;

maybe it is not.

There is always the possibility that the candle may burn itself out.

Editor's Note: Subsequent articles of this series will deal with some of the underlying causes of railway difficulties and indicate the various remedies proposed.