Part 2

Detailed reference will now be made to the methods and controlling effect of the Postmaster-General's apportionment of passenger train space between the mails and the other services rendered on passenger trains. Such an apportionment was a necessary step in the calculations reported in Document No. 105. Having obtained certain estimates of the cost of the passenger train services, considered together, by methods, producing the lowest results, the next step shown in Document No. 105 was to apportion a part of this cost to the mail service. The accepted method for such an apportionment is to distribute the total cost in proportion to the train space required by each of the respective services. The Postmaster-General obtained from the railways statements which he might have used in applying this method and these statements showed that 9.32 per cent. of the total space in passenger trains was required by the mails, but, instead of using the data showing this fact, he substituted figures of his own which reduced the space credited to the mail service to 7.16 per cent. of the total. The total of passenger train costs which the Postmaster-General estimated should be apportioned among passengers, express and mail, on the basis of space occupied, was $37,074,172.[D] He therefore assigned to the mail service 7.16 per cent. of the last-named sum or $2,654,510.69. If, however, he had used the proportion of space, 9.32 per cent., resulting from the reports he had obtained from the railways, the amount apportioned as cost of the mail service for the month would have been $800,802 greater. Multiplying this by twelve gives an increase in the estimated annual cost of over $9,600,000.

[Footnote D: This is the sum which was apportioned by the Postmaster General on the basis of train space occupied. He estimated $40,121,294.83 (Document No. 105, page 280) as the total operating expenses and taxes of the passenger train services for the month. Of this total $21,993.06 was charged directly to the mails and $3,025,129.77 directly to the other passenger train services, leaving the sum stated in the text to be apportioned on the space basis.]

Thus the Postmaster-General arrived at his declaration that the railways were getting an excess profit of $9,000,000 by means of two fundamental errors, omitting for the present reference to any other errors. He understated the annual mail expenses and taxes of the railways by at least $9,600,000, and he ignored entirely the necessary return on the value of railroad property.

This examination of his methods shows that the determination of space was of primary and controlling importance and that the changes in space allotment have destroyed the value of his deductions. These changes were due to his refusal to assign to the mail service the working space and temporarily unoccupied space on trains, which were necessary to the mail service and to his actually assigning much of this space to the passenger service rendered on the same trains.

It is scarcely necessary to note that all kinds of traffic require "working space" in addition to the space actually occupied by the traffic itself, and that this is especially true of the mail traffic, or that where there is a preponderating movement of a certain traffic in one direction there must be some empty space on account of that traffic, sometimes called "dead" space, in trains moving in the direction of lighter traffic. Thus passenger cars must have aisles, vestibules and platforms, and postal cars must have a great deal of space in which to sort the mails while, for mail carried in baggage cars, there must be space in which to reach the pouches and to receive and deliver them through the doors. A through train must also have the full capacity required for the maximum traffic of any kind likely to seek accommodation on any part of its journey, although during much of each trip the actual traffic may be considerably below this limit. The Postmaster-General, however, refused to credit the mail service with much of the space thus required by the Department although his figures for the other passenger train services allowed fully for all such space required by them. In fact in many cases such space, actually required by the mails and so reported by the railways, was taken from the total mail space and, without reason, assigned to the passenger service. These modifications of the data correctly reported, not susceptible of justification upon any sound transportation principle, were carried so far that the tabulations of the Post Office Department, which are stated for railway mail routes having a total length of 194,977.55 miles[E] show only 926,164,459 "car-foot miles" made in the mail service, although certain railways, included therein, and having railway mail routes aggregating only 178,709.96 miles, had correctly reported mail space equivalent to 1,153,110,245 "car-foot miles." Thus, although the Department's figures cover 8.3 per cent. more mileage, its reductions of space resulted in assigning to this greater mileage about one-quarter (24.5 per cent.) less mail space. At the same time the Department actually increased the space assigned to the other passenger train services, its figures showing 12,014,065,506 car-foot miles in these services for 194,977.55 miles of mail routes which must be compared with 11,222,478,739 car-foot miles reported by the railways for 178,709.96 mail-route miles.

[Footnote E: Document No. 105, p. 53.]

This treatment of the controlling figures as to space, supplementing the other errors of method and omissions of fact, which have been or will be cited, was amply sufficient to turn a real loss into an apparent profit.

VI. THE POSTMASTER-GENERAL IGNORED DATA WHICH HE HAD OBTAINED SHOWING EXPENDITURES ON ACCOUNT OF THE MAILS LARGELY IN EXCESS OF THE DIRECT EXPENSES FOR THAT SERVICE WHICH HE REPORTED.

As a part of the investigation reported in Document No. 105 the Postmaster-General obtained from the railways statements showing the amounts expended by them for the station and terminal services required by his Department and the amount of free transportation furnished on his requisition for officers and agents of the postal service when not in charge of mail. These data were not used (Document No. 105, p. 6) and, as no adequate allowance was made in any other way for these expenses, the omission unjustly reduced the estimates of the cost to the railways of their postal services. The Postmaster-General's explanation of this omission implies that it was partially offset by the assignment as cost of mail service of its proportion, on the space basis, of all the station and terminal expenses of the passenger train services but these special mail expenses are disproportionately heavy and the amount so assigned was far too low. The expenses for station and terminal services especially incurred for the mails, during November, 1909, and reported to the Postmaster-General, for ninety-two per cent. of the mileage covered by Document No. 105 aggregated $401,136.00, as follows:

Amount of wages paid to messengers and porters employed exclusively in handling mails $79,980.84

Portion properly chargeable to mail service, pro-rated on basis of actual time employed, of wages paid to station employees a part of whose time is employed in handling mails 198,927.01

Amount expended for maintenance of horses and wagons and for ferriage, etc., in connection with mail service 5,640.98

Rental value, plus average monthly cost of light and heat, of room or rooms set apart for the exclusive use of the mail service 37,258.93

Rental value of tracks occupied daily for advance distribution of the mail 47,029.12

Average monthly cost of light and heat for postal cars placed daily for advance distribution of mail 18,400.57

Interest at the legal rate upon the value of cranes, catchers and trucks required for mail service 3,895.36 ------------ Total $401,126.00[F]

[Footnote F: This total includes $9,993.19 reported by four companies which gave totals for these items, but did not report the items separately.]

All the foregoing data were reported to the Postmaster-General in response to his request but he made no use of these items, an omission manifestly to the serious disadvantage of the railways and having the effect of unduly reducing his estimates of the cost of the mail service.

Similarly, the Postmaster-General omitted to use the data he had obtained from the railways showing the volume of free passenger transportation, already referred to, supplied to the officers and agents of the Post Office Department and his estimates contain no recognition of the cost of this service although its extent should be a matter of record in the Department as it is furnished only on its requisition. The space in passenger coaches occupied by these representatives of the Post Office Department, traveling free, was not assigned to the mail service but was treated as passenger space.

VII. THE MONTH OF NOVEMBER IS NOT A FAIR AVERAGE MONTH IN ANY RAILWAY YEAR OR ONE THAT IS TYPICAL OF A YEAR'S BUSINESS AND ITS USE AS THE SOLE BASIS OF THE POSTMASTER-GENERAL'S CALCULATIONS WAS SO UNFAVORABLE TO THE RAILWAYS AS TO DEPRIVE THE RESULTS OF ANY VALUE EVEN IF IN ALL OTHER RESPECTS HIS METHODS WERE BEYOND CRITICISM.

All the Postmaster-General's calculations, reported in Document No. 105, and by him relied upon therein, and elsewhere, to substantiate his attack upon existing railway mail pay, depend solely upon data for the single month of November, in the year 1909. It is obvious, therefore, that the validity of his conclusions, if all the rest of his processes were accurate and his deductions otherwise sound, would depend upon whether November is sufficiently typical of the railway year to be safely used as the sole basis for conclusions applicable to a whole year. The truth is, however, that November is not a typical or average month and that all of its deviations from the averages of the year are such as greatly to favor the result which the Postmaster-General was seeking.

It may well be doubted whether the railway year contains any month that can properly be regarded as typical of the whole period but if it does, the month of November, with four Sundays, two holidays and only twenty-four working days, is certainly not such a month. The Interstate Commerce Commission publishes the monthly aggregates of railway receipts and these official data conclusively prove that November, 1909, was the one month for which the data were most strongly favorable to finding, by the Postmaster-General's method, an abnormally low apparent cost for the passenger train services and, consequently, for the mail service.

It is a month in which substantially Winter conditions prevail in a large part of the country and, on this account, one during which much of the ordinary work of maintenance of way and structures must be suspended. Such work occasions a large fraction of the yearly expenses of all railways and these expenses pertain in a relatively large proportion to the passenger services because the higher speed of passenger trains results in greater relative wear and tear upon road-bed and structures than that caused by the slower trains of the freight service and the requirements of safety to passengers carried at high speed impose more costly standards of maintenance than would otherwise be necessary. Consequently a month in which these maintenance expenses are necessarily below the yearly average cannot typify the full annual cost of the passenger train services. Figures showing the facts are contained in Appendix B.

It is, of course, understood that the respective expenses of the passenger and freight services must move upward and downward with the fluctuations in the volume of each sort of traffic. No month can furnish a reliable basis for estimating the proportion of the total expenses that is caused by the passenger service unless during that month the volume of passenger traffic bears a normal relation to the volume of freight traffic. But in November, 1909, as will appear from official figures for each month in the year contained in Appendix C, passenger traffic, as measured by receipts therefrom, was much below the average month of the year while freight traffic was far above the average. The November receipts from passengers amounted to only 21.5 per cent. of total receipts, the lowest relation shown for any month in the year. Of course, under these conditions passenger expenses were curtailed and freight expenses relatively enhanced. Certainly the use of data resulting from these abnormal relations could not possibly produce results fairly typical of a normal period, that is of a whole year. The results so obtained must have diminished the apparent cost of the passenger train services below the true cost, by just as much as the figures for November were below the average figures of the year.

These considerations fully establish the truth that, if every other feature of Document No. 105 were absolutely beyond criticism, the fact that it rests wholly upon estimates based upon data for the single month of November would render its conclusions illusory, misleading and seriously prejudicial to the railways.

VIII. A COMMISSION OF SENATORS AND MEMBERS OF CONGRESS WHICH, BETWEEN 1898 AND 1901, MOST FULLY AND CAREFULLY INVESTIGATED THE SUBJECT, ASCERTAINED AND DECLARED THAT RAILWAY MAIL PAY WAS NOT THEN EXCESSIVE; SINCE THEN THERE HAVE BEEN MANY AND EXTENSIVE REDUCTIONS IN PAY ACCOMPANIED BY SUBSTANTIAL INCREASES IN THE COST AND VALUE OF THE SERVICES RENDERED BY THE RAILWAYS.

The Congressional Joint Commission to Investigate the Postal Service, which reported on January 14, 1901, is authority for the fact that, at that time, railway mail pay was not excessive. Senator William B. Allison, of Iowa; Senator Edward S. Wolcott, of Colorado; Senator Thomas S. Martin, of Virginia; Representative Eugene F. Loud, of California; Representative W. H. Moody, of Massachusetts, and Representative T. C. Catchings, of Mississippi, six of the eight members of the Commission, then united in the following:

"Upon a careful consideration of all the evidence and the statements and arguments submitted, and in view of all the services rendered by the railways, we are of the opinion that 'the prices now paid to the railroad companies for the transportation of the mails' are not excessive, and recommend that no reduction thereof be made at this time." Fifty-second Congress, Second Session, Senate Document No. 89, pp. 19, 22, 25, 29.

Since the Commission reported, the volume of the American mails, the revenue of the American postal service and its demands upon the railways for services and facilities have greatly increased. The costs of supplying railway transportation have also greatly increased. The necessary cost of railway property per unit of service has increased, and in consequence the amount required as a reasonable return thereon, on account of higher wages and prices, the higher standards of service demanded and the higher value of the real estate required for extended and necessary terminal plants. Operating expenses have grown by reason of repeated advances in rates of wages paid to employees of every grade and increased prices of materials and supplies. Taxes have increased with the rapidly augmenting exactions of State and local governments and the imposition of an entirely new Federal corporation tax.[G] Yet during this period of rapidly advancing railway expenses, and in spite of the fact that at its commencement the railway mail pay was not excessive, the rates of payment for railway mail services have been subjected to repeated and drastic decreases accomplished both by legislative action and by administrative orders. These reductions have so much more than offset the rather doubtful advantages which the railways might be assumed to have obtained from the increased volume of mail traffic that in 1912 they find their mail service more unprofitable than ever before. The following table shows the facts:

Average railway mail Fiscal Total railway pay per $100.00 of Year mail pay postal receipts.

1901 $38,158,969 $34.18 1904 43,971,848 30.62 1907 49,758,071 27.10 1910 49,405,311 22.04 1911 50,583,123 21.26

[Footnote G: Data indicating some of the increases in wages and taxes are given in Appendices D and E.]

The foregoing shows that the Post Office Department expended for railway transportation, in 1901, $34.18 in order to earn $100.00 in gross and that by 1911 this expenditure had been reduced 37.8 per cent. to $21.26.

This notable reduction was the consequence (first) of the operation of the law fixing mail pay under which the average payment per unit of service decreases as the volume of mail increases; (second) of the Acts of Congress of March 2, 1907, and May 12, 1910, and (third) of administrative changes effected by the Post Office Department which, without decreasing the services required of the railways or enabling those services to be rendered at any lower cost, greatly reduced the payment therefor. Chief among these administrative changes was the Postmaster-General's order known as the "Divisor" order (No. 412 of June 7, 1907, superseding Order No. 165 of March 2, 1907) radically lowering the basis for calculating the annual payments for transportation. No official estimate of the reduction in the aggregate annual payment produced by the operation of the law fixing the scheme of payment has been made but from time to time the Department has published estimates of the reductions otherwise effected. None of these estimates is now up to date, and to make them comparable with the present volume of mail substantial increases would be necessary, but they are given below as representing an amount substantially less than the lowest possible statement of the total present annual reduction.

Cause of reduction Amount of annual reduction.

Natural operation of the law No estimate.

Acts of March 2, 1907, and May 12, 1910 $2,723,658.90

Withdrawal of pay for special facilities 167,005.00

Postmaster-General's divisor order 4,941,940.34

Other administrative changes 699,544.51 -------------- Total (with no allowance for the first item above) $8,532,148.75

No one will contend for a moment that there has been any net reduction in the cost of supplying railway mail services and facilities since 1901, the year in which the report of the Joint Commission to Investigate the Postal Service was made. In fact, all changes in railway operating costs, except those due to increased efficiency of organization and management, which can have little if any effect in connection with mail traffic, have been in the opposite direction. During the years characterized by these reductions the railways have been called upon continually to improve the character of their postal service and the Post Office Department will not deny that the railways are now rendering better, more frequent, and more expeditious postal service than in 1901, or any intermediate year, and are doing so at greatly increased cost to themselves.

In view of these thoroughly substantiated facts the drastic reductions of recent years afford unanswerable proof that railway mail pay is now too low.

IX. THE ADMINISTRATION OF THE POST OFFICE DEPARTMENT HAS NOT, IN THE LAST TWELVE YEARS, EFFECTED ANY REDUCTION IN THE ANNUAL TOTAL OF ITS EXPENSES FOR OTHER PURPOSES THAN RAILWAY TRANSPORTATION OR IN THE PROPORTION OF ITS REVENUES REQUIRED FOR SUCH OTHER EXPENSES, BUT THE WHOLE SAVING WHICH HAS NEARLY ELIMINATED THE ANNUAL DEFICIT OF THE DEPARTMENT IS REPRESENTED BY THE REDUCED PAYMENTS, PER UNIT OF SERVICE, TO THE RAILWAYS.

That the recent savings of the postal service have been wholly at the expense of the railways is shown by the following:

1901. 1911.

Postal gross receipts $111,631,193 $237,879,823

Postal expenses, all purposes; Total $115,554,921 $238,507,669 Per cent. of gross receipts 103.5 100.3

Railway mail pay; Total $38,158,969 $50,583,123 Per cent. of gross receipts 34.2 21.3

Postal expenses other than railway mail pay; Total $77,395,952 $187,924,546 Per cent. of gross receipts 69.3 79.0

This table shows that in the ten years from 1901 to 1911 the Post Office Department reduced its operating ratio between its total expenses and its gross receipts from 103.5 per cent. to 100.3 per cent., being a reduction of 3.2 points; but it also shows that this improvement was due solely to the fact that the ratio of railway mail pay expenses to gross receipts was reduced from 34.2 per cent. to 21.3 per cent., a reduction of 12.9 points, while the ratio of all other expenses to gross receipts increased from 69.3 per cent. to 79 per cent., an increase of 9.7 points. Thus the improvement of 3.2 points in the ratio for all expenses was due entirely to the greatly reduced ratio of railway mail pay, the heavy reduction in that respect exceeding by 3.2 points the very substantial increase in the ratio of all other expenses.

During the ten years from 1901 to 1911 the Department took up an enormous increase in business at a greatly decreased cost for railway transportation and at a largely increased cost for other purposes. It cost the Department, for purposes other than railway transportation, nearly nine-tenths of $126,248,630 to add that amount to its gross receipts (although for these other purposes it had previously spent less than seven-tenths of its gross receipts) while it required less than one-tenth of the same sum to pay for the added railway transportation that the new business required (although at the beginning of the period railway transportation had cost more than one-third of the gross receipts). This startling comparison fully warrants the conclusion that the power of Congress and the Department has been exercised to force upon the railways, by reducing the payments for their services, the burden not only of the effort to eliminate the annual postal deficit but of considerable increases in other forms of postal expenditure. No reference to rural free delivery will serve to explain away the conclusion suggested by this comparison especially since only a fraction of the cost of that service represents really an additional net outlay. This service has permitted a reduction of one-third in the number of post offices and has been in many cases substituted for star route service and the savings thus permitted ought to be credited to it before determining its cost.