All Commentary
Thursday, September 1, 1960

A Tale of Two Railroads

Dr. Stephenson, a former Boston University professor, is a World War 1 veteran of the Air Service, U.S. Army. He has lived in and traveled throughout Canada and has written widely on Canadian subjects. This article first appeared in the February 1960 issue of The American Legion Magazine.

When the chips are down, which is the more successful—private enterprise or government owner­ship?

This question is being debated all the time, in many countries. Answers tend to bristle with “if,” “yes but,” “maybe,” or “it de­pends.”

Why not look at the world’s unique big-scale example, where both kinds operate side by side? Here are two businesses, both in the $2.5 billion financial class. Both sell the same kinds of service. Both strive to make a profit. One fails to do so; the other steadily pays dividends. Perhaps a close up view may reveal some aspects of these two giants that argument and the­ory can’t make plain.

Canada is their home. The two largest railroads in the Western Hemisphere run coast to coast. The slightly larger one in terms of mileage is the Canadian National Railways, government-owned. The other, the Canadian Pacific Rail­way Company, is a corporation owned by its stockholders. You can buy its shares on a stock exchange.

The two railroads run from coast to coast. Canadian National is shown in gray. Canadian Pacific appears in black. Trans-Canada Air Lines is owned by Canadian National and Canada.

Those who favor nationalization or state socialism may find it hard to explain the profit-and-loss chart at left.

In no other country will you find a comparable situation, where rail­road transport services are about equally divided between private en­terprise and public ownership.

To see these big, impressive or­ganizations in their own backyard I flew from Boston to Montreal in a Viscount passenger plane of Trans-Canada Air Lines, a sub­sidiary of Canadian National. No competition here from the Cana­dian Pacific. But in Montreal it was different. There I found the two transportation giants battling it out in the air, on the rails, over the highways and waterways, from one end of Canada to the other—real, tough competition. So when you talk about railroads in Canada, you are talking about a lot of other means of freight and passenger service too.

The Government Referees

The referee is the government, which makes the ground rules, and also owns the Canadian National. Canadians are very much sold on the spirit of fair play, which is part of their tradition. Whenever the people of Canada think they detect favoritism in the transpor­tation business, they holler. And the referee pays attention.

The airways scrap of the 1950′s is a good example. Trans-Canada Air Lines, owned one-half by Ca­nadian National and one-half by the government direct, had a mo­nopoly on transcontinental flights. The private line, Canadian Pacific Airlines, an integral part of the C.P.R. system, couldn’t get a gov­ernment license to set up compet­ing service. Monopoly is sweet, and hard for anybody to surrender. But the people’s protest became so clamorous the government had to yield, and in May 1959 the new Canadian Pacific Airlines coast-to­-coast schedules began, using turbo­prop Bristol Britannia aircraft.

“To be sure,” I heard in St. James Street, the Wall Street of Montreal, “the C.P.A. boys are permitted to make only one flight per day each way, Montreal-Van­couver. But the government just wasn’t ready to face up to an old-fashioned laissez-faire competitive battle. We take on these things a bit gradually, don’t you know.”

“To express the basic transport difficulty in financial terms,” an­other St. James Street source ex­plained, “the Canadian Pacific—rails, air, highways, waterways, hotels, whatnot; all rather large, you know—was so inconsiderate as to turn in a profit of $36.4 mil­lion in 1958, as against a deficit of $51.6 million on the part of the Canadian National. To permit the gap between the two performances to grow even wider by permitting both to run from scratch on the coast-to-coast flight matter would have been too much. So the pri­vately owned airline has still to carry a slight handicap.”

A third financial man said rather grumpily that Canada has social­ism trying to get along with capi­talism in its basic transport indus­tries, and that this just can’t work.

A Most Difficult Task

Socialism? President Donald Gordon of Canadian National doesn’t talk like it. He said in London last summer:

“As for the Canadian National Railways, as a national policy, and indubitably in the national inter­est, its operations, its organiza­tion, and its business principles must be modeled upon those of pri­vate enterprise…. To ensure the efficiency of its day-to-day opera­tions the yardstick of success must be found in its profit and loss ac­count.”

Nowhere I went in Canada were Mr. Gordon or his associates in management described as social­ists, and their integrity is never in question. These men have fallen heirs to a most difficult task—op­erating a government enterprise in a generally free economy—and I suspect that privately they don’t like it much.

Mr. Gordon’s opposite number in the competing organization, President N. R. Crump of the Ca­nadian Pacific, said at his 1959 an­nual meeting of stockholders: “The Canadian people as a whole have never consciously or deliberately sought socialistic answers to their problems in transportation or in any other field.”

I did not attend this meeting, as I was elsewhere in Canada at the time; but that particular state­ment made a hit with stockholders, just because it indicates the tradi­tional fair-play attitude that Ca­nadians like to see. Mr. Crump was not calling names. But he knew which team he was on, for he added:

“If public [government] enter­prise were subject to the same ground rules, including penalty for failure in meeting the test of the marketplace, then competition with private enterprise would be pos­sible without prejudice to the principles of the market mechan­ism. But if public enterprise has access to capital without regard to cost, then sound economic princi­ples governing growth and prog­ress are jeopardized and an added burden is imposed on the tax­payer.”

A journalist assigned to Ottawa, the national capital, was somewhat more forceful. He told me:

“We have got this big socialistic enterprise, the C.N.R., hung around our necks like an albatross. Most people didn’t really want it in the first place in 1923, and nearly everybody would be delighted to be rid of the monster as a govern­ment business. But let’s face facts. It’s too late. The government-owned railway is a permanent li­ability that the people of Canada have got to support with tax money.

“I am proud of the Canadian National, with good reason. It’s a fine railroad—its subsidiary com­panies also turn in the best jobs they can. The fact that I don’t like the type of ownership doesn’t mean I think the management per­sonnel incompetent. Far from it: they stack up with the world’s best. But there is a sickness in so­cialism that never shows up in advance.”

Done in Desperation

How did Canada get into gov­ernment ownership of the giant C.N.R. in the first place? I have been traveling up, down, and across Canada for a great many years, preparing articles and eco­nomic reports. I recall the postwar depression of the early 1920′s, when Rod Mackenzie’s Canadian Northern was in a bad way finan­cially; the Grand Trunk System was in danger of collapse; and the half dozen or more components that were to be made part of the Canadian National were on their last legs. The government stepped in and rescued them by taking them over and forming a nation­wide railroad empire rivaled only by the privately owned Canadian Pacific. The Canadian people were driven in a time of desperation to take the drastic step of govern­ment ownership, almost against their will.

This 37-year-old experiment has proved conclusively that the two incentives that make a private en­terprise succeed are lacking in a government enterprise; namely, the reward for accomplishment and the penalty for failure. Before examining some of the evidence of this, let’s take a glance at some pretty big arithmetic:

Over the 18-year period from 1941 through 1958, the privately owned Canadian Pacific paid its stockholders $368 million in divi­dends, and paid income taxes amounting to $340 million to the Canadian government.

In this same period the govern­ment-owned Canadian National paid no income tax.

And in those 18 years the Ca­nadian Pacific earned a profit of $669 million while the Canadian National suffered a loss of $653 million. That meant big spending money for C.P.R. shareholders, big taxes for all Canadians.

The Canadian National had a good year in 1953, and paid the government nearly $250,000 in dividends on preferred stock. But five years later, with railroad op­erating revenues of $705 million, its 1958 loss was $14 million; the C.P.R. in 1958, taking in $467 mil­lion in railroad operations, showed a profit of $55 million. Both had revenue from other activities—the Canadian National $9 million and the Canadian Pacific $17 mil­lion.

“Integration” and “Enterprise”

Why these incredible differ­ences? I got two one-word answers by interviewing Canadian ship­pers, the men who pay the freight. One was “integration.” The other was “enterprise.” These two points of view gibe perfectly. Both seem valid to me.

Here’s an example of integra­tion that showed a lot of imagina­tive enterprise: A major headache to railroads, in the U.S. as well as Canada, has been the rise of air and truck transportation. The Ca­nadian Pacific launched a “pilot plant” operation on the West Coast, to see whether package shipments—less than carload lots—could be handled through one management no matter how they traveled. To­day you can ship from Vancouver by rail, truck, piggyback, or air, in any combination. This service is integrated in control of solicitation, handling, transportation, and accounting. It worked so well in 1959 that it will be extended throughout Canada. The shippers said it saves time, money, trouble, and bookkeeping.

The Canadian National will fol­low suit. That’s it, the government railroad isn’t as free to experi­ment, to find new ways.

Another example: Both rail­roads own a string of fine hotels across Canada. But the manage­ments’ attitudes are different. The Canadian National, after its ex­perience in building a splendid new hostelry in Montreal, the Queen Elizabeth, has flatly an­nounced it will build no more new ones. The rival Canadian Pacific completed and opened in February 1959 an addition to the Royal York in Toronto that makes this 1600-room hotel the largest in the Brit­ish Commonwealth. With enthu­siasm, the C.P.R. sees itself as “providing facilities for the needs of an expanding nation.” (Did you know Canada will have a population of 18 million in 1960?) So while the government hotel en­terprise wants no more, the pri­vate enterprise is alert to new places that will yield a profit.

The St. Lawrence Seaway

How about the St. Lawrence Seaway? Everybody asks that. Some diversion of freight tonnage from both railroads is inevitable, perhaps a great deal.

“It isn’t a threat: it’s only seven-twelfths of a threat,” a C.P.R. official remarked. He re­ferred to the fact that the winter freeze up will probably halt Sea­way traffic to far inland ports part of the year. The Seaway, that liquid turnpike that will trans­form much of Canada’s midwest, just as in the U.S., also can be looked on by railroaders as a chal­lenge and an opportunity.

The piggyback system of freight shipment—by which wheeled vehicles ride on flatcars, then take off on highways to make deliveries—gave somebody a big idea. Why not a fishy back? Why not adapt the same method to freight ves­sels? So the C.P.R. is developing a line of containers suitable for this traffic. This imaginative idea will help shippers pack their freight so that it can travel by land or inland sea, according to the season. The C.P.R. rails will provide a usable alternative when the inland waters are frozen over.

An Integrated Service

As 1960 opened, the Canadian Pacific had had six months’ ex­perience with its newly stream­lined organization. The country, previously divided into eight dis­tricts, is now divided into four re­gions—Atlantic, Eastern, Prairie, and Pacific. This cuts down over­head tremendously. This is part of the integration policy that seems to go right down the line. For ex­ample, rail, air, and steamship tickets can all be purchased at the same place; and the same salesman will help find accommodations at a C.P.R. hotel. And if he pushes C.P.R. express or C.P.R. communi­cations services, that ‘s what he’s paid for doing. The customer doesn’t get mixed up trying to find his way to a dozen offices in the same city.

More statistics could be cited—many more—such as comparison of fixed charges ratios, the input of $50 million more into the Ca­nadian National in 1958 despite a deficit of $51 million, and so forth. The big point, however, is not in the figures, but in the philosophy and policy. What actually is hap­pening in Canada is that a loyal group of hard-working and able managers are struggling with an impossible adversary—the sickness that is socialism, no matter how one tries to avoid the term.

Fish or Cut Bait?

Can the economic disease be cured? Is it really too late as the Ottawa journalist insists? Or is one big, courageous step all the Canadian government needs to take? Such a step would simply be to start treating the C.N.R. like a private enterprise. To do so, the government would have to: (a) Set up an income tax account for this railroad on the same basis as its competitor. (b) Simplify the corporate structure, streamlining it into an integrated whole (there were 79 corporations in the C.N.R. complex five years ago, 45 one year ago, more than 30 still). (c) Tell the railroad to keep its hand out of the government till; no more subsidies; when an operation loses money, cut it off.

Ah, what a capitalistic utopia, with every institution required to fish or cut bait, turn in a profit or sell out! The political screaming that would ensue would shake the polar icecap.

Citizens of the U.S. Might Learn from Canada’s Experience

But lest U.S. citizens gain the notion that it is only the Canadi­ans who have drifted into social­istic enterprise without knowing it, let us be aware of the follow­ing: The inland waterways system of the United States is wholly sup­ported by the taxpayers, not by the users; barges ride toll-free in channels kept open by the govern­ment for their benefit on the pre­text of military necessity. The various State-chartered “authori­ties” are exempt from property tax, exempt from federal tax on their securities; none is operated on a basis of full self-support and contribution to taxes. Port facili­ties, bridges, airports, toll roads do not pay taxes; they collect them, without calling them taxes. The country’s major highway system is a public utility. Such a facility is capable of standing on its own economic feet, as other public utilities are required to do.

Will the railroads of the U.S.A. succumb to the economic disease that is socialism? Of course we know that such a thought is ridic­ulous, until we recall the words of President Crump: “The Canadian people as a whole have never con­sciously or deliberately sought so­cialistic answers to their prob­lems.” But in times of economic difficulty, such an answer some­times seems so easy!

Editor’s note: Some persons may question the fairness of this comparison between private en­terprise and socialism on grounds that the Ca­nadian government took over and combined nu­merous railroad failures and then extended its services into unprofitable areas. But a charge of unfairness is scarcely warranted, since this is the way of socialism according to its own claims. In the open market, competitive enterprise aban­dons uneconomic ventures; whereas, the closed or monopolistic market of socialism is unrespon­sive to costs and uses its taxing power to cover losses.