Evening star., 1931-12-27
RAILROAD CREDITS
ARE URGED At ONCE.
BY CARRIER EXPERT
Swain Says Working Capital
Is Immediate Need
of Industry.
LOWER OPERATING COSTS
NECESSARY, He DECLARES
Reorganization of Managements
Also Vital to Recovery
of Business.
BY DR.. MAX WINKLER,

BY DR.. MAX WINKLER.
Special Dispatch to The Star
NEW YORK, December 26-Win-
throp C. Swain. vice president and di-
rector of Analyst Associates and recog-
nized authority on railroad problems,
having been head Of the railroad de-
partment Of Moodys Investors Service
was asked to comment upon the exist
ing transportation situation.
The railroad industry" saws Mr.
SWAIN, rs facing insolvency today be-
cause Of lack OF working funds. Private
capital by refusing credit, is on a gen.
eral strike for the first time in two
generations as the decentralization of
the markets for even the higheSt-gr
railroad bonds prohibits new financing
The promise OF central governmental
revolving fund to advance needed credits
appears to be the only way of side
stepping wholesale receiverships. Even
II this fund materialiZeS, the experience
OF the railroads during and after the
war suggests that loans NAV be made
only on full security, and that they NAV
take priority over existing obligations.
Merger Movements.
only few companies have been
content TO preserve in current form
much OF the excess earnings and pro-
ceeds OF financing Of the past few years
The larger companies of strongest credit
have been the least careful to maintain
reserves of working capital in spite OF
the fact that in the past they have gen.
orally absorbed the lions share Of new
capital. Moreover, many of the larger
companies, particularly in the East
nave been carried away by the lure of
the Dement'S OF consolidation. AS a re-
suit, their own obligations have been
increased. not only to finance the usual
run OF more or less unproductive capital
expenditures, but also to purchase
stocks Of other companies.
"A study Of such purchases shows
that prices were paid out of all rela-
tlonS to earnings and prospects. The
nelght OF absurdlty was finally reached
IN 1881, when one railroad reciprocated
Tor past benefits by purchasing in the
open market shares of the company bv
which 1t was controlled. The investors
WIN phllosophlc turn of mind could
only admit that reason had vanished
The Federal Trade Commission in
VeStlgauonS showed that in most in
stances railroads are owned by the small
investor. This type of ownership is not
conduclVe to an effective stockholders
lnHuence upon management policies
however honestly railroad officers and
directors tried to represent the will of
tneSe stockholders. it must be admitted
that the results have been disastrons
from the investment viewpoint, Pro-
tectlve committees of bondholders and
stockholders may in time substitute eff
lectlFe control, but the first effect of
ulSlIuSlonment must be such chaos in
IHe capita markets as now exists
ferhapS the experience will also
prove oenett in disguise by pointing
out the Importance of investment coun.
GIL independent OF all houses of issue
FOR the record of railroad financing
curing the past decade reflects LITTLE
cleo1t upon any OF the parties involved ="
Suggests Program.
What are the prospects," Mr., Swain
was aSKea, Tor the carriers to obtain
new capital?" Mr.. Swain renled SaI tbat
new capital should not be made avail
able until definite progress is made
along certain lines"
Inc following steps are necessary i,
the opinion OF Mir Swain:
4.LoWer operating costs, in particr-
lar lover wage scales, to permit re-
capture OF business lost to competin,
methodS OF transportation.
Substitution of co-operativ, sery-
ice between carriers in place Of IN
restrained and unproductive comD2ii-
ton; also, If necessary. scrapcine Of
much light traffic competitive mileage.
=, equalization Of taxation and
other competitive conditions as between
railroads and other public carriers
4-More flexible rate schedules, 10
permit accumulation of working capital
reserves during boom times and TO off
set lower rates during depressionS
5-Reorganlzation Of manas aments
and directorates to give adequate repre-
Sentatlon to security holders and the
wage Garner.
There appears to be no conflict be-
tween the long range interest of the
wage Garner and the railroad security
holder Mr.. Swain continued. The
wage Garner collects nearly so cents of
each dollar of operating revenues as
compared with perhaps 20 cents accru-
ing to the security holder, and any ,ln-
economically high rates, which drive
business away from the railroads pro-
notes lower railroad employment as
well as a lower return upon capital.
Unless it is the object of railroad labor
unions to drive the industry toward
Government ownership and control, the
deficits to be met by public taxation,
the interests of these two groups are
identical
When new capital again iiows into
the railroad industry, the capitalization
should be balanced more carefully. per-
laps to insure not more than so per
cent of funded debts as compared with
so per cent in preferred and common
stock. This ratio has been maintained
rather consistently by the utility in
dustry, which is favored over the rail-
roads in being practically non-com-
petitive Possibly the Indifference of
the stockholder in the past has been
due to the fact that he has been asked
only infrequently to contribute addi-
tional capital, this burden falling upon
the bond buyer. If some such OBSTACLE
had been placed in the way of the sale
of bonds it is doubtful if certain rail-
roads would be in or close to receiver
ship today.
IF it were possible to waive politics,
and attack the railroad problem on the
basis of elementary economic prIncl-
pies, the solution would be simple.
Under the conditions. which require
somewhat greater craftsmanship on the
par t of railroad management, 1t Is
hoped that railroad security holders will
select captains to guide their companies
more competently through the next
period of development"
(Copyright. 1881, by the North American
Newspaper Alliance, 1nc}