The Way Out

A Second Address on

The Canadian Railway Situation

By E. W. Beatty, K.C., LL.D.

Delivered Before The Canadian Club

Winnipeg, February 8, 1933

When I received the deeply appreciated invitation of your Club to come to Winnipeg and address you on the subject of the railway situation in Canada, I felt greatly honoured, not only because of the audience which I would meet, but because of the great importance of the subject. Frankly, too, I welcome the opportunity of discussing before this large and influential gathering a public question to which I have given a great deal of thought.

Winnipeg is an appropriate vantage ground from which to survey the transportation difficulties of the country. It is on the threshold of our richest producing area, it is the commercial capital of the Prairie Provinces and its business leaders exercise usually a decisive influence in the shaping of policies which regulate the flow of trade to and from the vast plains which form the keystone of Canadian prosperity. It is the window through which other portions of Canada must get their view of the Western landscape, and the source to which they turn for information as to the direction and depth of Western thought on any question.

There are obvious objections to one man stating his views too frequently. He is apt to be regarded as a propagandist, or as having some selfish interest to serve. At the risk, however, of being misunderstood, I feel compelled to summarise again the situation because I am convinced that the problem of our railways must be considered from the national standpoint of the country's interest. I am innocent enough to believe that one can be an officer of a great empire transportation company and still be a reasonably good Canadian—honest with himself and with his fellow Canadians. The truth is that the public interest, and the interest of the company I represent, are identical. It is not the first time that the letters "C.P." stood both for the "Canadian People" and the "Canadian Pacific," and I have no apology to make for offering my views upon the great transportation question that is before the country. The Canadian Pacific has made suggestions on several occasions before, which, if adopted, would have saved you many millions in money without in any way depriving the country of necessary transportation services.

The Canadian Pacific raised its voice in protest against the contract which provided for the construction of the Grand Trunk Pacific-Transcontinental System. It advised a running rights agreement with the Canadian Pacific between North Bay and the head of Lake Superior, and the acquisition by the Grand Trunk of the Canadian Northern Lines in the west.

Before the building of the Canadian Northern Railway between Sudbury and Port Arthur was projected, it offered, and the Canadian Northern accepted, satisfactory arrangements for the handling of Canadian Northern traffic between the East and the West. If that arrangement had been maintained, it would probably have saved the Canadian Northern from disaster.

In 1921, when the acquisition of the Grand Trunk was in the process of consummation, the then Chairman of the Canadian Pacific, Lord Shaughnessy, suggested to the government a form of amalgamation which would have preserved the advantages of private management.

My friends of the Winnipeg "Tribune" would probably accuse Lord Shaughnessy of being governed by fear, and no doubt he was genuinely and properly apprehensive for the future of the railways, and, because of their obligations, for the country's prosperity. He could find only one solution, namely, unification.

In 1925 the Senate conducted its enquiry and issued its brief but comprehensive report. Once again, by another method, the conclusion was for merger for the purposes of administration. It can, I think, be conceded that the fears they then entertained for the future of our railways were amply justified by the experience of the companies during the intervening years. The losses of the National System between 1925 and 1932 were approximately $439,126,000, and the net earnings of the Canadian Pacific decreased from $40,154,000 in 1925 to $20,089,000 in 1932.

After nine months of enquiry and study in 1931 and 1932 the Duff Commission marshalled the facts relative to the railway situation, and reached conclusions designed to secure co-operation or have it forced upon the railways, while preserving competition and separate administration of the properties. It is a finding difficult to understand as a practical solution. There is now, as you know, no competition in rates between the companies, since they are regulated by the Board of Railway Commissioners for Canada. The only competition is, therefore, in services, and it is possible that the Royal Commission felt that, with co-operation both voluntary and compulsory, competition in services would be so regulated and restricted that it would be virtually in the same category as that of rates. If this is a correct inference as to their hopes, why maintain the great expense of two sets of services to accomplish the results of one, and if virtual unification were intended, why not have it in a form that will give the administrators of the properties the best opportunity for real saving and the elimination of waste?

I have stated on more than one occasion the objections of the Canadian Pacific to the Commission's plan. We are prepared to agree to all proper measures of co-operation, but we cannot consent to our property being administered for us, but at our expense, by others. We cannot agree to turning over to an arbitrary body the conduct of our enterprise and the shaping of our policies, when, in the nature of things, the consequences must be borne by the shareholders. The views of those charged with the responsibility of protecting the enormous investment in the Canadian Pacific would not, in these circumstances, prevail. This is not regulation; it is the assumption of complete powers of administration without financial responsibility.

Now let me turn to the objections so strongly urged in the some quarters against unification in any form or by any means. Those who hold extreme views state frankly that such a plan is aimed at the Canadian National Railways and is an attempt to injure or destroy the property of the people of this country. On the contrary, it aims to preserve the integrity of both properties and the investments of their owners. May I suggest for your consideration the following facts:

The year 1928, from a railway earning standpoint, was the best year in the history of Canada. In that year the Canadian Pacific earned a substantial surplus over all charges and dividends, while the Canadian National fell short by $29,800,000 of earning its interest charges due to the public and to the government. The combined gross earnings of the two companies had decreased in 1932 from the level of 1928 by approximately $267,000,000 or about 48 per cent. Their combined operating expenses were reduced by approximately $183,700,000 or 42 per cent. Their net earnings decreased by $83,300,000 or 73 per cent.

That both companies stove to offset the enormous decrease in gross earnings by effecting economies is indicated by the fact that the decrease in operating expenses of the National Railways of 1932, as compared with 1928 was approximately $100,000,000, or a percentage decrease of 39 per cent. Decrease in the operating expenses of the Canadian Pacific in the same period was $83,500,000 or 46 per cent.

Neither company has escaped the devastating consequences of trade stagnation, and both are interested in the financial integrity of the investment in their properties. The question of aggrandisement or dominance does not arise. We must make common cause against the effects of the unwise policies of the past, intensified by this protracted period of depression, and we can make it more effectively in union than in competition.

The strongest and the most frequent argument against the principle of unification, even though property rights are not disturbed and the unification is for the purpose of administration and operation, is that it will create a railway monopoly, and that that is not in the interests of Canada. Indeed, some of the proponents of continuation of the present situation begin and end all arguments with the simple phrase: "it is against the interests of this country." I often wonder if those who so complacently use this argument ever seriously consider what the interests of Canada are. Do they consist, in their estimation, in the maintenance of two systems operating in competition and under the hazard of possible bankruptcy, or in a unified system which will provide adequate facilities to all parts of Canada, with economy in operation and administration not possible of attainment by any other method?

To the feeling against monopoly no Canadian can refuse respect. We have an instinctive distrust of dictatorships. We are not inclined to yield the unfettered control of any vital service to an individual or to a special group. The memory of abuses of monopoly still lingers. Admitting all that, are we to disregard the passage of time, the course of legislation during the last thirty years, and the adjustment of outlook forced on public utility executives by the progress of events?

The aversion of Canadians to railway monopoly has been due to certain experiences in the past. Portions of the Maritime Provinces for years were dependent on the service of the Intercolonial Railway only. It was satisfactory to the adherents of the political party in power at the moment, and profoundly displeasing to adherents of the party which happened to be out of office. Sections of Ontario and Quebec were in like manner dependent on the Grand Trunk Railway. Built by English capital, its long range administration from London, unacquainted with local conditions and necessity, failed to give satisfaction to the Canadian public. The Western Provinces for years had no railway service save that furnished by the Canadian Pacific. A flood of immigration temporarily overwhelmed it, and in stress and excitement of the times the company no doubt adopted an attitude not always defensible. I am free to admit the mistakes of that period, but to assert at the same time that they are impossible of recurrence in the light of more modern views of the obligations of public utilities. But in any case, a safeguard has been provided by law in the institution of the Board of Railway Commissioners. Since that tribunal was established in 1904, the tendencies of monopoly have been effectually curbed and the public interest fully protected. The Board has control of rates of carriage and all essential forms of service, and its jurisdiction can be invoked by any citizen without expense or formality. It is a court of appeal open to any Canadian who feels that he has a grievance against railways. If its powers are not broad enough, they can be enlarged. If the method of selection of its membership offers opportunities for mistakes, that method can be altered. The power which created it can modify its structure and adapt it to any change in the national situation.

The Royal Commission, in its report, drew special attention to the excess railway mileage operated in this country. There has been duplication of lines in many districts, and triplication in some. It is evident that some of this mileage should and must be abandoned. Under the reign of competition, two services have been furnished where one would suffice. Luxurious standards have been set up which, to a limited extent, are entirely necessary and proper, but, if duplicated, become wasteful. Some of these services must be consolidated and standards observed which will meet the requirements of the country and no more.

No scheme of co-operation between competing companies, however far it may be pursued, will effect these essential economies without risk to the integrity of one property or the other, and corresponding damage to Canadian credit.

The necessary economies can be reached through some form of unified operation and control. It can be done without drastic impairment of the service necessary to our industries and to our economic stability. The management would have to be armed with authority to accomplish them with the least possible disturbance, and without calling on any section of the community to carry an unfair burden of sacrifice. I believe it is possible to do all this, and yet to surround the operation with safeguards sufficient to relieve the anxiety of those most obsessed with the dread of monopoly.

The next most important objection is that urged on behalf of Labour. The railway industry provides employment for many thousands of men and women. What railway labour wants is regularity of employment, and the opportunity to earn a reasonable monthly wage, and it can never be sure of these if the industry itself rests on insecure foundations. If the country is unable to carry its railway burden, nothing can protect railway labour from the effects of disorganization and unsettlement. The division between two systems of traffic sufficient for one only has led already to short time and to unemployment throughout the length and breadth of Canada. How much better it would be to have the industry organized on rational lines so that a permanent staff could normally rely on a fixed measure of work.

Railway labour has been disturbed naturally by proposed changes in administration. The necessary adjustments cannot be made without some disturbance of staff. But, wisely handled, these need cause no widespread discomfort or dislocation. The normal turnover of labour will absorb the majority of those displaced as the adjustments are made. The temporary inconvenience involved will not be greater than that resulting from our present situation, and the change will lead to a permanent cure for the worst evils. There is not the slightest reason to fear that a consolidated system, operated by men who have dealt fairly with employees in the past and who know the priceless advantages of esprit de corps, would show lack of feeling in working out the problem of reorganization. I believe that the advent of such a system would immeasurably improve the position of railway labour in Canada.

Still another argument is that the deliberate, considered method of reducing, with the idea of ultimate elimination of our railway losses, is the argument of panic or of fear—is unworthy of Canadians having the slightest pretence of courage or confidence in their country. Any such settlement, in the view of its proponents, should be rejected, because some day the sun will shine again, Canada will be prosperous and our fears of today will become the jokes of tomorrow. This argument almost invites me to worry you with some philosophical observations on the difference between courage and common sense, and whether the courage which is born of unreason and of heedlessness is, in fact, courage, and if it is an admirable thing. I have been informed, in heavy type, that the success of the Canadian Pacific enterprise was due to the courage and confidence of its early administrators, and there is no doubt that they had courage and that their courage was justified. I cannot, however, overlook the fact that one of them—and one who played a great part in the difficult and arduous days of that company's early existence—was the man who, twelve years ago, warned the people of this country, through their government, that our railways would become a great drag upon the people of Canada unless a sane and sound method for their operation was provided. That his judgment was right needs no proof in the light of our experience, and yet I would hesitate to suggest that he was more cowardly than others because he was wise. The answer to our problem is not to be found in that kind of argument. I have never heretofore been accused of being a pessimist about Canada, and if I have any feelings of pessimism even yet I am no conscious of them. I have too great a faith in the country and its people to feel that ultimately it and they will not be restored to conditions of reasonable prosperity, but I do not think that prosperity is to be recovered through the process of spending more than we earn, of borrowing heavily to pay unearned interest, and of pyramiding our debts and mortgaging our future. What a tremendous deterrent that will be to the resumption of prosperous conditions. We should be able with all our experience, varied as it has been, satisfactory in some cases and unsatisfactory in others, to evolve and regulate an efficient transportation system for Canada, involving a minimum of waste but the maintenance of essential services to the public, and I am going to suggest to you that we should seriously consider the question of unification from the sole standpoint of national economic interest, and that we should live within our means, transportationally speaking. We should not continue to maintain what we cannot afford to maintain, safeguarded as we can be against any risk of inadequate facilities for the needs of the country.

It will be conceded that taxes and freight rates are of great personal consequence to the majority of the people of this country. The former have, unfortunately, increased until the burden has become heavy—the latter have not decreased with lower commodity prices, and, therefore, constitute a relatively heavier load on shippers. The cost of distribution is greater in proportion to commodity value and prices and absorbs a larger share of them. You will probably be surprised to learn, in these circumstances, that some witnesses urged before the Royal Commission that the remedy for the difficulties in which the railways find themselves is a wholesale increase in freight rates. I entirely dissent from this view. Freight rates are subject to revision upwards and downwards with changing circumstances, and in accordance with principles applied by the Railway Commission in determining what is fair between the railways on the one hand and the public on the other, and while the railways are suffering under present conditions, so are the producers, the wholesalers and the retailers. This is distinctly not the time for consideration of rate increases.

It would be impossible for me to attempt to deal with such an intricate subject as freight schedules at this luncheon, but I can say that while our rates are generally lower than in the United States, and substantially lower on grain, the interests of the shippers and exporters of Western Canada,competing in the world's markets, necessitate recognition of the fact that the handicap of distance shall be overcome so far as that is possible while permitting the transportation companies to live.

In consequence of the address I made in Toronto on this subject, certain queries have been made of me and suggestions offered that the plans I suggested should be further elaborated in order that the people of the country should have more definitely before them the proposal advanced for the proper solution of the problem in the interests of the country.

I am unqualifiedly in favour of unification of these properties for the purpose of administration. Most careful and comprehensive enquiries by the officers of the Company have persuaded me that under unification permanent economies of seventy-five million dollars a year will be secured after a reasonable period has elapsed to permit adjustments to be made in an orderly way. These economies are not of the temporary or distress variety which the depression has forced upon us, and they are not designed to eliminate any essential service to the public or remove trackage where its retention is necessary in the national interest, and where there is not already in existence another facility capable of adequately providing for traffic needs.

The Canadian National Railways are owned by the people of Canada and their future will be determined by Parliament. The Canadian Pacific is owned by shareholders, the majority of whom are resident in Canada and Great Britain, and the future of their property and the method of its administration is a matter for determination by these shareholders. The terms of unification as between the two systems must of necessity be the subject of negotiation and agreement between the representatives of the owners of the two properties. The attitude or the policy of the owners of the National Railways has not in the nature of things been as yet defined, and until it is defined it would seem presumptuous and improper that I should attempt to outline what terms should receive the Government's consideration or that would be acceptable to the Canadian Pacific's shareholders. When the principle to be followed is once determined, details of the arrangement should be made the subject of fair and frank discussion, so that all private and public interests will be adequately protected, and it goes without saying that in any such negotiations the interests of the owners of the National System must receive every proper consideration.

It is only right that I should point out to you two things which will have a great effect on the wisdom or otherwise of this policy. The first is that unification, of necessity, will lessen the extent of all capital expenditures for many years, because the unified company will have for joint use all the facilities, trackage, motive power and rolling stock of both companies.

The second important question is that which arises from the fact that because of the heavy accumulation of debt and of the enormous losses incurred in prior years, we must not only restrict our expenditures in the future, but we must improve our revenue position to the extent of being able to replace gradually the moneys so lost. We must reduce the drain on the public exchequer, and with wise administration and normal conditions, it is not too much to expect that in time not only will the full interest due the public be available to the owners of the National Railways but a substantial amount in addition which will go to provide interest on the money advanced by the Government on which no interest has at yet been paid.

We in Canada have been prone to greatly exaggerate the value and benefits of competition and to disregard the cost and waste incident to it. We have also established a kind of competition which is, so far as I know, peculiar to this country, namely, that between the State itself and a private corporation. That species of competition contains elements of injustice to private investors which is inescapable, and the wonder is that it could have continued for so long a period without more disastrous consequences than we have experienced.

This protracted depression, however, has served to emphasize the fundamental unfairness inhere in such a system, as well as the waste which competition, especially this form of competition, involves.

We have heretofore believed in competition as a natural regulator of activities of competing companies and as a protection to the public. We must I think revise our ideas, rely upon control by public and independent tribunals, and definitely and permanently remove the waste which such competitive operations involve.

In speaking as I have to you—as frankly as I know how—I have endeavoured to confine myself to facts which appear indisputable. No one can be indifferent to the serious burden of our present situation or the obscurity of our railway future. It is receiving the earnest consideration of Parliament. The principle of co-operation without consolidation has been recently approved by a committee of the Senate, no doubt in the view that this should be fully tried out before adopting more extreme measures, but I remain of the opinion that it is in the interest of Canada that more drastic measures should be taken at as early a date as possible.

I imagine it will be conceded that there has been a great change in public sentiment in the last few months, especially in our business communities. This change is not due to disloyalty to a great enterprise which has become the property of this country, but to a realization of the stern facts of our position and a desire that our railways, without change in ownership, should combine their operations for the benefit of the country, their owners, and Canadian credit.

When Parliament finally speaks, the method to be followed in the immediate future will be determined. I have my own settled convictions as to the method whereby the greatest savings can be effected, and, as I have said, the Canadian Pacific will be willing to voluntarily co-operate in every possible and practical way. That almost-exclusively Canadian organization has yet to be accused of lack of loyalty to this Dominion or a lack of desire to advance the latter's interests. In good times or bad, our own interests and those of this country are inextricably associated, and our submission to the people of Canada and the governing bodies of the country must have this cardinal fact always as its foundation.

I have said that we cannot afford a continuation of the present dual systems, and especially we cannot afford it because it is unnecessary, and the remedy may be applied without damage to any essential interest in Canada. If this is true, and I believe it to be undeniably true, are we not warranted in determining the problem free of prejudice and the bias that any of us have had in other days, with the sole purpose of maintaining national solvency and accelerating national prosperity?

We are compelled to consider disargreeable facts, but we have faced them in the past and have overcome obstacles to our progress in the building up of this country. We are not a boastful people but we can, I think, with some reason claim that courage and self-reliance are among our virtues; indeed, they may be said to rank high among our national assets. I believe that the fullest consideration of our railway problem will be given, that we will not fail to appreciate it to be one of grave moment and concern, and that it will be approached in a spirit which will demonstrate our ability to solve it and reach a solution which will lift from the backs of our people a heavy burden, improve the credit of our country both at home and abroad and expedite our return to normally prosperous conditions. I feel I can express these hopes to you in the realization that our loyalty to Canada and its institutions is indisputable, that our sanity and cool judgment have not departed from us in the three years of strain with have been under, that our belief in the Dominion and its people is still undisturbed, and that we can steer a safe course out of the almost uncharted sea of this depression.