C. N. R.

After the War---The Future of the Doctor

C. N. R. written by John Lorne McDougall

Luckenwalde

From The Canadian Forum, August 1921, p. 328

"If we could first know where wo are and whither we are going, we could better judge what to do and how to do it."

Abraham Lincoln.

When Sir Henry Drayton collaborated with Mr. Acworth to write the majority report of the Railway Inquiry Commission he stated that the Canadian Northern, Grand Trunk, and Grank Trunk Pacific Railway Companies had broken down, and added that he saw no way to organize new private companies in their place. Accordingly he recommended the formation of a new company to be controlled by the Government, which should own and operate these lines along with the Intercolonial and the National Transcontinental as a single system "on a commercial basis under politically undisturbed management, on account of, and for the benefit of, the people of Canada"^[1] . . . . "We have endeavoured," he wrote, "to estimate the annual liability of the government to meet unearned interest during the first few years of the scheme and we put it at about $12,500,000 per annum."^[2] When Mr. Reid, Minister of Railways and Canals, outlined in Parliament the results of the operations of the Canadian National System for the calendar year 1920 he reported a total deficit of $70,331,734.88.^[3] When his colleague, the Minister of Finance, the same Sir Henry Drayton who wrote the report, tabled the estimates for the financial year ending March 31, 1922, he reported that he required for railways (not including capital) $172,678,633.39.^[4] "And so the whirligig of time brings about his revenges."

It must be clearly understood that this situation has not fallen upon us with catastrophic speed. It is the direct outgrowth of our failure to attempt to see where we were and whither we were going in the first years of the present century when the "boomer" was king. It has followed, as night follows day, the unreasoning optimism and crass ignorance of the public and of public men. Then the people of Canada refused to consider the matter sanely and sensibly; now they are paying the price.

Any discussion of this situation pivots naturally about the report of the Commission. Accordingly an attempt will be made here to outline two things: First, the position of the different companies at the end of 1916; second, the recommendations contained both in the majority and minority reports. But let us ever bear in mind the two fundamental conditions underlying the whole situation. The first is that we have overbuilt our railways. If we had twenty million people we should probably have no problem. [p. 329] The growth in mileage, particularly between 1911 and 1914, has far outstripped the growth in population. In 1901 Canada had a population of 5,371,000, or 296 persons per mile of line; in 1911, 7,206,000, or 284 per mile of line. At present she has probably only about 230 persons per mile of line; perhaps not so many. Till the balance is restored there is bound to be difficulty.

The second is the enormously strong position of the Canadian Pacific. At the beginning of the century it had passed safely through the trying development period. It was then firmly established and was ready and able to play its full part in the great expansion which the country was about to experience. Faced with two rapidly growing rivals it extended its lines rapidly in the ensuing years and consolidated a position which was already immensely strong. At no time has that strength been so clearly shown as in the past few years. Subject to the competition of a heavily subsidized rival it continues to take the cream of Canadian traffic. "The Canadian Pacific handled traffic representing revenue 71 per cent. in excess of the Canadian National with an additional cost of transportation of only 13 per cent."^[5] So great is its strength that the Canadian Pacific could continue to compete on this unequal basis for a period of years before its dividend would be threatened.

The Canadian Northern is the most promising part of the present Canadian National System. Its lines were exceptionally well located with a view to future growth. It was cheaply constructed yet there was no sacrifice of future operating economy, when traffic should increase in volume. The following quotation illustrates this. "It was ... in their interest" (that of Sir William Mackenzie and Sir Donald Mann) "as owners of all the common stock, that the road should be as well located and as economically constructed as possible. And they did their utmost to attain this end. . . . The cost of construction of the Canadian Northern from Port Arthur east to Montreal can be compared fairly to the cost of the National Transcontinental from Winnipeg to Quebec. The cost of the Canadian Northern was $52,602 per mile, including in this amount interest at 5% during the construction period, but excluding the Montreal passenger terminal. The cost of the National Transcontinental was $93,735 per mile, inlcuding interest at 3% down to December 31, 1914, but excluding the cost of the Quebec bridge."^[6] The net earnings of the Canadian Northern Railways were increasing rapidly prior to their acquisition by the Government.

But there were two pitfalls in this prospect. First, the Prairie Lines, though self-supporting, were not yet sufficiently developed to support the extensions to the Atlantic and Pacific, which were bound to be a heavy drain on the system for many years. Second, the common stock, though it represented a great service to the company in the supervision of construction, did not represent a dollar of cash paid into the Company's Treasury. The result was that the road, being constructed in advance of existing requirements and entirely out of the proceeds of bond sales, bore a burden of interest that was out of all proportion to earnings. Net earnings for the year ending June 30, 1919, were $11,500,000, equal to about 75 per cent. of fixed charges. But this showing was made at the expense of the property. The Company was in urgent need of new capital for additions and betterments to its lines and, especially, for new equipment. A reorganization of some kind was inevitable.

The Grand Trunk Pacific-National Transcontinental Scheme was that most hopeless of all hopeless things, a highly capitalized main line without adequate terminals and practically without feeders. It ran through a territory that was either virgin or very sparsely settled. The western terminus was to be Prince Rupert, a splendid port suited for a large ocean traffic, which shows no sign of appearing. The eastern terminus is located inland at Moncton, because there was so much jealousy between Halifax and St. John that neither one could bear to see the other get it. How happy could the railway have been with either were 'tother fair city away!

The Borden Government recognized the fact that the National Transcontinental, as constructed, was largely a political venture, without economic justification, and informally relieved the Grand Trunk Pacific of its obligation to operate it. Even then the position of the Grand Trunk Pacific as a separate enterprise was hopeless. For the year 1916 it could barely pay operating expenses. Fixed charges were met out of a loan of $8,000,000 granted by the Government. There was literally no prospect of any improvement in the near future.

It is this lamentable failure of its subsidiary that has brought the Grand Trunk Company into its present position. It had guaranteed $97,000,000 of Grand Trunk Pacific bonds and had made cash advances of about $26,000,000. The cash advances drained off funds that should have been turned back into its own plant while the guarantees assumed such proportions, that they threatened the Company's own credit. In 1910 Grand Trunk officials estimated that $21,000,000, which should have been spent in maintaining their own road and equipment, had not been so spent. The Commission estimated that about $30,000,000 of new capital must be spent on the Grand Trunk itself, before the line could handle the available traffic efficiently. Yet in the ten-year [p. 330] period during which these financial requirements were piling up, the Grand Trunk Company paid out $36,000,000 in dividends. It is no injustice to say that the major part of these dividends was paid out of capital.

The position of the Grand Trunk Company in 1916 was then as follows; its own line and equipment were badly run down and needed to be enlarged and improved; it was bound to meet the interest on the bonds which it had guaranteed; and owing to the general rise in prices and wages its net earnings were being rapidly wiped out.

Under these circumstances the Railway Inquiry Commission was appointed in July, 1916, to investigate the whole Canadian transportation problem, and its report was presented in the spring of the following year. Sir Henry Drayton acted as chairman. The other members were Mr. W. M. Acworth, the English railway expert, and Mr. A. H. Smith, the President of the New York Central Lines. As the commissioners could not agree, the two sections of the report will be considered separately.

The key-note of the majority or Drayton-Acworth Report is contained in the following extract. "Our personal belief is strong that, in normal circumstances, railway enterprise is a matter best left in private hands, subject to proper regulation by the Government."^[7] . . . "But in the case of the Canadian Northern, the Grand Trunk, and the Grand Trunk Pacific the circumstances are not normal. These companies have broken down. We see no way to organize new companies to take their place. Their only possible successor is, in our view, a public authority. We are confronted with a condition and not a theory."^[8] Accordingly they recommended the formation of a new company to operate the three properties, along with the Intercolonial and National Transcontinental Lines, as one system. They suggested the appointment of a Board of Arbitrators to determine two questions: First, what portion of the Canadian Northern common stock might fairly remain the property of the present holders; Second, what proportion of the earnings of the new company might fairly be regarded as attributable to the Canadian Northern Lines. The whole capital stock of the Grand Trunk Company was to be surrendered by agreement to the new company, in return for an annuity which should be "a moderate but substantial percentage"^[9] of $3,600,000 (the average annual dividend payment between 1906 and 1916), increasing by 40% or 50% in 7 or 8 years. They expected that the new Company would be able to finance itself, if not immediately, at least very soon after its formation.

The Minority Report of Mr. Smith recognized that the problem had arisen with the aid and encouragement of both the Canadian Government and people. The solution he found in the utilization of existing agencies — not in an untried policy which bore a strong resemblance to the very government operation which his colleagues themselves condemned. He recommended that the Canadian Northern be required to confine its operations to the territory west of Winnipeg, and to take a lease of the Grand Trunk Pacific for a period of twenty-one years, at a rental equal to fixed charges. The Grand Trunk should be released from its obligations in respect to the Grand Trunk Pacific. It should be required to confine its operations to the east, and should lease the lines of the Canadian Northern east of North Bay and Parry Sound for the same period, at a rental equal to fixed charges. The Government could either operate the connecting link or arrange for its operation by one of the other companies. The Transcontinental would continue to be operated in conjunction with the Intercolonial. Under such a scheme the continuance of Government aid would be necessary till peace and the growth of the country made a permanent solution of the railway problem possible.

The Government of the day did not see fit to follow in toto either of the reports. Instead of leaving part of the stock of the Canadian Northern in the hands of its private owners it constituted a Board of Arbitrators to determine its value and then expropriated it at that price. The Grand Trunk Pacific was permitted to go on under the sedative of yearly Government loans, until it finally expired in March, 1919. From then until August 23, 1920, it was operated by the Minister of Railways and Canals as Receiver, and since then by the Canadian National Railway Board. Instead of taking the whole capital stock of the Grand Trunk Company in return for an annuity which should be "a moderate but substantial portion" of $3,600,000 per annum, and permitting the Directors of the Company to distribute this among the shareholders, the Government made itself responsible for annual interest payments amounting to $2,500,000, on the guaranteed stock of the Company, as well as for interest on the debentures (which are practically the bonds of the Company). The value of the first, second, and third preference stocks and of the common stock is at present under arbitration. Nor has the management realized the dreams of economy in which Sir Henry Drayton indulged. Omitting the Grand Trunk (which was not yet a part of it) the Canadian National System made a total deficit of $70,000,000 from January 1st to December 31st, 1920. These interesting developments will be reviewed in the pages of The Canadian Forum at an early date.

John L. McDougall.

1. ↑ Report of the Railway Inquiry Commission, page lxxxvii.

2. ↑ Ibid, page lxxxix.

3. ↑ House of Commons Debates, March 17, 1921.

4. ↑ House of Commons Debates, March 8, 1921.

5. ↑ Memorandum of Lord Shaughnessy to Premier Meighen, April 25, 1921.

6. ↑ Report of the Railway Inquiry Commission, page lxi.

7. ↑ Railway Inquiry Commission, page li.

8. ↑ Ibid, lii.

9. ↑ Report of the Railway Inquiry Commission, page lxxxviii.