by D.A. MacGibbon, M.A., PH.D.
Professor of Political Economy, University of Alberta

The application in Canada on a large scale of the principle of government ownership of railways is the result of a condition rather than the outcome of a theory. While there was a certain current of public opinion in favor of nationalizing the means of transportation, of itself this current had not sufficient power to commit the Canadian Government to such a course. In the actual event it was to avoid a threatened collapse in national credit that the acquisition of 20,000 miles of railways was forced upon the people of the Dominion. That fact, plus the further fact that the Dominion of Canada stood as guarantor for a large amount of bonds issued by the roads in financial difficulties, were the controlling consideration in taking over the lines.

GOVERNMENT OWNERSHIP

The train of occurrences leading up to this stroke of policy is well known. The outstanding feature was the lavish encouragement of railway construction by government grants, loans, and bond guarantees. As a natural result there was overbuilding. By 1914 it was evident to all that the future had been over-discounted and that an exceedingly serious railway crisis was at hand unless the body that was largely responsible for this condition stepped in and assumed the burden. With no great enthusiasm for the task this is what the Canadian Government has done.

The principal parts of the system so acquired are the Grand Trunk Railway, 3,948 miles, the Canadian Northern Railway, 9,259 miles, the Grand Trunk Pacific, 2,840 miles, the National Transcontinental, 2,007 miles, and the Intercolonial Railway, 1,593 miles. In addition there are the Prince Edward Island system, 279 miles, and the unfinished Hudson's Bay project of 334 miles.¹ The present Canadian railway problem is how to bring these lines into a coherent, unified self-sustaining system. The circumstances under which they were built, the financial problems which threw them upon the Government, and their physical situation and relationship to each other, make this indeed a very great task. Further, the form of management devised, though possibly the best that could be achieved, adds an additional complicating factor to the problem.

The Royal Commission, appointed by the Dominion Government in 1916, recommended that a new public authority be created by incorporation to take over these railways and operate them for the people of Canada. The main reasons for this recommendation were to minimize political interference and to avoid complications arising out of considerable American mileage. The failure of an appeal of the Grand Trunk shareholders to the Privy Council made it possible to complete recently the formal organization of the new system which since 1918 has been known under the general term "Canadian National Railways".

The distinctive feature of this corporation is a board of directors which owes its appointment to the Dominion Government rather than to a body of shareholders. In the selection of members territorial considerations and the claims of labour to representation have both been given recognition. At the same time there is a political tinge to the appointments. This does not apply to the chairman of the board, Sir Henry Thornton, who comes to the position with a fine record gained in the American and British railway service. He has been promised a free hand in the development and execution of his policy. It has been stated that "the Government has elected to administer the National Railways in substantially the same way as though they were privately owned." The aim set forth by the new chairman is "that the Canadian National Railways should be put upon a self-supporting basis and the burden on the purse of the taxpayers stopped as quickly as possible." ²

DIFFICULTIES

In view of these declarations and promises we may premise that there are two questions to be considered: (1) If the entrepreneur point of view is successfully maintained what promise of success does the present situation hold forth? (2) What forces and obstacles stand in the way of "administering the National Railways in substantially the same way as though they are privately owned?"

Reserving the second question for later discussion, let us consider the situation of the Canadian National Railways as though it were not a government-owned system. In the first place, the financial history of at least two-thirds of the constituent lines show that when constructed they held forth such little promise of financial success that they were unable to attract private capital into the investment except and in so far as it was bolstered up by Government guarantees. Further, as operating ventures, they were failures, in some instances ghastly failures. We need not suddenly expect a change. In 1921, on 17,338 miles, the gross earnings were $126,691,455, operating expenses $142,784,357, operating deficit $16,092,901. It is announced that operating revenue will cover operating expenses in 1922. The annual fixed charges of the Canadian Northern and Grand Trunk Pacific was $40,700,000. The total deficit ³ of all the national lines was $56,600,000.⁴ The total investment in the national lines is estimated by Sir Joseph Flavelle at $1,652,000,000. A true accounting including interest on the loans and advances made by the Government, it is estimated would give annual fixed charges in round figures of $60,000,000. Sir Henry Thornton estimates that the National Railways must earn $40,000,000 net annually to stop further advances from the Government. This calculation would leave out of consideration interest on the cost of the National Transcontinental and the Intercolonial, these items being merged in the general public debt of Canada. Even with this relief, the national lines must earn $40,000,000 annually to meet guaranteed interest charges.

CAN THE GOVERNMENT ESTABLISH A SELF-SUPPORTING BASIS AND HOW?

It is a principle of railway reorganizations that fixed charges should be scaled down until expected income will be ample to meet fixed charges. Viewed as a reorganization we may consider that Canada has written off a sum equivalent to the cost of the Intercolonial, and the National Transcontinental. As the Dominion is guarantor of the bonds it is impossible to relieve the country of any further burden of fixed charges. There remains, therefore, the very grave doubt as to whether the national lines can show an improvement sufficiently great to take care of this interest on guaranteed securities. The ability to do so rests upon the possibility of increasing traffic and of reducing costs by completely welding together the lines into a single physical entity.

Increased traffic depends upon (1) increased production, (2) ability to divert traffic from the Canadian Pacific Railway. While a certain increase in production is to be expected as the country shakes off the post-war depression, fundamentally no great increase can be hoped for until a tide of immigration sets in towards Canada. "How soon the Canadian National Railways will become self-supporting turns largely on what is done in the matter of immigration."⁵ This conclusion certainly does not hold out any promise in the immediate future, whatever it may mean ten years hence.

The possibility of the Canadian National lines diverting any large volume of traffic from the Canadian Pacific Railway is remote. There has already been some improvement in the relative position of the two systems and as the Government enterprise develops its routes and improves its facilities, it will probably make a better showing. However, apart from keener competition, the total effect will not be very large unless the Canadian Pacific drops from its present standard of efficiency.

More effective results will probably be obtained in savings due to the reorganization of traffic and service. A vast reorganization will have to be carried through. This will involve the determination of the best lines and routes for through traffic, the physical adjustment and coordination of other lines as feeders, the reduction to an inferior status of duplications, and of lines that offer no promise of traffic. This should lead to improvements in its operating schedules, reductions in staff and better train hauls.

This process seems to be in progress at the present time although it has not as yet gone very far. The mileage operated out of Winnipeg affords an example. Here the valuable Canadian Northern branch line system is being coordinated with the fine main line of the Grand Trunk Pacific. When reorganization is completed there should be considerable reduction in operating costs.

ELIMINATION OF DUPLICATIONS

The more difficult problem concerns duplications. Thus, at many points lines are parallel or so related to each other that the development of one route must be at the expense of the other. Obviously, certain portions of the present system must be discarded and other portions reduced to the status of being a branch line or at least local line serving local traffic. For instance, between Edmonton and Yellowhead Pass, there is a duplication of lines where one is all that is required. Beyond the Pass the old Canadian Northern goes to Vancouver and the Grand Trunk Pacific to Prince Rupert. "The Port of Prince Rupert is suited for a large ocean traffic which is non-existent."⁶ Both lines cannot be kept up to a high standard if the existing volume of traffic be considered.

The Hudson's Bay route is incomplete. The economic possibilities of this ill-starred project have never been competently investigated and reported upon. At present expenditure upon it is a speculative gamble of the wildest kind. If the chairman of the national lines holds to an economic administration of the system he can hardly fail to jettison this project or relegate it to the distant future.

Again, between Port Arthur and Eastern Canada, there are both the National Transcontinental and the Canadian Northern lines, although there is not sufficient traffic to utilize adequately and economically more than one route. Between Cochrane and the city of Quebec the best that can be hoped for is that the National Transcontinental should be used in the most capable manner to encourage settlement and to promote development. This means, however, that at present the idea of making this a great through route must be abandoned. As a colonization branch of the system it always will be available to relieve the pressure when a peak load develops on the alternative route.

CERTAIN PORTIONS MUST BE SCRAPPED

In brief, the new chairman is provided with 22,000 miles of line out of which to build up a working system. If he handles it purely as a business proposition, he will discard a portion absolutely and relegate about 2,500 miles of what is now main line to colonization standards of equipment, maintenance, and service. With a system lopped of its worst excrescences, he will then be in a position to concentrate on the balance and there is no doubt that careful handling will show economies. The national system is well supplied with good through routes. It has an admirable system of feeders both on the prairie and in Ontario. It will certainly be in a position to offer effective competition to the Canadian Pacific Railway.

The burden of charges is too great, however, to expect that the drain on the purse of the taxpayer will be stopped quickly. To expect that to be accomplished would be to ask more of the system than it could hope to achieve if its present status were that of a private company. The fact that Canada was guarantor of the bonds of the defunct companies made it impossible to scale down charges with the same rigor that would necessarily have been employed in a sound ordinary railway reorganization. This is a fact to be kept in mind in judging the performance of the new system as the fruits of its reorganization appear.

There remains to consider the forces that stand in the way of administering the National Railways as though they were privately owned. The dangers are political interference, the pull of sectional interest, and the public pressure for low rates. Sectional ambitions and public clamor for low rates have a way of getting into the political field so that ultimately it all comes down to a question of the degree that politics will be allowed to interfere with the working of the road.

The board that has been appointed to support the chairman, as far as can be judged, is not a strong skilled board composed of men of recognized outstanding ability with some knowledge of the field of transportation. This may have its advantages in that it will tend to allow the chairman a freer hand. Per contra it must be observed that it throws the burden upon his shoulders. Moreover, it is a bad omen that the leader of the opposition in the federal house already on the political hustings has animadverted (critisized) upon the chairman. It is evident that the board will do its work in the full glare of party politics. However, there is such a general wish among the taxpayers of the country to see the system managed well, that it is not likely that attempted political filibustering will be successful unless manifest inefficiency develops. Only time will show if the new board will permit political manipulations by the party in power. History is not encouraging.

A SERIOUS OBSTACLE

A more serious obstacle to a business administration of the system lies in the force of sectional interests. There are several problems of major importance where decisions unwelcome to sectional ambitions will arouse a storm of protest with strong political reactions. There is quite a body of public opinion in the western provinces favorable to the completion of the Hudson's Bay route, although as already pointed out this venture is in the nature of a gamble. Nevertheless, if this project is laid aside it will certainly be construed on the prairies as evidence that the board appointed by the present Government is callous and unsympathetic to western interests and aspirations

The city of Quebec desires that the old National Transcontinental line be developed and become the main route for transcontinental traffic. This would expand the commerce of this port which has been eclipsed by the port of Montreal. Such a policy would probably not yield economic returns to the railway for many years, and in so far as it was successful it would be injuring a more efficient route.

The Intercolonial Railway has already suffered from political manipulation. Already the attempt to integrate it into the national system and it under strict business management has provoked sectional bi-partisan protests. If the policy is pursued of putting it on a parity with the remainder of the system there will undoubtedly be intense dissatisfaction in the Maritime Provinces.

In addition to problems of this nature with their political reflexes which beset the board, it will face a continual agitation for new stations, new lines, etc., backed up by political pressure. These demands are pressed far more keenly and arouse far more antagonism in the case of a government board than of a private corporation.

The demand for lower rates always faces a railway executive and in many instances it is difficult for the administration of a road to show that reductions are not economically justified. It is doubtful, however, if this demand will be as dangerous an element in the situation as others already mentioned since the influence of the Canadian Pacific Railway will count and besides the Board of Railway Commissioners is the arbiter of rates. The latter should perform an increasingly valuable function in standing between the public and the railway.

In general, one may conclude that if the Canadian National Railways are administered purely as a business proposition there is a long and arduous struggle in prospect before they succeed in meeting the very heavy annual charges arising out of bond guarantees. If, in addition, political interference and sectional interests are allowed to hamper the operations of the line, the task is well-nigh hopeless.

1  Additional mileage constructed since make these figures slightly inaccurate in certain case.

2  Addressing the Montreal Board of Trade, 5 Dec 1922.

3  Statement by Hon. W.C. Kennedy, Minister of Railways in Parliament, 11 Apr 1922.

4  The Grand Trunk was technically still a private line. In 1922, there was a net operating revenue of $5,000,000, and a net deficit of $4,500,000.

5  Sir Henry Thornton.

6  Minority Report, Royal Commission to Enquire into Railways and Transportation, 1917. P. xcvi.