The weakness in railway financial organization is not so much in the relation between capitalization and investment as in the composition of that capitalization and in inadequate reserves for depreciation and obsolescence. The figures in the preceding para graph indicate that over 62% of the capitalization is in funded debt and that the stockholders' stake in the enterprise is but 38%. The fixed charges for interest on funded debt are such a burden on net income that substantial losses in gross earnings, as in the period of the depression, result in financial distress. Con servatism demands that the capital raised by the sale of bonds should be no greater than that raised by the sale of stock.
Since 2907, under the regulations of the Interstate Commerce Commission the railways have been required to accrue deprecia tion reserves on locomotives and rolling stock, but as to such reserves on physical structures there has been no such require ment. Very few railways have made such depreciation charges on physical structures and, moreover, the rates charged on locomo tives and rolling stock have been inadequate. The Commission had not, until very recently, specified the rates to be charged. As a consequence the depreciation reserve (in 1935) on roadway and structures was less than 1% of that part of the investment, and the depreciation reserve on locomotives and rolling stock was 45% of the investment in equipment. The total reserve was but io% of the total investment in road and equipment.
Similar in principle is the failure of railways, except in isolated instances, to provide sinking funds for the retirement of bonds. As such bonds matured they were refunded, with no reduction in funded debt. The Interstate Commerce Commission has recently advocated that the railways provide for sinking funds on new or refunding issues with a view to the gradual liquidation of debt. The failure to make such provision heretofore has been justified by the theory that investment in railroad physical structures and equipment, if properly maintained, is more or less permanent. This view had force in the earlier days, when railroads had a vir tual monopoly of inland transportation, but is not sound today when alternative methods of transportation are available and there is a substantial surplus in transportation facilities.
gross earnings. The low spot during the depression was reached in 1933. In 1935 better business conditions brought an upturn which continued in 1936.
The apparent inconsistency in an excess of dividends over in come in 1933 and 1935 is explained by the fact that these figures in Table IV. are the aggregates of all railways, some of which earned much more than the dividends paid and some of which failed to earn enough to pay all of their deductions from income.
Volume of Traffic.—The tonnage and passengers carried and the ton-miles and passenger-miles produced by railways during 1926, 1933 and 1935 are given in Table V.
The decline in the volume of railway freight traffic since 1929 was due in by far the greater part to the depression but the com petition of other agencies of transportation was a contributing factor. The motor truck began to make inroads on rail tonnage shortly after the service effectiveness of the truck had been dem onstrated during the war-time congestion in railway service, and during the depression the trucks' share of the total freight traffic increased while the railway share diminished. The continuing expansion in the national system of improved waterways resulted in further diversions from the rails and a substantial part of rail traffic in carloads of oil and gasolene was lost to the extended system of pipe lines. High-tension power lines displaced coal or oil formerly carried by rail to power plants. In addition to these losses the railways suffered from the growing tendency of ship pers to provide their own transportation by operating their own trucks on the improved highways and their own vessels on the improved waterways. The effect of these forms of competition was to cause a shrinkage in the railway share of the total traffic, and at the same time influences were at work which caused a slowing up in the total transportation demand by all agencies. These influences were (a) no new territories to develop; (b) slower growth in population; (c) shrinkage in exports and im ports ; (d) relocation of factories and warehouses nearer to the sources of raw materials and markets ; and (e) technological ad vances which reduce the amount of raw materials needed for a unit of finished product.