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Full text of "Service at cost for street railways [microform]; a symposium, four papers by experienced public officials answering the question, "Is service-at-cost a panacea or nostrum?""

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Author: 



Title: 



Service at cost for street 
railways 

Place: 

New Yorl< 

Date: 

[1921] 



^i'g>2^09-/l 



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Service at cost for street railways, 




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SUPPLEMENT TO THE 

National 

Muaicipal 
Review 



Vol. X, No. 2 



February, 1921 



SERVICE AT COST 

FOR 

STREET RAILWAYS 

A SYMPOSIUM 



I 



Four Papers by Experienced Public Officials 

Answering the Question, "Is Service-at-Cost 

a Panacea or Nostrum?** 



PUBUSHED BY THE 



NATIONAL MUNICIPAL LEAGUE 

RAILROAD SQUARE, CONCORD, N. H. 

EDITORIAL OFFICE, 261 BROADWAY, 

NEW YORK, N. Y. 




Watered as second-cUu matter April 15, 1914, at the post-office at Concord, New Hampshire, under the Act of Aocust 14, 



ItU 



I s''a Inir m 



\ 












SERVICE-AT-COST-PANACEA OR NOSTRUM? 

CONTENTS 

^ Ill 

Railway Co, 

126 

134 
Service at Cost Versv. ^x^^pal 0™ship ..^.^.^^^^^^^^ 

Charles M. Fassett, Former Mayor oj bpomne, i^luj, 
American City Consultants. 



»«— 







BOSTON— THE PUBLIC TRUSTEE PLAN 

BY JAMES F. JACKSON 
Chairman, Board of Trustees, Boston Elevated Railtoay 



Chapter 159 of the acts of the legis- 
lature of Massachusetts of 1918, known 
as the Public Control Act, went into 
effect on the first day of July in that 
year. It arranged what is practically 
a lease of the Boston Elevated Railway 
for the term of ten years to the state 
of Massachusetts representing for that 
purpose Boston and certain suburban 
cities and towns which the railway 
serves. Five trustees to be appointed 
by the governor of the state and to 
hold office for the ten years of the lease 
were given absolute control over the 
management and operation of the rail- 
way. The rental was to be paid in 
fixed dividends upon outstanding stock 
at 5 per cent for the first two years, at 
5^ per cent for the next two years and 
at 6 per cent for the balance of the 
term. 

This act grew out of the vain strug- 
gle under private management to fur- 
nish service upon a five-cent fare, a 
struggle that even under pre-war prices 
and conditions had grown more and 
more desperate until the payment of 
dividends was suspended and the effort 
to maintain the property practically 
abandoned. The problem was no 
longer a question of profits for stock- 
holders but of the existence of the serv- 
ice upon a system prostrated by lack 
of capital and revenue. 

The legislature could have met the 
situation in any one of four ways. It 
could have allowed the railway to go 
into the hands of a receiver with the 
consequent expense, delay and uncer- 
tainties; or it could come to the aid of 
private management with relief from 
burdens and with guarantee of credit; 



111 



or it could commit itself completely to 
the theory of pubUc ownership; or it 
could take the less radical step of an 
e3q>eriment with pubUc control of the 
railway under temporary lease from 
its owners. It chose the last of these 
courses. 

WHY THE TRUSTEE PLAN WAS 
ADOPTED 

Three factors in the situation un- 
doubtedly had influence in bringing 
about this decision. 

The first was the fact that the use- 
fulness of the street railway had come 
to be fully understood. It was appre- 
ciated as never before that the street 
car is not alone the poor man's carriage 
but that of the pubhc official, the man 
of business, the professional man- 
directly or indirectly the carriage on 
which everyone rehes and for which 
no jitney or other kind of electric om- 
nibus can be substituted. It must be 
preserved. 

The second was the fact that this 
metropoUtan railway represented an 
honest investment under a pubHe 
supervision that had prevented exces- 
sive issue of stock or bonds and that, 
therefore, there was no call for reor- 
ganization to ehminate watered stock. 
The third was the fact that the new 
capital which was indispensable to 
sustain this service must be obtained 
by buying it at market prices as other 
necessities are bought, in other words 
that investment must have its secure 
return. 

To the legislative mind the problem 
for experience to solve was whether or 



NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



1921] 



112 

not a public management coidd be 
efficient, that is conducted without 
waste and without loss of ambition or 
pride in achievement. It was thought 
that a trial was worth while. 

The basic plan for this experiment 
was that which I believe is the best for 
any street railway enterprise— a serv- 
ice at cost— meaning of course proper 
or necessary cost. 

In assuming their duties the trustees 
took over a railway that covered 
535.326 miles of track, 475.717 miles of 
it surface track, 30.080 miles in sub- 
ways and 29.529 miles upon elevated 
structure. Much of the surface track 
was of hght construction and badly 
worn, a large part of the roUing stock 
in poor repair and of obsolete type. 
The power plant was in process of 
development and repair shops and car 
bams utterly inadequate. The total 
investment in this railway system was 
$93,612,211.21 represented by out- 
standing stock and bonds in about 
equal proportion. The aggregate cost 
of the subways and tunnels under lease 
to this company was $35,033,506.11. 
The Cambridge subway was then in- 
cluded in the corporate property at its 
cost of $7,868,000 but last winter this 
subway was transferred to the state 
practically at cost and leased to the 
company as the other subways had 
been leased at construction. 



MORE REVENUE NEEDED 

The act directed the trustees to rein- 
state the railway in good operating 
condition. To do this additional cap- 
ital and additional revenue must be 
immediately obtained. As a measure 
for providing a first installment of the 
needed capital the act authorized an 
issue of preferred stock to the amount 
of $2,000,000. To secure operatmg 
revenue the act directed the trustees to 
put in force fares that would make the 



service self-supporting and provided 
that meanwhile deficits incurred should 
be met from taxation in the cities and 
towns served by the railway, the 
amounts so advanced to be repaid 
whenever operating revenue should 
exceed operating cost. 

The new capital was inmiediately 
used in part payment for 250 modern 
cars. Successive advances in fare fol- 
lowed. A seven-cent fare was put in 
effect in August and in October gave 
way to an eight-cent fare which after 
a trial of seven months also proved in- 
adequate. At the close of the year 
ending on June 30, 1919, receipts had 
failed to meet expenses by approxi- 
mately five miUion dollars which 
amount was raised by taxation in the 
cities and towns served. 

The ten-cent fare now in force was 
introduced in July, 1919. Losses under 
it continued in decreasing amount for 
two months, but in September this fare 
began to produce revenue sufficient to 
meet expenses and eventually to absorb 
the earlier deficits so that on June 30, 
1920, the trustees were able to report 
that operating receipts for the year had 
met operating costs including all fixed 
charges and a reserve to depreciation. 
In summer months the expense for 
street work is always large and receipts 
are always smaller than in other 
months, traffic falUng below average. 
These conditions prevailed as usual in 
July, August and September of this 
year. The expected operating deficit 
for those months was realized but 
unless some extraordinary event inter- 
venes this will be readily absorbed 
before next July leaving at the close of 
this year as at the end of last year no 

deficit. 

There is a natural interest about tne 
effect of higher fares upon traffic. Our 
experience has shown that there has 
been a gain in total revenue but a loss 
in the number of passengers carried. 



BOSTON— THE PUBLIC TRUSTEE PLAN 



113 



Under the ten-cent fare this loss at 
first amounted to 12 per cent of the 
traffic but gradually diminished to 10 
per cent. To use figures the number 
of passengers carried under a five-cent 
fare for the month of October, 1917, 
was 32,854,047. Under the ten-cent 
fare in October, 1920, the number was 
29,382,315. 

Had there been during this time no 
unusually large increase in operating 
costs over those prevailing in the days 
of private management, receipts would 
have met expenditures at a fare con- 
siderably below ten cents. As every- 
one knows, however, prices had risen 
upon every hand at a tremendous pace. 
This was featured most strikingly 
through advances in wages. The av- 
erage number of employes upon this 
railway is 10,000. In the spring of 
1918 an advance in wages took place 
the effect of which was felt throughout 
the first year of public control. In that 
year a further advance took place and 
last year a third. The aggregate in- 
crease in operating cost on this account 
has been approximately $7,000,000. 
To-day more than half of every fare 
goes to compensation of employes. 

The higher cost of coal has been an- 
other leading feature of increases in 
operating cost. Owing to a favorable 
contract that expired last July this 
advance has been seriously felt by us 
only during the last four months. As 
our yearly consumption of coal ap- 
proximates 300,000 tons the additional 
expense this year would reach at pres- 
ent rates $2,000,000. 

One item of expenditure is a reserve 
to depreciation amounting to $2,000,- 
000. This is annually set aside from 
fares to provide for renewals and re- 
placements. Proper charges to depre- 
ciation are made not to build up the 
property to the full measure of original 
investment for the benefit of stockhold- 
ers, but to maintain it in good operating 



condition for the benefit of the public. 
This means that the old-fashioned 
notion of maintaining a railway by 
hand to mouth methods with large ex- 
penditures in prosperous years and 
small expenditures or none at all in the 
lean years is a thing of the past. Sound 
policy to-day takes care that out of 
every day's receipts something is put 
aside to meet the wear and tear that is 
constantly taking place. The lack of 
this precaution accounts in large part 
for the disasters which have over- 
taken so many street railway enter- 
prises. 

ZONE FARES OR FLAT RATE? 

Boston has a single flat fare. It is a 
tradition and also the profound belief 
of many that this distributes the pop- 
ulation, attracting people from con- 
gested centers into the outlying sub- 
urbs and that in so doing it establishes 
more healthful living conditions. 
Many families have undoubtedly es- 
tablished their homes in these suburbs 
in the confident belief that this single 
flat fare would never be disturbed. 
But there are in Boston enthusiastic 
advocates of zone fares as more equi- 
table and just in making the cost of 
riding proportionate to some extent 
with the distance the passenger is 
carried. The trustees are studying the 
comparative merits of the two systems 
in the light of experience in this and 
other countries. 

Experiments have been recently 
made with a five-cent fare upon lines 
where the run is short and where prac- 
tically no competition with the general 
ten-cent fare is involved. Some of 
these experiments have proved failures 
but two of the Unes are now in success- 
ful operation. 

Nothing is more idle than an attempt 
to compare street railway service in 
one city with that in another without 



NATIONAL MUNICIPAL BEVIEW SUPPLEMENT [Feb. 



1921] 



BOSTON— THE PUBLIC TRUSTEE PLAN 



115 



l| 



114 

the knowledge that is nec^sary to en- 
able one to make proper "^Ho^f ^^«^ 
distinguishing condition that make 
the seWice dissimilar. The^ diffmng 
conditions vitally affect both the kind 
and the cost of transportation, lake 
a look at the situation m B<»ton. Ihe 
center of business is confined to a 
small area into and from which on an 
average forty to fifty thousand peopte 
daily ride upon.the street cars at about 
the same hour in the moniing and at 
night. The problem of furmshmg 
proper accommodation is one that is 
diflScult. We have here a transporta- 
tion wheel with a hub becoming more 
and more inadequate to receive the 
spokes which enter it as the terminal 
Eradiating lines. S*"** ^"^^^^ J^^i 
long ago inadequate for general travel 
and the street cars were dnven mto 
subways. The first subway bu.lt m 
this country was built in Boston The 
cost of constructing and mainta,ining 
these subways is borne under easting 
law by the car rider in rentals paid from 
fares into the public treasury. The 
i.vartion of this tax now means an 
^rSpayment of nearly $2,000 000 
or one-half of a cent upon each nde. 

This is a relic from days when tolls 
were exacted for the use of highways^ 
^e street car is a P«bbc conv^anoe 
operated in Boston by P"bl'« .o^^'^;^ 
aid the subway is a public highway. 
The automobilist uses highways spe- 
ciaUy adapted at great cost to his con- 
vince Vithout contribution from 
him to construction expense. What 
excuse is there for this discrimination 
in his favor and against the car r,d«? 

The investment in the Boston ele- 
vated system, including subways and 
I^elsf is $136,500,000. The average 
ride over this system is four and one 
S miles while the longest di^^-^ 
covered is nineteen miles. The aver 
age number of passengers earned dai y 
in 1918 was 955.245; the average m 



1919 was 889.750. The »v^'^8\^^^ . 
October of this year was 947.816 Ihe 
budget of expenditures for 1919 was 
$32,000,000. The budget for this year 
is $34,000,000. 

Up^n .Assuming office the trustees 
immediately worked out a general plan 
of improvement involving a total out- 
lay during a period of five years of 
about eighteen million dollars charge- 
able in about equal P^Pof f "^ ,.*" 
capital and replacement. Substantial 
progress has been made toward the 
consummation of this program bnnging 
with it modem cars, improved traxjk, 
larger accommodation and more fre- 
quent service. . ,„n,„ 
The trustees make no claim as to the 
success of the experiment m pubhc 
control which is in their charge. One 
reason for saying little or nothing about 
what has been done is the ever present 
knowledge on their part that whatever 
it may be it is only a step toward the 
goal which they hope the service will 

finally reach. . . 

The board is organized with chair- 
man and recording secretary, the 
former assuming the ^l^ties %dinari y 
performed by the president of a rail, 
way and the latter those ordinarily 
performed by the clerk of a board of 
dkectors. Committees of two are 
assigned to administrative depart- 
3 and report from their severa 
spheres of activity at the stated or 
special meetings of the board. The 
t^tees in this way are keeping m close 
touch with all matters of administra- 
tion The operating staff has at its 
head our general manager, Edward 
Dana, who was appointed to that posi- 
tion in recognition of his fitness for its 
Jes^LibiUtlTs. The confidence re^ 
posed in him has been amply justified 
in what he has accomphshed, and his 
abiUty, energy and untiring devoUon 
to the work and his harmomous rela- 
tions with the trustees and with sub- 



ordinate oflGlcials and employes have 
proved invaluable. 

GUIDING PRINCIPLES OF ADMINISTRA- 
TION 

There are certain principles of ad- 
ministration that the trustees have 
adopted to which I will briefly refer. 

Roosevelt, as we know, was fond of 
referring to the square deal. K men 
would oftener take the trouble to get 
below the surface of life they would 
find that there is something in every 
one that responds to the call for it, for 
even handed justice. It is the saving 
grace in the world. But we can be sure 
that no such thing is possible where 
ignorance rules instead of knowledge. 
Every effort then should be made to 
give out the truth, the whole truth and 
nothing but the truth with respect to 
all matters that are of interest to the 
travelling public. 

Nothing hinders the approach of rail- 
way service to the standard which it 
ought to reach so much as the lack of 
patience. We all fail to exercise it. 
We jump to conclusions without know- 
ing the facts; we hand in our verdict 
without waiting for the evidence. 
How can we secure patience on the 
part of the public? In only one way, 
by publication of facts. Plain and 
complete and frequent information 
makes for the sound public opinion 
which is the safeguard of manage- 
ment. 

Street transportation must always 
be subject to unavoidable interruption. 
A car loaded with passengers anxious 
to reach office or home stops, and an- 
other car stops, and another, and an- 
other until the Une is choked with cars 
carrying hundreds of impatient men 
and women. The use of every effort 
to let the crews and the passengers 
know perhaps that a truck has fallen 
across the track, or that a drawbridge 



is up, or that a rail is broken, or some- 
thing wrong with the p>ower is worth 
the cost at almost any price. With the 
information conductors can cope with 
the emergency and passengers will be 
as patient as we can fairly ask. 

Financial interests are entitled to 
know the whole truth. Credit cannot 
live without frank information. If this 
is given credit will follow as far as it 
ought to follow. 

Close relations should be established 
between management and employes. 
Acquaintance on the part of the men 
with receipts and expenditures with 
the reason for existing conditions and 
plans for their improvement and op- 
portunity to make suggestion about 
them will tend to lessen indifference, 
create mutual confidence and awaken 
ambition and pride in work. 

Street car service for the most part 
is a personal undertaking. Its standing 
in the community depends chiefly upon 
the men who operate the cars. Direct- 
ors or trustees or general managers 
may be wise in their day and genera- 
tion and yet if their wisdom fails to 
estabUsh team work with their em- 
ployes it will be of little avail. 

Co-operation between the public and 
employes is vital to success. Both 
must contribute to it. Bad work by 
the employe is quickly condemned. 
Why not commend good work? The 
automobile is the carriage of the indi- 
vidual. The car is the carriage of a 
group of individuals, practically their 
automobile. If your chauffeur shows 
skill you compUment him. Why not 
say a word in commendation to motor- 
man or conductor who does good 
work? 

Everyone knows the difference be- 
tween the motorman whose skill makes 
the journey safe and agreeable and the 
motorman who stops and starts his 
car in a way that throws his passen- 
gers about or drives it at a pace that is 



NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



1921] INDIANAPOLIS RETAINS THE FIVE-CENT FARE 



117 



■II 



> 



116 

disagreeable if not dangerous. Every- 
one appreciates the conductor who is 
alert, helpful and pleasant Why 
should passengers refuse to heed the 
request he makes of them in their own 
interest and that of all who nde? 

I have a last personal word. 1 have 
long been acquainted with the men who 
have had charge of the railways in 
Massachusetts and in New Englajid. 
They have been men who are held in 
the highest esteem in the commumties 
where they live. Through the stress of 
all these years they have kept at their 
posts undismayed. The record is one 
of ability, loyalty to pubUc interests 
and unblemished honor. Nor are they 



unUke the men who have managed 
street railways elsewhere. 

Under the conditions which prevail 
to-day we may all of us feel a new zeal, 
a new confidence in the success of the 
work at which they have labored so 
long. My last word then is one of 
optimism. But the struggle is not over. 
Fares are not yet adjusted. There is 
the fight against the jitney and the 
contest with the private automobile; 
the search for new economies to meet 
higher costs of operation; the effort to 
restore credit and inspire new conh- 
dence in capital. So it is an up grade 
and a long pull that lies ahead, but 
the street car is bound to win. 



INDIANAPOLIS RETAINS THE FIVE 

CENT FARE^ 

BUT REJECTS SERVICE-AT-COST 



BY E. I. 

ChaxTman, PuUic Service 

Your convention meets in Indian- 
apohs, a community that believes m a 
five-cent street carfare. It hopes to 

retain it. 

Those of you who have come from 
Portland, Maine, and Portland, Ore- 
gon, from New Orleans and the Twin 
Cities, and from cities between, may 
experience in IndianapoUs the pleasant 
reminiscence of the good old days of 

1 Editor's Note: At the time of the National 
Municipal League meeting in Indianapolis, there 
was pending before the Indiana Commission, as 
commented on by Mr. Ix^wis in his addr^, a 
petition of the Indianapolb Street Ra Jway Com- 
Uny for a two cent transfer charge. This petition 
^ acted upon December 18. 1920 and a one 
cent transfer charge was granted, the five cent 
basicfarebeingretained. The question of retain- 
ing or increasing this charge in the future will be 
a^wered in accordance with the anticipa^ 
changed conditions affecting both costs and rev- 
enue toing Wh as their effecU are discerned. 



LEWIS 

Commission of Indiana 

five-cent street car rides. With the 
desertion of Cleveland, the list of 
places where the all but forgotten 
sensation of buying a street car ride 
with one coin— unless it be a ten-cent 
piece— is approaching the point of near 

extinction. « , j *u« 

Delegates from Portland on the 
Atlantic Coast paid a ten-cent street 
carfare to get to the raibroad station. 
K they stopped at any cities enroute, 
except New York whose five-cent fares 
are causing heavy deficits that cannot 
continue, they have paid seven, eight 
or ten cents for street car rides. In 
Boston it was ten cents, in Providence 
six in Albany seven, in Buffalo seven, 
in Newark seven, in Philadelphia seven, 
in Baltimore seven, in Washington 
eight, in Pittsburgh ten, in Cleveland 
six in Detroit six, in Toledo seven, m 



Columbus six, in Cincinnati eight 
cents. 

Those coming from Portland on the 
Pacific Coast paid eight cents to get 
to their station. If they stopped off 
enroute they paid a ten cent fare in 
Seattle, in Tacoma ten cents, in Spo- 
kane six, in San Francisco five, in Los 
Angeles five, in Salt Lake seven, in 
Denver six, in Topeka eight, in Omaha 
seven, in St. Paul six, in MinneapoUs 
six, in New Orleans eight, in Louisville 
five, in Kansas City eight, in St. Louis 
seven, in Milwaukee seven, in Chicago 
eight cents. 

On July 1, 1920, I do not have the 
numerous changes upward since that 
date, if you had stopped off for a street 
car ride in any one of 69 municipalities, 
including such cities as Boston, Pitts- 
burgh and Seattle, you would have paid 
ten cents for a street car ride; if in any 
one of 32 cities, eight or nine cents; if 
in any one of 178 cities, seven cents; if 
in any one of 176 cities, six cents; and, 
generally, there would have been extra 
charge for transfer or for continuation 
of ride from one zone into another 
zone. To-day 600 cities have street 
car cash fares in excess of five cents. 

While discovery of a place where one 
can actually buy 18 miles of riding for 
five cents is notable, it is not as re- 
markable as the discovery that the 
company is solvent and full of hope. 
Returning confidence in its future is 
indicated by higher bid prices for its 
securities. 

On July 1, 1920, there were 118 
companies, with a total of 7,820 miles 
of track in receivership. Since July 
1 there have been a number of receiver- 
ships added to this depressing total. 
Other companies, some of which have 
exhausted possibilities of eight- and 
ten-cent fares, are showing hopeless 
tendencies. Fifty-six of those 118 
receiverships occurred between June 
1, 1919, and July 1, 1920.. Obviously 



the departure from the five-cent fare 
has not been a complete success. As 
an institution the street railroad has 
the pallor of bankruptcy. 

A great deal of attention has been 
directed to rehabihtation, or one might 
say resuscitation, of the national sys- 
tem of steam railway transportation. 
Our congress has given its best efforts 
to that solution. Important as is the 
problem of the steam railroads, the fact 
remains that while they transport 
approximately one billion persons 
annually, the street railways transport 
fourteen or fiif teen persons to every one 
carried by the steam roads. 

The day is past when financial 
distress of the street railway industry 
could be looked on as being only of 
concern to the industry. The growth 
of cities is, as never before, insistently 
demanding money for extensions. The 
fact that the voice calling for that 
money generally does not inspire con- 
fidence constitutes one of our most 
important municipal problems. 

THE company's ATTITUDE TO THE 
FIVE-CENT FARE 

When I was invited to appear on 
your programme it was to speak on 
"The Success of the five-cent fare in 
Indianapolis." I suggested change of 
title to "The Five-Cent Fare in 
Indianapolis." That does not imply 
that the five-cent fare has not been a 
success, but I believe that no one should 
speak of accomplished success until the 
war's readjustment period is past. 
We hope, and there seems to be good 
reason to expect, that two or three 
years from this time IndianapoHs» 
when called on at one of your meetings, 
can respond to the toast "IndianapoHs, 
the Five-Cent Street Carfare City." 
I proceeded after making the change 
in title to block out what I would say. 
Since then, however, a changed condi- 



118 



NATIONAL MUNICffAL BEVmW SUPPLEMENT IP*. 



II 



tion has come. The local street car 
company, by formal petition has come 
to the Commission saying that the 
frenzied price raising in coal has caught 
irand reversed, with the beginmng of 
fall the favorable financial showings 
ie up to that time. The company 
Talking for temporary rehef a transfer 
Se Ld readiustment of pay^^^^^^ 
by interurban companies ^or trackage 
^d terminal facilities, to tide them 
over this coal crisis. 

The significant feature of the peti- 
tion, however, is that there is indicated 
no desire for a higher basic fare than 

^"m^can be more remarkable than 
the experience of a pubhc utihty com- 
'i:^rer having gentlemen who two 
years ago sat on the front steps be 
moaning the denial of a six-cent fare 
^S coming around and ^ymg 
"We need some temporary rehef to 
get us past the exorlntant coal pnce 
L, but we want to hold fast to this 

'^S'Si^-narenotinbus^^^^^^ 
for pleasure. They are intent J.n 
making money^a most commendable 
^S for pubhc utihties notwith- 
Sng occasional short-sighted com- 
S fo the contrary. Why do not 
these gentlemen who now say a t^em- 
^r^ry emergency faces them, petition 
CaTix-centfare? Because they have 
experienced a great awakemng. It 
may all prove to be a mistake, but they 
now are of the opinion that a higher 
b^c fare than five cents, at least in 

Sanapolis, would result in cutUng 
down the most profitable Vftd^^ 
street railway company s business 
th^ is, the short-haul patronage for 
w£.h there is always the potential 
rS^tition of that patronage's own 
S^as well as the appeal of Jitneys- 

Fax^ing the fact that within two 

week^ I shaU sit as one of the judges m 

■ Z matter, I may not, with propriety, 



go into some details that Y?" niigbt 
desire. However, I am entirely free 
J:Tummarize the historic background 
of low fares in Indianapolis From 
my angle of view it covers the sub- 
stantial and f midamental phases of the 

subject. It is ^^^,^^^^1^^^.^^^^^^^ 
further back than the year 1918 when 
on a decision of the supreme court of 
Inchana, the Public Service Commi - 
sl^n assumed jurisdiction and ehm^ 
nated fares of less than five cents^^ 
December, 1918, the company came to 
the Commission for a six-cent fa^^ 
The Commission rejected the plea 
chiefly on four revelations that re 
suited from pubhc hearings. 



WHY A PETITION FOR INCREASED FARE 
WAS REFUSED 

The first revelation was that the 
company was not collecting its earned 
'r^^. The Commission reached 
this decision as a result of putting 
trained check^son^ cars. T^^^ 

presence was not fuspectea. 
^f the company had ^e^f ^ J.^^^^^^ 
of earned revenues did not exceed ^ 
T>er cent, and were more nearly 1 per 
^nt The Commission's inspectors 
Xwed a loss of 13.6 per cent on cars 
checked during a six day penoj. Jhe 
Commission held that "It ^^ ^^^^^? 
provide increased revenues for peti 
C^r if it does not collect revenues 
Seady provided." The introduction 
Jpa Wou-enter cars was the result 
of this investigation and decision 

The second revelation was that the 
value of petitioner's Property did not 
warrant its financial obligations. iHe 
Company presented an inventory and 
Xation tetaling f^^^^f^'^^.J 
the Commission had ever let that val 
nation get by, I^dianapohs would have 
been paying a seven-or eight-cent fare. 
J^m'Ve'^^y certain that officers of ^e 
company now wiU agree that the 



1921] INDIANAPOLIS RETAINS THE FIVE-CENT FARE 



financial outlook under such conditions 
would not be as favorable as it is now. 
The hearing revealed values only a 
little in excess of half the twenty-eight 
million six hundred thousand dollars. 
No one, except local taxing officials, 
who have assessed the company at 
almost twenty million dollars, is now 
claiming a value in excess of $16,000,000 
or $16,500,000. When a service-at- 
cost proposal was laid before the Com- 
mission this year the city and company 
practically agreed to a valuation of 
$15,000,000. 

From the date of its decision, the 
Commission has had the co-operation 
of officers and various groups of stock 
and bond holders in working out a 
voluntary reduction of obligations to 
a proper basis. A superimposed hold- 
ing and operating company, the In- 
dianapolis Traction and Terminal Com- 
pany, was eliminated. Four million 
dollars of common stock for which 
there was no substantial background 
was wiped out, and two million one 
hundred and eighty of interest bearing 
bonds, held in sinking funds, were can- 
celled, thus reducing securities approxi- 
mately $6,180,000. Also $1,000,000 of 
stock was made junior to such an extent 
that it cannot be considered a liability. 
Securities were thus reduced approx- 
imately 30 per cent. Indianapolis 
Street Railway stockholders who had 
been slumbering in comfortable berths 
with the assurance of guaranteed stock 
dividends, were called forth to operate 
their property and to assume the 
hazards of preferred stockholders. 

The third revelation was of a 
device that was not uncommon in 
the profitable days of unregulated 
street railroading. This device was a 
sinking fund for the retirement of 
bonds. The street car riders were not 
only to guarantee dividends to a non- 
operating company, but were also to 
wipe out the bonded indebtedness. 



119 

One hundred twenty thousand dollars 
annually was going into this sinking 
fund. Also, the bonds which, it 
would seem, should have been annually 
retired were continuing to draw in- 
terest. Payments to the sinking fund, 
and payment of interest on bonds held 
in the sinking fund, were amounting 
annually to almost $200,000 of money 
that was badly needed for property and 
service. 

When the Commission pointed out 
that this plan, simply analyzed, meant 
that the public was placed in the 
position of giving to the company not 
only sufficient fares to maintain and 
operate service, but also ultimately to 
give the company its property, and 
that such a plan was not at all consist- 
ent with regulation which, for emer- 
gency relief, the company was seeking 
to come under, there again was fine 
co-operation on the part of the bond 
and stockholders and officers. At 
least temporarily the sinking fund 
provisions are waived. Most advan- 
tageously to all concerned, the waiver 
provides that this money go into bet- 
terments. This means better security 
for bond and stockholders; better 
service for the rider. 

The fourth controlling revelation 
was that the community was drained 
dry of its young men, who were among 
the 4,000,000 away to war; that the 
absence of this vital part of the popula- 
tion, together with the absence of 
naany young women and the depres- 
sions of war, had very nearly stopped 
social activities; that influenza epidem- 
ics, sweeping the nation, had all but 
suspended local shopping, theatre and 
moving picture traffic; and that locally 
industrial activity was not normal. 

The Commission, in its denial, took 
all these conditions into consideration. 
It accurately forecasted reassumption 
of normal life and greater traffic. The 
change came with a rush. In 1918 



120 



NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 

justment has come, it is naturally to be 
presumed that this area will be least 
and last, affected. 

When the company came to the 
Commission its plea was that it was at 
bankruptcy's door. Its tracks and 
pavements were in bad condition; the 
condition of its rolling stock was ag- 
gravatingly proclaimed by flat wheels; 
its finances were such, it was repre- 
sented, as not even to permit the 
installation of rather inexpensive fare 
collecting boxes, or pay-as-you-enter 
equipment; its operating forces were 
not good; four much needed extensions 
were not forthcoming. 

There are, of course, critics and the 
impatient. Everything that is de- 
sired has not been accompUshed. Cars 
are crowded during rush hours. But 
those who will stop to survey the situa- 
tion, must agree that, under the reor- 
ganization, with a five-cent fare and 
universal transfer, and in face of the 
most adverse conditions the country 
has ever known, there has been in the 
short period of two years a decided 
change. All cars have been made 
pay-as-you-enter; new cars have been 
purchased and open cars have been 
converted into closed cars, and some 
of these are of exceptionally good type; 
the operating force is of higher stand- 
ard; flat wheels have disappeared and 
general maintenance has greatly im- 
proved; three of the four extensions, 
the College avenue, the Shelby street, 
and the Premier motor car plant ex- 
tensions, have been made, and the 
fourth, the Illinois street extension, is 
scheduled for next spring, unless the 
world upsets again. Diu-ing this pe- 
riod the city has done a great work in 
street reconstruction and the street car 
company is struggUng along with that. 
No one would presume to say all 
things are 100 per cent good, or even 
90 per cent good. I am, however, 
asking you who five in six, eight and 



1921] INDIANAPOLIS RETAINS THE FIVE-CENT FARE 



121 



the Indianapolis street cars transported 
70,003,795 revenue passengers; in 
1919 the trafl&c jumped to 84,051,850 
passengers; in 1920 it will probably 
pass the 94,000,000 mark. 

Briefly then, in answering to my 
subject "The Five-Cent Fare in In- 
dianapolis," I would summarize by 
saying that its foundation Ues in: 

(1) Elimination of unwarranted financial obli- 
gations; 

(2) Elimination of a holding company— and, 
incidentally, the elimination of absentee land- 
lordism; 

(3) Awakening to the fact that the short 
haul passenger is the profitable passenger; 

(4) Collection of earned revenues; 

(5) Taking into calculation subnormal traffic 
conditions in the war period and correct fore- 
casting of increased volume of traffic after 1918. 

(6) A healthy spirit of co-operation; 

(7) An intelligent handling of the whole 
situation by the city; 

(8) Better public relations. 

ADVANTAGES POSSESSED BY INDIAN- 
APOLIS 

It is true that there are other condi- 
tions which contribute fundamentally 
to make it possible for Indianapolis to 
be, when the readjustment is past — 
"The Five-Cent Street Carfare City." 
These advantages are geographical and 

social. ^ J 

The street car company mines a 
large amount of its own coal in fields 
located near to Indianapolis and this 
means cheaper fuel costs than those 
faced by most companies. Wages and 
cost of hving all through the war 
period have been at somewhat lower 
levels in Indianapolis than those 
prevailing in the zone of greatest war 
activities and excesses which reached 
back from the Atlantic seaboard 
through Buffalo, Pittsburgh, Youngs- 
town, Cleveland, Detroit, to Chicago. 
This applied to street raihoading. 
Now, that the national period of read- 



ten cent street car cities and who have 
well in mind what your own cars and 
service and extension inadequacies are, 
do you really think there is very sub- 
stantial ground for complaint from the 
five-cent car riders of Indianapolis or 
the city itself? 

I desire specifically to disavow any 
intention of saying that continuation 
of the five-cent fare would have been 
possible for all companies and cities. 
I am fully aware that it could not, for 
it has been our duty, as a public 
service commission, to put higher than 
a five-cent base fare into six Indiana 
cities. I do believe, however, that 
many cities did not try out the possi- 
bilities of the five-cent fare. 

Looking at the street car situation 
nationally, it appears that the peak 
has been reached in operating costs, 
and that the break is near at hand. 
Still the skies are not clear. Industrial 
letting down will likely increase any 
baneful effect of high fares which may 
fundamentally, but not now obviously, 
exist. High fares are not going to get 
some street car companies past the 
sheriff for the reason that there have 
not been fundamental readjustments 
of financial obligations and elimina- 
tion of needless superimposed operat- 
ing companies. 

The aftermath of the war also is 
generally marked by heavy increases 
in local taxation. Papers last week 
announced the inauguration of the 
six-cent fare in Cleveland and gave as 
one of the reasons for the increase, at a 
time when prices are falUng, a $150,000 
increase in local taxation falling on the 
company. In Indianapolis at just the 
time when we began to look on favor- 
able operating sheets the same burden 
fell. 

The whole subject of taxation — di- 
rect and indirect — of the conveyance 
of the masses of urban population 
loudly cries for careful study. Direct 



taxation, franchise tax and paving 
streets will, during the coming year call 
for almost eighteen per cent of the fare 
paid by Indianapn^Us street car riders. 

I would make a general observation 
that is applicable to the IndianapK>lis 
situation: When the water has been 
squeezed out, and securities represent, 
and are warranted by values of prop- 
erty put to pubHc service, those finan- 
cial obhgations must be protected. 
Occasionally the shortsighted demand 
that these legitimate demands be 
passed or deferred. 

Laying aside all moral considerations 
what — especiaUy to-day when all the 
world wildly is bidding for money for 
rehabilitation — can be so detrimental 
to a community as such a course? 

IndianapoUs is typical of all cities. 
It is growing with marvelous rapidity, 
ten per cent every three years. Street 
car lines must be extended so it can 
expand. More and better cars must be 
provided to carry more citizens. More 
power house capacity must be had to 
move these cars. The chairman of 
the board of works of this city says 
that $1,500,000 to $2,000,000 must be 
sj>ent by the local company next year 
to keep transportation apace with 
city growth. In this and all other 
cities, such heavy expenditures must 
constantly continue year after year. 
The great need of the street railway 
industry is credit. 

Where is this money to come from? 
From security holders who are unfairly 
dealt with? From bankers and other 
custodians and trustees of money who 
see legitimate obligations ignored? Or 
are the cities in a position to furnish 
the capital needed to keep local trans- 
portation abreast with their growth? 

SERVICE AT COST 

In April this year, the city of 
Indianapolis laid before the Commis- 



120 



NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



1921] INDIANAPOLIS RETAINS THE FIVE-CENT FARE 



121 



1^ 



the Indianapolis street cars transported 
70,003,795 revenue passengers; in 
1919 the traffic jumped to 84,051,850 
passengers; in 1920 it will probably 
pass the 94,000,000 mark. 

Briefly then, in answering to my 
subject "The Five-Cent Fare in In- 
dianapolis," I would summarize by 
saying that its foundation Ues in: 

(1) Elimination of unwarranted financial obli- 
gations; 

(2) Elimination of a holding company— and, 
incidentally, the elimination of absentee land- 
lordism; 

(3) Awakening to the fact that the short 
haul passenger is the profitable passenger; 

(4) Collection of earned revenues; 

(6) Takmg into calculation subnormal traffic 
conditions in the war period and correct fore- 
casting of increased volume of traffic after 1918. 

(6) A healthy spirit of co-operation; 

(7) An intelligent handling of the whole 
situation by the city; 

(8) Better public relations. 

ADVANTAGES POSSESSED BY INDIAN- 
APOLIS 

It is true that there are other condi- 
tions which contribute fundamentally 
to make it possible for IndianapoUs to 
be, when the readjustment is past — 
"The Five-Cent Street Carfare City." 
These advantages are geographical and 

social. ^ , 

The street car company mines a 
large amount of its own coal in fields 
located near to Indianapolis and this 
means cheaper fuel costs than those 
faced by most companies. Wages and 
cost of living all through the war 
period have been at somewhat lower 
levels in Indianapolis than those 
prevaiUng in the zone of greatest war 
activities and excesses which reached 
back from the Atlantic seaboard 
through Buffalo, Pittsburgh, Yoimgs- 
town, Cleveland, Detroit, to Chicago. 
This applied to street raibroading. 
Now, that the national period of read- 



justment has come, it is naturally to be 
presumed that this area will be least 
and last, affected. 

When the company came to the 
Commission its plea was that it was at 
bankruptcy's door. Its tracks and 
pavements were in bad condition; the 
condition of its rolling stock was ag- 
gravatingly proclaimed by flat wheels; 
its finances were such, it was repre- 
sented, as not even to permit the 
installation of rather inexpensive fare 
collecting boxes, or pay-as-you-enter 
equipment; its operating forces were 
not good; four much needed extensions 
were not forthcoming. 

There are, of course, critics and the 
impatient. Everything that is de- 
sired has not been accomplished. Cars 
are crowded during rush hours. But 
those who will stop to survey the situa- 
tion, must agree that, under the reor- 
ganization, with a five-cent fare and 
universal transfer, and in face of the 
most adverse conditions the country 
has ever known, there has been in the 
short period of two years a decided 
change. All cars have been made 
pay-as-you-enter; new cars have been 
purchased and open cars have been 
converted into closed cars, and some 
of these are of exceptionally good type; 
the operating force is of higher stand- 
ard; flat wheels have disappeared and 
general maintenance has greatly im- 
proved; three of the four extensions, 
the College avenue, the Shelby street, 
and the Premier motor car plant ex- 
tensions, have been made, and the 
fourth, the lUinois street extension, is 
scheduled for next spring, unless the 
worid upsets again. During this pe- 
riod the city has done a great work in 
street reconstruction and the street car 
company is struggling along with that. 
No one would presume to say all 
things are 100 per cent good, or even 
90 per cent good. I am, however, 
asking you who Uve in six, eight and 



L> 



ten cent street car cities and who have 
well in mind what your own cars and 
service and extension inadequacies are, 
do you really think there is very sub- 
stantial ground for complaint from the 
five-cent car riders of Indianapolis or 
the city itself? 

I desire specifically to disavow any 
intention of saying that continuation 
of the five-cent fare would have been 
possible for all companies and cities. 
I am fully aware that it could not, for 
it has been our duty, as a pubUc 
service commission, to put higher than 
a five-cent base fare into six Indiana 
cities. I do believe, however, that 
many cities did not try out the possi- 
bilities of the five-cent fare. 

Looking at the street car situation 
nationally, it appears that the p>eak 
has been reached in operating costs, 
and that the break is near at hand. 
Still the skies are not clear. Industrial 
letting down will likely increase any 
baneful effect of high fares which may 
fundamentally, but not now obviously, 
exist. High fares are not going to get 
some street car companies past the 
sheriff for the reason that there have 
not been fundamental readjustments 
of financial obligations and elimina- 
tion of needless superimposed operat- 
ing companies. 

The aftermath of the war also is 
generally marked by heavy increases 
in local taxation. Papers last week 
announced the inauguration of the 
six-cent fare in Cleveland and gave as 
one of the reasons for the increase, at a 
time when prices are falling, a $150,000 
increase in local taxation falling on the 
company. In Indianapolis at just the 
time when we began to look on favor- 
able operating sheets the same burden 
fell. 

The whole subject of taxation — di- 
rect and indirect — of the conveyance 
of the masses of urban population 
loudly cries for careful study. Direct 



taxation, franchise tax and paving 
streets will, during the coming year call 
for almost eighteen per cent of the fare 
paid by IndianapoUs street car riders. 

I would make a general observation 
that is appUcable to the IndianapoUs 
situation: When the water has been 
squeezed out, and securities represent, 
and are warranted by values of prop- 
erty put to pubUc service, those finan- 
cial obligations must be protected. 
Occasionally the shortsighted demand 
that these legitimate demands be 
passed or deferred. 

Laying aside all moral considerations 
what — especiaUy to-day when aU the 
world wildly is bidding for money for 
rehabiUtation — can be so detrimental 
to a community as such a course? 

IndianapoUs is typical of aU cities. 
It is growing with marvelous rapidity, 
ten per cent every three years. Street 
car Unes must be extended so it can 
expand. More and better cars must be 
provided to carry more citizens. More 
power house capacity must be had to 
move these cars. The chairman of 
the board of works of this city says 
that $1,500,000 to $2,000,000 must be 
spent by the local company next year 
to keep transportation apace with 
city growth. In this and all other 
cities, such heavy exp>enditures must 
constantly continue year after year. 
The great need of the street railway 
industry is credit. 

Where is this money to come from? 
From security holders who are unfairly 
dealt with? From bankers and other 
custodians and trustees of money who 
see legitimate obUgations ignored? Or 
are the cities in a position to furnish 
the capital needed to keep local trans- 
portation abreast with their growth? 

SERVICE AT COST 

In April this year, the city ci 
Indianapolis laid before the Commis- 



6 



in 



NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



1921] INDIANAPOLIS RETAINS THE FIVE-CENT FARE 



123 



:. H 



! i 



sion a service-at-cost plan. It was 
designed to strengthen the credit of 
the local company. Officers of the 
company were most favorable to the 
plan. Most of the members of the 
Commission thought that at last the 
formula for the solution of the local 
street railway problem had been offered. 
I was enthusiastic. Mr. Samuel Ash- 
by, corporation counsel for the city, 
had made a study of the Cleveland, 
Montreal, Boston and other service-at- 
cost plans that — especially the Cincin- 
nati plan — ^had been nationally pro- 
claimed as being the latest and best 
thought. He had particularly studied 
the great problem of inspring incentive 
and initiative in the operating com- 
pany. His plan incorporated — and 
I beUeve improved upon — the Cin- 
cinnati idea of giving the company 
higher retiu-n for lower fares. Effi- 
ciency was to be rewarded by maximum 
returns; inefficient operation was to 
be penahzed. The plan suggested just 
what rate of return should apply to 
each step of fare. Mr. H. H. Horn- 
brook, attorney for the street car com- 
pany, thought, with possible minor 
changes, the plan was good. 

It was agreed that it would be well 
personally to make the rounds of some 
of the nearby service-at-cost cities for 
the purposes of picking up suggestions 
and perfecting the plan so that when 
it was put into effect " The Indianapolis 
Service-at-Cost Plan" would supplant 
the Cleveland and Cincinnati plans as 
a national model. With high spirits 
we began our journey — ^Ashby, Horn- 
brook, and myself — all service-at-cost 
advocates. We did not Umit ourselves 
to interviews with the companies, or 
the cities. We checked statements of 
one against the other, and then made 
independent investigations. It was 
not long until we began to be less as- 
sured that we had found a panacea. 
We came home to think it over. It 



was mutually agreed to wait imtil 
business trips carried us, individually, 
within striking distance of more dis- 
tant points for further investigation. 
In the meantime the Commission was 
being subjected to criticism, together 
with some hammering, for delaying the 
adoption of service-at-cost. The term 
had, as usual, made its popular appeal. 
After the three friendly investiga- 
tors had come to a unanimous decision 
there still remained different points of 
view among the public service com- 
missioners which, with sickness, re- 
sulted in further delay. The first of 
this month Mr. Ashby, author of the 
original projwsal, filed with the Com- 
mission a motion to withdraw it. The 
company did not object. Recently 
the Commission, without a dissenting 
vote, acted in the affirmative on the 
motion. In his motion for withdrawal 
Mr. Ashby says: 

We have been unable to find or agree upon 
any plan of operation on the basis of serv- 
ice-at-cost which would furnish'^the incentive of 
private ownership in an operation of service-at- 
cost. The result of our investigations gener- 
ally has been to raise a most serious question and 
doubt as to the wisdom of the service-at-cost 
plan. The inevitable tendency seems to be for 
the operator or company readily to accept in- 
creased cost of operation with the view that it 
can be passed on to the public by higher fares. 
Such a course results in only adding to the 
burden of the public. 

Experience has demonstrated that any in- 
crease in fare above the normal fare, results in 
a very substantial reduction in the number of 
passengers carried, and has a tendency at the 
same time to increase the cost of operation, so 
that the financial results of the company under 
such a plan is unsatisfactory and in some cases 
disastrous. 

The experience of Cincinnati is a good il- 
lustration of the operation of the plan. The 
fare was increased from five cents to six cents 
and from six cents to seven cents, and from seven 
cents to eight cents, and during the compara- 
tively short time in which the plan has been 
in operation the company has accumulated a 



,''^ 



very large operating deficit of over $2,000,000. 
During practically the same time the In- 
dianapolis Street Railway Company has been 
operating under the emergency order of the 
Commission at five cents. It has been able, as 
heretofore stated, to operate without a loss, its 
revenues have been more than its operating ex- 
penses and sufficient to pay a reasonable return 
on the fair value of its investment. 

I have little to add to his brief 
summary. The Commission does not 
pronounce the verdict of nostrum on 
service-at-cost, nor dogmatically cast 
it out of all future consideration. 



DANGERS AHEAD 

It must, however, be confessed that 
it is suspicious of it. We, at least, will 
wait to see whether it proves to be 
panacea or nostrum. Personally, I 
am apprehensive. I have heard popu- 
lar acclaim of other epigrammatic 
panaceas. " Let the people rule " gave 
us the direct primary which seems not 
to have met all the exi)ectations of its 
friends, or the expectations of all of its 
friends; "cost-plus" has been repudi- 
ated; "he kept us out of war," only 
won an election. 

The remarkable thing to me is that 
service-at-cost did not appeal to every 
one. I recall numerous adverse com- 
ments. One is sufficient. When the 
hammering of the Conmiission to " save 
the company" by adopting the service- 
at-cost proposal was at its height, an 
elevator operator said to me "What 
is the Commission going to do, 
Mr. Lewis?" I repUed that I did 
not know. His answer surprised me: 
"Service-at-cost is the Umit — ^put that 
in and the company can do anything 
and charge it up to the riders." My 
elevator operator hit on the head one 
of the chief defects, and one which it 
seems to me is fundamental. 

For example: Coal is hard to get 
and the price is very high. A service- 



at-cost street car operator who already, 
as in most places, finds it imj)ossible 
to earn the maximum return and is 
assured of the minimum which will 
cover fixed charges, is called on by a 
representative of a coal company. 
He has plenty of coal for sale — good 
coal at that. Why should this street 
car executive worry about its price? 
Why should he join in the night and 
day scramble of other public utility 
operators who do not have his sinecure, 
and who are struggling to get coal for 
a low price in order to pull them through 
and give their people some return on 
their investment? It is true that they 
may be able to buy coal at $4.00 a ton, 
but here is coal offered to him in his 
nice warm office at $6.00. It goes into 
operating costs. All right — service- 
at-cost covers all operating costs. I 
fear that service-at-cost simply means 
that the lid is taken off. 

It is possible that some time in the 
f utiu-e some workable plan incorporat- 
ing incentive for efficiency and ini- 
tiative will be worked out. While the 
Commission does not pass finally on 
service-at-cost, nevertheless it seems to 
most of us to run contrary to human 
nature, which, at least in business, 
requires opportunities of a struggle 
for gain. Psychologically, the blocking 
out of rates which shall apply if 
operating expenses increase, threatens 
to become an open invitation for 
laxity. 

There is still another possible defect. 
Service-at-cost is closely connected 
with city halls. Quite often city halls 
are closely connected with poUtical 
organizations. Again, quite often po- 
litical organizations are connected with 
various interests. When one ventures 
into the field of speculation of what 
may happen to service-at-cost after the 
novelty wears off, and after changes 
in management supplant men who 
may have pride in keeping their plants 



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124 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



up and their operating costs down, 
one finds that the possibiUties rival 
those which have brought cost-plus 
into disrepute. 

It is possible, for example, that 
a coal operator, standing in with a 
highly politicalized city hall crowd, 
could obtain a contract for supplying 
coal to the service-at-cost utiUty at a 
price considerably in excess of a fair 
price. It is possible that real estate 
developers, operating through such a 
city hall, could cause the construction 
of losing lines to their projects. A tie 
between a political machine and the 
street railway would open the door 
to every sort of a demogogue and 
agitator. These are only a few of the 
possible diseases that may attack 
service-at-cost in its maturity. I do 
not beUeve that, up to this time, they 
have developed to any great extent. 
I sincerely hope they will not develop. 

During the last campaign we have 
seen, notably in New York and 
Chicago, the street carfare made the 
football of poUtics. My incUnations — 
I am not saying that they may not be 
wrong, but nevertheless they are my 
incUnations reached after a study of 
pubhc utilities on four continents 
during a period of twenty years — are 
that it is very desirable that public 
utiHties be removed just as far as 
possible from the very conditions 
which I fear service-at-cost invites. 

I strongly believe in the poUcy 
of delegating regulation to men who 
will give their time and best thought 
to the subject and who are selected 



because of fitness for their work, and 
to the removal of such supervision and 
regulation from too close contact 
with local influences and prejudices, 
which we know by experience are some- 
times narrow, bUnd and dogmatic. 
Such regulation permits of the accom- 
plishment of those things enumerated 
herein, which have resulted in both 
the five-cent fare and solvency of the 
street car company in Indianapolis, 
and in Indiana, while all around are 
higher fares and wreckage. 

As a final thought, the theory of 
regulation of public utilities is service- 
at-cost. Regulatory bodies determine 
rates by making them only sufficient 
to cover: 

1. Operating costs. 

2. The replacement of the wear and 
tear of the plant — depreciation. 

3. Taxes — but not individual income 
taxes. 

4. A fair and reasonable return upon 
the fair value of property used and 
useful in performing the pubUc service. 

When you have based your rate on 
those foundations you have a service- 
at-cost. 

In behalf of such control, I would 
point to the fact that not one of the 
118 electric railway receiverships in the 
coimtry is in Indiana; that only six of 
the 600 cities having more than a five- 
cent fare are in this state, and that the 
electric railways in this state emerge 
from the trying ordeals of the war 
period and the more trying ordeals of 
the post-war period, solvent and full 
of hope. 



CLEVELAND— SERVICE-AT-COST AND 
EFFICIENT MANAGEMENT 

BY FIELDER SANDERS 

City Street Railroad Commissioner, Cleveland 



On Sunday, November 14, 1920, the 
rate of fare in Cleveland was auto- 
matically raised, under the Tayler 
"Service-at-Cost" grant, to a six-cent 
<;ash fare, nine tickets for fifty cents, 
one cent for transfer and no rebate. No 
objection was made by the city, be- 
cause the stabilizing fund being below 
$300,000, under the franchise the com- 
pany had the absolute right to raise 
its charges. The fare on March 1, 
1910, at the inception of the Tayler 
grant was three cents cash, five tickets 
for fifteen cents, one cent for transfer 
and no rebate. It is, therefore, the 
fact that after more than ten years of 
operation under the Tayler grant, the 
fare paid by the car riders has almost 
doubled, the exact figure being the 
difference between 3.33 cents, the aver- 
age fare paid in 1910 in Cleveland, and 
5.90 cents, the average fare which will 
be paid under the present rate, an 
increase of 77 per cent. 

This makes an examination of the 
franchise and a survey of the operation 
of the railway company, thereunder, 
peculiarly fitting at this time in deter- 
mining whether service-at-cost has 
been a success or a failure, or to what 
extent it has been either. In my judg- 
ment it has certainly not proved a 
*' Nostrum" "a quack medicine," but 
possibly has not quite approached a 
'* Panacea'' or "an absolute cure for all 
ills." 

The street-railway situation in Cleve- 
land for many years prior to 1910 was 
that of operation by private companies 
with the usual competition, and five- 

125 



cent fare, with a slightly reduced ticket 
rate. These companies consolidated, 
the fare remaining at five cents on all 
lines, but with added transfer privileges 
for which no charge was made. This 
was followed by a bitter fight on the 
part of the city authorities for a lower 
fare, which after much warfare cul- 
minated in the present settlement. At 
the time of the adoption of the fran- 
chise, as for many years before, the car- 
riders were paying five cent fare, eleven 
tickets for fifty cents with universal 
free transfers. It was claimed that, 
under proper management, with the 
proper franchise, the car riders could be 
carried for three cents. As a result of 
all the dickering back and forth it was 
determined that the car riders should 
not be carried at five cents nor at three 
cents, but at actual cost, whatever that 
might prove to be. The conclusion, 
therefore, of success or failure of the 
plan, must be predicated upon the pur- 
poses which the plan was intended 
to carry out, and be a finding as to 
whether those purposes have been car- 
ried out. 

The franchise boldly states in its 
preamble an ambitious progranmie, to 
wit: "^ 

It is the common desire of the city and the 
company to have all the grants of street-railway 
rights then outstanding surrendered and renewed 
upon terms thereinafter recited, to the end that 
the rate of fare may be reduced, the transfer 
privileges made definite, and the right of the city 
as to regulation and possible acquisition made 
definite and certain, and that a complete read- 
justment of the street-railway situation should 



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NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



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126 

be made, upon terms that would secure to the 
owners of the property invested in the street-rail- 
way security as to their property, and a fair and 
fixed rate of return thereon, at the same time se- 
curing to the public the largest powers of regula- 
tion in the interest of jniblic service, and the best 
streetrraUroad transportation at cost, consistent 
with the security of the property, and the cer- 
tainty of & fixed return thereon, and no more. 

It will not be claimed by anyone that 
any of these declared objects of the 
franchise is or was anything but desir- 
able and laudable, except that possibly, 
in view of the developments of the last 
two or three years, some may claim 
that a fixed rate of return, and no 
more, is not now in the best interests of 
the company and the public. I wiU 
refer to this particular claim agam. 
It will also be admitted that, if these 
objects of the grant have been substan- 
tially carried out, a great civic benefit 

has resulted. 

The questions therefore before us 
are. Has the rate of fare been reduced, 
the transfer privilege made definite, the 
city's regulation effective? Have the 
owners had security for their property, 
and have they had a fair and fixed rate 
of return, have the car riders had the 
best street-railway transportation at 
cost? If so, haw has it been done, and 
what is there about the franchise, or the 
management, or the surrounding cur- 
cumstances that has made such a con- 
clusion possible? 

ARBITRATION BOARD ENDORSES TAYLER 

GRANT 

The question of the failure or success 
of a contract is ordinarily determined 
usually by the facts themselves, but 
sometimes by the opinion of experts 
who have gone over the facts and have 
drawn conclusions therefrom in the 
light of testimony and their experience. 
I desire to present in evidence an opin- 
ion first, which combines the two 



methods. During the last half of the 
year 1919 and the first half of the year 
1920, the city of Cleveland had a very 
lively controversy with the Cleveland 
Railway Company to determme the 
question whether the fixed return of 6 
per cent provided in the original fran- 
chise should be changed to 7 per cent. 
This finally developed into a popular 
vote at a referendum, which resulted 
unfavorably to the company, as such 
matters usually do when placed before 
the public. But in the middle of the 
controversy a very extended hearmg 
was had before a board of arbitrators. 
This board of arbitrators went into 
the financial condition of the company 
and all matters surrounding it very 
thoroughly. The hearing consumed 
many weeks. Financial and street- 
railway experts from all over the coun- 
try testified, both in behalf of the city 
and in behalf of the company. The 
city lost the arbitration so far as the 7 
per cent question was concerned, but in 
the decision of the board, the franchise, 
the management of the company and 
the actions of the city in its regulating 
capacity received a very illuminating 
commendation. The board said: 

The franchise and the amendments thereto 
have been shown by ten years of trial to be sound 
in principle, practical in operation, and of great 
benefit to the Cleveland Railway Company and 
its stockholders and to the public. It has kept 
the Cleveland RaUway Company from exposure 
to the dangers and misfortunes that have over- 
taken other railway properties in most other 
large cities. The protective features of the 
franchise, together with the high standard of 
raUway management and intelligent municipal 
supervision which the Cleveland Railway has 
had, have resulted m giving to Cleveland the 
best street-railway service at the lowest cost of 
any city in the United States. The testimony 
has taken a wide range. . . • The city street 
raihoad administration has always been efficient 
and keen to the pubUc interest, and there is no 
reason to believe that it will be otherwise in the 
future. . . . The evidence shows that this 



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CLEVELAND— SERVICE-AT-COST 



127 



railway property has been maintained at a high 
standard, that it justly enjoys the reputation of 
being the best managed, best equipped and most 
successful street-car enterprise in the country. 
We have been shown that a higher percentage of 
expenditure for maintenance and upkeep has 
been in force here than in any other cities. Ex- 
perts have analyzed the situation and presented 
the conclusions to us, that by reason of efficient 
and intelligent executive management, and by 
reason of the high rate of upkeep and mainte- 
nance, a large appreciation in the value of the 
property has resulted. . . . The most im- 
portant result of this hearing is the full and com- 
plete illumination of the question of the safety 
of the Cleveland Railway stock as an investment. 
A right understanding of the franchise discloses 
that the stock of the Cleveland Railway Com- 
pany is safeguarded and protected so as to be- 
come a quasi-municipal investment. . . . 
We have no difficulty in reaching the conclusion 
that this stock is protected and safe to the 
investor. . . . 

This was the decision of an unbiased 
court on the facts before it. 

THE TESTS OP FARES AND SERVICE 

Let me now briefly examine the facts 
themselves, of ten years of operation, 
to see if they show that the franchise 
has carried out its objects, if this par- 
ticular service at cost has made good. 
Considering increased fare first, the ob- 
jection that the fare has almost 
doubled under service at cost might be 
dismissed with the statement that 
every other commodity has doubled in 
price in the last ten years, and that it is 
only in accordance with the general 
economic trend of the last ten years 
that the price of a ride in Cleveland is 
now almost twice what it was in 1910. 
The wages of the trainmen operating 
the cars, for instance, have increased 
188 per cent since 1910. 

But if that alone were said, we would 
be justified in concluding that the 
franchise has not been a moving factor 
in improving matters, but has simply 
ridden with the general trend of events. 



The fare at its inception was about 
two cents lower than the fare in other 
cities through the country, with one or 
two possible exceptions; it has stood 
through the years at the same ratio to 
rates general elsewhere, and, notwith- 
standing this last raise, it is still lower 
than most, and possibly still at the 
same ratio to the fares in other cities. 
One tremendous result of this low fare 
in Cleveland not to be forgotten is the 
fact that its car riders in eight years 
between 1910 and 1918 have saved 
more than thirty million dollars, over 
and above what they would have paid 
if the fare had continued to be five 
cents under the pre-existing private 
management as in other cities; or, in 
other words, they have saved for their 
own use an amount which, if it had 
been put in a sinking fund, would have 
purchased all of the railway company's 
property in September, 1918. From 
the public's standpoint, this one fact 
alone has justified the Tayler franchise. 
But that fact is only the more obvi- 
ous of results obtained for the car riders. 
Examining further, notwithstanding 
the low price of our service, statistics 
show that from 1910 to 1920, while the 
population in the city and suburbs 
increased 40 per cent and the number 
of fares paid increased 75 per cent, the 
service given in Cleveland has doubled. 
The Broadway, Euclid, Payne and St. 
Clair lines east of the river, and the 
Lorain and Detroit lines west of the 
river, the six heaviest trunk lines of the 
system, show in their headways that 
during 1910, in the morning rush 
period, 7,790 seats per hour were fur- 
nished; 3,192 seats per hour on the base 
tables and 9,690 seats per hour in the 
evening rush period. The present 
headways on the same six lines furnish 
15,700 seats per hour in the morning 
rush, 5,590 seats hourly on the base 
tables and 19,300 seats per hour in the 
evening rush, an increase of 102 per 






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NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



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cent in the morning rush, 75 per cent 
on the base tables and 99 per cent in 
the evening rush. I am giving seats 
rather than headway because of the 
difference in the equipment . 

The number of passenger cars has in- 
creased from 955 in 1910 to 1,515 in 
1920. Great changes in the character 
and size of the cars have been made. 
The average seating capacity of the old 
cars was about 38; the newest cars seat 
58 and 60. The total seating capacity 
of the 1910 equipment was 36,100, of 
the 1920 equipment 74,800. The total 
standing capacity was 44,000 in 1910; 
in 1920 it is 80,460. So that while the 
number of cars has not doubled, the 
seating capacity has more than doubled, 
and the combined seating and standing 
capacity is almost double. In these ten 
years 375 of the 955 cars owned in 
1910, nearly 40 per cent of the total, 
have been retired, so that there are 
now on the system, of 1,515 cars, only 
580 that are more than ten years old. 
In the same period of time, the com- 
pany has developed a large number of 
additional lines within the city (a 
smaller number outside). In 1910 the 
railway operated 246 miles of track, 
exclusive of special work, track in car 
yards, etc. Today it operates 303 
miles, an increase of 23 per cent . Most 
of this increase is in new trunk lines 
and new cross-town lines within the 
original Hmits of the city of Cleveland, 
although some of it represents pushing 
out into the country. In addition al- 
most the entire layout of car houses, 
shops and power stations has been 
completely renewed. Many new most 
modern car stations have been built. 
The various power-generating stations 
have been abandoned, except one, 
which is on the programme for disman- 
tling in the near future. Power is 
being purchased, and many new sub- 
stations have been built or are under 
way for distributing purposes. The 



finest street-railway shops in the world 
have been built, at a cost of $1,300,000. 
The company has developed in the last 
three years an extensive plant for han- 
dling materials in its maintenance-of- 
way yards, and has added all kinds of 
improved conveyors, trucks and labor- 
saving machinery for doing its work. 
The 935 cars added to the system since 
1910 have been in each instance of the 
latest and most efficient type, some of 
them built in the shops of the company 
by direct labor, others purchased. Of 
the original 246 miles of track existing 
in 1910, 162 miles have been renewed, 
about 66 per cent of the original track- 
age, and the average age of all the pres- 
ent tracks on the system is very close to 
nine years . The number of cars owned 
per mile of track has increased from 
3.9 in 1910 to 5.05 in 1920. The fare 
remained at 3.33 cents until December 
15, 1917, and since that time has been 
at varying rates, most of the time 
5.33 cents. 

It is apparent from the foregoing 
brief summary, without going into de- 
tail, that the fare has been low, the 
service has been high, and that the 
property has been well kept up and 
highly improved, under service at cost 
a real railway has been developed, to an 
extent so noticeable as to merit and re- 
ceive the commendation of every 
street-railway man who surveys it, and 
so different from practice general else- 
where that many public addresses on 
this subject have summarized it by 
saying, "The railway has grown from a 
scrap heap in 1910 to the finest prop- 
erty in the United States in 1920." 

ARE ALL PARTIES SATISFIED? 

Another and third way of testing 
whether a contract has carried out its 
purpose, in addition to the opinion of 
experts and the actual facts hereinbe- 
fore detailed, is to analyze the effect 



1921] 



CLEVELiVND— SERVICE-AT-COST 



129 



which the contract has had upon the 
parties interested, with particular refer- 
ence to their conduct under and general 
satisfaction with the contract. Satis- 
faction with an arrangement by all par- 
ties to it does not always prove that the 
arrangement is a good one calculated 
for their mutual advantage, but satis- 
faction with an arrangement after a 
thorough trial over a period of years, 
after an exposition and public demon- 
stration of claimed defects, is proof of 
the inherent soundness of the contract. 
The Tayler franchise has been crit- 
icized at various times because of the 
so-called lack of incentive in it, and 
possibly on lack of other matters, al- 
though no critic has ever been able to 
frame a franchise which in practice has 
worked better. I have at times made 
the same criticism myself. But not- 
withstanding the criticism, the people 
of Cleveland are satisfied. We know 
that to be so, because it happened that 
the first period of the grant expired on 
May 1, 1919, and it was necessary be- 
fore that time for the city government 
either to renew the franchise for a 
further period of twenty-five years, 
thereby extending the expiration date 
ten years, or to permit the property to 
continue in the hands of the company 
without city control of the service, or 
to exercise itis option to buy it and put 
in force municipal ownership. A series 
of meetings was held in the city council 
chamber over a period of six or seven 
weeks by the committee of council 
having the decision to make. The 
matter was widely advertised in the 
newspapers, and especially the fact 
that the grant was about to run out. 
Nevertheless, all the amendments that 
were offered to the grant as being de- 
sirable were suggested by the city 
street railroad commissioner. There 
was no public sentiment manifested for 
municipal ovmership, or for any partic- 
ular change in the grant, except on 



the part of a few councilmen and a few 
public officials who had been in very 
close relationship with the railway 
company and its day to day operation. 
No amendment was offered by any 
civic society of Cleveland, of which 
there are many and active, nor any 
newspaper, nor by the chamber of 
commerce, or any of the various clubs 
interested in public matters. The rail- 
way company refused to accept the 
amendments, said that it was satisfied 
with the franchise as it stood. It be- 
came immediately evident that the 
public also was satisfied with the fran- 
chise and the service under it. The 
result was that the council renewed the 
agreement in identical terms for a 
further period, and we are now operat- 
ing thereunder. 

THE SIX PER CENT FIXED RETURN 

There is one serious problem now 
pending, arising in connection with the 
fixed return of 6 per cent for the stock- 
holders, — a problem which is entirely 
likely to face the operators of the vari- 
ous new service-at-cost franchises, now 
being adopted. It is the difficulty of 
finding new money with which to fi- 
nance extensions, betterments and per- 
manent improvements. Extensions in 
Cleveland have always been financed 
by the sale of new stock. For more 
than a year it has been impossible to 
sell Cleveland Railway 6 per cent stock 
at par in Cleveland, and the franchise 
forbids its being sold at less than par. 
The fate of all public utility stocks has 
.been largely reflected in the market on 
Cleveland Railway stock, through no 
fault of its own. The management of 
the railway made an effort to raise the 
dividend rate on all their stock to 7 
per cent, and failed at a popular vote. 
Although extensions are needed in 
Cleveland, the people evidently thought 
the 7 per cent remedy too drastic and 



NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



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130 

far-reaching. So for the present we 
are standing still— just finishing the 
programme laid out a year and a half 
ago. Many solutions for the future 
needs of the company and city have 
been suggested and debated, and I have 
no doubt the problem will be worked 
out satisfactorily in a mutual spirit of 
co-operation, as have so many of our 
previous difficulties. 

THE SUCCESS EXPLAINED 

The question now arises, What is the 
reason for the obvious success of this 
plan? There are many reasons. The 
low capitaUzation at which the railway 
was taken over has had some effect, of 
course, but that effect has been very 
largely overrated. The added expense 
of a few millions to its aggregate cap- 
ital value, with a return of 6 per cent 
thereon, distributed among the number 
of fares paid would have made an m- 
crease in the rate of fare so small as to 
be hardly noticeable. It would be 
expressed in tenths of a cent, less than 
a mill a ride. At the beginning of the 
grant, an addition of ten miUion dollars 
to the capital value would have made a 
difference of only three tenths cent in 
each fare paid, and this, of course,would 
have decreased each year since. The 
low capitalization was /ar more efeclive 
in developing public confidence in the 
honesty of the management and in the 
honesty of the arrangement than m 
any financial way. The whole secret 
of the success of the scheme has been 
the admirable combination of efficient 
and jealous management of the part of 
the company and its officials, of close 
municipal supervision, of harmony be- 
tween the company and the public, of 
the confidence which the pubUc has in 
the arrangement, and the ultimate fact 
resulting from all of these, that the 
company is financially strong, and able, 
up to a short time ago, to market any 



amount of its securities with which to 
carry out the object of the street rail- 
way. All of these have been deciding 
factors in the success of the plan. 

THE city's part 

The city, through the council and 
the commissioner's office, also guards 
its rights carefully. It maintains a 
complete department for the super- 
vision of the company's expenses of 
all kinds. It prescribes the quality 
and quantity of service. In the com- 
missioner's office a traffic department 
maintains, through a large force of in- 
spectors, a continuous check of^^® 
traffic loads on the various lines of the 
city, and from time to time makes 
changes in the headways, in the run- 
ning time, and in the cars on the vari- 
ous lines to more closely balance the 
service rendered with the service re- 
quired. It makes all the studies and 
investigations for determining any 
changes necessary. The results are 
tabulated, and graphs are drawn show- 
ing the necessity or non-necessity for 
any changes. Changes are being made 
almost daily by orders to the company 
to put in force new headways and new 
schedules. In so doing the commis- 
sioner is able to tell from day to day 
whether the schedules which he pre- 
scribes are being run, and to see that 
the company does no more nor less 
than run the service prescribed. The 
traffic department also makes the 
seasonal changes due to the closing of 
parks and the opening and closing of 
factories, makes the changes in places 
of stopping necessitated by new condi- 
tions, makes changes in routes neces- 
sary to relieve congestion and to speed 
up service, and also advises with the 
operating department daily in the col- 
lection of fares, loading and unloading 
of passengers, the stationing of men to 
sell transfers outside the cars, the pre- 



1921] 



CLEVELAND— SERVICE-AT-COST 



131 



payment areas, and all the details 
which make for excellency of service. 
The street railroad commissioner's 
office, also, through its engineering 
department, keeps close supervision 
over the cost of improvements, renew- 
als and ordinary repairs, and approves 
them in advance of expenditures. Not 
a bottle of ink is bought without the 
city passing on it and approving it 
first. In those matters we not only 
authorize and supervise the railway 
company from day to day, but we also 
advise with its officers and suggest 
changes and improvements. We main- 
tain a day to day continuous audit. 

the railway's part 

The railway officials have also had at 
heart not only the preservation and 
development of the property, but pride 
in themselves as successful managers. 
They have co-operated in every way in 
increasing the efficiency of the service. 
They have largely initiated a great 
many of the reforms which have made 
Cleveland street-car service a model of 
the country. They have adopted and 
carried out many of the suggestions 
made by the city. The result has been 
the employment of almost every new 
idea in street-railway operation, usually 
some years in advance of the rest of the 
country, such as the skip-stop, the 
speeding up of schedules, short-routing, 
cross-town fines, prepayment areas, 
pay-enter and pay-as-you-leave fare 
collection, the most modern — the-pay- 
as-you-pass — street car; the purchasing 
and distribution of power instead of 
costly generating plants; modern car 
shops, car stations and automatic power 
sub-stations; scientific and exactly 
sufficient schedules of service, the last 
word in maintenance-of-way equip- 
ment, materials and yards, labor-sav- 
ing machinery of every kind, the scien- 
tific training of employes in a separate 



school and department equipped with 
machinery and instructors for that pur- 
pose, careful and strict discipline of the 
employes; in short, most of the ad- 
vancements and improvements in 
street-railway management of the last 
ten years have originated or been tried 
in Cleveland. The peculiarly close 
combination of company management 
and city supervision has enabled Cleve- 
land to devise and put in force every 
possible economy which tends to 
efficiency. 

DOES THE PLAN LACK INCENTIVE? 

I think that most of the criticism of 
the service-at-cost plan as developed 
in Cleveland in the last ten years, as to 
the lack of incentive, is really directed 
at the conditions of the franchise and 
not at the working out of the same as 
shown in actual operation. Cleveland 
is not under absentee ownership. 
Clevelanders own the company. The 
management in Cleveland are all 
heavy stockholders in the company 
and are directly interested; therefore 
it is not really management of paid 
service alone, but it is a management 
largely by stockholders themselves. 
Some of its success is due to that. In 
this management they have also the 
benefit of daily counsel and criticism, 
not monthly or annually such as is 
granted by public state commissions. 
Nor has the criticism been selfish, 
partisan or political criticism, such as 
has so often developed at the hands of 
political bodies and newspapers in 
other cities. 

TOM JOHNSON OPPOSED THE SLIDINO 

SCALE 

In the meetings in March, 1909, 
between Tom L. Johnson, mayor of 
Cleveland, and Horace E. Andrews, 
president of the Cleveland Railway 



II 



132 



NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



Company, and various councilmen, one 
of the councilmen suggested a slidmg 
scale of interest, namely, that the 
lower the rate of fare the more mterest 
could be paid on the investment. He 
said he thought there would be an 
incentive then for the stockholders to 
make the fare as low as possible, a saymg 
which sounds very familiar now after 
eleven years. Mayor Johnson then 
replied, "And also quite an incentive 
to skimp the service; wouldn t it.'' 
Mr. Andrews suggested the well-knomi 
gas company arrangement in England, 
and thought that it would be a fairly 
good arrangement, but Judge Tayler 
was firmly of the opinion that the 
company should have only a fair return 
on the money for the privileges granted 
by the city, and that it should not be 
subject to the hazards of operation. 
He was of the opinion that the railway 
company was entitled to earn only a 
fair return for the use of the streets, 
and that if by ingenuity and econom- 
ical devices adopted by the operators a 
re4uction in fare was accomplished, 
and if thereby they obtained more 
than a fair return on the money, or, 
as he expressed it, an abnormal rate on 
their investment, there was something 
wrong somewhere. 

It seemed to the judge that it was 
fundamentally wrong to pay a man a 
bonus for doing that for which his 
salary is supposed to compensate him; 
that a bonus could not be a legitimate 
part of the cost, and that, therefore, 
this sort of an arrangement was service 
at m(yre than cost; that the people are 
entitled, for the salary that they pay to 
the officers of the railway, to intelligent 
and efficient management, and that 
they ought not to be taxed any more. 
My own notion is that the idea is not 
only fundamentally wrong, but that 
practically it would not work because 
it creates an incentive on the part of 
the railway company to keep down 



their expenses by skimping the service. 
Under the present service-at-cost plan 
the company has no desire and no 
incentive to skimp the service. They 
do not interfere in the slightest way 
with the full latitude of the city m 
exerting its power, and there is no 
desire on their part to do so, because it 
makes no difference to them, within 
the limits of their power to earn 6 per 
cent, how much or how little service is 
run. But I believe any temptation of 
an added dividend before their eyes, 
resulting from a reduction of cost which 
would make it advisable for the com- 
pany to reduce its operating expense, 
would create a tendency on its part to 
encroach on the city's prerogative as 
to service, by hampering and reducing 
the service in the many small ways by 
which they could do so without being 
caught by even an elaborate system 
of watching, and to render a cheaper 
and more unsatisfactory service even 
while ostensibly complying with the 
city's order. Such an objective is bad. 
From the stockholder's standpomt 
it is an incentive for the management 
not to keep the property up, because 
the lower the maintenance charges, of 
course, the lower the rate of fare and the 
higher the return to the stockholders. 
It is also an incentive to keep down the 
maintenance by increasing the capi- 
talization by charging repairs and 
replacements to capital, which could 
easily be done, thereby tending to make 
the enterprise top-heavy and reduce 
the physical value of the security 
which the stockholders have. This 
same thing would strike largely at the 
service given the car riders, because 
the first requisite of good service is a 
high class raih-oad, sufficiently mam- 
tained. Further than that, it increases 
the price which the city would have to 
pay on purchase and reduces the con- 
sideration for the price. 
A sliding scale of return based on a 



1921] 



CLEVELAND— SERVICE-AT-COST 



133 



sliding scale of fares, in my judgment 
is also theoretically wrong, because the 
stockholders of the company are com- 
pensated by dividends, the manage- 
ment of the company is compensated 
by salary; in other words, the price of 
money is one thing and the price of 
service is another. They have no 
immediate necessary connection. But 
if you are going to vary the price of 
money which the stockholders put 
into the company in the ratio of the 
rate of fare, or, in other words, the cost 
of service, the law of economics would, 
it seems to me, command the reverse 
of the suggested arrangement. I have 
heard it argued by financial experts 
(especially in the last arbitration) that 
there is no connection between a fair 
return on money, in other words, the 
price of the same, and the price of 
other commodities. Others have ar- 
gued that they rise and fall together. If 
there is any truth in the last argument 
that the price of money goes down and 
up as the price of commodities goes 
down and goes up, then as the cost of 
labor and materials used in the street 
railways, which largely determines the 
rate of fare, goes down, the return on 
the money invested should not go up. 
But, under the present incentive 
franchises, the return to the stock- 
holders does go up as the fare goes 
down, instead of going down as it 
should if the above rule is correct. 

It is also likely to be a bad arrange- 
ment from a practical standpoint for 
the public. According to the judg- 
ment of almost everyone we have 
reached the peak of high prices . There 
is bound to be a decrease in the next 
five or ten years. They may not drop 
to the point at which they were in 
1914. They may stay at a slightly 
higher level. After the Civil war it 
took from ten to fifteen years to bring 
the prices of everything down to where 
they were before the war. The same 



condition obtained after the Napoleonic 
wars in Europe. If history repeats 
itself, by 1930 we shall be back where 
we were in 1914. But even if that is 
not so, it is admitted that prices must 
decrease even if they do not come to 
the low level of 1914. If they do 
decrease, street-railway fares must 
and should go down. But under the 
sliding scale, what is the result from 
the public's standpoint? As the costs 
go down, the expense of operating is 
going up by the extra amount which 
the stockholders secure, which tends 
again to keep the fares up. 

The fare in the last five years went 
up largely without the fault of the 
railway companies of the country, due 
to economic conditions, and I am satis- 
fied that, without their action, without 
any credit to them, they will, by reason 
, of the same law, go down in the next 
five to ten years. But even if you grant 
that all these conclusions are wrong, I 
think that any scheme of incentive so far 
suggested is open to the criticism of 
lack of effectiveness, because of the 
remoteness from and lack of direct 
application to the actual executives. I 
cannot help thinking from my experi- 
ence of service at cost, from my knowl- 
edge of what has happened in the last 
five years, that after all the real in- 
centive to efficient management is to 
give the man at the wheel, the man who 
actually operates, sufficient compensa- 
tion to keep his best interest in his 
work, and then to have an efficient city 
administration to act as the watchdog, 
to criticize, advise and sit on his neck 
day by day, as is done in Cleveland, to 
see that he earns his salary. 

To recur to the question originally 
asked Panacea or Nostrum? We offer 
the Cleveland franchise, as a practical 
success, a sufficient remedy under its 
circumstances. Experience in Cleve- 
land shows, in my judgment, that 
service at cost is not perfection, neither 



M 



V- 



134 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



is it a nostrum or quack medicine, 
that whether it is a panacea or not, 
or how closely it approaches being a 
panacea, depends partly upon the 
franchise, but much more upon the 
development of it, upon the people 
who are charged with executing it, in 



whose hands it rests, and upon the 
public, who, if they have confidence in 
the arrangement, will make it a suc- 
cess or a failure. Many criticisms of 
the Cleveland plan can be made, per- 
haps justly, but, as for Cleveland, 
Cleveland is satisfied. 



SERVICE AT COST VERSUS MUNICIPAL 

OWNERSHIP 

SEATTLE'S EXPERIENCE 

BY C. M. FASSETT 

Former Mayor of Spokane, Staff Member American City Consultants 



The latest Imk in the constantly 
tightening chair of public regulation of 
utiUties is found in the service-at-cost 
franchise. Beginning with the passage 
of the interstate commerce law by 
congress in 1887, pubUc regulation has 
steadily, if slowly, increased the power 
of government over public utility cor- 
porations, gradually lifting them out 
of the class of private business which 
may be operated to suit the purpose of 
its owners, and enforcing in increasing 
measure a consideration of the needs 
and the purses of their patrons, the 
pubUc. As in the case of the steam- 
raihoads, this progressive regulative 
effort in the pubUc utiUty business has 
grown up in response to the demand for 
the abolition and curtailment of cer- 
tain specific practices of the owners 
and managers of utihty properties, 
which an awakening sentiment had 
condemned as contrary to the interests 
of the public. 

PRIVATE MISMANAGEMENT 

Only in recent years has it been 
recognized that a public utihty is a 
natural monopoly. In fact when utiU- 
ties were unregulated, the only hope of 



the consumer for reasonable rates and 
tolerable service was in competition. 
The great municipal utilities which op- 
erate in the streets of American cities 
to-day are almost without exception, 
consolidations of companies which were 
originally started or soon developed as 
competitors. The growth of urban 
population was extremely rapid, but 
the demand for utility service was in 
greater ratio. In the decade 1900 to 
1910 population in the continental 
United States increased 21 per cent, 
while the number of passengers carried 
one mile by the steam raihoads more 
than doubled, and a Uke condition pre- 
vailed in municipal utihties. The pio- 
neers in the utiUty business soon found 
that competition was the only inter- 
ference with their profits, and consoli- 
dation of the competing companies 
was the logical answer. 

With their utilities consolidated the 
pubUc soon felt the pressure of rate 
increases and service deterioration, 
complaints began to find their way 
into legislative bodies, and public 
regulation began to be attempted. 
Consolidation had not increased physi- 
cal assets but had greatly increased 
capitalization, for not only had enor- 



1921] 



COST VERSUS MUNICIPAL OWNERSHIP 



135 



mous prices been paid for the control 
of competing companies, but large 
bonuses went to pay the promoters 
and financiers who had brought the 
consolidation about. Then if the new 
concern showed profits above a fair 
dividend, further issues of stock ap- 
peared, the total capitalization being 
based upon the earning power of the 
utility in its years of greatest prosper- 
ity. It was not considered good busi- 
ness to apply excess profits to debt re- 
tirement, nor to large dividends on 
stock already issued. Either of these 
practices, if they became known, 
would have been the basis for a public 
demand for reduced rates or better 
service. Depreciation reserves were 
neglected, or if they were set aside at 
all it was merely as a ledger account, 
and the actual money was used for 
dividends on the heavily watered 
stock. The rates were all the traflSc 
would bear and the service was as lit- 
tle as could be given without too much 
public protest. Growing cities suf- 
fered for much needed extensions of 
utility service which were not made 
because they would not show an imme- 
diate profit. Street cars were designed 
to carry the greatest number of stand- 
ing passengers, and the arrogance of 
the utility magnate was reflected in 
the conduct of his lowest employe. 
His responsibiUty was to his stock- 
holders. His goal was more profits. 

In order to ward off further compe- 
tition and to defend themselves from 
attack, the utilities were forced to 
maintain lobbies in constant attend- 
ance upon legislative bodies, and to 
corrupt legislatures and city councils, 
and the story of these activities fur- 
nishes one of the saddest chapters in 
the history of municipal government 
in America. Extensive and expensive 
propaganda was used to influence pub- 
lic oflicials and leading citizens against 



public ownership and in favor of in- 
creases in rates, and the wells of public 
opinion were persistently and system- 
atically poisoned. 

Occasionally there has existed an 
honestly managed and efficiently op- 
erated public utility in private owner- 
ship, and to these I apologize for the 
company in which I have found them. 
Of all the different utilities, street rail- 
way interests have been the chief of- 
fenders. Ten years ago a proposal to 
guarantee them net earnings of 6 per 
cent on the actual value of their prop- 
erties would have met with derision; 
now it is the straw which they hope 
will save them from drowning. Ten 
years ago one might search the files of 
their trade journals in vain for ad- 
vocacy of public ownership; now you 
find it on every page. Ten years ago 
the proposal that a representative of 
the public should be admitted to the 
counsels of the management of the 
business would have been intolerable; 
to-day it has become an accepted part 
of the regulative scheme. 

Regulation began with the imposi- 
tion of a franchise tax, usually based 
on gross earnings. This was wrong in 
principle in that it took revenue from 
citizens in proportion to their use of 
the utility, for the benefit of citizens in 
proportion to their taxes; it was justi- 
fied only because we had not learned 
any better. We knew that the profits 
of the utilities were too great, and 
were groping to find the proper way in 
which to curtail them. The sharp ad- 
vance in the cost of labor and materials 
brought about by the war, the com- 
petition of the automobile and jitney, 
and past methods of frenzied finance 
by which the street railways were held 
at the verge of bankruptcy, have now 
forced them into a desperate situation. 
Increased fares are a palliative which is 
Ukely only to postpone the crisis. 



136 



NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 



1921] 



COST VERSUS MUNICIPAL OWNERSHIP 



137 



III 



THE EFFICACY OF SERVICE AT COST 

Two alternatives will save them 
from destruction: municipal owner- 
ship or service at cost. Both are now 
being tried and we will be better able 
to judge their comparative merit ten 
years from now than we are to-day. 
But the situation presses. 

The modern service-at-cost fran- 
chise puts an end to the evil practices 
of utility management which I have 
already outlined. It restrains finan- 
cial sky rocketing, gives a reasonable 
control over management, provides for 
extensions and betterments, recog- 
nizes the street railway business as a 
natiu-al monopoly, gives the public 
a little authority in the directorate, en- 
forces adequate accounting, and re- 
tains to at least a small extent the al- 
leged advantage of leaving the business 
in private management. But only to 
a small extent. The dominating mo- 
tive of private ownership is a desire for 
profit, and business undertakings are 
attractive to business men largely in 
proportion to the chances of earnings 
beyond the legal rate of interest. If 
they can only earn 6 or 7 per cent they 
might as well invest in mortgage loans 
and go on a camping trip. Just now, 
however, the question with them is not 
future earnings, but the salvaging of 
the miUions of capital which is threat- 
ened with obliteration. 

The crucial point in a service-at-cost 
franchise is the valuation of the prop- 
erty of the utility, and this is true also 
of proposals for municipal ownership. 
Here is a decaying business, but one 
which it is essential to the public good 
to keep going, at least until its suc- 
cessor has been developed. Here is a 
property with securities outstanding 
far in excess of any reasonable estimate 
of its real value. It is in much the 
same condition as a manufacturing 
concern whose processes are obsolete 



and whose product is losing hold on 
public favor. What is it worth .?* It is 
not diflScult for engineers to arrive at 
the value of property of a going con- 
cern, one with a future, but to fix a fair 
value of a street railway at the present 
time is a task which staggers the ablest 
expert in the business. A trolley pole 
may be worth what it costs as a trolley 
pole, but what if it is only an encum- 
brance to the street? Are we taking 
an unjust advantage in offering its 
owner its junk value? The American 
public wants to be fair to the public 
utility interests, but it does not want 
to be cheated. It does not want to buy 
a work horse and get a dead carcass 
which has no value except the hide. 

DIFFICULTIES IN MUNICIPAL OWNERSHIP 

Some cities have determined that 
they will themselves own and operate 
their street transportation business and 
are having a very interesting time. 
Many difficulties must be met and 
overcome. When the most of our state 
constitutions were written it was con- 
sidered unsafe to allow much freedom 
to city governments. Honest men 
feared the entrance of the political unit 
into business, even the business of sup- 
plying the collective needs of its citi- 
zens, and the selfish interest of the util- 
ities had an easy victory in denying 
the cities the right, or closing the 
avenues of opportunity, to engage in 
other businesses than those which did 
not offer profit to private operation. 
In fixing constitutional debt limits^ 
even in some so-called home rule states, 
the full debt limit could not be reached 
excepting for water supplies and sew- 
ers, or less frequently, for sewers, 
water and light plants. And behind 
the constitution stood the legislature, 
usually dominated by a combination of 
interests in which the utility corpora- 
tions were fully protected. 



y 



> 



But even if the law gave authority 
and opportunity, the very structure of 
city government, up to the last ten or 
fifteen years, was not adapted to the 
new proposal of public ownership. 
The public mind was not open to such 
business undertakings nor were the 
usual public officials competent to op- 
erate them or willing to undertake the 
new burden. A new light is dawning 
upon American municipal life, but the 
dawn comes slowly, and the greater 
number of cities are to-day in the con- 
dition I have just outlined. The elec- 
torate is heedless, the government is 
cumbersome and unresponsive, the of- 
ficials are frequently changing, poorly 
paid and unexpert, employes receive 
appointment and hold jobs on account 
of election day services, wages and 
standards of efficiency are low, and 
"politics" is not the science of govern- 
ment but a disreputable game for 
spoils. For such a city public owner- 
ship of utiHties is unthinkable as a 
hopeful business undertaking. Public 
regulation of privately owned utilities, 
having as its latest development the 
service-at-cost franchise, is as far as such 
a city should attempt to go. 

But no city government is as good or 
as bad as it might be. Extreme ex- 
amples are rare. Cities are Uke the 
human beings which build them and 
inhabit them, containing much good in 
the worst, and some evil in the bsst of 
them. Bad impulses, in a city govern- 
ment as in the individual, are not only 
immoral, they are unintelligent, and 
when that fact is discovered and both 
reason and moral impulse get to work 
there is sure to be a change for the 
better. The decision between service 
at cost and municipal ownership in 
any city cannot be made on the basis 
of right and wrong; it must be influ- 
enced by local conditions, and par- 
ticularly by the character of the city 
government. 



SEATTLE ACTS HASTILY 



Seattle has chosen to own and oper- 
ate its street railways; it took them 
over by purchase on April 1, 1919, at 
a price of fifteen miUions, paying for 
them with utility bonds, pledging the 
first application of the gross earnings 
to the payment of the interest and the 
gradual retirement of the principal in 
the term of twenty years. Seattle is a 
thriving city of 315,000 population. 
Its growth during the last decade 
was 33 per cent. Its population con- 
tains an imusually large proportion of 
intelligent, progressive, wide-awake 
Americans. Its government is the 
mayor-council form, the voters having 
defeated a city manager charter a few 
years ago. In addition to the recent 
purchase of its street railways it has 
owned and operated for many years its 
water works and an electric light and 
power plant, both of which have been 
very well managed and successful, and 
its Port district has splendidly equipped 
ocean terminals, warehouses, grain ele- 
vators and cold storage plants, all pub- 
licly owned and operated. The citizens 
are proud of their municipal under- 
takings, and when the question of 
buying the street railways came up in 
November, 1918, they voted for the 
purchase by about three and a half to 
one. 

The deal was a hasty one and did 
not allow time for a thoroughgoing 
valuation of the property, but a valua- 
tion by accountants of the Public 
Service Commission, begun but not 
completed, showed it to be worth in 
the neighborhood of the purchase price, 
and the city officials, in a statement to 
the voters just previous to the election, 
gave its value as $16,102,946. I am 
inclined to beUeve that, considering the 
state of the business at that time and 
the growing difficulties in which trac- 
tion interests all over the country 



I 



138 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb. 

found themselves, the price paid was 
too high, but I approve the judgment 
of one member of the Seattle city coun- 
cil, quoted as asserting that he could 
not see that the lines exceed eight mil- 
lions in value, but that he believed the 
elimination of the traction company 
from local affairs was worth the dif- 
ference and he would vote for the pur- 
chase. The price was probably lower 
than any valuation which could have 
been agreed upon as a basis for a serv- 
ice-at-cost franchise. 



1921] 



COST VERSUS MUNICIPAL OWNERSHIP 



1S9 



THE COURSE OF MUNICIPAL OPERATION 
IN SEATTLE 

Had the railways remained in the 
hands of their former owners, a raise in 
fares was imminent, and fares had been 
advanced in all other larger cities in 
the state. The Seattle railways under 
municipal ownership are burdened with 
a heavy obligation of debt liquidation 
which private ownership would not 
have entailed, but the new manage- 
ment, instead of raising rates at once, 
allowed their optimism to get the bet- 
ter of their judgment, asserting that 
their new utility would meet its obU- 
gations with a five-cent fare. Their 
system is virtually capitaUzed at 
$17,215,000, of which $16,440,000 is 
represented by utility bonds which are 
a first lien upon receipts, and not only 
must they pay 5 per cent interest on 
this sum, but they must also meet the 
principal in a series of annual pay- 
ments of $833,000, beginning March 1, 

1921. 

It soon became evident that in spite 
of a number of economies, fares would 
have to be advanced, and while this 
subject was being discussed a munici- 
pal election came on. The manage- 
ment of the street railways was the 
chief issue and the result was a change 
of administration. The report of op- 
eration issued at the close of 1919, 



covering the first nine months of mu- 
nicipal ownership, showed that with a 
rather Uberal allowance for deprecia- 
tion the lines had run behind $517,000. 
The cash fare was raised to ten cents,^ 
with metal tokens sold on the cars at 
four for a quarter. The mayor in 
signing the ordinance said he believed 
the advance was not suflScient. Wages 
of carmen have advanced from 64 to 80 
per cent over those paid in 1918, under 
private ownership. The gross loss for 
the first four months of 1920 including 
depreciation, was $468,000. There are 
rumors afloat that illegitimate means 
were used to influence the sale and the 
city council, at the request of the new 
mayor, has voted $10,000 as a fund for 
probing the transaction. 

It is too soon to make a reasonable 
forecast of the outcome of Seattle's 
latest experiment in municipal owner- 
ship. Inadequate financing was forced 
upon the city by reason of constitu- 
tional debt Umitation. It must pay for 
its purchase in eighteen years and at 
the same time build up a depreciation 
reserve of over twelve millions, thus 
placing an enormous burden upon its 
street car patrons in this generation in 
order to turn over to the citizens of 
twenty years hence a street railway 
fully paid for and adequately main- 
tained. It is a feat which no private 
company would undertake. A service- 
at-cost franchise would have called 
only for the payment of operation, 
depreciation and interest, and unless 
there is careful management the fares 
may be higher during this twenty-year 
period than they might have been un- 
der service at cost. Seattle has not an 
ideal form of government for carrying 
on the business of utility management, 
yet its pubUcly owned water-works 
and electric light and power plant have 
been efl&ciently managed, and the high- 
class men who are at their heads as 
superintendents, have been there many 



,1 



years, through many changing political 
administrations. The civic spirit in 
Seattle is high and I believe that public 
ownership has a better opportunity 
there than in many cities which have 
more modern forms of government. 

CAN PUBLIC OPERATION BE EFFICIENT? 

We are inclined to base our judg- 
ment on public ownership upon the 
presumption that privately owned 
utilities are always well managed, and 
that the reverse is true of all municipal 
undertakings. That this is a fallacy 
any intelligent student who is open- 
minded will aflfirm. Many of the mu- 
nicipally owned utilities have passed 
through this post-war period without 
asking for rate increases and are sol- 
vent. I know of no city which has 
owned and operated any utility for ten 
years or more, in which there has not 
been a great saving to its people by 
reason of reduced rates, not only for its 
own service, but by reason of its com- 
petition with privately owned utilities 
which have thereby been induced to 
reduce their rates. Municipal owner- 
ship is not often credited with any 
advantage for this reason, and yet I 
can name cities in which pubUc owner- 
ship would have been of the greatest 
advantage even if the publicly owned 
plant had never turned a wheel. The 
tendency in municipal plants is to pay 
off and cancel funded debt obligations; 
that of privately owned plants is to in- 
crease them. Under municipal owner- 
ship the chief incentive of operation is 



to give service; imder private owner- 
ship it is to make profits. The tend- 
ency imder private ownership is to a 
brand of political activity that, in my 
opinion, is infinitely worse than any 
"politics" that may creep into man- 
agement under public ownership. The 
people in every city in the state of 
Washington will be heartily thankful 
for any curtailment of the evil political 
domination of the state legislature by 
the former Seattle traction interests 
which results from mimicipal owner- 
ship in that fine city. 

It is my firm opinion that service at 
cost is a transition state, a temporary 
expedient, and one which will be in the 
long run unsatisfactory to both the 
owners of street railways and the pub- 
lic. To the owners, it will be just a 
tightening of the chain of public r^u- 
lation which curtails more and more 
their freedom of operation, but it will 
be sought in order to fix a value which 
may form a basis for public purchase 
later. The voters will ultimately 
awaken to the necessity of a better 
form of city government, in which the 
officials have more authority and more 
responsibility, and of a more lively in- 
terest in government on their own part, 
and when these things have been ac- 
complished, they will insist upon the 
ownership of their public utilities and 
their operation on the basis of the 
greatest good to the greatest number, 
and the banishment from municipal 
life of those evil forces, which have 
done so much to corrupt city govern- 
ment in America. 



-f 



I 

TECHNICAL SUPPLEMENTS of the 

National Municipal Review 

1. The Assessment of Real Estate 24 pages 

• By LAWSON PURDY 

For eleven years President, Dept, of Taxes and Assessments, 
City of New York 

2. Administrative Consolidation in State Governments 

By A. E. BUCK 32 pages 

New York Bureau of Municipal Research 

3. The Coming of Centralized Purchasing in State 

Governments 24 pages 

By A. E. BUCK 

New York Bureau of Municipal Research 

4. A Correct Public Policy Toward the Street Railway^ 

Problem 24 pages 

A Report of the National Municipal League Committee on Public 
UtiUUes. 

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5. Zoning 32 pages 

By EDWARD M. BASSETT 

Counsel of Zoning Committee of the City of New York; former 
Chairman of Districting Commission of the City of New York 

6. Employment Standardization in the Public Service 

By WILLIAM C. BEYER 16 pages 

Assistant Director, Bureau of Municipal Research of Philadelphia 



7. The Presidential Primary 

By RALPH S. BOOTS 

Columbia University 

8. The Law of the City Plan 

By FRANK B. WILLIAMS 

Counsel for American City Consultants 



24 pages 



30 pages 



9. Administrative Reorganization in Illinois 

By JOHN M. MATHEWS 20 pages 

University of Illinois 



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Service at cost for street railways i' 
a synposium, four papers by experi- 
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