REALISM OR FATALISM
An Address by
DONALD GORDON Chairman and President, Canadian National Railways
Joint Meeting with the Canadian Club of Toronto
Monday, March 12th, 1962
CHAIRMAN: The President of the Canadian Club, Mr. Morgan Reid.
MR. GORDON: I have found the theme I would like to be able to discuss with you today too large a subject for me. And so, after a bare outline of this larger issue, I shall retreat rapidly into my own modest sphere of activity where I can claim to speak with some authority.
First then, let me try to put into words some questions that can hardly be avoided as one looks at the state of the world we are living in. For surely in all human experience there is no record of such a revolution in human affairs as our world has witnessed in the past couple of decades. With the advent of new implements of destruction so terrible that the mind recoils from the thought of their use, the resort to war as a means of settlement of disputes between nations must be rejected by anv rational individual.
But having said that war is impossible and that there is no alternative to peace, how then is peace to be secured? Here, it seems, the human race is caught in an extraordinary dilemma. It has achieved a means of mutual destruction, but has failed to discover an acceptable means whereby two completely conflicting ideologies can share
the world in peace. For it seems clear that our western society will not accept the ideology and doctrine of the communist society nor can our western views be imposed upon the communist world.
Has modern man in fact failed to adapt himself to the massive changes in his environment brought about by his own ingenuity, and is he capable of measuring up to the physical and psychological challenges he has himself created? In a little more than ten short years we have seen war-one of the oldest habits of mankind-changed by the Nuclear Age into a way of mutual suicide. And more recently, we have seen the emergence of a Space Age that might well cause us to exclaim with Hamlet: "There are more things in heaven and earth than are dreamt of in your philosophy!"
As I said at the beginning of this talk, the theme is too large for me, so I leave it with only a comment to provide the bridge over which I shall retreat to the relative safety of my own range of comprehension. My comment is that I see no need for despair or fatalism despite the frustrations, exasperations and confusions. The basic lesson must surely be already obvious, namely that the right of unlimited sovereignty on the part of any nation or any group of nations is no longer possible in our new world-a world dominated by a scientific capability that demonstrates an enormously enlarged productivity, undreamed of speed in communications, and, most important of all-the devastating potential of thermonuclear warfare.
In this new world, conflict of opinions must be reconciled and not crushed. One side cannot take action without concern for the other. Therefore, I cannot believe that the human mind is incapable of developing the sort of world organization that will recognize the needs of the times. Indeed, the Charter of the United Nations already states the fundamentals, and what has been called "A Crisis of Confidence" in respect of its functioning must reflect only the strains that are inevitable as mankind struggles to establish the rule of law, peace on earth and good will towards men. So it is from this conviction that I pass on. For it seems equally obvious that if we Canadians are to fit into the scheme of things in a world order we must first learn how to order our own affairs and demonstrate our ability to find solutions for our own recurring domestic problems. My main purpose in coming here today was to speak to you about my business, which is transportation. The capacity in which I speak is that of a railroader, and first of all I present my credentials. They stem from the fact that among more than 100 Class I railroads in North America, I am one of the six longest serving presidents. I am constrained to sound this personal note because the fact that I was once identified with the banking business is for some reason played up in public references as if I were an amateur in my job of railroading. I take this opportunity, therefore, to stake my claim to the job description of a railroader and to say that my twelve years as President of Canadian National have not been merely an exercise in longevity but have given me an unusual concentration of experience. Indeed, my years of railroading have seen the most radical industry changes in the history of the transportation business. In fact, during these years the competitive environment of the transportation industry has completely changed, and along with that has gone a major technological revolution in equipment and in methods of operation.
Transportation in terms of its availability, its flexibility and its cost, is one of the important requirements of the Canadian economy. Without an efficient low-cost transportation system, Canada simply could not have become one of the larger industrial nations of the Free World, nor could it have become one of the world's largest trading nations. It follows that the Canadian transportation industry is also heavily influenced by the economic health of Canada and must be concerned, not only with its own role, but as well with anything that changes the scope and character of Canada's trade.
My introductory references to the gigantic changes flowing out of the disciplines that are being imposed by the Nuclear Age and the coming Space Age may now be brought into this context. For already part of the struggle between conflicting interests is being expressed in the formation of large trading blocs, each designed to create a form of self-contained area protected by tariffs against outside encroachment. In these developments the Canadian position seems rather obscure but, most certainly, we cannot live unto ourselves. We simply do not have a domestic market of a size that could support a policy of trying to establish an independent trading entity so that we will have to be ready to reach some sort of an accommodation with all or some of the trading groups that are in formation.
Along with this problem is that which emerges from the possible appearance in world markets of goods from hitherto undeveloped countries which have been encouraged to achieve both political independence and industrial competence. By definition, many of these goods for a considerable time will appear on the markets of the world as the products of low wage industries and will be generally competitive with the products of more mature and high cost economies, such as Canada's. These developments will certainly bring major problems, and it will take all the skill and knowledge we have to meet the challenges they present. Undoubtedly, the need is to improve our productivity, develop new technology, improve specialization where we have natural advantages and generally to face our problems with bold, imaginative and realistic appreciation of the competitive forces we must meet.
Against this background, it is easy to see why the costs of our products for export become so vitally important. With transportation adding something to the cost of almost everything we use or export, the nature of Canada's transportation system is thus also a matter of vital concern. We are fortunate, therefore, that there recently became available Volume II of the Royal Commission's Report on Transportation, with its recommendations to improve Canada's transportation efficiency.
The Commission was appointed in May, 1959, and travelled to every province in Canada, receiving submissions from more than 140 different parties in 134 days of public hearings. Its first volume of recommendations was made public in April 1961. It laid the foundation for the conclusions and recommendations of the second volume which was tabled in the House of Commons less than two months ago. A third volume, to be submitted later, will present a number of special studies undertaken by the Commission.
The recommendations in both Volumes I and 11 are an outstanding contribution to the fresh thinking needed to find real and lasting solutions to modern-day transportation problems. In fact, this Report is not only a treatise on transportation problems, but it is also a forceful enunciation of how the basic principles of competition and freedom of enterprise may be made to serve the general good of the Canadian people.
I am not suggesting, of course, that the Report is a complete answer to every question in the complex of Canada's transportation, nor do I intend my comments to be interpreted as an endorsement of each and every recommendation made. What I do say is that the Report is a most searching and thoughtful analysis, excellently presented, and that it does not shrink from stating the challenge that free enterprise presents to everyone who believes in that system. It states boldly that lip service is not enough and sweeps aside the often hypocritical utterances of vested interest. For these reasons I advance my opinion that the Report is required reading for everyone with a serious interest in transportation and its influence on Canada's economy.
The fundamental recommendations concern rate freedom. That is to say, the freedom to establish rates and adjust them as business sagacity directs, with railway rates subject only to minimum and maximum rate controls. These recommendations for rate freedom apply to all transportation media and recognize competition between every mode of transportation as the best regulator of efficiency. The proposals would reduce sharply the need for regulation and, subject only to maximum and minimum rate rules, the railways would have all the discretion on non-statutory pricing matters that any other company has, including their transportation competitors. However, the feature that is fundamental to transportation economics and efficiency is that rate freedom would achieve the most effective allocation of transportation resources by forcing every mode of transport to operate at the lowest possible costs in a free and open market place.
This principle of rate freedom is in complete accord with the principles by which Canadian National has lived, within the limitations of existing regulation. Although by an accident of history it is a publicly-owned corporation, Canadian National, as everyone knows, has always operated according to the principles and within the framework of free enterprise and under the same regulatory rules as its privately-owned counterpart, the Canadian Pacific Railway. With implementation of the proposed rate freedom which would permit the railways to react with speed and flexibility to the forces of competition, the railway industry should establish rapidly what their rightful share of the transportation market is in terms of what traffic it can attract with the services it has to offer and the prices it must charge. In such a truly competitive environment I am confident that the railways can and will survive as efficient, healthy and profitable undertakings.
A clear line is drawn by the Royal Commission between national policy and national transportation policy. The lack of this separation in the past has undoubtedly confused enquiries into Canadian transportation problems. The MacPherson Report separates these two policies by stating that a clear distinction has to be drawn between the objectives of a national policy which uses transportation to achieve certain ends and the objective of the national transportation policy which it defines to be efficiency and economy in the transportation system. The Commission further recommends government action that would redress the competitive imbalance against the railways by removing, and I quote: "certain national obligations which reside with the railways as the legacy of tradition, law and public policy."
As a first step towards adjusting the balance of competition between the various modes of transportation in Canada, and removing burdens that have seriously weakened the competitive position of the railways, the Commission declares that public policy must be changed in four major areas and these are summed up in the Report in this language, and I quote:
l. The regulation of transportation in Canada should be minimized as much as possible, consistent with the protection of the public interest, and such regulation as is retained should bear in a reasonably equitable fashion on all carriers.
2. The rationalization of railway plant and operations should be actively encouraged by public policy and where, for national policy reasons, it is considered necessary to retain rail operations such as unprofitable passenger or branch line services, the railways should be entitled to payment from public funds to cover their deficits on such services.
3. No particular form of transport should be singled out as an instrument of national policy if any burden is involved in the performance of the function unless sufficient compensation is provided to that mode of transport to prevent distortions in the competitive transportation market.and finally,
4. Assistance to transportation which is designed to aid, on national policy grounds, particular shippers and particular regions should be recognized for what it is and not be disguised as a subsidy to the transportation industry. Moreover, whenever assistance of this kind is distributed through the transportation medium it should be available on a non-discriminatory basis to all carriers.
I want to point out that the recommendations I have just read to you are by no means all pro rail, but rather are "pro" whatever is the most efficient and economical mode of transportation for the shipper, whether it be by air, rail, water, pipeline or truck. In other words, they are not biased in the railways favour, but are an objective analysis of what needs to be done to ensure the most efficient and effective allocation of the nation's transportation resources.
The observations of the Commission on the freedom to enter into new trucking operations are extremely important since trucking has become an integral part of the competitive transportation system. I feel that such freedom is of definite value to the shippers-the users of the services and would allow the railways to integrate their road and rail services to produce transportation required at the lowest possible cost to the country. Thus under the competitive conditions outlined, freedom of entry into the trucking field, for anyone willing to assume the risks and obligations, should certainly dispose of any fears that the railways will monopolize the trucking industry in Canada. In fact, the Commission clearly states that the only thing that independent truckers could fear was the possibility of increased efficiency through railway ownership, and the Report emphatically states that "Efficiency should not be penalized".
Concurrent with rate freedom, the Commission holds that the railways must receive relief from uneconomic branch lines and passenger services that are no longer required or used by the public because of the mushrooming growth of modern highway networks.
This relief from the burden of uneconomic services is necessary to enable the railways to compete freely with other modes of transportation. The Commission recognizes that the burden placed on rail shippers by loss operations should be removed gradually. For example, it has recommended that the abandonment of uneconomic lines should be spread over a period of time so as to avoid the disruption that a rapid programme would bring to labour, to shippers, to investment tied to rail and to communities affected. However, the Commission is opposed to paying long-term subsidies for uneconomic services and would only tolerate payments to the extent that the Government decides the maintenance of certain services to be necessary for national policy purposes.
The Commission's proposals clearly indicate that it agrees with the railways that subsidies are payments to the people of Canada-to manufacturers and consumers in certain sections of the country. They are not payments to the railways in the hand-out, something-for-nothing category! At Canadian National we consider ourselves lucky if these "indemnity payments"-for that is what they are-meet the actual cost of the service we must perform because of the obligations of national policy, and it is basically in accord with this fact that the Report recommends "that transportation which is designed to aid on national policy grounds particular shippers and particular regions should be recognized for what it is and not be disguised as a subsidy to the transportation industry".
Now let me say a few words about how the Commission's recommendations for rate freedom and rate controls might be implemented. Unfortunately, the railway freight rate structure has had a history of great complexity and even some experts have fears that the recommendations of the Commission may bog down under the weight of administrative impracticability. I do not share that view. The Commission has explicitly stated that under present-day circumstances there is no justification for elaborate and expensive rate regulating machinery. The new mechanism of railway rate control would replace, not supplement, the present freight rate regulations. The Commission recommends that: "Railways in common with other carriers, particularly trucks, will be free to make independent assessment of all their rates and adjust them as business acumen directs, subject only to the maximum controls over significant monopoly and the minimum controls of directly associated costs of the movement."
The minimum rate formula suggested by the Commission makes good sense in any industry. We are not going to cut below costs or charge anyone less than the out-ofpocket costs of the movement. So far as maximum rate control is concerned, for the great majority of commodities, there is really no need for it since competition is sufficiently pervasive to ensure that if the railways want to live and want to carry anything they must offer competitive rates. Nevertheless, in the small number of instances where the shipper may be regarded as captive to the railways, the Commission wants to ensure that he is protected. The maximum rate recommended is 150% above the long-run variable costs of moving a 30,000 pound carload. At first glance this percentage may seem high, but if you knew the cost characteristics of the railway as I do, you would consider this percentage moderate or even low.
Just for a moment, consider the fixed costs of a railway which do not vary with the volume of traffic moved. An example is the 24,000 miles of Canadian National rightof-way which must be maintained, fenced, kept clear of* weeds and snow, drained and taxes paid, regardless of the number of cars or trains which move over the road-bed. These costs, plus many other costs which are not related to volume, must be met from the excess of revenue above the costs directly related to any particular shipment. This principle is not new, and undoubtedly all of you here today are familiar with it, for it is basic to free enterprise and competition. What is new is that this principle has finally been proposed as applicable to the railways.
The Commission has allowed for a transitional period for the implementation of the new rate mechanism so that there would not be a rupture to the present rate structure. The large majority of existing rates are attuned to competition and will not be changed substantially with rate freedom. Another segment of our rates will in all probability have to fall to make ourselves more effective in the market place. Before a rate is raised, its relationship to costs will be carefully studied by railway management since any change in rate will automatically subject that rate to the maximum rate control.
Under the new formula, horizontal rate increases, as we have them now, would no longer be needed to protect railway earnings. However, it is important to note that the Commission says explicitly that all the recommendations with regard to maximum and minimum rate control, the removal of the burden of unprofitable lines and services, and the granting of related subsidies, must be brought about in their entirety, concurrent with the cancellation of the present rate regulations. A partial implementation of the recommendations will not solve the nation's transportation problems.
And finally, in respect of the whole programme, the Commission has very ably stated the managerial function:
Management of rail facilities is the responsibility of the rail company, be it privately or publicly owned. Within the framework of government regulations, management must be free to manage. The responsibility must be theirs to initiate the removal of unprofitable segments of their business, to streamline their operations, to reduce costs and to initiate new facilities to meet the needs of the shipping public. No one else can do this for them and no one else should try to do so. That mangement must do the managing is an elementary principle, the acceptance of which we believe is vital to the achievement of an efficient rail transportation system in Canada.
Despite what I have just quoted it must be realized that management cannot bring about the changes necessary to improve the nation's transportation efficiency without the whole-hearted support and co-operation of labour, of the public and of the various regulatory and legislative bodies. And this brings me to a very important subject affecting the railway situation which I want to touch on very briefly before concluding. It is the subject of labour-management relations. The Commission, of course, recognized this to be an important subject but found that it was not included in their terms of reference.
Let me emphasize that there is nothing in the MacPherson Report that guarantees or assures what portion of the transportation market can be secured for railroading and its associated services. On the contrary, the Report makes it bluntly clear that in advocating competition as the best regulator of efficiency it assumes that each transportation medium will find only the share of the market to which it is entitled in terms of its own inherent advantages, be they reflected in equipment, service, cost or otherwise. In recommending the removal of outmoded regulations and restrictions that would impose discriminatory burdens on any transportation medium, it is clear that reference is made to all forms of out-moded rules and practices. Thus the Report speaks to governments, to shipping interests, to communities and to labour and management alike.
It has saddened me, therefore, that in current discussions with labour this fact does not seem to have been grasped by our labour friends and that management's allout effort to achieve a basis on which directly to negotiate realistic working agreements has been rebuffed.
I refer now to what you have all read in your newspapers about demands made on the railways for a "job freeze", based on 1961 employment levels, from fifteen unions representing 110,000 non-operating employees.
In dealing with this, railway management made honest, sincere and far-reaching proposals to settle the uneasiness of employees about job security. Our proposals included guaranteed jobs or income for employees with 20 or more years' service-and bear in mind that in the railway industry that group today represents one-third of the work force -and also severance pay on a guaranteed scale for those with more than eight years' service. These proposals also included a wage increase to be negotiated in the light of work security and other benefits, and were subject only to recognition being given by the unions to changes in seniority groupings and certain work rules that would provide sufficient flexibility to make management's new approach both practical and workable.
Frankly, I am baffled that our union leaders have apparently failed to recognize that this pioneering effort by railway management would benefit the employee by substantially improving stability in railway employment in Canada. It is in the long-term interest of the employee, as well as the railway, that management be allocated the necessary flexibility and mobility in the assignment of the work force. The plan that we proposed was designed to reduce unnecessary layoffs caused by a multiplicity of seniority groupings based on "point and craft" restrictions that prevent the transfer of workers from one point or job to another to meet actual work requirements. Thus the restrictions of the existing seniority system frustrate efforts by management to maintain the employment level in periods of fluctuating demand and do not fit into the presentday environment of the railway industry.
It seems to me that in refusing to negotiate on matters of this kind, our union leaders are not serving the real interests of the employees they represent. For it would appear that unless labour is prepared to deal in realism and face the competitive facts of life in what has become a fiercely competitive transportation world-instead of insisting that wage and working agreements can be reached only on its own terms-there is little hope that settlements can be made which will enable railway companies to compete today and tomorrow. Inevitably, over time, that means a fatalistic acceptance of a much greater reduction in the railway labour force than would have been necessary in future adaptation to the new transportation environment. For the truths of economic survival are no different from the facts of physical survival-no species can survive unless it adapts to its changing environment.
In concluding, let me repeat that transportation costs will certainly continue to be an important factor in determining Canadian industry's competitive position in world markets. If Canada is to be at its best fighting weight, it cannot afford to go into the international ring with the fatiguing fat of services and products-or, indeed, of a work force-priced beyond what could be achieved if costs were whittled by efficiency and attuned to realism.
THANKS OF THE MEETING were expressed by Dr. Z. S. Phimister.