An Address By DONALD GORDON, C.M.G., LL.D. Chairman and President, Canadian National Railways
Joint Meeting with The Canadian Club of Toronto
Monday, March 12th, 1951
CHAIRMAN: The President of The Canadian Club of Toronto, Mr. R. F. Chisholm.
MR. GORDON: Mr. Chairman and Gentlemen: My job bears the title of Chairman and President of the Canadian National Railways, and I have come here today to talk to you about it. For I must assume that each one of you is interested in my job, first, because you have been kind enough to invite me to come and break bread with you and to speak to you today, and second, because of the series of events, during the first quarter of this century, which accidentally made each of you a shareholder in this great enterprise.
The physical facts relating to the C.N.R. are, I think, fairly well known in broad outline. You will be aware--if our publicity is at all effective--that our Railway lines serve all of Canada and 11 States South of the Border. But the Canadian National is much more than a railway network. It is a System, organized into a managerial unit, which also exercises ownership or control over three major steamship operations, a nation-wide telecommunications network, a chain of ten hotels and three summer resorts, and such varied facilities as car ferries, busses, trucks, electric trams, dockyards, stockyards, warehouses, grain elevators, even a coal mine, and of course our association with an airline is well-known. I am sure you will not quarrel with me if I claim that the Canadian National occupies a special place in the annals of transportation.
The employees of the Canadian National--115,000 of them scattered from the Atlantic to the Pacific Coast--constitute the largest single industrial working force in Canada. The range of occupational skills in the Canadian National is a continuing source of amazement to me; they include architect and artisan, cook and chemist, draftsman and deep-sea diver, geologist and garage mechanic, sailor and surgeon--I could almost work through the alphabet in this fashion. Together the Canadian National employees make a vital contribution to our economic life; individually they lend a remarkable variety of talents to the social and cultural life of this nation. The list of our employees who actively participate in Government, for example, include Members of Parliament, Provincial Cabinet Ministers and legislative representatives, officers of local government and mayors in a dozen towns and cities across Canada.
Last year this vast System took in over half a billion dollars in revenues. To restate this colossal sum in more familiar proportions, it means that on the average throughout the year we take in more than $1000 for each minute of the day and night. And what do our patrons get in return? For value received--and not always full value at that--in the course of a year we carry something like 80 million tons of freight, 24 million shipments of express and 18 million passengers. We send 14 million telegrams and cables, and accommodate three quarters of a million guests in our hotels. This list of activities is of course by no means complete, but it will serve as an illustration of the volume of work performed by the System and its employees.
This effort requires not only an army of people but a vast amount of equipment and supplies. We enter the market for a great variety of articles ranging from lead pencils to locomotives, and our stores inventories carry some 50,000 different items, worth about $75 million.
As the largest single buyer of materials in Canada we are an important customer to some 10,000 different firms in all parts of the country.
The scope and magnitude of our purchasing activities naturally means that the Canadian National management is among the first to feel the effects of rising prices. To choose a smaller example this time, the Canadian National spends close to $51/2 millions a year on food supplies for dining cars, restaurants and hotels; so, like any housewife living on a budget, my job gives me good reason to be concerned about the cost of living.
Just to give you an idea of what price inflation has done to our operating expenses, we paid out last year something like $230 million more than would have been necessary if the 1939 levels of wages and material and equipment prices had been in effect. Higher costs have affected other industries too, but I would like to remind you that, unlike the railways, they have been free to make price adjustments at their discretion.
Inflation really means that the 1939 dollar and the 1950 dollar are related in name rather than fact. Not all facets of economic life have been equally adjusted to the shrunken yardstick of dollar values. Indeed, the rapidity of the decline in the value of money over the last decade, and particularly since the beginning of 1946, has created a number of awkward by-products. For example, industrial firms are still discovering that depreciation funds built on original cost are quite inadequate for making replacements in kind. Higher corporate and individual incomes automatically inflate Government revenues and make fiscal problems appear deceptively simple. In general terms debtors gain to the extent that they are able to discharge their obligations with depreciated money. The same economic environment puts a squeeze on charitable institutions and universities, which depend in part on fixed income from legacies.
An even more distressing social problem arises in the case of all those, including the self-employed, who have reached retirement age. Not only do low interest rates reduce the annual yield of accumulated savings, but those whose industrial or state pension is fixed in dollar amount find themselves defenceless against rising prices. Indeed, one of the most vexing problems for Canadian National management at the moment is how to adjust our pension plan in face of the fact that benefits paid, in the lower brackets particularly, were based on a dollar that had a much greater purchasing power than that of today.
To revert to the general pictures of the Canadian National, the relationship between our operating expenses and revenues in terms of the work we must do can be appreciated from this fact: we had to haul, on the average, 2 1/2 tons of freight for a distance of one mile in order to earn enough gross revenue to buy the typewriter ribbon with which this speech was recorded. This is intended not as an explanation of why I turn down many invitations to make speeches, but as an illustration of the fact that the average level of railway freight rates in Canada is still one of the lowest of any country in the world.
If in general the physical facts relating to the System are fairly well known, I am sure that cannot be said of the financial record. I doubt, for example, if it is appreciated by many people that since the Canadian National began operations as an organized System in 1923, it has never failed to meet operating expenses. I do not mean to suggest that the failure to cover interest charges in most years is a matter of no consequence--but I do believe that the nature and origin of these interest charges are not understood and never have been understood by the vast majority of the Canadian people.
It is necessary to recall that the Canadian National Railway System came into being on January 1st, 1923, having taken over in one form or another the operations of the Grand Trunk Railway, the Canadian Northern Railway, the Grand Trunk Pacific and the Canadian Government Railways. Ownership of the first three mentioned railway corporations had previously been assumed by Government because they had broken down, were insolvent and had only been kept going through large advances of public money. All sorts of financial legerdemain had been practiced by the managements of these corporations to keep them alive--expenditures properly chargeable against income had been capitalized, maintenance had been seriously deferred and necessary improvements postponed. In the normal course of events, following their financial collapse, there would have been a receivership in bankruptcy in which the fixed charge debt would have been written down to a point having some relationship to earnings-or rather the lack of them. Most of you are familiar with the reasons why that course was considered unwise. In general it was felt that bankruptcy proceedings would have resulted in serious injury to the credit of Canada, having regard to the fact that many of these outstanding railway obligations were guaranteed in one form or another by the Federal Government and some of the provinces.
I have no quarrel with the decision--all things considered I believe events have justified the action taken in bringing about the consolidation of these railways into a unified system. But I do take issue with the choice of policy which transferred all the debts from the bankrupt companies on to the balance sheet of the newly organized System, and required it to shoulder a fantastic burden of interest quite beyond its capacity to pay out of operations. Since I have taken office, I have heard many tributes to my illustrious predecessor Sir Henry Thornton, first President of the System, and one whose name is revered and honoured by every railroader I have met. His was the task of welding the competing units of the railways taken over into a unified operating system, and breathing into the workers of the amalgamated organization a loyalty and an esprit de corps which to this day makes the Canadian National the envy of other railroads in this Continent. It does seem to me, therefore, to be nothing short of tragic that his initial, perhaps unwilling acceptance of the financial pattern, his subsequent failure to win approval for its correction, and his inability to shake off the implications of that Balance Sheet, should have so over-shadowed his great record and brought his career to a heart-breaking end.
Just think of this one fact that in the five years preceding consolidation the deficit of the four component railways I have mentioned totalled two hundred and thirteen millions of dollars and that in those same years they fell short by nearly sixty millions of covering even their operating expenses. How then could anyone assume that these properties could be put together on a basis that would overcome such a disability? Yet it came about that the Canadian National, upon its formation, was charged with the financial sins of its predecessor corporations to the tune of $63 million in annual interest charges, $28 million of which was payable to the government itself. Now there are a great many places where these sins can, and ought to be recorded, but I do not believe they belong in accounting records which are supposed to reflect economic values. Essentially this was the reasoning which lay behind our submissions last year to the Royal Commission on Transportation, but quite apart from the recommendations of the Commission, there is, I am convinced, a strong body of public opinion which supports and expects action now to put the accounts of the Canadian National in such order that its annual operations will be readily comprehensible.
My job, as I have already stated, is to act as chief executive for the System some of whose ramifications I have been describing to you. In a great many respects, allowing for the size of the undertaking, my position is not very different from that of the president of a private corporation. The Canadian National Railway Company is the corporate nucleus of the System, and the model for the whole organization was drawn from private enterprise. The direction and control of the Company is vested in the Board of Directors, of which I am Chairman. Whenever, under the provisions of the relevant legislation, approval or confirmation by the shareholders is required, the law stipulates that it may be given by the Governor-in-Council. Once a year our annual report and capital budgets are presented to Parliament through the Minister of Transport and soon afterwards we appear before Members of Parliament meeting in Committee to explain these documents and review our activities. These hearings are closely analogous to a shareholders' meeting--the Committee Members as it were, voting your shares by proxy. I doubt, incidentally, if there is any other shareholders' meeting at which such a penetrating curiosity is exhibited in the activities of the Company. This is a healthy attitude and one which I heartily welcome-provided, of course, that it is restrained by common sense.
Now for a few minutes I shall make reference to the rather serious paradox to be found in the competitive relationship between the railways and commercial road transport. Railways, as you will appreciate, provide by far the lowest cost medium of land transportation, their average costs per ton mile being about one-third that of the trucks; yet because of the pattern of railway rates and the conditioning of the industrial structure to relatively low rates on basic commodities, the railways seem to be on the defensive. You are perhaps aware of the major anomalies which surround these circumstances--the contrasting freedom of the trucker to pick and choose traffic, and to adjust rates and services, using a right of way provided by the public, whereas the railways must provide and maintain their own. This, too, is a problem which was argued before the Royal Commission and I am not here to argue it in detail again. I do, however, want to let you know that we in the C.N.R. are not passively taking our ease in hopes that some one will throttle our competitors. We have no such desire--first because we recognize clearly that there is a proper economic field for truck transportation and we are not so foolish as to try and turn back the clock to a bygone age; secondly, because the motor vehicle manufacturing industry is an important source of traffic to us. We do not want to strangle the truckers, but to meet them--and beat them where we can--on an equal footing.
To this end I can see two lines of approach that are within our power. The first is to re-examine with an open mind all our methods, procedures and techniques for handling the traffic on which we are vulnerable; the second is to undertake jointly with our fellow members of the Railway Association, an intensive fact-finding programme of research into the common problems arising from road-rail competition. It may surprise you to learn that there are no complete or comprehensive statistics available to the public on trucking operations in Canada, and this is one of the gaps that needs to be filled.
Another thing that still seems very odd to me after more than a year in office is the notion some people have that the management responds better to representations if they are sponsored by third parties. Occasionally people seem to believe, for example, that special pressures can achieve the desired effect on our employment bureaux, or our Purchasing Department or our Operating Department. Let me hasten to put the record straight with the assurance that no favour is shown--we make a point of giving applications of this kind just as good a hearing as if they came to us directly.
As I conceive it, the duty of the management to the owners of this System is to obtain the maximum value for every dollar expended and to give the maximum value for every dollar received. To do this effectively the management must have the greatest possible degree of autonomy consistent with the broad pattern of economic policy laid down by the Government. I believe that all Canadians are proud of the fact that both practice and tradition are firmly against the interjection of partisan politics or special privilege in the affairs of the National System.
This does not mean, of course, that we are insensitive to public opinion--no organization under any ownership can afford to be for very long. We are just as concerned with letters of blame as we are pleased with letters of praise--and we get some of both.
Yet it seems strange to recall that only two decades ago the Canadian National was regarded as the problem child of the nation--a foundling that had been left on the doorstep and was starting to eat Canadians out of house and home. If someone in those days had designed a coat of arms for the C.N.R. it would certainly have contained a bar sinister in token of its questionable parentage. Throughout the worst years of depression the central question of debate was whether the C.N.R. should continue to exist as a separate organization.
The bitter quarrels and controversies of the thirties are happily heard no more. On the one hand, great additions to the national wealth are paying off the heavy mortgages placed on the future by our early railway builders. On the other hand, there is a more general recognition that the two great railway systems, publicly and privately owned, can co-exist in a stable yet highly competitive relationship. There is, moreover, as a consequence of the Second World War and the threat of a third outbreak, a strong appreciation of the fact that railways in Canada constitute the fourth arm of defence.
Canadians are still trying to adjust their sights to the immense changes that have taken place within our economy since the depression of the thirties. Consider the new horizons that have been opened up in the past five years alone--the possibility of enormous power' and aluminum development in Northern British Columbia, the rich oil fields in Northern Alberta, the uranium possibilities of Northern Saskatchewan, the nickel deposits in Northern Manitoba, the development and exploitation of mineral and forest wealth in the Laurentian Shield, and, most recently, the copper deposits in Gaspe. All across the country Canadian National lines skirt along the edge of this newly recognized economic frontier of the north. Because of this location the C.N.R. stands in the vanguard of some of the major economic developments in prospect in Canada. Our policy is to encourage industrialists to come and talk over their plans with us. We are glad to offer technical advice where it is needed and to examine every proposal on its merits, and we are willing to take the long view in evaluating our returns for each dollar of expenditure.
While on the subject of development let me remind you in passing of the importance of immigration to the early growth of this country, and the part played by railways as the major agencies of colonization. I welcome the show of vigour in the Government's new immigration policy, and I anticipate that the Canadian National will continue in the future to fill an important role in attracting, transporting, and establishing new citizens in this country.
Meanwhile the world has entered upon a period of twilight peace in which we cannot be sure when or if total darkness will descend. In this atmosphere matters concerned with our national security assume first priority. The fact that the railways are periodically called upon to carry enormous peaks of war-time traffic poses an awkward problem in the adjustment of capacity. Compared to 1939 we, are operating on a new and much higher plateau of traffic, using for the most part equipment and facilities whose service life has been reduced by at least ten years. Despite the new equipment that has been acquired, roughly one quarter of our freight equipment is over thirty years old. Our passenger equipment has an average age of about 28 1/2 years, and in spite of reconstruction, a good deal of its is obsolete by present day standards. It must be frankly admitted, too, that our supply of rolling stock is not adequate to the demands of seasonal traffic peaks, and while some improvements have been made to terminal and yard facilities, serious bottlenecks exist. It should be remembered that the C.N.R. did not have the advantage of planned growth as an integrated system--originally it was just a conglomeration of lines seldom complementary, sometimes duplicative, and often competitive. As a consequence, terminal and yard facilities have been, and will continue to be for a long time, one of our major headaches in operation. Indeed, in the face of these handicaps I think the C.N.R.'s record in handling traffic is a tremendous tribute to the teamwork and effectiveness of our employees and officers.
Large orders for equipment have been placed and we expect our expenditures to show a good return. But deliveries will be slow and in the meantime, in order to meet the urgent demand for rolling stock, intensive efforts are being concentrated on getting the maximum use out of existing equipment and facilities.
The relationship between the Canadian National Railways management and the employees is another major responsibility of my job. I believe--and I have tried to act consistently in this belief--that honesty and frankness and fair dealing constitute the foundation of good employee relations. I do not pretend they are enough in themselves to insure absolute harmony, if only because the question of wages and working rules leaves scope for sincere differences of opinion. Perfect agreement is rare enough among the closest of friends or family circles; it is hardly to be expected in industrial life where the machine age has tended to impersonalize human relations. Mere size imposes its own handicaps on the problem of human relations in industry, for it is too often necessary to summarize human beings in the imperfect shorthand of statistics. Moreover, the difficulty of making frequent personal contacts engenders a feeling of remoteness, and the sources of friction and misunderstanding are naturally increased as lines of communication are lengthened.
The Canadian National has a justifiable pride in the kind of institutions and procedures which have been built up for developing closer ties within the organization. But it must be admitted that the methods and procedures open to us for the settlement of major wage disputes leave much to be desired. Looking back on the history of recent years, it seems that each dispute has been more difficult to resolve; each one. has entailed longer delays; and each settlement has relied more heavily upon the opinion of third parties, until in the most recent case the matter was taken out of our hands entirely. However easy and expedient it may seem at the time, I do not believe that lasting solutions to wage disputes will emerge from the abandonment of managerial responsibility in any direction--to the employees, to our patrons, or to the public who are the owners of this property. On the other hand, I have said before and I say it again, that neither side in an industrial dispute will gain in the long run by the forcible imposition of the less intimate and less informed judgment of third parties. Personally, I feel that the railway union leaders and, indeed, our employees generally agree with me in this. When we are free of the current round of negotiations, which incidentally have been going on since before I assumed office, I am confident that if we sit down together we can, in re-examining our procedures, find ways and means of working out our own settlements. The proof that we can do so was demonstrated just recently when mutually satisfactory wage agreements were signed with certain operating trades.
Let me conclude with one observation from my experience in what has proved to be an eventful year with the Canadian National Railways. It is that few occupations demand of those who engage in it a greater sense of vision, and resolute, realistic faith in the future. This is not only because units of motive power and car equipment may be durable over two or more decades, or because branch lines may in practical terms represent capital commitments in perpetuity. It arises also from the fact that almost every major industrial development requires the mass over-land transportation that only railways can provide, and from the fact that railways on the fringe of settlement are so often called upon to create the conditions for new development. Nowhere else can the pulse of this nation's economic activity be felt more quickly than in the arteries through which the great bulk of its commerce must flow, and therefore no one has a greater stake than railway management in the direction and rate of 'advance achieved by our population, technology, and national production. Conversely there is no activity more vital than the railways to the security, prosperity, and progress of the Canadian people.
VOTE OF THANKS, moved by Mr. Sydney Hermant, President of The Empire Club of Canada.