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Whether the Milwaukee would have recovered from its long-term downward slide after 1920 if no new factors had entered the picture that is to say, with this expensive, poorly located and terribly burdensome, financewise, extension to the Pacific Coast-it would then have managed at least to stay in the black is a useless question, for the simple reason that in business new factors are always entering the picture. And they entered the railroad picture very rapidly in this period.

The basic profitability of the old Granger lines was destroyed and very largely by Detroit and Washington after the First World War. What the coming of the motor truck did not do to destroy the profitable traffic of most American railroads, regulation as carried out by the Interstate Commerce Commission all but finished it. By the early 1920's, the smart money was being pulled out of the Milwaukee.

World War II and the liquidity that it engendered for the railroads gave them a reprieve, but by 1950 the long-term trends had reasserted themselves. By the mid-1950's nobody in the know believed that the Milwaukee or the North Western or the Rock Island had any future. The ICC, in its role as judge of whether mergers are in the public interest, procrastinated so scandalously as to justify its abolishment on those grounds alone, and the merger route was effectively shut off for most of the old Granger roads when they still had some natural beauty remaining to them. Whether one chooses 1890 or 1905 or 1928 or 1932 or 1950 as the date by which the ultimate fate of the Milwaukee had been sealed, it seems clear that restructuring the corporation within a holding company after 1970 can have had very little to do with the out

come.

That proposition that it did reminds of a statement that was made by a very high scholar and professor in the field of the training of public school teachers in the United States. When somebody came to him with yet another way of revising the American public school system, he said, "Gentlemen, sometimes I have this terrible feeling that we are merely rearranging the chairs on the deck of the Titanic." And that is exactly what the Milwaukee was doing in 1970.

The burning question, of course, is why was the Milwaukee mismanaged, why did they get themselves in a situation like that? What is there about the flow of power and the exercise of property rights, et cetera, that would explain that?

Well, in the first place, superb entrepreneurial leadership is far rarer than is generally supposed. Talent to steer an enterprise on a selected course is fairly common, but vision and courage, a thorough and intimate knowledge of the business and where it is headed, and a fierce identification of one's own welfare and reputation with the success of the business, such qualities, in combination, seldom occur. Unfortunately, this distinction between real entrepreneurship and mere business administration is not widely understood, not even at some of our most prestigious institutions in America.

Only two western railroads were led by talented entrepreneurs in the confused period from 1879 to 1895: the Southern Pacific, in Collis P. Huntington, one of those rare people who had not made a

wrong move since he was 3 years old, as they say; and the Great Northern, in James J. Hill.

The Milwaukee had the misfortune to be controlled from the early 1880's on by two very rich men whose main interests lay elsewhere. These men seem to have valued their railroad connection, apart from its undeniable value as an investment, primarily because it qualified them as tycoons while they risked only a fraction of their huge fortunes and others did all the work. These men, who were both great successes in their original lines of business, were William Rockefeller, young brother of John D., and Philip D. Armour, the Chicago meatpacker.

Armour died in 1901 but Rockefeller remained influential in the Milwaukee until his death in 1922. Some years before, his place on the board had been taken by his son, Percy, who himself left the board in 1921. William had at least a sentimental interest in "his" railroad; but Percy, who went right on attending board meetings after 1921, when he was no longer a member, seems to have brought nothing to its management whatsoever. In fact, his ignorance of the road's affairs, as brought to light on the ICC's witness stand, was shocking. Even more shocking was the revelation that the Rockefellers had sold their holdings in the Milwaukee several years before, without even confiding in the Harkness family, also large investors in the Milwaukee, and associates of the Rockefellers in the petroleum business for many years.

Rockefeller and Armour made their major contribution to the Milwaukee's financial "image." With them in the picture, financing, both long and short term, was always easy to get. Various New York and Chicago bankers also served, notably members of the firm of Kuhn, Loeb & Company. None of these men had any firsthand knowledge of the railroad and could not have contributed much to strategic planning, the time for that having long passed in any event.

A minority of the board were operating executives, but they were not strategists and in any case seem to have been rather like estate managers who had graciously been invited to sit at the lord of the manor's table and who knew they were expected to speak only when spoken to.

I think, with that, I have dealt pretty well, as I refer back over this and according to my ad libbing, with the idea that the Burlington Northern formation in 1970 can have contributed anything to the decline of the Milwaukee. I fail to see how the de facto competitive relationships of the three so-called Hill roads with those of the western roads or the eastern roads with which they connected can have been changed by the actual formation of the holding company-I am sorry, of the merger in 1970.

I would like to close with some comments which are largely philosophical in nature. I am addressing myself to the question, how can we best provide for the well-being of western railroads?

The best guarantee that the people will continue to receive excellent transportation services, and that anticipated growth in traffic can be carried, lies in freeing the leaders of enterprises like Burlington Northern to pursue their profit opportunities as they see them, within established environmental criteria.

Should we fear that holding companies will dump hopeless railroad subsidiaries? Of course not. Where would they dump them? Who wants a dying railroad? On the contrary, the Penn Central bankruptcy taught railroad leaders a valuable lesson: if a railroad property declines in operating efficiency below a certain point, it will start to fall apart. They will have to keep it running; a railroad serves the public. And in the effort it may well devour the entire estate. They cannot afford to let that happen. A sick railroad in a holding company, Mr. Chairman, is like a sick elephant in the living room: it claims the family's full attention.

The leaders of the Burlington Northern know that their railroad, as Mr. Bressler has already said, can earn an attractive return provided they are able to equip the property for the bright future it faces and if the Government keeps the faith on deregulation. Every divisional head in the Burlington Northern should be able to say that the operating results of his division-railroad, trucking, air freight, forest products, petroleum, or what else you have bought in the last 45 minutes, Dick-reflect only his own efficiency or the lack of it. Top management should be free to reinvest the profits where their judgment dictates.

Under such an arrangement, the railroad will get its full share. As Jim Hill liked to say, "Every pot should sit on its own bottom." Thank you.

Senator BAUCUs. Thank you, Mr. Martin. I can tell your classes are probably pretty full.

Mr. MARTIN. Until they get their first grades.

Senator BAUCUs. I appreciate that very much. Without objection, we will insert your prepared statement into the record. [Material referred to follows:]

STATEMENT BY ALBRO MARTIN PRESENTED TO THE SUBCOMMITTEE ON AGENCY
ADMINISTRATION OF THE COMMITTEE ON THE JUDICIARY OF THE UNITED STATES
SENATE, MARCH 26, 1982

My name is Albro Martin.

Before joining the academic community,

I spent 17 years in business, in marketing and advertising research. I am now Oglesby Professor of the American Heritage at Bradley University, Peoria, Illinois. For six years I was professor of business history at Harvard University Graduate School of Business Administration, where I also edited the Business History Review. I have also taught at Columbia University, The American University, and the State University of New York. I am the author of both scholarly and popular articles on the impact of the railroad on the American political economy, and two books that deal in whole or in part with various aspects of railroad history, notably the consequences of public regulatory policy vis a vis the railroads, and the qualities of effective railroad leadership. My major work, published as a book in 1976 by Oxford University Press, is a definitive biography of James J. Hill, based on exclusive access to his complete private and business papers, in which I deal at length with the evolution of western railroad strategy and administration.

The Question before this Committee

As I understand it, the question before this committee comes down to whether the formation and operation of holding companies, themselves immune from government transportation regulation, whose major properties are railroads, will result in financial undernourishment of the railroads and thus in the failure to furnish adequate, efficient, low-cost transportation.

In this particular instance, as I understand it, evidence has been adduced, or at least hypotheses have been formulated, suggesting that the formation of Burlington Northern, Inc., as a holding company for the stock of Burlington Northern Railroad and such of the latter's subsidiaries, some in transportation and some not, as may be transferred to the holding company, may be expected to result in a long-term decline in railroad service to the vast and vital midwest and northwest sections of the United States that the Burlington Northern serves. It has been suggested that in the case of the Chicago, Milwaukee, St. Paul & Pacific Railroad, the

formation of such a holding company has indeed resulted in depriving

sections of the northwest of a vital transportation service. The Burlington

Northern merger of 1970 is further thought to have contributed to the

Milwaukee's distress.

The Milwaukee: A Century of Poor Management

The seeds of the decline of the Milwaukee railroad (until the

reorganization of 1928 known colloquially as "the St. Paul") were planted as early as the first years of the most fateful decade in western railroad history--the 1880s. Since that time, even at the height of an enviable prosperity and apparent success, decisions both made and not made were continuing to seal the ultimate doom of this railroad as a viable, independent carrier. The Milwaukee's fatal weakness lay in those executives who formulated and put into effect strategic decisions. These men were, for the most part, only part-time executives, being directors, rather than fulltime professional managers, and men of great wealth and a variety of other interests; the Milwaukee had to compete for their time and attention, which was not always forthcoming and was frequently incompetent. The Granger Years, 1860-1880.

The Milwaukee was one of several large "Granger" railroads that were quickly and inexpensively built through the states of the midwest (primarily Illinois, Wisconsin, Missouri, Iowa, and Minnesota) in the years following the Civil War, as these rich lands quickly filled up with settlers. The word Granger merely means "farmer," and these were indeed farmers' railroads, for their chief function was that of gathering up the harvest, and transporting it to one of the gateway cities (chiefly Chicago and St. Louis) where the Trunk Lines (New York Central, Pennsylvania, etc.) would take it East to the volume domestic market or to the docks for export; and to distribute to these same farmers the manufactured goods of the East on which farmers seemed to grow more dependent with each passing year. Each of the Granger roads prospered in a lucrative carrying trade based largely upon serving numerous points on an exclusive basis, and in carrying freight which was either short-haul, or originated or terminated at points served exclusively by a single line. This was the age of total ascendance by

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