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The American Railway Industry

And this introduces us to the second characteristic of the railway in dustry, which especially commends railway securities to the investor. Not only is the railway business proﬁtable, but its prosperity is con tinuous and its proﬁts are therefore subject to very moderate ﬂuctuations. In 1908, the year following one of the severest panics in our history, railway proﬁts declined only 6.2 per cent., and in 1909 they more than regained the loss. In good times and in bad, railway proﬁts not only hold their own, but tend strongly to advance. The reason for this move ment of proﬁts it is important to understand. The proﬁts of a business depend primarily upon the demand for its products. If that demand is sporadic and intermittent, the business will be, as Andrew Carnegie said

of steel, either “ a prince or a pauper.”

If the demand is continuous,

however, ﬂuctuating within narrow limits, and always tending upward,

and if the business shows a large margin over the cost of operation, we have what is from the investor’s standpoint an ideal situation. Such a condition prevails in the railway industry. There is a wide difference between the proﬁts of railway transportation companies and manufacturing companies, the instability of whose proﬁts we have just been considering. The demand for the products of a single industry is limited to a small portion of the total number of commodi ties produced. The demand for railway transportation, on the other hand, is represented by every commodity of commerce. The demand for transportation corresponds to the supply of commodities. The broader is the demand for the products or service of an industry, the more stable are its earnings. A large and diversiﬁed demand is but slightly affected by any inﬂuence, but if this inﬂuence is left to operate by itself upon the price of a commodity or service, it produces wide ﬂuctuations. The withdrawal of ten thousand gallons from a standpipe appreciably affeets the level of water in the pipe. Withdraw the same amount from the reservoir, and the water level is scarcely affected. This analogy may be applied to explain the stability of the demand—for railway transportation as compared with the demand for coal, sugar, or iron. The railroad company is patronized by the producers of every commodity. What it loses in freight earnings from a decline in price or supply of one group of products, is often more than regained by advances in others. The manufacturing company, on the other hand, by producing, at the most, only a small number of products, has usually less compensation for a decrease in demand.

Its earnings usually, therefore, show a larger eﬂect

from a fall in prices. The classiﬁed freight traffic of the Pennsylvania Railroad, for ex ample, includes thirty-six general classes of freight, some of which corn‘ prise thousands of individual articles, and each one of which contributes to the $153,564,528 of gross earnings which the company earned in 1909. Each one of these commodities is acted on by a variety of inﬂuences