Melville J. Ulmer

English

Research Papers in Economics

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of Economic Research
Volume Title: Trends and Cycles in Capital Formation by United States Railroads,
1970-1950
Volume Author/Editor: Melville J. Ulmer
Volume Publisher: NBER
Volume ISBN: 0-87014-357-3
Volume URL: http://www.nber.org/books/ulme54-1
Publication Date: 1954
Chapter Title: Summary
Chapter Author: Melville J. Ulmer
Chapter URL: http://www.nber.org/chapters/c9506
Chapter pages in book: (p. 50 - 51)Summary
Any appraisal ofthe future capitalrequirements of therailroads must rest in part, at least,upon an analysis ofgrowth patterns discernible in the past. InAppendix A of thisreport the assembly of theraw statistical materialsrequired for thispurpose is presented. In thepre- ceding pagesan exploratory investigationof thesenew series was undertakej
It was found thatthe expansion ofthe railroadsover the long term proceeded at aconstantJdiminishing rate fromthe earliestyear - 1870covered in this study.The peak of thetotal stock of roadand equipment wasreached at the endof 1930, when theaggregate value in 1929 priceswas $24 billion. In thesubsequent twentyyears there was a modest netdecline.
The explanationfor this behaviorwas not found simply inchanges in the level ofrailroad traffic. Forin the yeaprior to World \VarI, railroad outputrose for the mostpart at an increasingrate, while the flow of netinvestment, thoughvery sharp, nonethelessdiminished per- sistently. Thesediverse trendswere reflected in thesharply declining ratio of the stockof capital to theannual flow ofoutput, bothmea- sured in constantdollars. From theearly l880's tothe years justpre- ceding World WarI, the dropwas from 15 to 4, instrikingcontrast to the rise in theCorresponding ratio formanufacturing in thisperiod. Underlying thischange wereseveral factors,some of whichsuch as the high degreeof indivisibilityof facilities-arc common tomost utilities, others ofwhich arccharacteristic ofrailroads alone. Their influence, inconcert, was to reduceover time thequantity of invest- ment required fora given expansionin output. Thisprogressively dampening effectupon the volume ofcapital formation,which was most pronounced inthe pre-WorldWar I period,was reinforced in
50subsequent years when the volume of trafficitself leveled off in the
face of the growing competition of otherforms of transportation.
As implied above, net capital formationin the period 1919-1950,
taken as a whoic, was relatively small in contrast tothe swift accumula-
tion of earlier years. However, the flow of grossinvestment remained
at substantial levels, for the hugedimensions reached by the entire
stock of road and equipment brought with it largereplacement re-
quirements. Capital consumption in the decade of theforties alone was
as great as the entire net investmentmade in the railroads during the
years 1870-1890, when expansion was atits peak.
Reference in preceding paragraphs was to the seculardrift percep-
tible in the eighty-year span under review. The record of railroadcapi-
tal formation in the shorter term is dominated by dramaticexpansions
and contractions, lasting from peak to peak on the averageeither fifteen
or over twenty years, depending uponthe moving average used to
eliminate the shorter-term cycles. As might be expected, the tipper
turning points of these long cycles uniformly occurred in the neighbor-
hood of major downturns in general business activity. Their character,
however, was appreciably altered over time. Expansions grew persis-
tently weaker, contractions deeper and more prolonged. This difference
reflected transition from the stage of youthful, vigorous growth to one
of maturty.
Although the net expansion of railroad facilities after World War I
was retarded and ultimately reversed, risingprices and substantial
replacement requirements have maintained this industry's need for
money capital at fairly high levels, In theearliest decade covered in
the study, capital requirements were financed primarily by the sale of
stocks and bonds. From the first, however, there was evidence of a
long-term trend toward internal financing. This trend persisted until,
in the aggregate, all capital needs in the 1940's were provided by either
earnings or depreciation charges.
51

Trends and Cycles in Capital Formation by United States Railroads, 1970-1950

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