182 INDUSTRIAL REVOLUTION AND WAGES

distributed as bonuses to the underwriting syndicates or to
the holders of securities.
2. Railroad debts as a rule were not paid. Old obligations
were refunded into new issues, and fixed charges accumulated
 and increased.
3. Proper reserves for depreciation of property and equipment
 were not set aside from current earnings.
4. As the costs of materials and supplies advanced, the net
income of the railroads declined.
You are familiar with that situation. Prior to the war,
with these requirements as to fixed charges and as to the
payment of securities which had been issued in an unwarranted
 way, with the costs of operation and materials and
supplies advancing, the net income of the railroads constantly
declined.
5. As the result of this situation, the margin of safety of
railway net income over fixed charges was so reduced that
railroad securities could not be sold, and railway credit was
impaired. The attempt was made to have freight rates advanced,
 but the increases were not sufficient to offset the
tendencies which had been developing for a number of years.
6. The final outcome of the financial management of the
railroads prior to the war came in 1917, when the entire industry
 collapsed because of the unusual pressure placed
upon it. Operating and mechanical officials, because of the
absorption of earnings arising from financial mismanagement,
had been forced to defer much-needed improvements on account
 of a lack of funds or credit, and had been compelled to
permit the physical deterioration of the equipment and properties
 of the railway companies. As a consequence, the transportation
 industry was unable to withstand the unusual strain
which our entrance into the war imposed upon it.
7. Altho the employees were debarred from a fair participation
 in earnings, labor costs of operation steadily declined
up to 1914. Despite the physical exploitation of the railroad
properties by those in financial control, labor and other costs
were kept at a low level by the efforts of operating and me-