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Title: Railroads: Rates and Regulations
Author: Ripley, William Z.
Language: English
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                               RAILROADS

                         RATES AND REGULATION

                         _BY THE SAME AUTHOR_

                               RAILROADS

                       FINANCE AND ORGANIZATION

             =8vo. Pages xx + 638, with Index. $3.00 Net=

                           TABLE OF CONTENTS

  CHAPTER

      I  Railroad Construction Finance.
     II  Capital and Capitalization.
    III  Railroad Securities: Capital Stock, etc.
     IV  Railroad Securities: Mortgage Indebtedness, etc.
      V  The Course of Market Prices.
     VI  Speculation.
    VII  Stock-Watering.
   VIII  Stock-Watering (_continued_).
     IX  State Regulation of Security Issues.
      X  The Determination of Reasonable Rates.
     XI  Physical Valuation: Reasonable Rates.
    XII  Receivership and Reorganization.
   XIII  Intercorporate Relations.
    XIV  Combination: Eastern and Southern Systems.
     XV  Railroad Combination in the West.
    XVI  The Anthracite Coal Arrangement.
   XVII  Dissolution under the Anti-Trust Law.
  XVIII  Pooling and Inter-Railway Agreements.

                        LONGMANS, GREEN, AND CO.



                               RAILROADS

                         RATES AND REGULATION


                                  BY

                       WILLIAM Z. RIPLEY, PH.D.
     NATHANIEL ROPES PROFESSOR OF ECONOMICS IN HARVARD UNIVERSITY

                       WITH 41 MAPS AND DIAGRAMS

                            New Impression

                        LONGMANS, GREEN AND CO.
                 FOURTH AVENUE & 30TH STREET, NEW YORK
                      39 PATERNOSTER ROW, LONDON
                     BOMBAY, CALCUTTA, AND MADRAS
                                 1916

                          COPYRIGHT, 1912, BY
                        LONGMANS, GREEN, AND CO.

  Published, November, 1912
  Reprinted, November, 1913
  September, 1916

                          THE·PLIMPTON·PRESS
                                [W·D·O]
                          NORWOOD·MASS·U·S·A



PREFACE


This treatise is the outcome of a continuous personal interest in
railroads, practically coincident in point of time with the period
of active participation of the Federal government in their affairs.
During these years, since 1887 when the Act to Regulate Commerce was
passed, as the problem of public regulation has gradually unfolded,
opportunity has offered itself to me to view the subject from different
angles. At the Massachusetts Institute of Technology, as instructor
of embryo engineers in the economic aspects of their callings; in
service for the United States Industrial Commission in 1900-01, in
touch alike with government officials and, travelling all about the
country, with shippers and commercial bodies during a period of acute
unrest; and finally ripening the practical experience, thus gained, in
the favoring atmosphere of Harvard University, seeking to imbue future
citizens with a sense of their civic responsibilities; through all
these years, the conviction has steadily grown that, as one of the most
fundamental agents in our American economic affairs, the subjection
of transportation to public control was a primary need of the time.
An earnest effort has been made to set down the facts concerning this
highly controversial subject with scientific rigor and with fairness
to all three of the great parties concerned, the owners, the shippers
and the people. If bias there be, it will in all likelihood be found to
favor the welfare of the "dim inarticulate multitude,"--that so inert
mass of interests and aspirations, too indefinitely informed as to
details and too much occupied in earning its daily bread, to be able
to analyze its own vital concerns, to give expression to its will,
and even sometimes, as it seems, wisely to choose its spokesmen and
representatives. It is this helpless and unorganized general public,
always in need of an advocate, which, perhaps, most strongly appeals to
the academic mind. If there be lack of judicial poise in this regard,
it is, at all events, palliated by free confession in advance.

Nor is the history of the assumption by public authority of its
inherent right to control railroads, as narrow an interest as it at
first appears. Transportation, as a service, is the commodity produced
by common carriers. The manner in which the price of this commodity has
been brought under governmental regulation has a direct bearing upon
another problem just beginning to open up; namely that of the control
by the state of the prices of other things. It is not unlikely, in my
judgment, that the final solution of the so-called Trust Problem in
the United States, whether for good or ill, may ultimately contain as
one important feature, the determination by governmental authority of
reasonable prices for such prime necessities of life as milk, ice,
coal, sugar and oil, when produced under monopolistic conditions. This
view is shared by my colleague Professor Taussig in his "Principles of
Economics." It is also distinctly set forth by President Van Hise of
the University of Wisconsin, in his recent "Concentration and Control."
When the seed of such an industrial policy is planted, as I believe
it possible in time, the soil will have been richly prepared for its
reception by our experience in the determination of reasonable charges
for the services of railroads and other public utilities.

A word of explanation may also be offered to the reader who finds
in these pages an almost exuberant mass of illustrative material.
Possibly, even, it may be alleged that in places so thick are the
circumstantial trees of evidence that one can scarcely perceive
the wood of principle. But, under the circumstances, it is almost
inevitable that this should be so. The method of inquiry adopted has
been mainly inductive. Text books and theoretical treatises have been
used only by the way. I hold them to be merely of secondary importance.
The principal reliance has been upon concrete data, painstakingly
gathered through many years from original sources. In this present
excursion in the far more complex domain of the social sciences, an
endeavor has been made to adhere strictly to the same scientific method
pursued in the field of natural science in writing "The Races of
Europe." A search far and wide for every possible bit of raw material
had to be made at the outset. To this succeeded the classification and
realignment of the concrete data thus obtained. The last step of all,
was the formulation of the governing economic principles. But an almost
indispensable result of this mode of work is a plenitude of reference
and example. One might almost say that under such circumstances it
becomes second nature to demand concrete illustration for every
economic theory or principle laid down. Such a statement, however,
would be fallacious. It would misrepresent the true sequence of events
as above outlined. Rather should it be affirmed, that, inasmuch as the
concrete examples are the sources of the reasoning, no theory can be
held valid for which somewhere or somehow, positive illustration drawn
from practice cannot be found. Such an ideal is, indeed, difficult
to attain; but it may be stated as a cardinal principle to be always
kept in mind. And it ought to excuse an author from the charge of
over-elaboration of detail in illustration. The only crimes for which
no verbal atonement will suffice are that the chosen illustration does
not fit the principle, or else that the facts have been distorted to
serve a preconceived idea.

References throughout this work to a second volume will be noted. This
will deal primarily with matters of finance and corporate relations.
The general subject of railroad combination was necessarily relegated
to another set of covers. This, however, is quite fitting, inasmuch
as the connection between matters of finance and organization is at
all times so intimate and necessary. The development of inter-railway
relationships has been, perhaps, next to the establishment of
government regulation, the most striking phenomenon of the last decade.
It is absolutely essential to a comprehension of present day financial
problems, to understand the nature and extent of the consolidation
of interests which obtains. This second volume, now nearly completed,
will, it is hoped, appear early in 1913.

This volume is also frequently linked by means of cross references
to a set of reprints of notable interstate commerce cases or special
articles which was published some years ago as "Railway Problems."
(Ginn & Co.) Much new material having accumulated since its original
appearance in 1907, it is the intention to prepare a new and revised
edition, particularly designed as an accompaniment to this treatise.
But the same chapter numbers will be preserved for all material taken
over from the first edition.

Many friends and specialists, who shall be unnamed, have been of
assistance in various ways for which I am duly grateful. But a few
have been so peculiarly helpful that it is fitting to make more
particular mention of my personal obligation. Especially is this true
of Hon. Balthasar H. Meyer of the Interstate Commerce Commission,
from whom through many years of friendship and common interest in the
subject, have come all sorts of aid and suggestion. Prof. F. H. Dixon
of Dartmouth College, Statistician of the Bureau of Railway Economics
at Washington, also a co-worker in the same field, has always without
reserve freely shared the best he had to give. I have drawn liberally
from his special contributions on transportation, particularly in
the history of recent Federal legislation. Despite the difference
in our point of view, the always friendly criticism of Frederic A.
Delano, President of the Wabash Railroad, has been most welcome and
serviceable. In matters of classification, Mr. D. O. Ives, Traffic
Expert of the Boston Chamber of Commerce, has extended a helping hand.
And I have profited greatly from the published work of Mr. Samuel O.
Dunn, now Editor of the _Railway Age Gazette_. In this connection,
acknowledgment should be made of my deep obligation to the other
editors of that admirable technical journal, who have in series during
a number of years afforded me an opportunity of reaching a class of
readers and, it should be added, not infrequently of unsparing critics,
whose intelligence and technical knowledge have held me to a strict
accounting in all matters of fact or principle. Without this critical
oversight, many statements, happily now tested, would have held less
secure place. Then again, there is the entire staff of the Interstate
Commerce Commission to whom I have been a care and trouble for so many
years. Ungrudgingly have its members always given response to all sorts
of requests, whether for documents, statistics or opinions. Without the
official stores of information at Washington, this present volume would
have been woefully incomplete.



CONTENTS


                               CHAPTER I

                 THE HISTORY OF TRANSPORTATION IN THE
                             UNITED STATES

    Significance of geographical factors, 1.--Toll roads before
        1820, 2.--The "National pike," 3.--Canals and internal
        waterways before 1830, 4.--The Erie Canal, 4.--Canals
        in the West, 6.--First railroad construction after
        1830, 7.--Early development in the South, 9.--Importance of
        small rivers, 10.

    The decade 1840-1860, 11.--Slow railway growth, mainly
        in the East, 12.--Rapid expansion 1848-1857;
        western river traffic, 13.--Need of north and south
        railways, 14.--Traffic still mainly local, 15.--Effect
        of the Civil War, 16.--Rise of New York, 17.--Primitive
        methods, 17.

    The decade 1870-1880, 18.--Trans-Mississippi
        development, 18.--Pacific Coast routes
        opened, 19.--Development of export trade in grain and
        beef, 20.--Trunk line rate wars, 21.--Improvements in
        operation, 23.--End of canal and river traffic, 24.

    The decade 1880-1890, 27.--Phenomenal railway
        expansion, 28.--Transcontinental trade, 28.--Speculation
        rampant, 29.--Growth of western manufactures, 30.--Rise of
        the Gulf ports, 31.--Canadian competition, 33.--General
        résumé and forecast, 34.

    Public land grants, 35.--Direct financial
        assistance, 37.--History of state aid, 39.--Federal
        experience with transcontinental roads, 40.

                               CHAPTER II
                      THE THEORY OF RAILROAD RATES

    Analysis of railroad expenditures, 44.--Constant v.
        variable outlays, 45.--Fixed charges, 46.--Official
        grouping of expenses, 46.--Variable expenses in each
        group, 51.--Peculiarities of different roads and
        circumstances, 56.--Periodicity of expenditures, 61.--Joint
        cost, 67.--Separation of passenger and freight business, 68.

                              CHAPTER III
               THE THEORY OF RAILROAD RATES (_Continued_)

    The law of increasing returns, 71.--Applied to
        declining traffic, 73.--Illustrated by the panic of
        1907, 75.--Peculiarly intensified on railroads, 76.

    Growth of mileage and traffic in the United States since
        1889, 77.--Increase of earnings, 79.--Operating expenses,
        gross and net income, 80.--Comparison with earlier
        decades, 85.--Density of traffic, 86.--Increase of train
        loads, 88.--Limitations upon their economy, 92.--Heavier
        rails, 93.--Larger locomotives, 94.--Bigger cars, 95.--Net
        result of improvements upon efficiency and earning
        power, 97.

    The law of increasing returns due to financial rather than
        operating factors, 99.

                               CHAPTER IV

                        RATE MAKING IN PRACTICE

    Evolution of rate sheets, 101.--Terminal v. haulage
        costs, 102.--Local competition, 104.--What the traffic
        will bear, 107.--Trunk line rate system, 111.--Complexity
        of rate structure, 113.--Competition of
        routes, 114.--Competition of facilities, 116.--Competition
        of markets, 118.--Ever-widening markets, 119.--Primary and
        secondary market competition, 121.--Jobbing or distributive
        business, 124.--Flat rates, 127.--Mississippi-Missouri
        rate scheme, 128.--Relation between raw materials
        and finished products, 134.--Export rates on
        wheat and flour, 135.--Cattle and packing-house
        products, 139.--Refrigerator cars, 140.--By-products
        and substitution, 142.--Kansas corn and Minnesota
        flour, 143.--Ex-Lake grain rates, 145.

                               CHAPTER V

                 RATE MAKING IN PRACTICE (_Continued_)

    Effect of changing conditions, 147.--Lumber and
        paper rates, 148.--Equalizing industrial
        conditions, 148.--Protecting shippers, 149.--Pacific
        Coast lumber rates, 150.--Elasticity and
        quick adaptation, 152.--Rigidity and delicacy
        of adjustment, 153.--Transcontinental rate
        system, 154.--Excessive elasticity of rates, 155.--More
        stability desirable, 159.--Natural _v._ artificial
        territory and rates, 159.--Economic waste, 159.--Inelastic
        conditions, 161.--Effect upon concentration of
        population, 162.--Competition in transportation and trade
        contrasted, 163.--No abandonment of field, 165.

    Cost _v._ value of service, 166.--Relative merits
        of each, 167.--Charging what the traffic will
        bear, 169.--Unduly high and low rates, 171.--Dynamic
        force in value of service, 177.--Cost of service in
        classification, 179.--Wisconsin paper case, 181.--Cost
        and value, of service equally important, checking one
        another, 184.

                               CHAPTER VI

                        PERSONAL DISCRIMINATION

    Rebates and monopoly, with attendant danger to
        carriers, 185.--Personal discrimination
        defined, 188.--Distinction between rebating
        and general rate cutting, 188.--Early forms of
        rebates, 189.--Underbilling, underclassification,
        etc., 190.--Private car lines, 192.--More recent
        forms of rebating described, 195.--Terminal and
        tap-lines, 196.--Midnight tariffs, 197.--Outside
        transactions, special credit, etc., 198.--Distribution
        of coal cars, 199.--Standard Oil Company
        practices, 200.--Discriminatory open adjustments from
        competing centres, 202.--Frequency of rebating since
        1900, 204-6.--The Elkins Law of 1903, 205.--Discrimination
        since 1906, 207.--The grain elevation
        cases, 211.--Industrial railroads once more, 212.

                              CHAPTER VII

                          LOCAL DISCRIMINATION

    Concrete instances, 215.--Hadley's oyster case not
        conclusive, 217.--Two variants: lower long-haul
        rates by the roundabout route, as in the Hillsdale,
        Youngstown, and some Southern cases, 221; or by the
        direct route, as in the Nashville-Chattanooga and
        other southern cases, 225.--Complicating influence of
        water transportation, 232.--Market competition from
        various regions, a different case, 234.--The basing
        point (southern) and basing line (Missouri river)
        systems, 238.--Their inevitable instability and probable
        ultimate abandonment, 242.--Postage-stamp rates,
        illustrated by transcontinental tariffs, 245.--Which
        line makes the rate? 255.--Cost not distance,
        determines, 256.--Fixed charges v. operating
        expenses, 257.--Proportion of local business, 259.--Volume
        and stability of traffic important, 261.--Generally the
        short line rules, but many exceptions occur, 263.

                              CHAPTER VIII

                          PROBLEMS OF ROUTING

    Neglect of distance, an American peculiarity, 264.--Derived
        from joint cost, 265.--Exceptional cases, 265.--Economic
        waste in American practice, 268.--Circuitous
        rail carriage, 269.--Water and rail-and-water
        shipments, 273.--Carriage over undue distance, 277.--An
        outcome of commercial competition, 278.--Six causes
        of economic waste, illustrated, 280.--Pro-rating
        and rebates, 281.--Five effects of disregard
        of distance, 288.--Dilution of revenue per ton
        mile, 289.--Possible remedies for economic
        waste, 292.--Pooling and rate agreements, 293.--The long
        and short haul remedy, 295.

                               CHAPTER IX

                         FREIGHT CLASSIFICATION

    Importance and nature of classification
        described, 300.--Classifications and tariffs
        distinguished, as a means of changing rates, 301.--The
        three classification committees, 304.--Wide
        differences between them illustrated, 305.--Historical
        development, 306.--Increase in items
        enumerated, 309.--Growing distinction between carload
        and less-than-carload rates, 310.--Great volume of
        elaborate rules and descriptions, 312.--Theoretical basis
        of classification, 314.--Cost of service v. value of
        service, 315.--Practically, classification based upon
        rule of thumb, 319.--The "spread" in classification
        between commodities, 319.--Similarly as between
        places, 320.--Commodity rates described, 322.--Natural in
        undeveloped conditions, 323.--Various sorts of commodity
        rates, 324.--The problem of carload ratings, 325.--Carloads
        theoretically considered, 326.--Effect upon commercial
        competition, 327.--New England milk rates, 329.--Mixed
        carloads, 331.--Minimum carload rates, 322.--Importance
        of car capacity, 334.--Market capacity and minimum
        carloads, 336.

    Uniform classification for the United States, 337.--Revival
        of interest since 1906, 339.--Overlapping and
        conflicting jurisdictions, 340.--Confusion and
        discrimination, 341.--Anomalies and conflicts
        illustrated, 342.--Two main obstacles to
        uniform classification, 345.--Reflection of
        local trade conditions, 345.--Compromise not
        satisfactory, 346.--Classifications and distance tariffs
        interlock, 347.--General conclusions, 351.

                               CHAPTER X

             THE TRUNK LINE RATE SYSTEM: A DISTANCE TARIFF

    Conditions prevalent in 1875, 356.--Various elements
        distinguished, 358.--The MacGraham percentage
        plan, 360.--Bearing upon port differentials, 361.--The
        final plan described, 363.--Competition at
        junction points, 368.--Independent transverse
        railways, 370.--Commercial competition, 372.--Limits of the
        plan, 375.--Central Traffic Association rules, 376.

                              CHAPTER XI

           SPECIAL RATE PROBLEMS: THE SOUTHERN BASING POINT
                 SYSTEM; TRANSCONTINENTAL RATES; PORT
                          DIFFERENTIALS, ETC.

    Contrast between the basing point and trunk line
        systems, 380.--Natural causes in southern
        territory, 381.--Economic dependence, 381.--Wide-spread
        water competition, 382.--High level of rates, 382.--The
        basing point system described, 383.--Its economic
        defences, 384.--Early trade centres, 384.--Water
        competition once more, 385.--Three types of
        basing point, 387.--Purely artificial ones
        exemplified, 388.--Different practice among
        railroads, 390.--Attempts at reform, 391.--Western
        _v._ eastern cities, 391.--Effect of recent industrial
        revival, 392.--The Texas group system, 393.--An outcome
        of commercial rivalry, 394.--Local competition of trade
        centres, 395.--Possibly artificial and unstable, 395.--The
        transcontinental rate system, 395.--High level of
        charges, 396.--Water competition, 396.--Carload
        ratings and graded charges, 398.--Competition
        of jobbing centres, 398.--Canadian
        differentials, 400.--"Milling-in-transit" and similar
        practices, 401.--"Floating Cotton," 402.--"Substitution of
        tonnage," 403.--Seaboard differentials, 403.--Historically
        considered, 403.--The latest decision, 403.--Import and
        export rates, 404-409.

                              CHAPTER XII

              THE MOVEMENT OF RATES SINCE 1870; RATE WARS

    Contrast before and after 1900, 411.--Revenue per
        ton mile data, 412.--Their advantages and
        defects, 414.--Nature of the traffic, 416.--Low-grade
        traffic increasing, 416.--Growing diversification of
        tonnage, 418.--Present conditions illustrated, 419.--Length
        of the haul, 421.--The proportion of local and through
        business, 422.--Effect of volume of traffic, 424.--Proper
        use of revenue per ton mile, 425.--Index of actual
        rates, 426.--Its advantages and defects, 427.--Difficulty
        of following rate changes since 1900, 427.--Passenger
        fares, 429.--Freight rates and price movements, 430.

    Improvement in observance of tariffs, 431.--Conditions
        in the eighties, 432.--The depression of
        1893-1897, 433.--Resumption of prosperity in
        1898, 436.--The rate wars of 1903-1906, 438.--Threatened
        disturbances in 1909-1911, 439.

                              CHAPTER XIII

                  THE ACT TO REGULATE COMMERCE OF 1887

    Its general significance, 441.--Economic causes, 442.--Growth
        of interstate traffic, 442.--Earlier Federal
        laws, 443.--Not lower rates, but end of discriminations
        sought, 443.--Rebates and favoritism, 445.--Monopoly
        by means of pooling distrusted, 446.--Speculation
        and fraud, 447.--Local discrimination, 448.--General
        unsettlement from rapid growth, 449.--Congressional history
        of the law, 450.--Its constitutionality, 451.--Summary
        of its provisions, 452.--Its tentative
        character, 453.--Radical departure as to rebating, 454.

                              CHAPTER XIV

                   1887-1905. EMASCULATION OF THE LAW

    Favorable reception, 456.--First resistance from unwilling
        witnesses concerning rebates, 457.--Counselman and
        Brown cases, 458.--The Brimson case, 459.--Relation
        to Federal Courts unsatisfactory, 460.--Interminable
        delay, 461.--Original evidence rejected, 461.--The
        Commission's court record examined, 462.--Rate orders at
        first obeyed, 467.--The Social Circle case, 468.--Final
        breakdown in Maximum (Cincinnati) Freight Rate
        case, 469.--Other functions remaining, 472.--The long
        and short haul clause interpreted, 474.--The Louisville
        and Nashville case, 474.--The "independent line"
        decision, 476.--The Social Circle case again, 478.--"Rare
        and peculiar cases," 479.--The Alabama Midland (Troy)
        decision, 481.--Attempted rejuvenation of the long and
        short haul clause, 483.--The Savannah Naval Stores
        case, 484.--The dwindling record of complaints, 485.

                              CHAPTER XV

             THE ELKINS AMENDMENTS (1903): THE HEPBURN ACT
                                OF 1906

    New causes of unrest in 1899, 487.--The spread
        of consolidation, 487.--The rise of freight
        rates, 488.--Concentration of financial power, 490.--The
        new "trusts," 491.--The Elkins amendments concerning
        rebates, 492.--Five provisions enumerated, 493.

    More general legislation demanded, 494.--Congressional
        history 1903-1905, 495.--Railway publicity
        campaign, 496.--President Roosevelt's leadership, 498.--The
        Hepburn law, 499.--Widened scope, 499.--Rate-making
        power increased, 500.--Administrative v.
        judicial regulation, 501.--Objection to judicial
        control, 503.--Final form of the law, 505.--Broad
        _v._ narrow court review, 506.--An unfortunate
        compromise, 507.--Old rates effective pending
        review, 508.--Provisions for expedition, 511.--Details
        concerning rebates, 512.--The commodity
        clause, 513.--History of its provisions, 514.--Publicity
        of accounts, 515.--Extreme importance of accounting
        supervision, 516.--The Hepburn law summarized, 520.

                              CHAPTER XVI

                 EFFECTS OF THE LAW OF 1906; JUDICIAL
                       INTERPRETATION, 1905-'10

    Large number of complaints filed, 522.--Settlement of many
        claims, 524.--Fewer new tariffs, 525.--Nature of complaints
        analyzed, 526.--Misrouting of freight, 527.--Car supply
        and classification rules, 527.--Exclusion from through
        shipments, 529.--Opening new routes, 530.--Petty grievances
        considered, 530.--Decisions evenly balanced, 532.--The
        banana and lumber loading cases, 532.--Freight rate
        advances, 534.--General investigations, 536.

    Supreme Court definition of Commission's authority, 538.--The
        Illinois Central car supply case, 538.--Economic v.
        legal aspects considered, 540.--The Baltimore and Ohio
        decision, 541.--The Burnham, Hanna, Munger case, 542.--The
        Pacific Coast lumber cases, 543.--Decisions revealing
        legislative defects, 546.--The Orange Routing
        case, 546.--The Portland Gateway order, 547.--The
        Commission's power to require testimony affirmed, 549.--The
        Baird case, 549.--The "Immunity Bath" decision and the
        Harriman case, 550.--Interpretation of the "commodity
        clause," 552.--Means of evasion described, 553.

                              CHAPTER XVII

                      THE MANN-ELKINS ACT OF 1910

    Prompt acquiescence by carriers, 557.--Opposition begins
        in 1908, 557.--Political developments, 558. President
        Taft's bill, 559.--Three main features of the new
        law, 560.--Suspension of rate changes, 561.--Former
        defective injunction procedure remedied, 562.--The
        new long and short haul clause, 564.--Provision
        for water competition, 566.--The new Commerce
        Court, 566.--Congressional debates, 567.--Jurisdiction
        of the new Court, 568.--Its defects, 569.--Prosecution
        transferred to the Department of Justice, 570.--Liability
        for rate quotations, 571.--Wider scope of Federal
        authority, 572.--The Railroad Securities Commission,
        573--Its report analyzed, 574.--The statute summarized, 578.

                             CHAPTER XVIII

             THE COMMERCE COURT: THE FREIGHT RATE ADVANCES
                                OF 1910

    The Commerce Court docket, 581.--The Commerce Court in
        Congress, 582.--Supreme Court opinions concerning
        it, 583.--Legal _v._ economic decisions, 586.--Law
        points decided, 586.--The Maximum (Cincinnati) Freight
        Rate case revived, 588.--Real conflict over economic
        issues, 590.--The Louisville & Nashville case, 590.--The
        California Lemon case, 592.--Broad _v._ narrow court review
        once more, 593.

    The freight rate advances of 1910, 594.--Their
        causes examined, 595.--Weakness of the railroad
        presentation, 596.--Operating expenses and wages
        higher, 597.--The argument in rebuttal, 598.--"Scientific
        management," 598.--The Commission decides adversely, 599.

                              CHAPTER XIX

                    THE LONG AND SHORT HAUL CLAUSE:
                        TRANSCONTINENTAL RATES

    "Substantially similar circumstances and conditions"
        stricken out in 1910, 601.--Debate and probable
        intention of Congress, 602.--Constitutionality
        of procedure, 603.--Nature of applications for
        exemption, 604.--Market and water competition, 605.

    The Intermountain Rate cases, 610.--The grievances
        examined, 611.--The "blanket rate" system, 611.--Its
        causes analyzed, 612.--Previous decisions
        compared, 615.--Graduated rates proposed by the
        Commission, 616.--The Commerce Court review, 620.--Water v.
        commercial competition again, 620.--Absolute v. relative
        reasonableness, 622.--Legal technicalities, 625.--Minimum
        v. relative rates, 624.--Constitutionality of minimum
        rates, 625.

                              CHAPTER XX

             THE CONFLICT OF FEDERAL AND STATE AUTHORITY;
                            OPEN QUESTIONS

    History of state railroad commissions, 627.--The legislative
        unrest since 1900, 628.--New commissions and special
        laws, 629.--The situation critical, 630.--Particular
        conflicts illustrated, 631.--The clash in
        1907, 632.--Missouri experience, 633.--The Minnesota
        case, 634.--The Governors join issue, 634.--The Shreveport
        case, 635.

    Control of coastwise steamship lines, 638.--Panama Canal
        legislation, 641.--The probable effect of the canal upon
        the railroads, especially the transcontinental lines, 643.

  INDEX                                                    649

RAILROADS



CHAPTER I

THE HISTORY OF TRANSPORTATION IN THE UNITED STATES[1]

    Significance of geographical factors, 1.--Toll roads before
        1820, 2.--The "National pike," 3.--Canals and internal
        waterways before 1830, 4.--The Erie Canal, 4.--Canals
        in the West, 6.--First railroad construction after
        1830, 7.--Early development in the South, 9.--Importance of
        small rivers, 10.

    The decade 1840-1860, 11.--Slow railway growth, mainly
        in the East, 12.--Rapid expansion 1848-1857;
        western river traffic, 13.--Need of north and south
        railways, 14.--Traffic still mainly local, 15.--Effect
        of the Civil War, 16.--Rise of New York, 17.--Primitive
        methods, 17.

    The decades 1870-1880, 18.--Trans-Mississippi
        development, 18.--Pacific Coast routes
        opened, 19.--Development of export trade in grain and
        beef, 20.--Trunk line rate wars, 21.--Improvements in
        operation, 23.--End of canal and river traffic, 24.

    The decade 1880-1890, 27.--Phenomenal railway
        expansion, 28.--Transcontinental trade, 28.--Speculation
        rampant, 29.--Growth of western manufactures, 30.--Rise of
        the Gulf ports, 31.--Canadian competition, 33.--General
        résumé and forecast, 34.

    Public land grants, 35.--Direct financial
        assistance, 37.--History of state aid, 39.--Federal
        experience with transcontinental roads, 40.


The possibility of a unified nation of ninety odd million souls, spread
over a vast territory of three million square miles,--three-fourths
of the area of Europe,--was greatly enhanced at the outset by the
geographical configuration of the continent of North America. It was
fortunate, indeed, that the original thirteen colonies were strictly
hemmed in along the Atlantic seaboard, thus being protected against
premature expansion. At the same time the north and south direction
of this narrow coastal strip, with its variety of climates, soils,
natural resources and products, brought about a degree of intercourse
and mutual reliance of the utmost importance. The mere exchange of the
dried fish and rum of New England, for the sugar, tobacco, molasses
and rice of the southern colonies, paved the way for an acquaintance
and intellectual intercourse necessary to the development of national
spirit. Throughout the colonial period, the protected coast waters and
navigable rivers as far inland as the "fall line," rendered the problem
of long distance transportation relatively easy. For everything went
by water. Population was compelled to develop the country somewhat
intensively, by reason of the difficulty of westward expansion. But
this population after the Revolution began to press more and more
insistently against the mountain barriers; so that the need of purely
artificial means of transportation at right angles to the seaboard
became ever more apparent.

The period from the Revolution down to 1829, when Stephenson's "Rocket"
made its first successful run between Liverpool and Manchester,
attaining a speed of twenty-nine miles per hour, was characterized in
the United States by increasing interest in canals and toll roads as
means of communication. As involving less expenditure of capital, the
highways were naturally developed first. In 1756 the first regular
stage between New York and Philadelphia covered the distance in three
days, soon to be followed by the "Flying Machine," which made it in
two-thirds of that time. Six days were consumed in the stage trip from
New York to Boston. But by 1790 a considerable network of toll roads
covered the northern territory,--systems which, as in Kentucky by 1840,
attained a length of no less than four hundred miles. Post roads linked
up such remote points as St. Louis, New Orleans, Nashville, Charleston,
and Savannah by 1830. Pennsylvania had made an early beginning in 1806;
and by 1822 had subscribed nearly two million dollars to fifty-six
turnpike companies and wellnigh a fifth of that sum toward the
construction of highway bridges. Most of these roads throughout the
country, however, were private enterprises, and, even where aided by
the state governments, were imperfectly built and worse maintained,
disjointed and roundabout.

The need of a comprehensive highway system, especially for the
connection of the coastal belt with the Middle West, early engaged the
attention of Congress. Washington seems to have fully appreciated its
importance. Ten dollars a ton per hundred miles for cost of haulage by
road, necessarily imposed a severe restriction upon the extension of
markets. The Federal Congress in 1802 appropriated one-twentieth of
the proceeds from the sale of Ohio lands to the construction of such
highways. Gallatin's interest in the matter five years later, led to
his proposal of an expenditure of $20,000,000 for the purpose. The
Cumberland Road or "National Pike" was the result. This great highway
started from near the then centre of population in Maryland and cut
across the Middle West, half-way between the lakes and the Ohio river.
From the upper reaches of the Potomac it followed Braddock's Old Road
to Uniontown, Pennsylvania, then by Wheeling over "Zanes trace" to
Zanesville, Ohio. From that point on it trended toward St. Louis by
way of Columbus and Indianapolis, ending at Vandalia, Illinois. During
the space of thirty years about $10,000,000 was expended upon it, and
it undoubtedly did much to promote the settlement of the country. But
the success of canals and railroads in the meantime sapped the vitality
of the movement for further turnpike construction before St. Louis
was reached. By the close of the war of 1812, in fact, it had become
apparent that highways were destined to serve only as feeders after
all; and not as main stems of communication.

Improved riverways and canals constituted the next advance in
transportation method. So far as the latter were concerned, although
the initial expense was great, the subsequent cost of movement as
compared with turnpikes was, of course, low. Especially was this
cheapness of movement notable in river traffic. Whereas it was said to
cost one-third of the worth of goods to transport them by land from
Philadelphia to Kentucky, the cost of carriage from Illinois down to
New Orleans by water was reputed to equal less than five per cent,
of their value. Hence the steamboat, invented in 1807 and introduced
on the Ohio river in 1811, opened up vast possibilities for enlarged
markets. But it was not until the generation of sufficient power to
stem the rapid river currents about 1817 that our internal waterways
became fully utilized.[2] From that period dates the rapid growth of
Pittsburg, Cincinnati, and St. Louis. The real interest of the East
in western trade dates from the close of the war of 1812. Even then,
however, the natural outlet for the products of the strip of newly
settled territory west of the Alleghanies, was still over the mountains
to the Atlantic seaboard. Cotton culture in the South had not yet given
rise to a large demand for food stuffs in the lower Mississippi valley.
It was a long and wellnigh impossible way around by the Gulf of Mexico.
Consequently the main attention of the people during the canal period
between 1816 and 1840 was focussed upon direct means of communication
between the coastal plain and the interior. A few minor artificial
waterways, like the Middlesex canal from Boston to Lowell, completed
about 1810, proved their entire feasibility from the point of view both
of construction and profit. Even earlier than this the Dismal Swamp
canal and one along the James river in Virginia had been projected and
in part built. But the era of canal construction as such on a large
scale cannot be said to begin until after the close of the war of 1812.
The most important enterprise, of course, was the building of the
Erie Canal to unite the headwaters of the Hudson river with the Great
Lakes at Buffalo. This waterway, began in 1817, was completed in eight
years and effected a revolution in internal trade. It was not only
successful financially, repaying the entire construction in ten years,
but it at once rendered New York the dominant seaport on the Atlantic.
Philadelphia was at once relegated to second place. Agricultural
products, formerly floated down the Susquehanna to Baltimore, now went
directly over the Hudson river route. Branch canals all over New York
state served as feeders; and flourishing towns sprang up along the
way, especially at junction points. The cost of transportation per
ton from Buffalo to New York, formerly $100, promptly dropped to less
than one-fourth that sum. By wagon it was said to cost $32 per hundred
miles for transport, whereas charges by canal fell to one dollar.
Little wonder that the volume of traffic immensely increased, and
that, moreover, the balance of power among western centres was at once
affected. The future of Chicago, as against St. Louis, was insured; and
the long needed outlet to the sea was provided for the agricultural
products of the prairie West.

The instant and phenomenal success of the Erie Canal immediately
encouraged the prosecution of similar enterprises elsewhere.
Philadelphia pushed the construction of a complicated chain of horse
railroads, canals and portages in order to reach the Ohio at Pittsburg.
In 1834 an entire boat and cargo made the transit successfully. The
cost of this enterprise exceeded $10,000,000; but it was expected to
provide a successful competitor for the Erie Canal. The latter in
the meantime had been linked up with the Ohio river by canals from
Cleveland to Portsmouth, from Toledo to Cincinnati, and from Beaver
on the Ohio, to Erie on the Lake. By the first of these routes in
1835, no less than 86,000 barrels of flour, 28,000 bushels of wheat
and 2,500,000 staves were carried by canal on to New York. Boston and
Baltimore were prevented from engaging in similar canal enterprises
only by the advent of the railway. Meantime the Chesapeake and Ohio
Canal was started in 1828 as a joint undertaking of Maryland, Virginia,
and the Federal government, to connect the Potomac with the Ohio.
It was not completed in fact until 1850, long after its potential
usefulness had ceased. Besides these through routes, canals for the
accommodation of local needs were rapidly built in the East. Boston was
connected with Lowell; Worcester with Providence; New Haven with the
Connecticut river. In Pennsylvania, especially, the anthracite coal
industry, developing after 1815, encouraged the building of artificial
waterways. The Delaware and Hudson, the Schuylkill, Morris and Lehigh
canals were built between 1818 and 1825 along the natural waterways
leading out from the hard coal fields. New Jersey connected New York
and Philadelphia by the Raritan Canal in 1834-1838 at a cost of nearly
$5,000,000; and another canal to connect Delaware and Chesapeake bays
was with difficulty, and only by the aid of the Federal government,
finally completed about 1825 at a cost of nearly $4,000,000. Further
south, many small canals and river improvements were made. The Dismal
Swamp enterprise had already connected Chesapeake Bay and the coast
waters and sounds of the Carolinas; but provision for slack water
navigation of the Tennessee river at Mussel Shoals in Alabama, and of
the various branches of the Ohio river in Kentucky was not made until
the middle of the thirties.

The open prairies of the West offered the most inviting prospects for
canal construction, both because of the dearth of roads and the ease
of construction of artificial waterways. Not only through routes to
the East, as already described, but local enterprises of various sorts
abounded on every side. Chicago was connected with the Mississippi
system by way of the Illinois and Michigan Canal; a route across the
lower peninsula of Michigan, and many feeders in Indiana and Ohio
were built. The demands upon the capital of the country for these
purposes during the twenty years after 1815 were enormous; and it
was only by resort to state subventions and grants from the Federal
government out of the proceeds of sales of public lands, that so
much was actually accomplished. State debts aggregating no less than
$60,000,000 for canal construction were incurred prior to 1837. Much
of this investment proved ultimately unproductive; extravagance and
fraud were rife. But the economic results were immediately apparent and
highly satisfactory, as witnessed in the higher prices obtainable for
all the products of the interior for transportation to the seaboard.
Flour, which could be had at three dollars a barrel at Cincinnati in
1826, rose to double that figure by 1835; and corn rose from twelve
to thirty-two cents a bushel. The panic of 1837 and the subsequent
depression, of course, put a severe check upon further canal building.
But an even more potent force was the proved success of the newly
invented mode of carriage by railroad. Before 1840 the era of canal
construction was definitely at an end. Almost the only exception was
the Erie Canal, which continued to prosper by reason of its strategic
location. Rates were reduced in 1834; and two years later the canal
was widened and deepened to accommodate the ever increasing traffic.
Surplus revenues enabled the amortization of its debt; and by 1852
the revenue exceeded three million dollars annually. Although the
pressure of railway competition was increasingly felt; as late as 1868,
practically all the grain into New York was brought by canal barge. The
movement of this canal tonnage, year by year, is shown by the diagram
on page 25. As will be seen, it was not until the trunk line rate wars
of 1874-1877 that the inferiority of the canal to the railroad, even
in this favored instance, was finally demonstrated. The revival of
interest in the Erie Canal which has occurred in recent years, leading
to the expenditure of millions of dollars by the state of New York in
still further enlarging it, is due to an effort to insure the supremacy
of the port of New York in export trade against the growing competition
of the Gulf ports, which it originally gained when the canal was
constructed.

The first serious attempt at railroad operation in the United States
was on the Baltimore & Ohio line in 1830. The company, although
chartered in 1821, did not begin construction for seven years. It was
three years later than this when Peter Cooper's "Tom Thumb" made
a trial run out from Baltimore with a record of thirteen miles per
hour. A road from Albany to Schenectady was opened in 1831; and a
series of connecting links was rapidly pushed westward across New York
state, finally reaching Buffalo in 1842. But prior to 1840, activity
in railroad construction was most noticeable in Pennsylvania: partly
because of its lack of so admirable a water route to connect it with
inland markets as was enjoyed by New York, and partly because of the
growth of the coal business which caused the main lines of the Reading
Railroad to be laid down as early as 1838. The state of Pennsylvania
was busily engaged in improving her existing route over the mountains
by replacing the canal and portage portions with rail lines. Pittsburg,
which formerly had been five and a half days distant, was thus
connected by railroad in 1834. Cars built in the form of boat sections
were to be transferred from the rails to canals along part of this
route. The Pennsylvania Railroad aiming to provide continuous railway
communication over the mountains, was not chartered until 1846; but,
nevertheless, as early as 1835 Pennsylvania had over two hundred miles
of railway, about one-quarter of the mileage of the United States. New
York and New Jersey had about one hundred miles between them, while
South Carolina had one hundred and thirty-seven miles. The Baltimore &
Ohio during this time was being slowly pushed westward; although it did
not reach the Ohio river until 1853, two years after the Erie had, by
liberal state aid, been carried to the lakes at Dunkirk, N.Y. Thus it
appears that during the decade to 1840 railroad building had progressed
unchecked by the panic of 1837. This panic, in fact, by rendering the
state construction of canals impossible, may actually have increased
the interest in railroad building. The railways of this time were still
mainly experimental. They were local and disconnected, serving rather
as supplementary to, than as actual competitors of the existing water
routes. In Massachusetts and Connecticut the lines radiating out from
seaports were intended to serve only as feeders to coastwise traffic;
just as short lines were built along the Great Lakes during the decade
to 1850 to bring products out to a connection with the natural water
routes. A notable exception was the continuous line which by 1840 was
in operation lengthwise of the Atlantic coast plain from New York
south to Wilmington, North Carolina. The Camden and Amboy between
Philadelphia and New York was operated early in the thirties; about the
same time that the Philadelphia, Wilmington & Baltimore was completed.
Much interesting history centres about the first named road. It seems
to have been a notoriously corrupting influence in New Jersey politics
from the outset. Public opinion became so roused over its exactions,
that a memorial from the merchants of New York to the Thirtieth
Congress resulted. The enterprise was the most profitable of all the
earlier companies, its net earnings in 1840 amounting to $427,000. In
1855 it paid a twelve per cent. dividend. From Washington south by way
of Fredericksburg and Richmond, the southern states could be reached
without undertaking the perilous passage round Cape Hatteras. By 1840
the only portions of the original colonies still isolated were New
England, at one end, which was still obliged to depend upon Long Island
transit to New York by boat; and in the Far South, the back country
behind Charleston and Savannah.

Several important economic causes conspired to stimulate railroad
construction at a very early time in the southern states.[3] They
welcomed the new means of transportation even more eagerly than the
wealthier, commercial and more densely populated North. Ever since the
invention of the gin in 1793, the production of cotton had grown apace.
Profits were so high that all interest in other forms of agriculture
waned. Cotton production until about 1817 was mainly confined to the
long narrow strip of Piedmont territory, lying between the sandy "pine
barrens" along the coast and the mountains in the rear. This fertile
strip--the seat of the plantation system--thus geographically isolated,
had only one means of communication with the outer world, namely the
coast rivers debouching upon the sea at Charleston, Savannah, or, later
on, upon the Gulf at Mobile. But these seaports were not conveniently
situated to serve as local trade centres. They were separated from
the cotton belt by the intervening pine barrens. The local business
of buying the cotton from the planters, and in return supplying their
imperative needs for supplies of all sorts, including even foodstuffs
which they neglected to raise, was concentrated in a series of towns
located at the so-called "fall line" of the rivers. From Alexandria
and Richmond on the Potomac and James, round by Augusta, Macon, and
Columbia to Montgomery, Alabama, such local centres of importance
arose, each one just at the head of navigation. For some years profits
were so large that heavy charges for transportation to the sea were
patiently borne. But after the opening of the western cotton belt
along the Mississippi bottom lands after 1817, the price of cotton
experienced a severe decline, greatly to the distress of the older
planters. For this reason an insistent demand for improved means of
transportation had already brought about great interest in turnpike
and canal building. South Carolina at a very early date had expended
about two million dollars for these purposes. Steamboats on the smaller
rivers were also used. Immediately upon the successful demonstration
of traction by steam the aid of the states, cities and individuals was
invoked; so that a well planned system of railroads resulted even as
early as 1843. The South Carolina Railroad between 1829 and 1833 most
successfully operated a pioneer line, its securities being quoted at
twenty-five per cent. above par. The Charleston & Hamburg line opened
in 1833, one hundred and thirty-seven miles long, was said to be the
largest system under one management in the world. Augusta & Columbia
were linked up with the coast. Savannah also penetrated inland to the
Piedmont belt by a line finished in 1843 as far as Macon. The interest
in a through route to connect Cincinnati and Louisville with Charleston
was very keen; and had it not been for the tremendous fall in cotton
prices in 1839-1840, the project might have succeeded. As it was, a
great railroad convention at Knoxville in 1836 was attended by no
less than four hundred delegates from nine different states. It was
not so much the mileage of these roads which rendered them notable,
as the fact of their intended reliance upon through freight instead
of passenger business. Roads in other parts of the country were as
yet depending in the main upon passenger traffic or upon the carriage
of what we would now call local or parcel freight. These southern
lines were built to accommodate traffic in great staple agricultural
products--cotton out and foodstuffs in. Unlike the northern roads,
also, they early adopted a uniform gauge and sought to promote long
distance business. Later developments in the South especially in the
direction of improved service were very slow. The northern states
speedily outstripped them; but the enterprise of this region in
railroad building and operation at the outset has not been fully
appreciated.

The decade 1840-1850 was marked by slow growth of the railway
net,--everywhere except in New England, where the main lines were
being rapidly laid down. The doom of the canal as a competitor had
been sealed, to be sure; but the dearth of private capital, except in
New England, rendered progress slow until aid from the government was
invoked. Until this time private enterprise had been the main reliance.
Several important undertakings were now launched. The Pennsylvania
Railroad was chartered in 1846, but was not completed to Pittsburg
till 1852. The Boston & Albany line was built; and Buffalo had been
reached. But neither the Baltimore & Ohio, nor the Erie had yet been
pushed to completion. The possibilities of the great Northwest had
not dawned upon the people. At the opening of the decade, St. Louis
was still almost three times as large as Chicago. Cincinnati was the
most important western centre, its prestige being enhanced by the
first all-rail line to the Great Lakes at Sandusky, opened in 1848.
The relative importance of these inland centres is indicated by their
populations. In 1850 these were as follows: Cincinnati, 115,000;
Chicago, 30,000; St. Louis, 78,000; and Louisville, 43,000. Cincinnati
retained its preëminence until after the Civil War; but by 1880 had
dropped to a low third in rank, only half the size of Chicago and
two-thirds the size of St. Louis.[4] During the decade to 1850, the Ann
Arbor line from Detroit also was pushed on to Chicago in 1852, to cut
off the roundabout trip by lake;[5] but St. Louis was still isolated;
Indianapolis was barely connected with the Ohio river. The river trade
thus still dominated the western situation. In the South one important
enterprise monopolized all attention, namely the construction by the
state of Georgia of the Western & Atlantic road over the mountains from
Atlanta to Chattanooga on the Tennessee river.[6] Atlanta was to become
the western terminus of the coast roads, built, as has been said, to
provide an outlet to the sea for the Piedmont cotton belt. This new
enterprise was to open up a direct route, not alone to the new western
South but to the entire Northwest by connecting with a navigable branch
of the Ohio. It is an odd fact that at this time the southern ports
were nearer the West than the cities of the North Atlantic. Part of the
first rush of the Forty-niners to California was by way of Charleston
and thence west over the Charleston & Hamburg line. From 1837 on, the
Western & Atlantic line was under construction. In the meantime Atlanta
had been reached from the east; so that at the beginning of the next
decade, two at least of the main arteries of the southern net were
ready for business.

The total mileage of the United States expanded in ten years after
1840 from 2,800 to upwards of 9,000 miles of line. For some time not
over four or five hundred miles annually had been constructed; but
suddenly the new mileage laid down in 1848 jumped to more than fourteen
hundred miles. This was a presage of the great expansion to occur in
the next few years,--an expansion made possible partly as a result of
important mechanical improvements and inventions. Notable among these
was the substitution of the solid iron rail for the primitive method
of plating beams with thin strips of iron. The manufacture of rails in
the United States, begun in 1844, did much to stimulate the subsequent
growth. The repeal of the law of 1832 permitting free entry of railway
iron which took place in 1843, marks the beginning of a new era. During
these eleven years almost five million dollars in duties on rails was
refunded.

The utmost activity in railroad building obtained from 1848 until
the panic of 1857, interrupted only by a minor disturbance in 1854.
The total mileage expanded more than threefold, attaining a total of
30,000 miles by 1860. A veritable construction mania prevailed in the
states of Ohio, Indiana, and Illinois. Not very much, relatively,
was accomplished in New York and Pennsylvania, and very little in
New England, which was already well served. A dominant influence in
promoting the new construction at this time was the imperative need
of the South for foodstuffs. Cotton culture was in full swing in the
lowlands of Alabama, Mississippi and Louisiana. An enormous steam and
flat boat tonnage on the Ohio and Mississippi rivers had grown up to
care for this trade.[7] By 1845 the river shipping amounted to nearly
two million tons. Fifteen hundred out of four thousand steamboat
arrivals at New Orleans in 1859, came from the Ohio river and the
upper Mississippi. The vessels had also greatly increased in size. The
flat boats which in 1820 carried only thirty tons of freight, were
enlarged tenfold in tonnage and threefold in length by 1855, and in
that year first began to be towed back up the river. A rapid increase
in coal shipments down stream from Pittsburg also took place during
the forties. From 737,000 bushels in 1844, to 22,000,000 bushels in
1855 and 37,900,000 in 1860, represents an enormous development of
internal commerce. The lead mines of Missouri shipping through St.
Louis had become important after 1832 and quadrupled in volume by
1848, attaining a total of 42,400,000 pigs of sixty pounds each. This
traffic steadily dwindled, however, falling away by one half within the
next ten years. Memphis was rapidly growing, outstripping the city of
Natchez which had formerly played a more important part in the southern
trade. But the most important element in this Mississippi river
business was the shipment down stream of food stuffs. Produce received
at New Orleans was valued at $26,000,000 in 1830, $50,000,000 in 1841,
and $185,000,000 in 1860. About thirty per cent. of this consisted
of farm produce from the Northwest, together with horses, mules,
implements, and clothing. The need of ampler transportation facilities
to accommodate all this business was apparent. A response came in plans
for new north and south lines of railway. The difficulty of financing
these enterprises was solved in part by the expedient of land grants
by the different states. These amounted to no less than eight million
acres under President Fillmore, attaining a total of nineteen million
acres under the Pierce administration. By 1861 these grants, mainly
in aid of railroads, had reached a total of no less than 31,600,842
acres,--more than equal to the area of either of the states of Ohio, or
New York.[8] The Illinois Central grant in 1851 was the largest among
these. Congress in 1850 had made over a tract of 2,700,000 acres to
the state of Illinois to be used for this purpose. This gift was soon
followed elsewhere by grants to aid the building of the Mobile & Ohio
and the Mississippi Central, together with smaller roads in Alabama
and Florida. The Gulf of Mexico was thus reached by through lines from
the west in 1858-1861. In other parts of the country railroads were
pushed well out in advance of population. The Mississippi was reached
by the Rock Island system in 1854, quickly followed by the Alton, the
Burlington and the predecessor of the present Northwestern system.
The Hannibal & St. Joseph was the first to reach the Missouri river
in 1858. There is no doubt that the discovery of gold in California
greatly stimulated interest in all these far western enterprises.

Despite this remarkable record of growth, a corresponding development
of long-distance communication between different parts of the country
had not yet taken place. While the all-rail routes were open, they
still consisted in large part of disconnected local lines. The New
York Central with difficulty in 1853, and in spite of intense local
opposition, succeeded in effecting a consolidation of what were
originally eleven separate lines; but the union with the Hudson River
Railroad was not to follow until 1869. The Boston & Albany was still a
local enterprise, although built with larger ends in view. At this time
the possibility of long-distance carriage of grain was only very dimly
appreciated. Fast freight lines to operate without breaking bulk over
independent roads, constituted the first step in this direction. Such
companies on the New York Central in 1855 and on the Erie two years
later, were operating in the eastern trunk territory. The so-called
Green lines were engaging in long distance business by way of Ohio
river connections between the territory to the northwest and the great
grain and pork consuming cotton belt. But railroad traffic as a whole
was still relatively unimportant as compared with water carriage. The
culmination of steadily increasing receipts on the Erie Canal did not
occur until 1856. River tonnage went on steadily increasing for another
twenty years. The years just before the war seem to have marked the
turning point in respect of canal competition; but the total volume
of railroad shipments, nevertheless, still appears insignificant by
comparison with the present day. The total traffic in 1859 on the
Pennsylvania Railroad was only 353,000 tons east bound and 190,700 tons
west bound; while on the New York Central it was 570,900 and 263,400
tons, respectively. The important point was that the cost of shipment
was steadily declining. According to H. C. Carey, the passenger rate
from Chicago to New York had fallen from about seventy-five dollars to
seventeen dollars in 1850; while the freight rate per bushel on wheat
had fallen to twenty-seven cents; and per barrel of flour to eighty
cents. Nothing but the development of a large surplus production in the
West was needed to create a great traffic; and this was dependent upon
the spread of population and improvements in agricultural production
which had not yet occurred. Transportation as yet waited upon the
progress of invention; not in instruments of transportation alone, but
in all the other fields of industrial endeavor.

The panic of 1857 and the increasing bitterness of the slavery
question, followed by the outbreak of the Civil War, quite diverted
the attention of the country from internal development. Railroad
construction had already declined from 3,600 miles in 1856 to 1,837
miles in 1860. It fell to less than 700 miles in 1861. Brisk recovery
set in after 1865; but it was not until 1868 that any rapid growth
again ensued, or even a resumption of the activity of the preceding
decade. All of the southern lines were prostrated; the north and south
roads, like the Illinois Central system, stood still. The western
railway net alone was slowly expanding. The Burlington grew from 168
miles in 1861 to over 400 miles in 1865; and the Chicago & Northwestern
then succeeded in bridging the Mississippi. The Erie was still a more
important route by fifty per cent., measured by ton mileage, than the
New York Central; although its evil days, under the control of Jim
Fiske and Jay Gould in 1866-1869, were about to begin. The Mecca of
trade from the Atlantic ports was still St. Louis, although Chicago
outgrew it during the decade. The predominant direction of trade is
shown by the widespread public interest in New York in the newly opened
Western & Atlantic railroad, which by a spur from the Erie road at
Salamanca, was to shorten the time of shipment of goods from New York
to Cincinnati from one month to a week. The commercial star of New York
was steadily rising. A great aid thereto was, of course, the progress
of consolidation among the connecting links to Chicago. Vanderbilt and
Scott were busily engaged in this constructive work. The former had
shifted his interest from steamboats to railroads, and became dominant
in the Harlem and Hudson River roads in 1863-1864. Three years later
he secured control of the New York Central from Albany west, and
consolidated it with the Hudson River line. These trunk line roads, the
Pennsylvania and the New York Central, both finally secured connections
with Chicago in 1869. A channel for new through currents of trade
merely awaited the growth of business.

It is important to realize the relative primitiveness of transportation
at the close of the Civil War.[9] The Bessemer steel process was not
perfected until the latter half of the decade.[9] Iron rails still
rendered light rolling stock necessary. But after 1868 the price of
steel rails rapidly declined, from about $166 (currency) per ton in
1867 to $112 in 1872, and to $59 in 1876.[10] This doubtless gave a
tremendous impetus to the developments of later years, although its
effects were not evident for some time. One of the most troublesome
features of the time were the differences of gauge which rendered
through traffic difficult. In New York and New England, the standard
gauge was four feet eight and one-half inches. West and south of
Philadelphia it was four feet ten inches. In the Far South it was
five feet; and in Canada and Maine, either five feet six inches or six
feet. Between Chicago and Buffalo five different roads still had no
common gauge. Clumsy expedients of shifting car trucks, three rails
or extra wide wheel flanges were adopted. Even as late as 1876 Albert
Fink refers to the celerity with which trucks could be changed at
junction points, not over ten minutes being requisite.[11] The first
double tracking in the country, that of the New York Central, was not
accomplished until the war period. There was not even a bridge over the
Hudson at Albany until 1866, and no bridge at St. Louis, although the
Northwestern had bridged the Mississippi higher up. No night trains
were run generally. No export grain trade existed, although feeble
beginnings had been apparent at New York for some years. Philadelphia
did not even have a trunk line as late as the end of the war; and
neither Boston nor Philadelphia had regular steamer lines to Europe.
For the great staples of trade, the canals and rivers were largely
utilized. The Erie Canal during the war, took twice as much freight as
the Erie and New York Central together. Even in 1865 the ton mileage of
the Erie Canal--844,000,000--compared with a ton mileage of 265,000,000
for the New York Central and 388,000,000 for the Erie Railroad. And
in 1872, eighty-five per cent of the freight between New York and
Philadelphia still went by water.

       *       *       *       *       *

Railroad construction during the next decade to 1880 was extremely
active. East of the Mississippi developments were confined in the main
to building branches and feeders. One new through line in the East
was opened, by the entrance of the Baltimore & Ohio into New York
in 1873 and into Chicago in the following year. Another important
enterprise was the building of the Air Line route to connect Atlanta
with Richmond by a road traversing the fertile Piedmont belt. The
completion by the state of Massachusetts of the Hoosac Tunnel line,
providing a new outlet to the west from Boston, was also a notable
achievement. This route was at last opened in 1874 after a painful
experience extending over twenty years, involving an expenditure by
the state of about $17,000,000. Most of the new railroad building of
the seventies took place in the upper Mississippi valley. The states
of Wisconsin, Minnesota, Iowa, (eastern) Nebraska and Kansas were
rapidly gridironed with new lines. Much of this construction took
place after 1868, activity culminating in 1871 with the building of
no less than 7,379 miles of line. The panic of 1873 put an end to all
this, except in California where expansion went on unabated. Nearly
one thousand miles of new line were added to the systems of this state
during the five years to 1878,--nearly doubling its mileage during this
period. Elsewhere in the country little was accomplished during the
protracted hard times. In 1875, for instance, only seventeen hundred
miles were constructed. This cessation of development did not change
for the better until the resumption of general prosperity in 1878.
The net result of ten years building was, nevertheless, considerable,
represented by an expansion from 53,000 to upwards of 93,000 miles of
line. Railroad building, in fact, increased about two and one-half
times as fast as population. So that by 1880 the United States was
already more amply furnished with transportation mileage than any
country in Europe.

Among the important events to be associated with this period was the
opening of the first transcontinental route, marked by the joining of
the Union and Central Pacific railroads in 1869. The history of its
construction under liberal land grants from the Federal government
belongs in another place. Aside from the political effect, the economic
results were immediate. Population at once flowed over onto the Pacific
slope. And a large volume of trade was at once deflected from the sea
route round Cape Horn. The value of goods shipped by water between New
York and San Francisco, which in 1869 amounted to $70,000,000, fell
in the next year to $18,600,000, and in 1872 to less than $10,000,000.
The success of the enterprise, together with growing interest in the
Pacific states, doubtless led to the opening of construction of the
Northern Pacific as a transcontinental route in 1870.

The rapid development of an export trade in grain to Europe between
1870 and 1874 was a direct result of improvements in agriculture and
the opening up of a surplus grain-producing area. As yet this territory
lay mainly east and south of Chicago. Even as late as 1882, over
four-fifths of the eastbound trunk line traffic originated not further
west than Illinois. Wisconsin and Iowa contributed less than ten per
cent. of this business. The methods of handling wheat were still quite
primitive. During the Civil War thousands of men were employed to
unload the grain by hand, every tenth barrel being weighed. Elevators
had been used in Chicago for some time but no eastern city had them
until 1861. Prior to 1872, when the first grain elevator was set up at
Baltimore, the cost of thus unloading grain by hand amounted to four or
five cents per bushel. At Boston until 1867, all the export grain was
still unloaded back of the city and hauled across to the waterfront.

The volume of exportable surplus products of the country rose rapidly
after 1870. An increase from five or six bushels of wheat production
_per capita_ in 1860, to nearly nine bushels in 1879, left a large
margin for foreign sale. The growth of such traffic, big with
importance for the carriers, is indicated by the opposite diagram.
The large total of 59,000,000 bushels of wheat and (equivalent) wheat
flour reached in 1862, partly as a result of the closing of markets in
the southern states, was not again surpassed for more than a decade.
The most notable increase ensued after 1873, when the level rose about
fifty per cent., to become established thereafter upon a permanently
higher plane. A second sudden boost occurred again in 1877 when wheat
exports rose rapidly to a total of 180,000,000 bushels within three
years. The disastrous failure of European crops in 1879, with a
coincident bumper yield in the United States, led to the immediate
climax of the movement in 1881. These exports, moreover, which fifty
years earlier, owing to the cost of carriage, were almost exclusively
in the form of flour, were now in 1880 about three-fourths constituted
of raw wheat. Examination of the diagram with its steep pyramid of
development at this time is convincing as to the stimulus thereby given
to the railway interests. Foreign trade in cattle and beef products
also enormously increased during these years. In 1876 only 244 steers
were exported, while in 1877, 71,794, and in 1881, 134,000 head were
shipped abroad. The value of preserved meats exported quadrupled in
one year after 1877, and grew eightfold by 1880. Doubtless part of
this disposition of products abroad during the seventies was due to
a cessation of demand at home owing to the prevalent hard times; but
the important discovery was incidentally made that the demand abroad
existed, and merely required cheap transportation for its successful
development.

[Illustration: EXPORTS OF DOMESTIC WHEAT AND FLOUR]

The second step necessary for permanently developing railroad business
was a lowering of the charges. This was first brought about during
the seventies through unregulated competition between the trunk
lines. The fiercest warfare occurred during the years immediately
following the entrance of the Baltimore and Ohio and the Grand Trunk
railroads into Chicago in 1874. This was some five years after the
Pennsylvania and the New York Central had consolidated their through
lines to the same point. These two original rivals had already slashed
rates indiscriminately. Charges of $1.88 and 82 cents for first-and
fourth-class freight from Chicago to New York in 1868, had already
for a brief period in the following year dropped to a uniform rate
of twenty-five cents for all business. As Hadley justly observes,
such rates could not long prevail; and for the next few years nominal
rates of one dollar, and one dollar and fifty cents for first class,
and sixty and eighty cents for fourth class obtained. The outbreak
of open warfare between the Baltimore & Ohio and the Pennsylvania
over the charges made by the latter for the use of its lines between
Philadelphia and New York, occurred in 1874. Grain rates of sixty cents
per hundred pounds from Chicago to New York during 1873 fell to forty
cents in 1874 and to thirty cents in 1875. Special or commodity rates
were often as low as twelve cents. After a year's truce, only partially
observed by the leading participants, discord again prevailed during
1876. The commercial rivalries of seaboard cities now became involved.
Different or specially favorable rates had been accorded to Baltimore
and Philadelphia as compared with New York since 1869.[12] Rates
finally fell lower than ever before. This was especially true of grain.
The published rate in March, 1876, was forty-five cents per hundred
pounds from Chicago to New York. In May it fell to twenty cents--a rate
almost as low as prevails today with all modern improvements in methods
of conducting the business. Westbound rates dropped correspondingly.
Quotations from New York to Chicago at twenty-five cents per hundred
pounds first class, and sixteen cents fourth class were freely given.
Actual rates were often much lower than this.

Rival cities again intervened and finally the whole matter was of
necessity referred for arbitration to a commission. Even then both the
Erie and the Baltimore & Ohio roads were well advanced on the road to
bankruptcy. For us, however, the immediate result of importance was a
permanent reduction of the general level of freight rates, not alone
for the trunk line territory but for the entire country. The diagram
on page 413 shows this plainly. From an average revenue per ton of
freight moved one mile of 1.92 cents in 1868, intermittently upheld
until 1872, the fall of over one-third to about 1.1 cents in 1882 was
sudden and continuous. The end was not yet. The renewed outbreak of
a rate war between the trunk lines in 1881 and again in 1884 led to
further reductions. The decision in 1882 of the Thurman Commission on
Differentials settled nothing.[13] All kinds of traffic were affected.
Immigrants were carried from New York to Chicago for $1.00 a head.
East-bound grain rates were as low as eight cents. At last, late in
1885, the warfare was terminated by an elaborate pooling agreement.
These struggles brought about great reductions in the revenue of the
carriers concerned; but declines in rates after this period were, in
the main, more gradual, with short intervals of relief interspersed.

One immediate result of these lower freight rates was the impetus
given to economy and systematic operation. This is the period when, as
we have said, pooling as a device for restraint of competition first
appeared in the "Evening" contracts on beef shipments in the West, in
the notable Southern Railway & Steamship Association in 1874 and in
the trunk line pool in 1877. Agreement between the anthracite coal
roads began about 1872 and has continued with increasing effectiveness
ever since.[14] This was also the heyday of the through freight lines
which were now operating from every important western centre. In 1876
the first attempt at a systematic scheme of rate adjustment between
competing localities was made in trunk line territory.[15] Order
was indeed emerging out of chaos. In respect of operation, larger
locomotives and cars and longer trains were rapidly coming into use.
On the Lake Shore the average train load in 1870 was 137 tons. Nine
years later it had risen to 213 tons. The widespread substitution of
steel for iron rails was not yet to follow for some time. For in 1880
only three-tenths of the mileage of the country was laid with steel.
This proportion rose to eight-tenths in 1890. It was doubtless this
change during the eighties which made possible the heavy decrease in
operating expenses which occurred during the five years subsequent to
1881. It appears, indeed, as if the need of economy was enforced by the
decline of rates in progress; but, as usual, the supply of economies
waited upon the demand and, in fact, tarried well behind it. To this
circumstance may be attributed some of the financial hardships suffered
by the roads during the ensuing interval between the reduction of rates
during the seventies and the mechanical improvements of the succeeding
decade. An incidental result of the rate wars of this period, it may
also be noted, was the readjustment of the relative shares of the great
seaports in foreign business. Philadelphia, especially, increased its
quota of exports from about eleven per cent, in 1860 to over twenty
per cent. in 1880. Much of this was gained, however, from the southern
ports, as the relative status of Baltimore, New York, and Boston
remained about the same.

A second important consequence of the severe decline in railroad rates
during the seventies, was the permanent supersession of canals and
riverways in favor of railroads as means of transportation. The Erie
Canal outlasted all the other artificial water routes, most of which
had succumbed to rail competition by the close of the Civil War. But
even as late as 1868, practically all of the grain arriving at New York
came by canal. The change, when it occurred, came suddenly.

[Illustration: FREIGHT RECEIPTS AT NEW YORK]

No canal could meet the fierce slashing of rates which suddenly
supervened on the rail lines. Since 1855, when the canal carried
twice the traffic of all the trunk lines, until 1861-1862 when the
rail and water lines were about even, the railroads had steadily
gained in tonnage.[16] The turning point was reached in 1872 when the
canal traffic actually began to decline. Between 1871 and 1876 the
aggregate tonnage (both ways) on the New York canals fell away about
half, spasmodically recovered during the great expansion of exports
in 1879-1880, held constant for five years, and thereafter steadily
dwindled away. As the accompanying diagram shows, the rise of railroad
tonnage was rapid up to 1873. Thereafter for several years during the
actual panic, despite the railroad wars and low rates, no great change
occurred. But by 1876, eighty-three per cent. of all-grain receipts at
Atlantic ports came by rail; and over nine-tenths of all the commerce
between East and West had left the water routes. At New York the three
main railroads carried six times the traffic of all the state canals
in 1880. After that time the canal barges were loaded only with coal,
lime, sand, cement, and similar low-grade traffic. So that in the rapid
expansion of business, which, as our diagram shows, occurred after
1878, the canal shared not at all. The disparity between east-and
westbound tonnage was notably great. In 1870 this eastbound traffic was
about three times as great as the tonnage west bound. In 1881 it was
seven and one-half times as great, declining thereafter to a proportion
of about 6.5 to 1 during the late nineties. This inequality, of course,
whetted the appetite of the carriers for back loads to fill the
westbound trains, and undoubtedly gave an impetus to rate disturbance.
The rate wars led by the New York Central during 1881 were largely due
to this fact.

As for water carriage elsewhere, the rivers soon followed the canals in
steady decline of relative importance. On the southern streams, such as
the Cumberland and Tennessee, the principal diversion to the railroads
of traffic in foodstuffs south bound from the West, took place in the
five years subsequent to 1866.[17] High-water mark in the Mississippi
trade was reached in 1879, the year of the completion of the jetties
for the improvement of navigation at the mouth of the river. A steady
decline thereafter has ensued down to the present day. New Orleans had
then only recently engaged in foreign trade in grain. Exports of wheat
and flour (equivalent) had suddenly risen from less than 1,000,000
bushels in 1875 to over 12,000,000 bushels in 1880. At this time this
came principally by river. It was nearly ten years later before the
Illinois Central actively engaged in such export business. But when
the railroads finally seized upon it, the river trade was doomed.
The only exception to this decrease of inland water transportation
occurred on the Great Lakes. The carriage of coal, iron ore, and lumber
rapidly increased. Through the Detroit river, the tonnage grew from
9,000,000 in 1873 to 20,000,000 tons in 1880; and through the St.
Mary's Canal from 403,000 in 1860 to 1,734,000 tons in 1880. Inasmuch
as a fair proportion of this rapidly growing business was ultimately
destined to reach the seaboard either as raw material or in the form of
manufactures, this water traffic contributed to, rather than lessened
the prosperity of the trunk lines operating east of the lakes.

The growing importance of railroads during the seventies was
accompanied by collateral developments, which deserve mention in a
general preliminary survey. The abuses of personal discrimination
and favoritism, constantly recurring rate wars and disturbances,
the financial scandals of construction companies and subsidiary
corporations, the frauds perpetrated by unscrupulous financiers like
Gould and Fiske, coupled with the arrogance of railroad managements,
aroused widespread public hostility. This led to an insistent demand
for public regulation and control. The Granger movement formed its
open expression in the western states. The searching inquiries of
the famous Hepburn Committee of the New York legislature in 1879
voiced it in the East. The Windom report of 1874 was called forth on
behalf of the Federal government. The first railroad commission, that
of Massachusetts in 1869, was soon followed by others all over the
country. And a campaign of education was set under way which finally
led to the Federal inquiries of the Cullom Committee of 1886 and the
Federal Act to Regulate Commerce of the following year.

       *       *       *       *       *

The decade of the eighties, so far as common carriers are concerned,
was primarily characterized by new railroad construction. Over 70,000
miles of line were built in ten years,--a mileage just about equal
to the total new construction for both the ten preceding and the ten
following years combined. The movement culminated in 1882, and again in
1887, in two veritable crazes of promotion and speculative activity,
unequalled before or since in our railroad history. The first was
suddenly stopped by a short, sharp railroad panic in 1884. Jay Gould's
operations in Union and Kansas Pacific set a pace for manipulation and
fraud, which could have no other sequel. The second craze was doubtless
in part restrained by the moral effect of the passage in 1887 of the
Act to Regulate Commerce; although, viewed in a larger way, it was more
directly due to the exhaustion both of the supply of capital and of
confidence among investors. These two outbreaks of railroad promotion
are deserving of further comment, both by reason of their extent and
character. Prior to 1880, new railroads constructed had averaged a
little over two thousand miles annually. The figures for 1881-1882,
respectively, were 6,711 and 9,846 miles, rising finally to a total of
11,569 miles in 1882. This record has never been surpassed but once:
when, four years later at the height of the second "boom," 12,983 miles
of new line were laid down. A large part of this building was in the
Far West and Southwest, these regions being now opened up as the upper
Mississippi valley had been developed between 1868 and the panic of
1873. A second transcontinental route was opened in 1881, through the
joining of the Southern Pacific and Atchison Topeka and Santa Fe roads
at Deming and El Paso. Within two years thereafter two direct routes to
connect the Southern Pacific system with New Orleans were completed.
The Pacific Northwest was admitted to rail connection with the rest
of the country in 1883-1884, by two significant events. The Northern
Pacific road was then opened, and the Oregon Short line to connect the
Columbia river basin with the Union Pacific system. The Great Northern
road reached the Pacific slope in the year 1893, accompanied by the
Canadian Pacific, constructed just over the border. This activity in
far western railroad building was mainly due to the growth of the
Pacific slope; but it was also favored by the successful competition of
railways with the water routes round Cape Horn. It was estimated that
as late as 1878, not over one quarter of the total tonnage moved into
California went by rail. But the railroads then inaugurated a system
of special contracts by which shippers who agreed to use the railroads
exclusively, were given considerably reduced rates. By 1884 when the
plan was discontinued, the percentage of tonnage carried to California
by rail rose from twenty-five to between sixty and seventy-five
percent. In the eastern states, the eighties was the period of
speculative "parallelling" of existing lines of road, in order to
dragoon the older lines into purchasing the new ones at extortionate
prices. This was done under the guise of affording satisfaction to
the popular outcry for competition as a means of reducing rates. Two
notable instances were the building of the West Shore road, paralleling
the New York Central; and of the Nickel Plate line which similarly
ran for miles within a few rods of the Lake Shore across northern
Ohio. The fact was that the prolonged period of depression during the
seventies had brought about an accumulation of surplus capital awaiting
investment. The rapid repayment of its debt by the United States
government, also released a large supply of funds. General prosperity
prevailed and prices were everywhere rising. This increase of prices,
extending from commodities to all issues of stocks and bonds, reduced
the rate of return upon investment for these new supplies of capital
in all the older enterprises. The only alternative, in seeking for
a liberal return on investments, was to risk it in new ventures.
Speculation ran riot. All sorts of projects were eagerly taken up, and
among these, new railroads were most important. They were freely built,
far in advance of population in the West or of prospective needs for
enlargement in the East, not so much sometimes to develop the country,
as to enrich the promoters. That they ultimately served the public
interest was not the main concern in too many instances. This was also
the heyday of the fraudulent construction company, already so ably
utilized by the builders of the Pacific roads.[18]

In short, speculation in every conceivable form ran riot in a way not
repeated thereafter for nearly twenty years.

Aside from rampant speculation, American railroad history during the
eighties must record various other economic events of importance.
The city of New York and the New York Central Railroad were at the
culmination of their relative importance in the export trade of the
country. The volume of eastbound tonnage was enormous in the early
eighties. In 1881, 2,500,000 tons of freight east bound were carried
by the New York Central alone, a figure surpassed in only two years
until 1896. Another event of importance was the general westward drift
of population and agriculture. This was accompanied by a corresponding
migration of manufactures inland from the Atlantic seaboard. The lines
from the Central West to the South, such as the Illinois Central and
the Cincinnati, New Orleans & Texas Pacific road, had formerly relied
almost entirely upon the carriage of grain or flour and packing-house
products from the farms of Ohio, Indiana, and Illinois to the
cotton-raising South. During the latter half of the eighties they
carried an ever increasing proportion of manufactured goods, such as
boots and shoes, clothing, wooden ware, harnesses and groceries,--in
fact everything denoted by the words general merchandise. More and more
the supplies of grain, flour and packing-house products were being
produced in Iowa, Nebraska, and Kansas, while larger quantities of
general merchandise originated in the Middle West. The result was a
need for new diagonal trunk lines from such points as Kansas City and
Omaha into the lower Mississippi valley. The decline of Cincinnati as a
great pork-packing centre dates from this time. Memphis and Vicksburg
derived a new importance at the junction of such lines as the Kansas
City, Memphis & Birmingham with the older Mississippi river roads. At
about this time, in 1889, also, occurred the opening of the Gulf ports
for the export of the surplus grain products of the territory west of
the Mississippi. The significance of this for the eastern trunk lines
did not appear until later; but the occurrence forms a part of that
westward trend of population above mentioned. These years were all
characterized by the increasing importance of long-distance through
business, as distinguished from mere local trade. The markets of the
country as a whole, the areas of commercial competition, were steadily
expanding. Viewed in a large way, it was doubtless this economic
phenomenon which at this time emphasized the need of centralized
Federal control, instead of state regulation, if control there were
to be. This found its expression in the passage by Congress of the
Interstate Commerce Act of 1887.

A phenomenon of national importance was the rapid expansion of export
trade in staple commodities, through New Orleans, Galveston and
other Gulf ports. This began in 1889 when the Illinois Central first
engaged in export business in grain. It soon assumed considerable
proportions, with the growth of population and agriculture in the
southwestern part of the United States; and, with the completion of
the Panama Canal in 1913, will doubtless be even more notable in
future. The opening of new railway connections with these Gulf ports
about 1896 led to still further expansion of this trade. An immediate
result was of course a decline in the relative importance of the great
Atlantic seaports, particularly New York. A growing appreciation of
this fact is accountable for the great interest in New York state in
projects for enlarging the Erie Canal. A few figures, together with
the diagram on the next page, illustrate the situation. A generation
ago about nine-tenths of our exports of wheat and about seven-tenths
of our exports of flour, went out through the port of New York. In
1899 less than one-half of our wheat and less than one-third of our
flour was exported through the same city. The larger part of this loss
ensued after 1896, with the opening of new lines to the Gulf ports as
above mentioned. The New York Commerce Commission in its report for
1900 found that for 1899, while the nation's total foreign shipments
of wheat was larger than at any time since 1892, New York actually
exported twenty million bushels less than seven years earlier. Exports
in 1900 were the smallest in her history, forming, that is to say,
the lowest proportion of the total exports of the United States. They
were actually about a million bushels of wheat less than went out
through the two principal Gulf ports. An indirect result of this growth
of New Orleans and Galveston was an intense competition between all
the Atlantic trunk lines interested in the eastern seaports and the
railroads tributary to the Gulf of Mexico. The part of the country
most affected by this competition, of course, was that portion about
equidistant from the two sea coasts. This rivalry led to rate wars on
a scale not witnessed before since the trunk line struggles during
the seventies. St. Louis, Kansas City and all the region thereabouts,
enjoyed the benefit of ruinously low rates as a consequence,--an
advantage not accorded to other parts of the country. One cannot doubt
that this factor was most influential in encouraging the growth of
their population and trade.

[Illustration: EXPORT OF WHEAT BY SEAPORTS MILLION BUSHELS]

The development of the Gulf ports more recently, together with the
situation respecting rate wars on export grain, is still further
indicated by the chart. When New Orleans in 1891 considerably increased
its business through the activities of the Illinois Central Railroad,
it speedily developed that climatic conditions led to saturation of
the grain with moisture in the vessels' holds. This fact, together
with other difficulties, discouraged progress. But, for a time, with
the revival of foreign commerce in 1897, both the Gulf and Atlantic
ports shared in the greatly increased business. Galveston had now come
into the field; and at times surpassed New Orleans in importance by
virtue of the development of wheat fields in the Southwest. But the
overweening ambition of these Gulf ports, threatening as they did
the supremacy of New York, led to intense rivalry. All the lines to
the Gulf became finally pitted against all the trunk lines serving
the Atlantic seaboard. The advantage for two or three years seemed
to lie with the southern lines; and, as the chart indicates, in
1903-1904 grain exports through New Orleans and Galveston actually
exceeded those of any other ports. After the utter collapse of export
business in 1905, trouble once more threatened to break out; but it
was fortunately averted by a compromise effected in 1906. The Gulf
lines on through freight demanded a substantial differential to
offset certain disabilities, such as the longer haul, poorer service
and climatic damage to which they were exposed. The trunk lines
successfully met this contention in part, and finally brought about
a peaceful settlement of the difficulty. Under this arrangement of a
small differential in favor of the Gulf, New York, as the chart shows,
has once more resumed its preëminence as compared with the rest of the
country. But of late the ever-lessening volume of surplus American
grain for export to Europe[19] has rendered the question of far less
importance than at one time it threatened to assume.

The rapid growth and development of the Canadian railroads and ports
has also been notable in recent years. The Grand Trunk Railway was a
factor in Chicago business from the very first; and had to be reckoned
with in all trunk line rate adjustments. The dressed beef rate war
of 1887 proved this fact. But a new era of Canadian competition was
inaugurated with the opening by the Canadian Pacific of the so-called
"Soo" route in 1890, across the straits of Mackinac, thus opening a
short line from St. Paul and Minneapolis to the East. Persistent rate
wars during the next few years, particularly 1892-1893, finally led
to recognition of the claims of this lien by the trunk lines. Much
business was undoubtedly diverted from Chicago. Between 1884 and 1891
the flour shipped from Minneapolis increased over fifty per cent., yet
the proportion going by way of Chicago largely declined. Much of this
business, of course, ultimately reaches the seaboard by the combined
Lake and rail routes; but a large part goes out through Canada during
the open season. Yet, on the other hand, it is equally true that the
wonderful development of the Canadian Northwest since 1905, contributes
in many ways to the prosperity of American carriers and seaports.

As for new railroad construction since 1890, as shown by the
statistical chart on page 78, it has been proportionately much slower
than during the eighties. From about five thousand miles laid down
in 1890, a drop ensued to less than two thousand miles in each of
the four years of depression after 1893. And the former rate was not
resumed until 1901, since which time construction has ranged about
six thousand miles annually. This slackened rate of growth during the
last fifteen years is an indication of a fact of great importance. The
country as a whole with almost 250,000 miles of line in 1911 seems to
be fairly well supplied with transportation routes. It seems as if
the main trunk lines and systems had now been provided, leaving for
the future the problem of constructing branches and feeders and of
increasing facilities upon the main lines already built by duplication
of tracks and enlargement of terminals. A comparison of the rates of
growth of mileage and traffic, or of density of traffic, shows how new
construction is lagging behind the development of business. Present
conditions may best be shown by a few figures. The total mileage of
the United States is nearly equal to a ten track railroad completely
encircling the globe. The United States had already in 1900 about
forty per cent. of the aggregate mileage of the world, considerably
exceeding the total mileage of all the countries of Europe combined.
The situation may be illustrated in another way, by reference to
the relation of mileage to population and area. Europe in 1902 had
about 7.4 kilometres of line to every 10,000 inhabitants, as compared
with 41.4 kilometres (twenty-six miles) for the United States. This
shows that proportionately to population the United States is about
six times as well equipped with railroads as Europe. Similar results
appear with reference to superficial area. As compared with Europe
alone, we have about two-thirds as much mileage to every square mile
of territory, despite the fact that our density of population is only
about one-seventh of that of Austria Hungary--one of the most sparsely
populated countries in Europe. These figures show conclusively that
our railroad problems for the future will be mainly concerned with
accommodating the huge volume of existing traffic along the routes
already built, rather than in seeking to develop new ones to parallel
the old.

       *       *       *       *       *

Several essential peculiarities of American railroad development stand
out in sharp relief by comparison with the experience of Europe. The
most significant, perhaps, is the large amount of public participation
in construction, evinced through liberal grants of aid in lands, credit
and cash by both the state and Federal governments. The huge aggregate
of these state subventions is not generally appreciated. Because our
railroads are now private concerns, so far at least as legal title
is concerned, it is too often assumed in public discussion that they
owe their existence solely to private initiative and enterprise. With
all credit to their sturdy builders, to whose vision and courage so
much is due, the plain historical fact remains that the people of the
United States have had a large share in the great task of creating our
present railway net,--not indirectly alone, through settlement of the
virgin territory, but immediately and directly through land grants and
subventions.[20]

The total of land grants by state and Federal governments in aid of
railroads, according to the most careful estimates, is approximately,
155,000,000 acres,--that is to say, about 242,000 square miles. The
United States alone is believed to have given about 26,000,000 acres or
40,000 square miles. For purposes of comparison, the following table of
present-day areas is useful.

  German Empire          208,000 sq. miles
  France                 204,000 sq. miles
  Texas                  265,000 sq. miles
  New England States      66,000 sq. miles
  Illinois                56,000 sq. miles
  Belgium                 11,000 sq. miles
  Massachusetts            8,300 sq. miles

It thus appears that a gift of territory greater by about one-fifth
than the entire area either of the German Empire or France, almost
equal in size to the state of Texas or four times the New England
states, has, at one time or another, been made in aid of railroad
construction. The Federal grants equal about two-thirds of the area
of the New England states, or, in other words, are about five times
the size of the state of Massachusetts. A large proportion of the
area of the newer commonwealths was offered as a bonus to railroads.
Seven western states--including, for example, Minnesota, Iowa, and
Wisconsin--gave away from a fifth to a quarter of their birthrights.
Nebraska donated one-seventh, and California one-eighth. The Lone Star
state discovered in 1882 that in her youthful ardor she had given
away some 8,000,000 acres more than she possessed.[21] Shall it ever
be said, in the face of such evidence, that these common carriers are
private concerns, to be administered solely in the interest of holders
of their securities?

As concerns aid in the form of funds or credit, that is to say, through
subscription to railroad stocks or bonds, it is hazardous to venture
statistics, particularly for the separate states and municipalities.
But the statement[22] of direct appropriations and subscriptions to
securities on the next page is as reliable as any. The amount of
municipal and local aid can only be a matter of guess work, even
nominally, to say nothing of its real cash value. Including everything
from the heavy investments of such cities as Baltimore ($3,500,000) or
Cincinnati ($10,000,000) down to those of little places like Watertown,
Wisconsin,[23] with its railroad debt of $750,000 on a population of
7,553 souls ($100 _per capita_), the total for local aid as above
stated seems conservative enough. For Massachusetts alone no fewer than
171 town and city bond issues for railroad construction were authorized
in the forty years to 1871. The municipalities in Wisconsin by 1874,
despite its later settlement, issued about seven million dollars in
bonds for similar purposes. As long as the state legislatures were
free to appropriate moneys, they did so with a lavish hand; but when,
as in Illinois in 1848, they were constitutionally prohibited from
doing so, the enthusiasm shifted to the lesser governmental units.
Forty-three counties in Nebraska, between 1869 and 1892, voted subsidy
bonds to railroads to the amount of $4,918,000. In the case of towns
and cities, also, it was possible to play off one against another. No
ambitious community could stand idly by and see a new railroad go to a
rival place. There was no option but to vote bonds. And farmers, as in
Illinois, who had no cash, simply mortgaged their farms. It is clear
that in the aggregate these local contributions greatly exceeded in
amount those of the state and National governments.

                     _Amounts granted to railroads_

  Alabama                        $15,800,000
  Arkansas                        $7,100,000
  Delaware                          $600,000
  Florida                         $4,000,000
  Georgia                         $4,000,000
  Illinois                       $12,000,000
  Indiana                         $1,800,000
  Kentucky                          $200,000
  Louisiana                       $7,700,000
  Maryland                        $6,800,000
  Massachusetts                  $41,000,000
  Michigan                        $3,200,000
  Minnesota                       $2,200,000
  Missouri                       $31,700,000
  New York                        $5,400,000
  North Carolina                 $11,400,000
  Ohio                              $500,000
  Pennsylvania.                  $12,700,000
  South Carolina                  $5,700,000
  Tennessee                      $34,100,000
  Texas                           $4,800,000
  Virginia                       $15,400,000
                                ------------
      Total  (approximately)    $228,500,000
  United States:
      Bonds                      $64,600,000
      Interest to 1887          $114,000,000
                                ------------
                                $400,000,000
  Municipal and local           $300,000,000
                                ------------
                                $700,000,000

A true estimate of the proportions of this public aid recognizes, of
course, that many of these grants possessed only a nominal value.
The eighty-mile line in Texas, cited by Potts as the recipient of
588,000 acres of land, was glad enough to dispose of them for sixteen
cents an acre. Stickney mentions a Minnesota half-breed member of the
legislature who took ten dollars in cash for his vote on a railroad
bond subsidy, rather than $100,000 in capital stock. But, on the other
hand, if the land or bonds had little value, the roads themselves
were actually laid down at a very low cost. It was the proportion of
public aid to total real investment which was significant. Wisconsin
to 1874 had officially subsidized its roads to the amount of over
$21,000,000, including lands at three dollars per acre. This sum was
sufficient to have met one-half the legitimate cost of construction of
the properties then existent. Reliable evidence[24] tends to show that
the state and National governments, up to 1870, had pledged themselves
one way or another for a sum equivalent to one-fifth of the cost of
construction of the 47,000 miles of line then in the United States.
And approximately another fifth, at the very least, must have been
contributed from local and municipal sources.

In point of time, public aid by the states was quite unevenly
distributed.[25] Massachusetts and Maryland, about 1826, were the
first to take notice. But in the northern states most of the activity
was confined to the period of 1837-1840; whereas, in the South,
governmental subsidies did not become frequent until 1850. The whole
movement, so far as the separate states were concerned, came to an end
about 1870; after which time, with the exception of Massachusetts and
Texas, little more financial encouragement of the sort is recorded. In
many instances the hands of legislators were tied by constitutional
prohibitions; and in other cases the railway net had been so far
completed as to lessen the zeal of the public in the work. The centre
of interest after the Civil War, in fact, is to be found in the
activities of the Federal government.

More than a broad-line sketch of the land grants and subsidies to
railroads by the United States would be out of proportion.[26] Sporadic
grants in the South were made directly as early as 1835; but the first
considerable transfer was made by act of Congress in 1850. This statute
ceded to the state of Illinois the alternate, even-numbered sections
of land for six sections in width on each side of the projected
Illinois Central Railroad and its branches. The state then promptly
turned over these lands to the promoters of the line. The Federal
government lost nothing by the transaction. Rather did it gain,--the
lands having been long in the market,--through the sale of the odd
sections at a more than doubled price. Similar extensions of this grant
soon followed down through Alabama and Mississippi. Then other states
demanded recognition. Missouri, Arkansas, Iowa, Louisiana, Wisconsin
and Minnesota were in turn appeased. The last direct grant to a state
was made to Michigan in 1872. With the rise of interest in the Far
West, the Federal government during the Civil War period inaugurated a
new policy of direct charter and subsidy. Under this plan most of the
transcontinental lines were built.

The Union Pacific Railroad was the most notable beneficiary of the
Federal government. Its experience may be offered as typical. By
an act of 1864, twenty alternate sections of land per mile were
granted, together with a subscription to junior bonds to the amount
of $27,600,000. With this substantial encouragement the road was soon
completed. The following table gives details concerning the succeeding
grants to other companies.[27]

                       _Federal Aid to Railroads_

                              Bonds     Lands ($1.25 per acre.)

  Union Pacific            $27,200,000         $14,100,000
  Kansas Pacific            $6,300,000          $7,500,000
  Central Branch (U.P.)     $1,600,000            $278,000
  Sioux City and Pacific    $1,620,000             $54,000
  Central Pacific          $25,800,000         $10,000,000
  Western Pacific           $1,970,000            $567,000
                           -----------         -----------
                           $64,623,000 (about) $32,536,000

The primary investment of the United States in this pioneer road was
thus considerable. Despite elaborate sinking-fund provisions, the
combination of speculation, fraud and mismanagement in its affairs,
rendered even the payment of current interest charges impossible.
Matters went from bad to worse, especially after 1883 when several
new competitive routes were opened--the Southern and Northern Pacific
roads, the Atchison and the Burlington. Bankruptcy ensued in 1893, a
state of affairs which, as it soon appeared, could not be bettered
until provision should be made for settlement of the government's
claim.[28] Various proposals for partial payment proved unsuccessful.
Until at last, in 1897, under threat of foreclosure proceedings, the
banking interests in charge of reorganization agreed to a settlement
in full--$27,200,000 principal and $31,200,000 interest. The outcome a
year later on the Kansas Pacific, was less fortunate. The United States
received payment of the principal of its lien, $6,300,000; but was
obliged to forego the interest, amounting to about as much more. Then,
in turn, in 1899, the Central Pacific claim, amounting to $27,855,000
principal and $30,957,000 interest was disposed of by being refunded
in notes payable semi-annually over a period of ten years. Thus, with
unexpected ease and despatch, was the direct interest of the United
States in railroad affairs brought to a brilliant conclusion.

A striking characteristic of American transportation history,
emphasized by the foregoing account of land grants and subsidies,
is its essentially speculative character. Railroads were more often
constructed in advance of population and settlement than to accommodate
traffic already in existence. Speculation, as will appear in another
volume, has permeated all of our railroad finance. In the early days
the most extravagant visions of development were indulged in on all
sides. In the words of a Wisconsin legislative committee in 1854
protesting against the passage of further laws for the encouragement of
railroad construction: "In imagination every acre of land from Walker's
Point to Snake Hollow has been plowed, sowed, fenced, and is bearing
forty bushels of wheat.--Such estimates are quite delusive.--It takes
money to make railroads. It takes money to make the mare go; much
more the iron horse." True indeed, then and now! But a review of our
transportation history makes it plain that without this national note
of optimism and adventure, the vast capital creation in railroads of
the present time could never have been called into being. Public aid
and private enterprise and sagacity were alike needed to accomplish the
great work in hand.

       *       *       *       *       *

The dominating events in our later economic history, so far as
railroads are concerned, have been the period of severe distress and
prostration following the panic of 1893; a subsequent revival of
prosperity, with unprecedented demands for transportation during the
ten years thereafter until 1907; and a movement toward consolidation
of the railroad net into great territorial systems, notably during
the two years after 1898, as a result of which competition was
practically eliminated from all railroad business. The long decline in
freight rates was succeeded after 1900 by a steady rise of charges;
the phenomenal prosperity and consolidations led to wild speculative
outbreaks on the stock exchanges, especially in 1901 and 1906; and the
spread of industrial consolidation enormously emphasized the evils and
abuses of personal discrimination and favoritism. As a result of these
influences there arose in turn, after 1900, an irresistible demand
for greater governmental supervision, both of rates and of finance.
Taken all in all, these later years have witnessed both a public and
private interest in railroads, greater perhaps than at any earlier
period of our history. But these later events, aside from being set in
their proper relation to the whole in this preliminary general survey,
require detailed analysis each one by itself. Where not considered
within these covers, they will be treated in a second volume dealing
primarily with matters of finance and corporate organization.


                                  NOTE

    No attempt at an exhaustive historical account is herein
    attempted. Except as specially noted, the main reliance has
    been placed upon the following standard works:--

    Bogart, E. L. The Economic History of the United States, 1908.

    Callender, G. S. Selections from the Economic History of the
    United States, 1765-1860, 1909.

    Cleveland, F. A. (and Powell). Railroad Promotion and
    Capitalization in the United States, 1909.

    Coman, K. Industrial History of the United States, 1909.

    Gephart, W. F. Transportation and Industrial Development in the
    Middle West. Columbia University Studies, XXXIV, 1909. (Fine
    bibliography.)

    McMaster, J. B. History of the People of the United States, 7
    vols, 1883-1910.

    Phillips, U. B. The History of Transportation in the Eastern
    Cotton Belt, 1908.

    Poor, H. V. History of Railroads and Canals in the United
    States. 1860.

    Ringwalt, J. L. The Development of Transportation Systems in
    the United States. 1888.

    Tanner, H. S. Railways and Canals in the United States. 1840.

    Many other authorities, such as the Annual Reports upon
    Internal Commerce (since 1876) have been consulted. The
    admirable Catalogue of Books on Railway Economics, 1912,
    gives an exhaustive list. Many special contributions to the
    forthcoming Carnegie Institution Economic History of the United
    States have also been utilized.

    An admirable description in detail of early conditions in the
    West is reprinted in our Railway Problems, new edition, chap.
    II.

FOOTNOTES:

[1] For authorities, see note at end of chapter.

[2] F. H. Dixon, Traffic History of the Mississippi river, prepared for
the National Waterways Commission, 1909, is best on this.

[3] U. B. Phillips, A History of Transportation in the Eastern Cotton
Belt to 1860, 1908, is a standard authority in this field.

[4] U. S. Report on Internal Commerce, 1880, p. 72 _et seq._

[5] H. G. Pearson, An American Railroad Builder, John M. Forbes, 1911,
for this field.

[6] _Yale Review_, 1906, pp. 259-282.

[7] Dixon, _op. cit._

[8] _Cf._, p. 36, _infra_.

[9] E. D. Fite, Social and Industrial Conditions at the North during
the Civil War, 1910, pp. 42-77.

[10] _Railway Age Gazette_, 1912, p. 125, reprints statistics since
1840 of all sorts concerning rails.

[11] U. S. Reports Internal Commerce, 1876, App. 31.

[12] Pp. 361 and 404, _infra_.

[13] P. 404, _infra_.

[14] Pooling is discussed in vol. II.

[15] Chapter X, _infra_.

[16] Report of Committee on Canals of New York State, 1899, gives
elaborate statistical data. Cf. especially table 14. Also Rep. U. S.
Internal Commerce, 1881, p. 179, and 1884, p. 5.

[17] U. S. Reports on Internal Commerce, 1876, App. p. 29.

[18] More fully treated in the chapters on speculation and finance in
the second volume.

[19] _Cf._ the diagram on p. 21, _supra_.

[20] The literature is considerable; in the form of special economic
studies as well, of course, as in the standard histories and documents
already named at the head of this chapter. The bibliography in
Cleveland and Powell is to be commended. The long-promised Economic
History of the United States in preparation by the Carnegie Institution
will doubtless add much. Among special references, the following
authors are typical; titles of others being given in the Catalogue of
the Bureau of Railway Economics, 1912, under the names of states.

  Wisconsin. B. H. Meyer, _Bull Univ. Wis._, XII, 1892.
  Texas. C. S. Potts, _Bull. Univ. Texas_, No. 119, 1909.
  Missouri. J. W. Million, University of Chicago, 1896.
  Michigan. H. E. Keith, University of Michigan, 1900.
  Southern states. U. B. Phillips, History of Transportation, etc., 1908.
  Pennsylvania. A. L. Bishop, The State Works of Penn., 1907.
  Illinois. Davidson and Stuvé, History, etc.
  Nebraska. _Quarterly Journal of Economics_, VI, p. 337 _et seq._

On typical city participations; J. H. Hollander on the Cincinnati
Southern, _Johns Hopkins University Studies_, 1894: U. B. Phillips,
_op. cit._, on the Western and Atlantic; on Philadelphia, Ringwalt,
_op. cit._: on municipal aid in Massachusetts, 2nd Ann. Rep. Mass. R.R.
Com., etc.

[21] Potts, _op. cit._, p. 85.

[22] Thesis of Miss Ethel Jenney at Radcliffe College, under direction
of Professor A. B. Hart.

[23] B. H. Meyer, _op. cit._, p. 362.

[24] Miss Jenney, _op. cit._

[25] Bogart, p. 219; Coman, p. 239.

[26] For the Federal land grants, the standard works of Donaldson and
Sanborn are best. Also, H. K. White, History of the Union Pacific
Railroad, 1895: (The chapter on construction is reprinted in Ripley,
Railway Problems, Chap. III.) E. V. Smalley, History of the Northern
Pacific Railroad, 1883: etc.

[27] Details are in the Pacific Railroad Commission Report; 50th Cong.,
1st sess., Exec. Doc. 51, 9 vols. The final settlement is described in
_Quarterly Journal of Economics_, XIII, 1899, pp. 427-444.

[28] A more detailed account of the rise of the Harriman system is in
vol. II.



CHAPTER II

THE THEORY OF RAILROAD RATES

    Analysis of railroad expenditures, 44.--Constant v.
        variable outlays, 45.--Fixed charges, 46.--Official
        grouping of expenses, 46.--Variable expenses in each
        group, 51.--Peculiarities of different roads and
        circumstances, 56.--Periodicity of expenditures, 61.--Joint
        cost, 67.-- Separation of passenger and freight
        business, 68.


Analysis of the theory of railroad rates begins naturally with a study
of railroad expenditures. The examination of earnings is not feasible
until a later time. For neither a railroad nor a factory can earn money
until it has first liberally expended it. A physical plant must be
provided, in the first place, which means the guarantee of interest on
a large capital; and, secondly, it must often be operated unprofitably
at the outset. This is especially true in a new and undeveloped
country like the United States; where demand for transportation must
be frequently created by the invasion of virgin territory, making it
inviting for settlement. Twenty years ago such an analysis of railroad
expenditures with any approach to precision, owing to the absence of
scientific data, would have been impossible. A few companies, such as
the Pennsylvania, the Union Pacific and the Louisville & Nashville,
had indeed attempted to systematize their accounts; but there was
no agreement as to details, despite a certain harmony in questions
of principle. But since the passage of the Act to Regulate Commerce
in 1887, and largely owing to the work of Prof. Henry C. Adams as
statistician to the Interstate Commerce Commission, the matter may now
be examined profitably in detail. The data is published annually in
a volume entitled "Statistics of Railways in the United States." The
amplified powers of the Interstate Commerce Commission since 1906 have
considerably changed the system in force since the original law of
1887; but the general principles remain unchanged.[29] One feature of
the new law, however, is important. Not only must detailed reports be
periodically and promptly made; but no company is now permitted to keep
its books in any other form than the one officially prescribed. This
standard was adopted after extended conference with the Association
of American Railway Accounting Officers, which body has, in fact,
officially approved of the form adopted in most regards. These
accounts, therefore, may be said to represent the combined intelligence
of the practical and theoretical analysts, of the operating and
financial staffs, and of the governmental supervisory board. A great
impetus to scientific railroad economics has undoubtedly resulted from
this coöperation between government officials and private managements.

The primary distinction in railroad expenses is between those which
are constant and independent of the volume of traffic, and those which
vary more or less directly in proportion to it. Thus, of the total
outlay, it may at once be premised that for a time, at least, certain
capital expenditures are entirely unrelated to the volume of business
transported. Interest on bonded indebtedness is neither increased nor
diminished, up to a certain point, by the number of tons of freight
moved; whereas, on the other hand, other items of expenditure, such as
wages of train hands and fuel cost, are more or less directly affected.
The distinction above mentioned finds its clearest expression in
the primary division of railroad accounts into so-called "operating
expenses," which are variable; and "fixed charges," which, as the name
implies, are constant. Much of the direct wear and tear of equipment
belongs to the first class, while, as we have said, interest on its
own funded or floating debt, together with capital obligations on
leased lines, naturally fall into the second group. This second class
of constant expenses, which along with taxes is often denominated
in railway reports "Deductions from Income," is a relatively large
one. Thus, in 1910, out of a total expenditure by all the operating
railroads of the United States of $1,822,000,000, no less than
$490,000,000, or about 27 per cent., consisted of interest on debt and
taxes. This proportion of absolutely fixed expenditures, moreover,
shows a remarkable constancy throughout a series of years. It reached
high-water mark during the hard times in 1895, at 33.07 per cent. of
all outlay. Indebtedness had accumulated unduly, while at the same
time the volume of traffic was so small that mere operating expenses
dwindled in proportion. But since that time, largely as a result of the
financial reorganizations of 1893-1897, the percentage of fixed charges
has reached its present low point. This improvement is also in part due
to the growth of traffic, and thereby of operating expenses. The latter
have indeed grown faster than the accumulation of debt, owing to the
practice prevalent among American roads of paying for many improvements
and additions out of surplus income, rather than by charging them to
capital account,--that is to say, by borrowing money to pay for them.

Having at the outset deducted approximately one-quarter of our total
expenditures to meet fixed charges, we may now proceed to analyze
those outlays which remain. And this is to be done, always keeping in
mind the fundamental distinction between constant and variable items.
From 1887 until 1906 the operating expenses of American railroads were
allocated in the four following groups:

  (1) Maintenance of Way and Structures
  (2) Maintenance of Equipment
  (3) Conducting Transportation
  (4) General Expenses

This grouping under the new law of 1906 has been somewhat
redistributed. But inasmuch as most of the statistical data as yet
available is presented under the above-named heads, we shall adhere to
that classification. This we may the more properly do, as our object
is to show the general bearing of railroad expenditures upon rate
making, rather than specifically to analyze cost accounts. For this
simple purpose the above arrangement is entirely adequate.

The general nature of each of these above named groups is roughly
expressed by its title. Under the first, Maintenance of Way, are
segregated those outlays which have to do with the up-keep of the
roadway and permanent structures in proper shape for the moving of
trains. It includes, besides such obvious items as ballast, rails, ties
and the wages of track men, every outlay on permanent structures, such
as bridges and tunnels, stations, grain elevators, stock pens, gas, oil
and water tanks, and even scrap bins and eating houses. To these are
added scores of other minor items, such as maintenance of telegraph
lines, fences and cattle guards, signal plants and docks and wharves.
Every kind of tool or appliance used, and all wages paid in connection
with the maintenance of this part of the property are included.
Insurance and even the legal costs and damages incurred in connection
with accidents, are all assigned to the appropriate property. The
second group, Maintenance of Equipment expenses, includes, as the name
implies, the proper care and preservation of all the rolling stock
in good working order. Repairs and renewals of all locomotives, cars
and vessels, form the largest single items. But all shop machinery
and power plants are included, with specification in detail of every
appliance needed in connection with the work, as, for example, over
one hundred and fifty possible items from "adze handles, ammonia and
auger bits" down to "wire brushes, wrenches and zincs." Conducting
Transportation expenses, the third group, are supposed to provide for
the actual movement of traffic. The two former classes of expenditure
having put the fixed plant and rolling stock in condition, it remains
to operate the property. Under this head is chargeable all costs of
coal and supplies, wages of train hands from enginemen to car porters,
yard, station, switch and signalmen and telegraph operators. To these
are added such items as "purchased power," "cleaning cars," "clearing
wrecks," and "losses and damages"; in short, every conceivable item of
expenditure which can be assigned to the service as distinct from the
mere property.

A fourth group of expenditures remains, denominated General Expenses.
This includes all salaries of principal administrative officers from
the president or receiver down to the real estate and tax agents,
together with all their allowances for expenses, special cars or trains
and the like. All clerical salaries in the general offices naturally
belong here, as well as most of the legal expenses, outlay for
pensions, relief departments and the like.

A distinct improvement in the matter of principle has been made in
the revised classification of operating expenses under the new law
of 1906, by the segregation of a fifth group, denominated Traffic
Expenses.[30] These cover all the work of soliciting business, making
rates and accounting for freight and passenger traffic. Such outlays
were formerly grouped in the main under conducting transportation,
but, as is quite evident, they are distinct in their nature from the
expenses incidental to the actual handling of trains. Administrative
railroad organization has long recognized the peculiar and important
nature of this work by constituting it a separate department,
usually headed by one of the vice-presidents of the road. The main
items under this special head are salaries and expenses of a large
staff of officers and clerks, such as general passenger and freight
managers, agents and travelling solicitors; rents and care of offices
at home or abroad; advertising, membership in traffic associations,
immigration and industrial bureaus, expenses for experimental farms,
field demonstrators, donations to expositions, fairs and stock
shows--everything, in brief, which tends to create or keep business,
to be afterward actually handled by the transportation departments. In
future the detailed official statistics will segregate these expenses;
but at the present writing and in statistics down to 1906 they must be
bulked in with conducting transportation. An important modification
in accounting under the new law of 1906 has also been made in respect
to depreciation charges. Heretofore the practice of companies varied
widely, as will hereafter be shown. Under the new rulings a definite
and uniform system of charging off for depreciation has to be provided,
the details of which, however, need not concern us at this time.[31]

The following table based upon the returns for 1905 shows the relative
importance of the principal items under railroad expenditures grouped
under the proper headings:

  ======================================================================
                                     | Per cent. of | Per cent. of
                                     | operating    |    total
                                     | expenses     | expenditures
  -----------------------------------+--------------+-------------------
  Maintenance of way and structures  |        19.78 |     14.39
    Repairs of roadway               | 10.39        |      --
    Renewals of rails                |  1.3         |      --
    Renewals of ties                 |  2.66        |      --
    Repairs, etc., of bridges, etc.  |  2.32        |      --
    Repairs, etc., of buildings, etc.|  2.11        |      --
  Maintenance of equipment           |        20.76 |     15.09
    Repairs & renewals of locomotives|  8.29        |      --
    Repairs & renewals passenger cars|  1.97        |      --
    Repairs & renewals freight cars  |  8.20        |      --
  Conducting transportation          |        55.49 |     40.36
    Engine and roundhouse men        |  9.4         |      --
    Fuel for locomotives             | 11.28        |      --
    Train service (wages)            |  6.54        |      --
    Switchmen, flagmen, etc.         |  4.34        |      --
    Station service                  |  6.44        |      --
  General expenses                   |         3.96 |      2.90
                                     |--------------|
        Total operating expenses     |       100    |
        Fixed charges                |              |     27.23
                                     |              |    ------
        Total--all expenditures      |              |    100
  ======================================================================

[Illustration: DISPOSITION OF REVENUES AND INCOME FOR THE FISCAL YEAR
ENDING JUNE 30, 1909. (OPERATING ROADS)

  11.64%   MAINTENANCE OF WAY AND STRUCTURES
  13.62%   MAINTENANCE OF EQUIPMENT
   1.85%   TRAFFIC EXPENSES
  80.46%   TRANSPORTATION EXPENSES
   2.38%   GENERAL EXPENSES
   1.89%   OUTSIDE OPERATIONS
   3.19%   TAXES
  13.25%   INTEREST
   4.50%   RENTS
   6.54%   OTHER DEDUCTIONS
   8.72%   DIVIDENDS FROM CURRENT INCOME
    .89%   ADDITIONS AND BETTERMENTS
    .77%   RESERVES
    .40%   PROFIT AND LOSS]

[Illustration: PERCENTAGE DISTRIBUTION OF OPERATING EXPENSES,
1890--1906]

In the first two columns the percentages given relate to the
operating expenditures alone, without reference to the total
expenses--eliminating, that is to say, the large group of fixed
charges, and treating these operating costs entirely by themselves as
if the others were non-existent. In the third or right-hand column,
it will be observed, the main groups are again given in percentages,
not of the operating expenses alone, but of the total outgo, including
capital expenditures in the nature of fixed charges. It should also
be noted, of course, that only a few of the large or more important
items are here included, and in the right-hand column no details, other
than for the four main headings, have been computed. The constancy
in the distribution of these groups of railroad expenditures over
a term of years is graphically shown by the opposite diagrams.[32]
The perpendicular line for each year is divided proportionately to
the relative importance of each designated item of expense for that
year. Thus the course of the horizontal lines, dividing the four
main percentage zones, represents the ups and downs in the relative
importance of each item. Occasionally, as in the years following 1895,
the proportion of so-called general expenses decreased appreciably;
but, in the main, all the items moved more or less in unison subject to
the movements of wages and prices. This relative constancy proves how
fundamental the arrangement of groups is.

The attempt to differentiate the constant from the variable expenses of
railroads on the basis of the foregoing operating statistics may now be
made. What proportion of each item in the table for each of the large
groups is fixed in amount; and what proportion fluctuates more or less
in connection with the volume of traffic?

Under the first category, Maintenance of Way and Structures, absorbing
about one-fifth of operating expenses, over one-half is incurred for
so-called "repairs of roadway." It is evident that a large part of this
expense is due not to wear but to weather. A costly plant is exposed
to every vicissitude of flood, fire, and waste. Re-ballasting and
realignment may be somewhat more expensive where traffic is heavy; but
certainly all general repairs, the wages of track walkers, the removal
of snow, ice, and weeds, must be attended to entirely irrespective of
the number or size of passing trains. Of the second item, renewals
of rails, it is probable that this expenditure is directly traceable
to wear and tear in large part. The more trains, the heavier the
locomotive and cars or the higher the speed, the more rapidly must
these rails be replaced. But even so, the proportionate amount is
small, constituting generally between five and ten per cent. only of
the group expenditure for maintenance of way. With ties, an item about
twice as important as rails, the case is exactly the reverse. Ties rot
out rather than wear out. They have a natural life varying from four
to fourteen years, as influenced by climate, ballast, and drainage.
The necessary expenditure per mile for them by different roads varies
greatly, as might be expected; but it seems to bear little relation
to the density of traffic. As for the principal remaining items under
Maintenance of Way, such as repairs of bridges and buildings; if
properly designed to withstand their loads and strains, most expenses
of their up-keep such as repainting and reroofing should be practically
independent of the volume of business. A recent elaborate discussion of
these matters in 1907 in the Wisconsin Two-Cent Fare decision, reached
the conclusion that all of the cost of rails, one-third of the ties
and ten per cent. of expenditures for roadway, track and bridges, are
all that can properly be charged to wear from traffic, as opposed to
natural depreciation. Acworth illustrates this point by comparison of
the Midland & Great Western Railway of Ireland and the Lancashire &
Yorkshire Railroad. These two are of about equal length, approximately
530 miles. The latter carries forty times the traffic of the former
road, and yet its expenses for maintenance of way are only eight
times as much. It seems safe, in general, to conclude that in this
first large group of expenditures for maintenance of the fixed plant,
probably not over one-third are variable to any considerable degree.
Acworth for England estimates this proportion at about two-fifths.

The proportion of variable expenditures for Maintenance of
Equipment--the second group--is probably higher than in that of
maintenance of way. This is due to two causes. Rolling stock is, of
course, subjected more directly to wear and tear in service than are
bridges, cuts and fills and buildings. Rolling stock, moreover, is
susceptible to change of type and improvement. Its effective life is
thus shortened both by use and by replacement. Before being worn out it
may have become antiquated. More powerful locomotives and larger cars
suited to new requirements of the business may necessitate scrapping
otherwise good equipment. This very fact, however, imposes upon the
management the need of intensive service while it lasts. All the
mileage possible must be extracted from each vehicle before it goes
out of date, and this implies a higher proportion of wear-out than
of mere rust-out. Yet the fact is still true that many of the items
in this class are unaffected by the mileage or tonnage performance.
There is little difference in wear on a freight car as between light
and moderately heavy loads; and as for passenger cars, the actual wear
assignable to the paying load is a negligible quantity. We may, at all
events, risk an estimate in the statement that probably not over half
of all the expenditures of a railroad for maintenance of equipment vary
with the volume of the business.

The direct effect of a changing volume of business is most clearly seen
in the third group of operating expenses, having to do with Conducting
Transportation. This is very important, comprising as shown by the
table on page 49, no less than fifty-five per cent. of operating outlay
and forty per cent. of total expenditures including fixed charges. At
first glance it would appear as if, at last, one had here to do with a
direct relativity between cost and volume of business. Surely the cost
of fuel for motive power will vary with the tonnage moved! This item,
amounting in 1905 to no less than $156,000,000 for the railroads of the
United States, was the largest in the budget, constituting eleven per
cent. of all operating expenses. Yet brief consideration shows that
even here much of this expense is constant and invariable. A locomotive
will burn fully one-third as much coal merely to move its own weight
as to haul a loaded train. Five to ten per cent. of its total daily
consumption is required merely for firing up to the steaming point.
Twenty-five to fifty pounds of coal per hour go to waste in holding
steam pressure while a freight train is waiting on a siding. Every
stop of a train going thirty miles per hour dissipates energy enough
to have carried it two miles along a level road. In brief, expert
evidence shows that of this important expenditure for coal, from thirty
to fifty per cent. is entirely independent of the number of cars or
the amount of freight hauled. The largest wage items in this group
of conducting transportation expenses are for engine and roundhouse
men, and conductors and brakemen. This expense is, of course, even
more independent of the volume of business than the cost of coal. No
more engine men or conductors are needed for a heavy through express
or freight train than for a single car tram on a branch line. And
the extra cost for service of more brakemen as the size of the train
increases, is relatively unimportant when modern equipment with air
brakes is used. Appreciation of this fact is largely responsible for
the great increase in train loads in recent years. Train-mile costs
can be economized most effectively by distributing the wages of a
train crew over as large a tonnage as possible of paying freight. As
for the wages of station men, switch and flag men, they are largely,
and often entirely, independent of the amount of business. From all
these considerations, it appears that at a conservative estimate, no
less than fifty per cent. of the cost of conducting transportation
constitutes a fixed charge upon the property once it is in operation,
irrespective of the volume of business transacted.

The group of general expenses, which alone remains for analysis, is
relatively small in amount. It is obvious that these outlays are a
constant burden but slightly influenced by the variation in traffic.
Salaries may indeed be reduced somewhat during hard times--a few clerks
may be laid off; but, on the other hand, this being an expense of
organization, the general staff must be maintained at about a certain
standard of efficiency regardless of business.

Summarizing our estimates thus far, we may reconstruct a table,
distributing expenditures theoretically according as they are constant
or variable in somewhat the following way:

  ======================================================================
                            |    Per cent. of    |    Per cent. of
                            | operating expenses |   total expenses
                            |--------------------+----------------------
                            |      | Con- | Vari-|      | Con- | Vari-
                            | Both | stant| able | Both | stant| able
  --------------------------+------+------+------+------+------+--------
  Maintenance of way        |  20  | 13.4 |  6.6 |  15  | 10   |  5
  Maintenance of equipment  |  20  | 10   | 10   |  15  |  7.5 |  7.5
  Conducting transportation |  56  | 28   | 28   |  40  | 20   | 20
  General expenses          |   4  |  4   | --   |   3  |  3   | --
                            |------+------+------|      |      |
                            | 100  | 55.4 | 44.6 |      |      |
  Fixed charges             |      |      |      |  27  | 27   | --
                            |      |      |      |------+------+--------
                            |      |      |      | 100  | 67.5 | 32.5
  ======================================================================

Thus one arrives at the general conclusion that approximately
two-thirds of the total expenditure of a railroad and more than
one-half of the actual operating expenses are independent of the volume
of traffic. The remaining third of all expenditures, or what amounts
to the same thing, the other half of the operating expenses, are
immediately responsive to any variation in business. Applied to the
railroad net of the United States, this means that only about one-third
of the $2,000,000,000 disbursed in 1905--an amount equal to about two
and one-half times the national debt--was susceptible of variation
according as the traffic expanded or decreased. This provisional
estimate, defective principally because of inadequacy of the returns as
to depreciation and replacement, agrees in the main with computations
based upon other data. The Vice-President of the Southern Pacific
Railroad, in 1892, after extended investigation, arrived at precisely
the same general conclusion. The great German authority, Sax, estimates
that one-half of a road's operating outlay is constant and that this
operating outgo equals about half the total expenditure, the other half
being capital cost and hence constant. This calculation places the
constant factors even higher than ours, viz., at about three-fourths
of the total expenditure. Eaton states that half of the operating
expenses respond to changes in the volume of traffic. Our estimate,
above detailed, seems to be in accord therefore with good authority,
and differs but little from any of the reliable writers.

It should be observed in passing that the relative distribution of
outgo above mentioned, varies greatly both as between different
railroads and, on the same road, as between different years.[33]
During lean seasons the imperative need of reducing expenses generally
induces the heaviest inroads on expenditure for maintenance of way.
Nearly one-third of these expenditures can probably be postponed for
short periods without serious detriment to operation; but, of course,
there is for each property an irreducible minimum at which economy
must halt. On the other hand, the cost of moving each train, that is
to say, the outlay for fuel and wages, cannot be greatly cut, although
some discontinuance of freight trains may take place. The most readily
postponable outlay is therefore found in the department of maintenance
of way. Two hundred ties per mile may be annually renewed instead
of twice that number for a year or two. Heavy decreases in the wage
account for road and track men may be effected, sometimes at the
cost of public safety perhaps, but none the less effectively from an
immediate fiscal point of view. A series of hard years thus always
results in heavy proportional curtailments of maintenance of way
expenses. In 1895, for instance, midway between the two worst years
of the depression of 1893-1897, only 19.82 per cent. of operating
expenses was devoted to maintenance of way, with 15.76 per cent.
expended for maintenance of equipment.[34] Six years later, in the
full tide of prosperity, the outlay for maintenance of way had risen
to 22.27 per cent. With over 350,000 freight cars idle on sidings, as
during the spring of 1908, expenditures on repairs of equipment may
temporarily be postponed. Depreciation rather than wear takes place.
An economy of about five per cent. may temporarily be effected in this
wise. It is only with the return of prosperity that the temporary
postponement of this expenditure makes itself felt. Economy at the
expense of efficiency is poor business policy in the long run. With
the revival of activity on the other hand, as in 1898, there may be
witnessed a sudden concentration of the postponed expenditures of
the preceding years. The Illinois Central was spending $1,400 per
mile on maintenance of way in 1905, as against only $1,150 in 1897.
A succession of fruitful years may, however, find the property so
thoroughly kept up that some measure of relaxation in expenditures
may ensue. During these good years with heavy traffic, it is the
maintenance of equipment charges which tend to rise. Locomotives and
cars are constantly in need of repair owing to hard usage. This was
a noticeable feature during the four years after 1900. The Illinois
Central, expending only $866 per mile for maintenance of equipment in
1897, laid out $2,200 per mile for the same purpose in 1907.

Sometimes, as in January, 1903, or November, 1906, general wage
increases all along the line take place. These, of course, affect all
branches of the service. Supplies of all kinds may also enhance in
price. It was doubtless the rise in the price of coal which increased
the proportionate importance of the fuel item in the railroad budget of
the United States from 9.8 per cent. in 1900 to 11.8 per cent. in 1904.
The tremendous rise in expenses of all kinds in 1907 was not at first
appreciated because of the large volume of traffic. It was only when
the sharp decline in business following the panic in October of that
year took place, that the full influence of this factor became apparent.

As between different roads also, the relative proportion of the various
elements of cost will vary according to circumstances. Northern lines
are exposed to heavy maintenance of way charges, owing to snow,
ice, and frost. In rugged districts or with heavy grades, expensive
operation is apparent in high conducting transportation expenses. On
the Pennsylvania trunk line, rising to 2,100 ft. above sea level and
with many curves, the distribution of expenditures is quite different
from that on the New York Central, which operates a straighter line at
about water grade. On the Union Pacific, movement expenses have been
at times over fifty per cent. higher than on the St. Paul road, which
operates in level country. It is a combination of high grades and poor
equipment, which undoubtedly keeps the relative cost of conducting
transportation so high on the Erie. The proportion of local to through
business is of importance in this connection.[35] Railroads like
the Boston & Maine or the St. Paul system before 1908, because they
have so much local business, contrast strongly with others like the
Chicago Great Western, the Erie or the old Fitchburg Railroad. On the
latter roads the distribution of expenses is different, because their
large volume of through traffic carried in bulk is so much cheaper to
handle. Obviously, the expense incident to frequent stops and loss
of time, as well as in loading and unloading local business, will be
much greater than in long haul trainload traffic. The cost of large
items like fuel will vary greatly in different parts of the country
from perhaps $1.25 per ton for coal in Pennsylvania up to $7 or more
on the Pacific coast. Since the recent discoveries of petroleum in
Texas and California, economies have been effected upon the Southern
Pacific, which by comparison with Northern Pacific, still using coal,
may be of great importance. More than six-tenths of the cost of
locomotive service is for fuel, so that a reduction of cost from $4
a ton to an oil equivalent at $1 per ton may aggregate a large sum.
It has been estimated that such a saving on 1,600,000 tons of coal
would pay five per cent. on an additional capital of $100,000,000.
Similarly the character of the freight, whether it be like coal, iron
ore or grain, cheaply handled, or merchandise which must be carefully
housed and treated; its regularity, whether it flows evenly the year
round like the dressed beef business, or as on the cotton and cattle
range roads, is concentrated in a short season and all moves in one
direction;[36] the relative proportions of freight and passenger
business--in New England about on an equality, while in the West and
South nearly nine-tenths freight; and, finally, the efficiency of
management, in the use of rolling stock, making up trainloads and
keeping all equipment busy; all of these factors will influence the
proportionate distribution of expenditures. The operation of each road
thus constitutes an interesting problem in statistical analysis by
itself.[37]

[Illustration: _RELATION OF TRAFFIC TO MAINTENANCE OF WAY COSTS ON
REPRESENTATIVE EASTERN AND WESTERN ROADS--1910_]

The relation of course between density of traffic and the distribution
of expenditures is direct. Heavy and frequent trains increase the wear
and tear as distinct from mere depreciation from age and weather. This
is demonstrated graphically by the following diagram.[38] The solid
black horizontal belts to right of the centre show how low is the
density of traffic on the five upper western roads by contrast with
the five carriers in trunk line territory. The left hand horizontal
belts show proportionally in dollars the outlay per mile of road for
maintenance. Naturally the expense of such maintenance is likewise
less on the western lines. But when stated, not absolutely in dollars
per mile of road but in terms of utilization, as by the shaded belts
to right of the centre, the true state of things appears. Density
considered, in other words, the western roads are all as well kept up
as those in the East. The necessity at all times of interpreting such
expenditures, not in absolute figures but in terms of utilization, is
obvious; and yet it is not always done in practice.

Up to this point it has appeared as if, in making distinction between
the constant and variable expenditures of a railroad, it was the
latter only which grew as the volume of traffic increased. This is
not absolutely, but only relatively true, not only of the so-called
constant operating expenses, but of fixed charges as well.[39]
Everything depends upon the length of time under consideration. Many
expenses follow the fluctuations of business, not evenly but by
jerks. Up to the full limit of utilization of the existing plant,
each increment of traffic seems to necessitate but a very small
increase in the so-called variable expenses, with hardly any change
at all in the constant ones. A branch road can haul more and more
tons of freight with a given outfit of cars and locomotives by merely
increasing slightly its outlay for fuel, train service, wages and
supplies. But after a certain point more rolling stock must be provided
to accommodate the growing business. As each of these additions to
property occur, they contribute new quotas to the fixed charges and
to the so-called constant expenses of operation, such as maintenance
of roadway and the like. Nor can these new expenses be allocated to
the new business alone. The moment the old traffic has outgrown the
existing plant, the new expenditure becomes chargeable to all the
business alike. The new outgo must be distributed evenly over the
entire volume of traffic thereafter handled. Each ton, both of old and
of new traffic, beyond the haulage capacity of the locomotives then
in service, is equally responsible for the expense of new equipment
purchased. Although the old business could have been handled without
a million dollars spent for double-tracking or terminal enlargement,
this addition to the expense of maintenance of way or to the fixed
charges is equally attributable to every ton of traffic hauled.

A concrete example may aid in making this important principle clear.
The new through-freight trunk line built by the Pennsylvania Railroad
since 1900, paralleling its old four-track one, represents both in the
cost of maintenance and capital charges, a sudden jump in the expense
of transporting each ton of freight on _both_ lines, until such time
as the new business grows to a point where it can support the new line
by itself alone. The relation between increasing returns and density
of traffic is well illustrated in this instance. With six tracks in
operation nearly all the way from Pittsburg to Philadelphia, the four
old tracks are sometimes almost fully utilized for passengers and fast
freight. The extraordinary density of traffic appears in the statement
that this road in 1911 on 3534 miles of track handled one-third more
ton miles than the Union Pacific--by far the most worked of all the
western lines--handled on 13,674 miles of track. The two new low-grade
Pennsylvania freight tracks are used only for slow traffic; largely
coal and westbound steel empties. Not-withstanding the extraordinary
density of traffic on this extra two track line, it probably does
not meet the fixed charges on cost of construction of the line. Yet
the new double track was absolutely necessary, regardless of its
profitableness, in order to relieve congestion on the old four tracks.
In other words, the demands of the service forced an expenditure which
in and of itself was not financially self-supporting. But the profit
from the old lines would be sufficiently enhanced to take care of
the whole. The bearing of such cases upon the capital needs of the
future is obvious. A resolutely conservative policy of finance becomes
imperative under such circumstances.

In much the same way, the general condition of congestion reached
in 1903-'05 on the eastern trunk lines and in the West and South in
1906-'07, manifested mainly in the need for more tracks and terminals,
represented the permanent outgrowth of the old plant; and necessitated
a readjustment of capital expenses for the purpose of enlargement.
Viewed in a large way over a term of years, nearly every expenditure,
even the fixed charges which appear constant or independent of the
volume of business, thus become in reality imbued with more or less
variability.

The preceding considerations hold good not alone of increased
facilities, but of their curtailment as well. This point is often
neglected in respect of capital outlay, which once made cannot be
recalled. Rotting of ties we have held to be a constant expense
of operation. It goes on steadily, whether traffic conditions be
good or bad. But, on the other hand, those ties, if they be under
a third or fourth track, would never have been laid had not there
been a promise of business sufficient to render the added investment
profitable. As Lorenz observes, "the question is not, What expenditures
would disappear if a certain proportion of the traffic should be
discontinued? but What expenditure would not now be incurred if that
traffic had never been called forth?" Viewed in this way, even the
necessary replacement of ties under a (temporarily) little used extra
track, is an expense determined at some time, even if not always, by
the volume of the business. In the long run, therefore, the percentage
of total cost which we may assign to an increase in the volume of
traffic, is higher than appears from a cross-section of expenses,
taken, as was at first had, in a given year. Lorenz has illustrated
this steady expansion of all groups of expenditure in relation to
expansion of traffic by the following table, in which the actual
figures for each year [brought down to date] are replaced by an index
number based upon 100 for the year 1895. It would have been highly
suggestive to continue all of this data alike to the present time; but,
as noted on the table, certain items have been so modified by changes
in accounting practice, that this could not be done.

  ==================================================================
       |Gross earnings from operation
       |     |Ton miles
       |     |       |Passenger miles
       |     |       |       |Total operating expenses
       |     |       |       |     |Maint. of way & structures
       |     |       |       |     |       |Maintenance of equipment
       |     |       |       |     |       |       |Conducting
       |     |       |       |     |       |       |transportation
       |     |       |       |     |       |       |       |Gen'l
       |     |       |       |     |       |       |       |expenses
  -----+-----+-------+-------+-----+-------+-------+-------+--------
  1895 | 100 | 100   | 100   | 100 | 100   | 100   | 100   | 100
  1896 | 107 | 111.8 | 107   | 106 | 111.2 | 117.9 | 103.1 |  99.4
  1897 | 104 | 111.6 | 100.5 | 103 | 108.5 | 106.4 |  99.8 |  98.4
  1898 | 116 | 133.8 | 109.7 | 113 | 120.4 | 124.9 | 109.1 | 101.1
  1899 | 122 | 145.1 | 119.7 | 118 | 126.8 | 134.6 | 115.6 | 110.0
  1900 | 138 | 166.1 | 131.5 | 132 | 150.4 | 164.2 | 126.9 | 112.7
  1901 | 147 | 172.5 | 142.3 | 142 | 164.6 | 173.2 | 135.5 | 121.8
  1902 | 160 | 184.5 | 161.5 | 154 | 185.2 | 200.2 | 151.7 | 131.4
  1903 | 176 | 203.2 | 171.6 | 173 | 198.6 | 225.6 | 174.7 | 142.1
  1904 | 184 | 204   | 179.8 | 184 | 194.8 | 250.7 | 188.6 | 153.5
  1905 | 193 | 219   | 195   | 191 | 191   | 253   | 179   | 154
  1906 | 216 | 254   | 206.5 | 212 | 216   | 288.8 | 194   | 166
  1907 | 240 | 277   | 227   | 241 | --[40]| --[40]| --[40]| --[40]
  1908 | 222 | 256   | 238   | 230 |  --   |  --   |  --   |  --
  1909 | 224 | 256   | 238   | 220 |  --   |  --   |  --   |  --
  1910 | 256 | 300   | 265   | 251 |  --   |  --   |  --   |  --
  ==================================================================

According to this showing, maintenance of equipment, which we held in
our analysis to be about one-half a constant expense and independent
of traffic, especially after 1900, appears to have actually outrun
the expansion of ton-mileage and passenger business. How largely
this is due to actual purchases for the sake of future growth is
not determinable. And maintenance of way outlay--one of our largely
constant expenses--has increased, in fact, more rapidly than conducting
transportation, which we held to be mainly variable. But these
figures are confused by the failure to differentiate in the accounts,
mere maintenance from actual improvements and additions to plant.
Expenditures for these latter purposes, charged to operating expenses
rather than to capital account, have been so enormous during these
years of prosperity that they confuse the true facts utterly. It is
to be hoped that now with the revised statistics since 1906, which
will permit a clearer definition of these expenditures in detail,
an analysis covering a series of years will bring out the real
relationships. Equally important is the fact that these years have been
characterized by rapid and extensive rises, both of prices and wages.
Had our table covered a longer series of years the results would have
been more clear. Until such an analysis be made, it will suffice for
our purpose, viz., the analysis of the principles of railroad rate
making, that we adhere to our first general conclusion, namely--that
of the total expenditures of a railroad _at any given time_ about
two-thirds of them are constant, while only one-third vary with the
ups and downs of the volume of traffic. Comprehending in survey a long
period of years, it might happen, as Acworth concludes, that nearly
one-half of the total expenditures were entirely fixed in character,
leaving the other half as dependent upon the amount of transportation
effected.

The manner in which heavy capital outlay for maintenance accompanies
as well as partly accounts for a decline in the cost of conducting
transportation on American roads, is graphically shown by the diagram
on the next page.[41] During ten years a steady decline in direct
operating costs has accompanied an equally marked upward tendency in
expense of maintenance. The bearing of this on the problem of rate
advances in future is direct. Profitableness results from two separate
sources; economical operation such as longer trains and better loading,
and also from far heavier capital investment in plant, by which such
operation is rendered possible.[42] Both alike, however, attend upon
increased volume of business. Heavy capital investment may lessen
immediate maintenance charges,--lower grades and straighter alignment
naturally wearing less; but, on the other hand, the burden of interest
and other fixed expenses steadily grows. How will they stand toward
one another by 1925 on the eastern trunk lines? Will growth of business
bring lower rates or not? A fine field for further analysis is as yet
unworked.

[Illustration: _RATIO OF MAINTENANCE OF PROPERTY AND CONDUCTING
TRANSPORTATION TO TOTAL OPERATING EXPENSE._]

One final relation between operating and fixed expenses is left for
consideration. It is so well put by J. Shirley Eaton in an unpublished
paper, that it can best be stated in his own words:

    "It is impossible to have an absolute and universal line of
    demarcation between the direct and the fixed expense, that
    shall be the same on all roads. One road chooses to reduce
    a grade and thereby increase the capital account in order
    to save in the current expense of a helper at a hill or the
    lost margin of efficiency of the loaded train on the level.
    The relation between a current expense and the annual charge
    of the capitalized cost on a fixed plant that performed the
    same service, was well illustrated in a case arbitrated by
    Mr. Blanchard in New Orleans. One road which did not have
    access to the heart of the city undertook to compensate its
    disadvantage by trucking to and from its depot. The hire of
    a public truckman to perform the service for its patrons was
    very soon commuted to the practice of paying the amount of
    the truck expense to the consignee by deducting it from the
    freight bill rendered, the consignee or shipper performing the
    service. This, known as 'drayage equalization,' was claimed by
    competitors to be in the nature of a rebate to secure business.
    The arbitrator decided that the first roads had elected to buy
    their right of way into the heart of the city; and the road
    that had not built into the city elected to pay the expense of
    the same service in the shape of a current drayage bill instead
    of in the shape of interest on money invested in right of way.
    Therefore he decided there was no cause for complaint."[43]

Railroad expenditures, as Taussig clearly pointed out a number of years
ago,[44] afford a prime illustration of the production of several
commodities by a single great plant simultaneously at joint and
indistinguishable cost. The classic economists illustrated this law by
the joint production of wool and mutton and of gas and coke. In both of
these instances neither commodity could conceivably be produced alone.
Nor was either one, so to speak, a by-product of the other. So nearly
of equal importance are the two, in fact, that the cost of production
for each may approximately be determined by dividing the total cost
according to the relative worths of the two or more products. The
law of joint cost with reference to the production of transportation
is somewhat different. Compare, for instance, the carriage by a
railroad of thousands of passengers and different commodities in every
direction, under varying conditions, singly or by wholesale, slowly or
by express, over a given set of rails every day; with the operation
of a great refinery producing simultaneously kerosene, gasoline,
lubricating oils and greases as well as various odd chemicals. Both
are examples of production at joint cost, but with various important
contrasts. In the refinery all the costs are joint. All the processes
are interlocked. Every increase in the output of kerosene produces
_pari passu_ an increase of the other commodities. On the railroad not
all, but only a part of the costs are joint, in such manner as has
been shown. For, from the joint portion of its plant--roadway rails
and locomotives--the railroad may produce transportation of different
sorts quite independently. It may choose to especially cultivate its
passenger traffic, or its cotton or coal business. After a certain
point of congestion is reached, the various sorts of traffic on the
railroad may even become actually competitive with one another so far
as the joint use of the plant is concerned. It is plain that this
could never happen in the refinery. The use of more stills for making
kerosene would automatically produce more by-products of every sort.
But on a railroad it might well happen that the coal and passenger
business might come to interfere with one another. A choice of emphasis
as between fast refrigerator beef or fruit traffic, and limited express
service, may have to be made on a long single track line. Nevertheless,
in spite of these peculiarities of transportation, the general law
of joint costs holds good, in that it is a demand for each service
rather than its cost which finally determines the chargeable rate.[45]
This must be so, because of the fact that the cost of each shipment
is so largely joint and indeterminate, and that a large part of the
entire plant is indistinguishably devoted to the general production of
transportation without reference to particular units of business. One
concrete example may serve to illustrate this point.

For years attempts have been unsuccessfully made by accountants to
effect the primary separation between expenses of passenger and freight
business,[46] in order to determine the cost of transportation per
unit in each case. Some companies like the Louisville & Nashville
and the Burlington system, still divide up the two, usually on the
basis of the engine mileage for each class of traffic. This may be
serviceable enough for comparisons of costs from year to year in the
same company, but it has no general value and it may, moreover, become
highly misleading. The most absurd conclusions may result. Thus at one
time it appeared from such data, compiled by the Interstate Commerce
Commission, that the New York Central, with five times the density of
traffic of the Illinois Central, was actually conducting its freight
business at a much higher cost per ton mile. Such inconsistencies
induced the Interstate Commerce Commission in 1894 to abandon the
attempt at any such primary separation of accounts.[47] It has since
been reattempted, in special cases, as by the Wisconsin Railroad
Commission in its notable "Two-cent Fare" decision in 1907, the
division being made according to a number of different criteria.[48]

But it is plain that a very large proportion--probably over half--of
the expenditures for freight and passenger business are entirely joint,
however distinct the revenues from each service may be. We have seen
that approximately two-thirds of the outgo is incurred on behalf of
the property as a whole. Certain expenses, to be sure, such as train
wages, coal consumption and the maintenance of rolling stock, are
readily divisible; but with respect to the maintenance of way and
structures--about forty per cent. of the total outgo--all guides fail.
Even in respect of the cost of rails, due to wear and tear of train
movement, we are quite at sea in the allocation of expenses. Freight
trains may indeed be four times as heavy as passenger trains; but, on
the other hand, they move at far slower speeds. And then, finally, how
about the large item of capital cost, the proportion of outgo for
fixed charges? This equals about twenty-seven per cent. of the total
expenditures for the United States as a whole. We may, of course,
divide these expenses arbitrarily on the basis of the relative gross
revenue from freight and passenger business respectively. And yet how
absurd it would be to attempt to allocate an expense of a million
dollars for the abolition of grade crossings in this way. As between
the New Haven road, with passenger and freight revenues about equal,
and a western road with only one-tenth of its income derived from
passengers, the apparent cost of freight business on the eastern road
would be absurdly reduced by any such process. The facts are plain.
So many expenditures are incurred indiscriminately on behalf of the
service as a whole--being an indispensable condition for operation
of the property at all--that no logical distinction of expense even
as between passenger and freight traffic is possible. This being so,
how futile it is to expect to be able to set off the expenses due to
any particular portion either of freight or passenger service, and
especially to any individual shipment. It may oftentimes be possible
to determine the _extra_ cost due to individual shipments. This, of
course, mainly applies to what are called movement expenses. Thus the
haulage cost of a 2,000-ton grain train from Chicago to New York has
been estimated at $520. But how small a part this is of the total
cost, the preceding analysis must have made clear. In the Texas Cattle
Raisers' case, detailed analysis of the extra cost for the traffic
in cattle was presented.[49] The starting point in this attempt was
necessarily an allocation of freight and passenger expenditures, which,
if defective, would vitiate the entire subsequent calculation as to
costs. In this instance, it was the judgment of the Interstate Commerce
Commission in its final decision in 1908, that no such separation of
expenditures was possible as a basis for the determination of cost of
service.

FOOTNOTES:

[29] _Quarterly Journal of Economics_, XXII, 1908, p. 364 _et. seq._

[30] U. S. Statistics of Railways, 1908, p. 165 (and annually
thereafter), gives an outline of these expense accounts for all
railways over five hundred miles long.

[31] Treated in vol. II, chap. XV. Begins in U. S. Statistics of
Railways, 1909, p. 76.

[32] Changes in accounting rules in 1907 prevent its continuation
to date; but the data for 1909 under the new system are reproduced
alongside.

[33] U. S. Statistics of Railways, 1908, p. 165, and annually
thereafter gives data for all large roads.

[34] The sharp decline in traffic in 1911, especially after the
suspended advance of rates, as affecting maintenance expenditures per
mile of road, is shown as follows:

  ===================================
                     |  1911 |  1910
  -------------------+-------+-------
  Baltimore & Ohio   | $5931 | $6336
  Union Pacific      |  3296 |  3363
  Great Northern     |  2375 |  2653
  New York Central   |  8681 |  8087
  Northern Pacific   |  2451 |  3413
  Pennsylvania       |  9088 |  9792

Multiplying these differences into thousands of miles of line shows the
great economy resulting.

[35] _Cf._ pp. 259 and 422, _infra_.

[36] The provision of plant and equipment to carry the "peak of the
load" is often a serious handicap.

[37] For an instance of detailed analysis of cost, the general
investigation of soft coal rates to the lakes in 1912 is highly
suggestive. Two-thirds of revenue went for operation and maintenance,
one-third for return upon plant. This was the first attempt to justify
an advance in rates for a large volume of traffic on the ground that it
did not contribute its proportionate share of earnings. 22 I.C.C. Rep.,
604.

[38] From Railroad Operating Costs; by Suffern & Co., New York, 1911.

[39] Lorenz in _Quarterly Journal of Economics_, XXI, pp. 283-292, is
suggestive.

[40] Change of accounting methods vitiates further comparisons of
operating costs after 1907.

[41] From Railroad Operating Costs, by Suffern & Co., New York, 1911.

[42] _Cf. Yale Review_, 1910, pp. 268--288; with reference to the
rate advances of that year.

[43] _Cf._ the Free Cartage case, 167 U.S., 633.

[44] _Quarterly Journal of Economics_, V, 1891, pp. 438-465.

[45] Two important qualifications of this law, however, are set forth
at p. 265, _infra_.

[46] _Cf._ our Railway Problems, rev. ed., _circa_ pp. 684, 706.

[47] The first successful attempt, as to soft coal rates to the lakes,
is in 22 I.C.C. Rep., 613. Cf. 13 _Idem_, 423.

[48] Wisconsin Railroad Commission Report, 1907, p. 101. Compare also
Woodlock, p. 91; U. S. Statistics of Railways, 1894, p. 70; _Yale
Review_, 1908, p. 382; and Record, Cincinnati Freight Bureau Case, II,
p. 941.

[49] 13 I.C.C. Rep., 423. Compare 9 _Idem_, 423; and _Yale Review_,
1908, p. 287.



CHAPTER III

THE THEORY OF RAILROAD RATES (_Cont'd_)

    The law of increasing returns, 71.--Applied to
        declining traffic, 73.--Illustrated by the panic of
        1907, 75.--Peculiarly intensified on railroads, 76.

    Growth of mileage and traffic in the United States since
        1889, 77.--Increase of earnings, 79.--Operating expenses,
        gross and net income, 80.--Comparison with earlier
        decades, 85.--Density of traffic, 86.--Increase of train
        loads, 88.--Limitations upon their economy, 92.--Heavier
        rails, 93.--Larger locomotives, 94.--Bigger cars, 95.--Net
        result of improvements upon efficiency and earning power,
        97.

    The law of increasing returns due to financial rather than
        operating factors, 99.


A railroad theoretically presents a clear example of an industry
subject to the law of increasing returns--that is to say, an industry
in which the cost of operation grows less rapidly than the volume
of business done. Each ton of freight added to the existing traffic
costs relatively less to haul. From this it follows, obviously, that
the net returns increase more than proportionately with the expansion
of traffic. This may be demonstrated by a simple calculation. It has
already been shown that only about two-thirds of the total expenditures
of a railroad are applied to operation, the remaining third being
devoted to capital account. Moreover, of these two-thirds of the total
applied to operating outlay, only about one-half responds to any change
in the tonnage, the other half being constant up to a certain point.
Otherwise expressed, an increase of one per cent, in traffic and,
therefore, of revenue, produces an increase in expense of only one-half
of two-thirds of one per cent.[50] Two-thirds of the entire increment
of revenue goes to profit. Carry this increase further and the effect
is more striking. Suppose traffic to grow tenfold. The former outlay
being $100 for a given volume of business, would be divided according
to our rule as follows: one-third for fixed charges, one-third for
constant operating outlay and one-third for variable expenses. With ten
times as much traffic, only the last group of outgoes will expand. One
thousand dollars revenue would therefore become available under the new
conditions, to pay the same fixed charges as well as constant operating
costs. The total outgo would thus become $33 plus $33 plus $330, or
$396 in all. Almost two-thirds of the increment of revenue still
remains as profit. It might well happen that such an expansion could
not ensue without large increases in the capital and plant, as has
already been noted; but up to that point this calculation would hold
good. The following statement varying but slightly from our foregoing
assumptions, illustrates the principle.[51] Let the distribution of
expenditures for given conditions, producing $100 of revenue, be these,
viz.:

  Operating expenses       $ 67
  Fixed charges            $ 28
                           ----
                           $ 95
  Profits for dividends    $  5
                           ----
                           $100

Now assume an increase of ten per cent. in the traffic and consequently
in the revenue; but assume also that the average _extra_ cost per
unit, of the new business, is only forty per cent. as much as for the
preëxisting tonnage. Were the added cost of each ton mile as great as
before, the operating expenses would rise by the full ten per cent. of
$67. But on Webb's assumption, they will rise by only forty per cent.
of ten per cent. The new account would then stand thus:

  Operating expenses ($67 plus forty per cent. of
  ten per cent. of $67)                            $ 69.68
  Fixed charges as before                          $ 28.00
                                                   -------
                                                   $ 97.68
  Income, increased by ten per cent.               $110.00
                                                   -------
  Balance for profit or dividends                  $ 12.32

By an increase of ten per cent. in tonnage, balance for dividends has
more than doubled.

In this connection it will be noted that a constant rate of return per
unit of business newly acquired has been assumed. Attempts were made
on behalf of the railroads, during the long period of decline of ton
mile revenue down to 1900, by Newcomb and others, to show that this is
an unreasonable assumption; in that increased traffic is presumably
to be had only by a progressive lowering of the rates charged. This
contention has been effectively demolished by the steady and remarkable
growth of traffic since 1900, even in the face of a substantial rise
of rates all along the line. A necessary corollary to our proposition,
beside that of the maintenance of a constant scale of charges, is, of
course, also of the continuance of a given grade of service and of
costs of operation. If more luxuriously appointed passenger trains or
quicker freight service have to be given in order to produce the growth
of business, the added costs of operation must, naturally, be taken
into consideration. If widespread rise of wages follows an increase in
the general cost of living, that too is an entirely extraneous factor.
But with a given grade of service, constant rates and steady wage
scales, there can be no question, up to the point of full utilization
of the existing plant, that the operation of railroads affords clear
demonstration of the law of increasing returns.

The obverse side of the law of increasing returns is also of great
importance. For the same reason that when traffic increases, only a
portion of the expenses are affected, it follows that, when business
declines, only a part of the costs can be lopped off. In other words,
a reduction in the volume of traffic does not in itself alone lead to
a corresponding reduction in the operating expenses. Of course, many
of these latter may, as we have seen, be temporarily postponed, as
they were in 1893-1897, especially in the group of maintenance-of-way
expenses. In such an event they must ultimately be made good by
extraordinary outlay at some later time. But, unless they be thus
postponed and unless the rates charged for service be reduced in order
to stimulate traffic, it is inevitable that the margin of profit will
drop as rapidly as it tends to rise with increased volume of business.
This may be illustrated by the following computation.[52] Assume the
total revenue from a given business to be $100, and assume it to be
distributed as before, viz.:

  Operating expenses   $ 67
  Fixed charges        $ 28
                       ----
                       $ 95
  Leaving profit       $  5
                       ----
  Total                $100

A positive decline of ten per cent, in the tonnage, if the cost for
operation per unit of the portion lost was the same as the rest, would
obviously reduce the operating expenses also by ten per cent. Let it
next be assumed, as was done previously, that the average extra cost
per unit of the latest increment of business was only forty per cent.
as much as for the remainder of the tonnage. How closely this will
approximate the facts in any particular instance will depend upon the
density of traffic attained in relation to the capacity of the existing
plant. If the addition of the last ten per cent. of business did not
increase the large proportion of fixed expenses at all, and only added
forty per cent. per unit more to the variable expenses; per contra, the
loss of it would merely reduce the variable expenses and still leave
the constant outlay the same. On this assumption, by the loss of ten
per cent. of business the total amount of operating expenses under the
new conditions would be lessened, not by ten per cent. of $67, but
by only forty per cent. of ten per cent. of $67. The income would,
however, decline by the full amount of ten per cent. The account, after
a loss of ten per cent. of business, would then stand somewhat as
follows:

  Operating expenses ($67 less forty per cent. of
  ten per cent. of $67)                            $64.32
  Fixed charges, as before                         $28.00
                                                   ------
                                                   $92.32
  Income, reduced by ten per cent.                 $90.00
                                                   ------
  Leaving a deficit of                              $2.32

Or, in other words, a decline of ten per cent. in tonnage has
transmuted a five per cent. dividend condition into one involving an
actual deficit nearly half as great as the former profit. The sudden
reversal from apparent prosperity to very real distress, such as
occurred during the fall of 1907, is thus explained. Its suddenness
may be shown by the following table of monthly gross and net earnings,
promulgated by the Interstate Commerce Commission.[53] The acute panic
occurred during October, but its effect was not apparent until the
following month. The total mileage included is shown by the first
column:

  ===============================================
       |           |         |     Earnings
       |           |         |   --per mile--
       |           |         |-------------------
       |           | Mileage |  Gross  |   Net
  -----+-----------+---------+---------+---------
  1907 | July      | 223,900 |  $1,022 |  $304
  1907 | August    | 224,100 |  $1,079 |  $345
  1907 | September | 224,300 |  $1,045 |  $314
  1907 | October   | 224,700 |  $1,116 |  $337
  1907 | November  | 224,800 |    $981 |  $261
  1907 | December  | 224,400 |    $861 |  $197
  1908 | January   | 198,700 |    $746 |  $148
  ===============================================

This table shows that whereas under full prosperity, up to and including
the month of October, the net revenue was about thirty per cent. of
gross; after the sharp decline in traffic, it dropped in November to
twenty-six per cent., and progressively thereafter to twenty per cent.
in January. In other words, a decline of about one-fourth in the gross
revenue within four months, entailed a loss of over fifty per cent.
in net earnings. Higher operating expenses in the winter may have
exaggerated this tendency, but, on the other hand, drastic economies
were put into effect, which would more than offset the difference.

The urgent need of at once meeting any loss of business by prompt
reduction of operating expenses is apparent. But there is comfort to
be found at this point in the fact that each one per cent. saved in
operation at any given time, results in saving two per cent. for the
net earnings. According to our estimates, and as a rule practically,
operating expenses equal about two-thirds of gross revenue, leaving
one-third to meet charges and pay dividends. Every reduction from
this two-thirds of gross revenue, therefore, transferred to the
balance, increases the latter proportionately twice as much. This
fact in turn explains the urgent pressure always brought to bear at
such times to effect economies all along the line. These are too
often indiscriminately made.[54] Such paring down of expenses should
always be made with an eye to their ultimate effect upon the operating
efficiency of the property in the long run. To postpone much-needed
repairs of equipment during a period of depression, like that of
1907-1908, when repair shop costs are at a low ebb, only to hamper
operations and to effect repairs under pressure when business revives,
is an instance of such wasteful economy.

The qualification of the law of increasing returns as applied to
railroads, arising from the distinction between long and short term
production of its commodity--transportation--as above described, is
of course by no means confined to carriers alone. It holds good of
a factory or mercantile establishment as well. But in the case of
railways, it is emphasized by the abruptness with which the condition
of congestion of plant arises. The limit of full working capacity
in a factory is elastic, by reason of the fact that under the "peak
of load"--in busy seasons--it may prolong operations beyond the
daylight hours or, at worst, work all night by double shifts. But a
railroad, customarily working by night as well as by day and thus
distributing its operations over the entire twenty-four hours, enjoys
no such expansible limits upon utilization of its plant. When such
full utilization is attained, the end comes suddenly. No postponement
to a more favorable time for raising funds for better terminals or
four tracking the main line is possible; nor does its character as a
public servant permit a railroad to curtail service. The dead wall
of congestion cannot be gotten around by either path. A crisis is
presented, calling for the most heroic measures. This, of course, still
further emphasizes the need for a long look ahead into the future with
respect to railroad finance; not for the management alone, but for the
government as well, charged as it is at present with control over rates
for service.

       *       *       *       *       *

The application of the law of increasing returns to railroads in actual
practice is beset with difficulties. In order to make these clear, it
will be necessary first to describe the phenomenal development of this
country which has taken place during the last two decades.

The freight service of the railroads of the United States, measured by
weight, in 1910, amounted to 1,026,000,000 tons. Only since 1899 when
the corresponding figure given by the Interstate Commerce Commission
was 501,000,000 tons, have accurate data been obtainable. This would
indicate a growth in ten years of about one hundred per cent. But
this figure takes no account of the distance each ton of freight
travels. This factor is included in what is known as ton mileage--that
is to say, the equivalent of the number of tons of freight carried
one mile. Obviously, so far as the amount of service rendered is
concerned, one ton carried a hundred miles is the equivalent of one
hundred tons transported one mile. Every carrier totalizes in this
way each ton of freight movement by multiplying it into the distance
transported. For the United States as a whole, this ton mileage in
1910 was 255,016,000,000--that is to say, the service rendered would
be represented by the carriage of that number of tons one mile.
The appended diagram shows the phenomenal rapidity with which this
transportation service has grown since 1899. The scale on the left hand
side of the chart serves this purpose. The right hand scale indicates
the miles of line in operation.

[Illustration: Relative Growth of Mileage and Traffic]

The rapid growth up to 1893 was suddenly interrupted by panic and
subsequent industrial depression lasting for about four years.
Recovery began in 1897, since which time the freight movement has
increased by leaps and bounds from about 95,000,000,000 ton miles
to 255,016,000,000 ton miles in 1910. It is obvious that the growth
of transportation in any country is bound to be more rapid than the
increase either in population or in wealth. It appears, indeed, almost
as if the volume of transportation in the United States increased
more nearly as the square of population than in direct proportion.
It has been estimated that we forward two and a half times as much
freight _per capita_ as some of the leading European countries like
France. Our domestic population from 1890 to 1910 increased about
fifty per cent. The railroad mileage grew at about the same rate. Yet
the freight service surpassed this rate of growth more than six times
over; and the passenger service augmented nearly as much. Both alike in
1910 were practically three times as great in volume as twenty years
before. The diagram on page 78 is intended to illustrate the relative
rapidity of this development. While population and mileage increased
about one half, the railroads in 1910 hauled the equivalent of three
times the volume of freight traffic handled in 1890. At the beginning
of this period, the railroads had to seek the freight. Now it appears
that traffic normally will seek the railroads. At times, even, as in
1906-1907, the railroads have actually sought to escape the flood of
business presented.

The magnitude and importance of the growth of tonnage, as above
described, is revealed by the rapid increase in railroad earnings. The
course of these is shown by the succeeding chart on page 82. Gross
revenues of American railroads in 1889 were about one billion dollars.
In 1910 they amounted to $2,750,000,000. Thus it appears that gross
earnings almost equalled three times the amount of twenty years ago.
The net income available for dividends has grown even faster. The
increase was, roughly speaking, about five fold; namely, from 101
millions in 1889 to 515 millions in 1910. Nearly three and one-half
times as much money went annually to the owners of railroad securities
as dividends and interest, besides leaving surplus earnings for 1910
of about 222 millions available for improvements and surplus. But the
limit of utilization seems to have been about reached on many roads
in 1906; and an era of extensive new capital outlay to increase the
existing plants and facilities ensued. Indications are not lacking to
show that at the height of activity before the industrial collapse of
1907-1908, such a point of saturation had been reached, especially in
trunk line territory and on the northern transcontinental lines.[55]
On the Northern Pacific, for instance, the ton mileage increased from
2.2 billions to 5.2 billions between 1900 and 1906. The Northwest
was suddenly confronted at that time with the new issue of enlarging
facilities, which had been slowly becoming apparent elsewhere in the
country during the preceding decade. Grain actually rotted on the
ground, and an acute coal famine occurred, because of sheer inability
of the roads to care for the new traffic. Changes in methods of
business also somewhat exaggerated this strain upon the carriers.
Merchants now expect quick delivery to order. They object to stocking
up months ahead, even when conditions are auspicious; therefore,
business, when especially stimulated, comes with an irresistible
rush. All these causes, coupled with undiscriminating attempts by
inadequately bedded roads to imitate the methods of progressive ones by
prematurely increasing their train loads, led to a practical breakdown
of the transportation business of the country in the autumn of 1906. To
the student of transportation, this congestion denoted the attainment
of a point of saturation for the then-existing physical plant. The
analogy to the case of the Pennsylvania Railroad, previously described,
is obvious. Such a predicament is bound to arise in the development of
any carrier in a rapidly growing country. Its fiscal significance will
appear in due time.

A comparison of the growth of business and of operating expenses for
the entire railroad system of the United States over a series of years
is given in the following table. The results are expressed by means of
index numbers based upon the year 1880, taken as 100.[56]

       RELATIVE INCREASE IN TRAFFIC ITEMS, OPERATING EXPENSES AND
                  REVENUE FROM 1880 TO 1906, INCLUSIVE

  ======================================================================
                       |       --Average, from and inclusive--
         Items         |     |  1881  |  1886  |  1891  |  1896  |  1904
                       | 1880|   to   |   to   |   to   |   to   |   to
                       |     |  1885  |  1890  |  1895  |  1898  |  1906
  ---------------------+-----+--------+--------+--------+--------+------
  Ton miles of freight | 100 | 134.36 | 203.23 | 264.90 | 313.81 | 595.0
  Passenger miles of   |     |        |        |        |        |
    passengers.        | 100 | 138.12 | 189.46 | 233.15 | 224.65 | 412.0
  Operating expenses   | 100 | 132.75 | 174.39 | 215.30 | 221.42 | 394.0
  Gross income from    |     |        |        |        |        |
    operation          | 100 |  --    |  --    | 183.0  | 190.0  | 346.0
  ======================================================================

From this table it appears that between 1880 and 1906 the ton mileage
of freight increased about six fold, and the passenger business more
than four fold. Operating expenses, on the other hand, were in 1906
less than four times as great as in 1880. Increasing returns are quite
evident. The period from 1880 down to 1896-1898, before the recent
general increases in prices and wages took place, shows this even more
strikingly. In order to transport more than three times as much freight
and two and one-quarter times as many passengers, it required a direct
outlay for operation of little more than twice as much money.[57] On
the other hand, owing to the rapid rise of all operating costs since
1898, a comparison of expenditures confined to the last ten years by
themselves, affords an apparent contradiction. The results for this
period have already been given, classified in greater detail. And
yet, despite this disturbing factor and the one earlier mentioned
that these later operating expenses have been heavily loaded with
improvement expenditures, it appears by comparison of 1895 with 1905,
that passenger business has more than doubled, and freight business is
two and a half times as great, while operating expenses in 1905 were
not much over twice their amount ten years before.

[Illustration: EARNINGS & EXPENSES]

A comparison of the movement of gross earnings with operating expenses
introduces still another disturbing factor, namely, the changes from
year to year in the level of freight rates as well as in the character
of the traffic handled. The effect of fluctuating costs of production
of transportation having just been considered, we may now turn to the
fiscal returns as affected by the price obtainable for the service
given. Any long-time comparison of results reflects the influence of
the steady decline of freight rates during the generation prior to
1900. Thus comparing 1880 with 1898, as shown by the preceding table,
operating expenses grew in the ratio of 100 to 221, while gross income
grew from 100 to only 190. Three fold the freight business produced
less than twice the revenue. Pushing the comparison later, down to
1906, operating expenses grew after 1880 from 100 to 394, while gross
income rose to only 346. This reflects the influence during the last
few years of the rapid rise in prices and wages.

       *       *       *       *       *

According to the opposite diagram, comparing 1890 with 1910, both
operating expenses and gross income from operation seem to have
moved together; the curve of gross revenue rising proportionately
only a little faster than that for operating expenses. The latter
have risen from a general figure of about $800,000,000 before the
depression of 1893-1897, to $1,822,000,000 in 1910; the former from
about $1,200,000,000 to over $2,750,000,000. Both alike somewhat more
than doubled, therefore, in twenty years. At times, especially during
the rapid revival of business after 1897, before rising prices began
to affect costs of operation, extraordinary increases in earnings
appeared, outstripping the growth of expenditures. Comparing the year
1899 with 1895 we find that the gross earnings of the railroads of
the United States increased by twenty-two per cent. This involved
an increased expense of operation, however, of only eighteen per
cent. Similar comparison year by year, there having been an enormous
expansion of business, shows an increase in gross earnings somewhat
more rapid than the growth of operating expenses. This differential
advantage has progressively lessened since 1902, and especially since
the let-up in 1907. The official returns for 1911 with the marked
decline in gross, show an even more distinct drop in net earnings.
Whether the need of an increase of rates commensurate with the
augmented operating costs is imperative, can only be ascertained after
a return to more normal business conditions.

These relationships would be the more striking could we exclude the
enormous expenditures for betterments which have been charged to
operating expenses during these years. Comparisons of net earnings
are vitiated by uncertainty upon this point. Working over these
results by comparison per mile of line, it appears that the rate of
increase in earnings per mile of line for five years prior to 1900,
was approximately double the rate of increase of operating expenses
per mile of line. The greatly lessened cost of performing additional
business becomes at once apparent. But these latter conclusions, as has
been said, cover only a brief period of time. Judging by the results
over many years, it appears that changes both in the level of freight
rates and of wages and prices have operated to leave the railroads not
much better off than they were some time ago. The only thing which has
saved them whole in the face of rising prices and wages since 1900,
and especially since 1907, has been the rise of freight rates and the
enforced improvements in operation. With the methods of transportation,
such as size of cars and locomotives and train loads, as they were a
decade ago, very real distress would be more widely apparent than it
is. On the whole, the public seems to have shared in the benefits of
these improvements to a considerable degree. This statement, however
true for the entire railroad system of the country as a whole, does not
by any means represent the facts for any single system. Moreover, it
is not by any means clear how fully the railroad system of the country
has been enlarged and improved out of surplus earnings. There is reason
to think that foundations in some cases--the Pennsylvania road, for
example--have been laid during these prosperous years, for largely
increased tonnage in the immediate future without a corresponding
growth of expenses chargeable to plant; in other words, that the
transition to a distinctly higher grade of operation has been effected
out of surplus earnings.

The comparison of gross and net earnings from operation, if
expenditures have grown almost as fast as gross income, confirms the
preceding conclusions. Surveying the chart for the period since 1890,
it appears that net earnings for the railroads of the United States
have more nearly trebled than doubled; the increase having been 177
per cent. up to 1910. This takes no account whatever of the immense
volume of new capital added to the system. The entirely distinct
question of the relative rate of return upon the investment will engage
our attention at a later time. Examination of the years of rapid
revival after 1897 by themselves, however, especially for individual
companies, shows striking results. This is especially true of roads,
not then developed up to a fair working capacity for their plants.

An interesting comparison with the previous decade, 1870 to 1880,
exemplifies this relation still further. The gross earnings of the
trunk lines of the United States decreased very greatly per mile of
line from $7,211 in fact to $6,636 during the decade; but at the same
time the net earnings steadily increased. This was due primarily to the
great volume of business developed,--the ton mileage increasing more
than three fold during these ten years. It happened despite the fact
that the miles of line during the same period had more than doubled.
The following decade, 1880 to 1890, was represented by an increase of
only 82.7 per cent. in mileage, while the number of tons of freight
hauled one mile increased by 132 per cent. Density increasing in this
way, a corresponding ability to carry at a lower rate per ton was a
necessary result. So indisputably has this law--that an expanding
volume of business up to a certain point, may profitably be carried
at a continually lowered cost--been proved, that it is estimated by
so competent an authority as the _Engineering Review_ that, provided
sufficient tonnage be available for 2,000-ton freight train loads, a
cost of one mill per ton mile can be attained. Its significance may be
realized from the fact that the lowest revenue per ton mile reported
for the United States is 2.21 mills per ton mile for the long haul
soft coal business of the Chesapeake & Ohio.[58] This, of course, does
not imply that any railroad in actual operation, carrying all kinds
of freight including a large proportion of local traffic, can in the
immediate future hope to attain this result. It is intended only to
show that, provided the volume of traffic be large enough, the cost of
operation tends to decline as a matter of course, until a condition of
congestion for the existing plant has been reached. At this point a new
cycle of costs of operation and of profits makes its appearance.

The most important single factor in the production of increasing
returns upon a railroad is the density of traffic; that is to say,
the amount of business which can be conducted with a given set of
rails, terminals and rolling stock. In other words, it is the degree
of effective utilization of the plant and equipment. It is too obvious
to need demonstration, after what has been set forth concerning the
nature of railroad expenditures, that economy of operation and,
consequently, profits are more or less directly dependent upon this
fact. Such effective utilization of the property may be secured in two
ways: either by a large tonnage per mile of its line, or else by a
concentration of such traffic as it may have into large train loads,
which can individually be transported at low cost. The first of these
economizes the fixed expenses for roadway and line which respond but
slowly to enlargement of traffic, by distributing them thinly over a
large tonnage; the second economizes the mere movement expenses which
tend to grow less rapidly than the size of the trains. For neither
fuel consumption nor wages of train crews expands _pari passu_ with
the paying load. Fortunate the lot of the railroad which enjoys both
these advantages, of density of traffic per mile of line and of tonnage
capable of such concentration in heavy train units.

Traffic density--the tons of freight carried one mile per mile of
line--is readily computed. The ton mileage, representing the total
transportation service, is merely divided by the number of miles of
line operated. The following graded table illustrates the wide range
of this figure, according to the location of different companies and
the nature of their business, as well as the change in the last few
years.[59]

  ========================================================================
                       |                 1902-3               |  1910
                       |--------------------------------------+---------
                       |           |--Percentage of tonnage-- |
                       |           |--------------------------|
                       |  Traffic  | Agric'l|Products| Manu-  | Traffic
                       |  density  |products|of mines|factures| density
  ---------------------+-----------+--------+--------+--------+---------
  Rock Island Company. |   428,116 |   25   |   29   |   14   |  581,000
  C. M. & St. P.       |   605,139 |   23   |   24   |   17   |  709,000
  Great Northern       |   657,102 |   --   |   --   |   --   |  814,700
  N. Y., N. H. & H.    |   802,954 |   --   |   --   |   --   |1,057,000
  Wabash               |   885,208 |   24   |   32   |    9   |1,322,000
  Baltimore & Ohio     | 2,181,518 |    6   |   62   |    8   |2,711,000
  New York Central     | 2,163,000 |   16   |   44   |   12   |2,548,000
  Lake Shore ('05)     | 3,355,209 |   --   |   --   |   --   |3,911,000
  Penn'a Railroad ('05)| 6,337,625 |   --   |   --   |   --   |5,139,000
  ======================================================================

The first of these companies operates in a sparsely settled
agricultural territory. The St. Paul system lies nearer Chicago, but is
still largely dependent upon a local and rural constituency. The Great
Northern--a great transcontinental trunk line--despite its sparsely
settled western area, exchanges a large volume of through freight for
the Pacific Coast for lumber and other bulky products carried east.
The New Haven serves perhaps the most densely settled area in the
United States, but much of its traffic is on branch lines and is of a
retail character. The Wabash lies in well settled territory and hauls
a heavy tonnage of low-grade freight. The last two are not only great
trunk lines to the seaboard, but also tap the coal and iron fields.
Much of their tonnage is consequently of low grade. The Pennsylvania
enjoys a still further advantage, super-adding a rich local traffic in
manufactures and merchandise. As compared with its rival trunk line,
the New York Central, it hauls relatively little grain; but, on the
other hand, the New York Central has a much smaller coal and iron
business. Some one has aptly characterized the difference between
the two roads, describing the New York Central as "operating between
good points, but not through a good country" so far as local business
is concerned. On the one, through traffic is supplementary to local
business, while on the other it is the reverse. The high density of
trunk line traffic is such that about two-thirds of all the tonnage of
the United States is transported east of the Mississippi and north of
the Ohio river.

Traffic density has enormously increased during the last two decades,
as a result of the filling up of the country and the relative cessation
of new construction. This is manifested by the growth since 1890. In
that year the density was less than 500,000 ton miles per mile of line,
and during the depression of 1893 it fell well below that figure. The
total of 1,053,000 reported for 1911 represents, therefore, more than
a doubling of the density in twenty years. This growth during 1898 and
1905-'06 was notable. The latter period, especially, was a time when
congestion upon all the roads of the country occasioned much distress.
The fact is evident that the country has well grown up to the measure
of its existing transportation facilities.

The second measure of effective operation for the production of
increasing returns, is concentration in the trainload. This is regarded
by many as the supreme test of efficiency in management. Great progress
has been made during the past years in this regard in the United
States--an improvement which has largely enabled the carriers to
bear up under an increasing burden of expenditure. The trainload is
generally adopted today as the unit of operation, measuring the cost
of service.[60] It is a fact that, within certain limits, the cost of
handling a train does not vary greatly with its capacity. Since the
first application of air-brakes to freight trains in 1887, a train
crew sufficient to handle fifteen cars can care for thirty about as
well in long haul wholesale business. Fuel cost, also, as has been
shown, lags well behind the rate of increase of the load. Eaton in his
Railroad Operations, concludes that from thirty to fifty per cent. of
cost is independent of the trainload. The effect is that any increment
in the paying load very materially decreases the cost of operation per
ton.

Progress in the United States in increasing the average train load
is shown by the lowest curve on the diagram on page 97. The scale
applicable is along the left hand side of the chart. From 175 tons
per train in 1890 to an average figure of 383.10 in 1911 is certainly
a remarkable showing. The most rapid increase seems to have occurred
after 1897, with the first resumption of general prosperity. As for
individual roads, the following table of average train loads is
suggestive, as showing the gradation between roads of different type,
as well as progress from year to year:

   AVERAGE NUMBER OF TONS OF FREIGHT PER TRAIN (TONS PER TRAIN MILE)

  ==============================================================
          Road   (Fiscal Years)            | 1901 | 1905 | 1910
  -----------------------------------------+------+------+------
  Pennsylvania Railroad (East of Pittsburg)|  478 |  498 |  649
  Pennsylvania Company (West of Pittsburg) |  382 |  420 |  511
  Pennsylvania System (Both)               |  454 |  476 |  607
  Chesapeake & Ohio                        |  511 |  557 |  701
  Great Northern                           |  347 |  541 |  520
  Erie Railroad                            |  379 |  416 |  497
  New York Central & Hudson River          |  365 |  381 |  413
  Northern Pacific                         |  324 |  367 |  429
  Atchison, Topeka & Santa Fe              |  238 |  265 |  298
  Chicago & Northwestern                   |  255 |  259 |  261
  New Haven                                |  208 |  222 |  293
  Southern                                 |  190 |  194 |  237
  ==============================================================

The great coal and iron roads, the trunk lines and the transcontinental
lines all concentrate their business; while the granger roads, like
the Atchison and North Western, the roads with much local business
like the New Haven or the Southern, operating in sparsely settled
regions, all have of necessity smaller trainloads. But all alike betray
remarkable progress in this regard. In 1870 the average for the best
roads was little above 100 tons,--such as 103 tons reported for the New
York Central and 137 tons on the Lake Shore. From this level to results
of 400 or 500 tons on the average represents a notable achievement. The
Lake Shore for 1911 reports a revenue train load of 635 tons. It should
be observed, however, that such results come from longer trains, not,
apparently, so much from larger cars. To raise the average trainload on
the Wabash from 196 tons in 1890 to 386 tons in 1908 is also worthy of
note. The significance of these recent figures can be realized from the
fact that the London & North Western, one of the leading railroads in
Great Britain, reports recently an average freight train load of only
68 tons. This represents probably a fair average for European railroads
as a whole, although in England the general practice of privately owned
cars, of light locomotives, short freight sidings, etc., may reduce
the figure slightly below the continental average. Statistics not only
show the notable improvement in recent years; they at the same time
show how the trainload performance is affected by trade conditions. For
nearly every road the trainloads for 1904 were distinctly lower than
in the preceding years. This was a year of acute business depression.
The movement of great staple commodities, such as iron ore, coal, steel
and iron and lumber, was greatly curtailed. All business was conducted
on a narrower basis. Smaller trainloads were an almost inevitable
consequence. The revival in the following year, however, immediately
improved the conditions of operation, as the figures indicate.

It will be noted that the figures for the American roads above given
represent averages. These are compounded from local and through traffic
taken together. It is apparent at once that local trains must average
far lighter loads than are customary upon long hauls without breaking
bulk. Thus New England railroads report for 1906 an average trainload
of only 220 tons, while other parts of the country, such as the North
Central group, report 426 tons of paying load. Only by separation of
local from through business can we adequately appreciate the enormous
advances which have taken place in railroad operation in the United
States, with corresponding reductions in the cost of transportation.
While the New York Central at one time reported an average trainload
of 322 tons, the average load of its through trains on the main line
rose as high as 750 tons. More than twice this figure is attained upon
the Pittsburg, Bessemer & Lake Erie road in hauling ore from the lakes
to the furnaces at Pittsburg. The Illinois Central, for its low grade
and long haul to the Gulf, has recently built locomotives capable of
hauling 2,000 tons of net paying load. A standard grain train on the
Lake Shore in 1903 consisted of fifty cars holding forty tons each.
Even this figure has recently been surpassed by the New York Central,
which, with its monster new "mogul" engines, hauls eighty loaded 30-ton
cars, giving 2,400 tons of revenue freight. The Mallet locomotives with
a tractive effort of 100,000 lbs., at present seem to have reached the
limit of size and weight. Seventy-five grain cars holding 1,000 bushels
apiece are equivalent to the production of twenty bushels per acre of
an area of six square miles. This is an ordinary trainload. It is not
infrequent to transport a fifth more than this. Eighty and even one
hundred cars in a train since 1900 often bring the load up to 3,600
and even 4,000 tons of freight. Such a train is over four-fifths of a
mile long. From these figures it certainly appears that trainloads for
long haul are standardized at not less than 2,000 tons, a figure which
would have seemed absolutely impossible to railroad managers of fifteen
or twenty years ago. The maximum trainload in Germany on coal traffic,
which, of course, greatly exceeds any general average for trains of all
classes, is about five hundred tons. It has been regarded as a notable
achievement that this represents an increase of about one hundred tons
in the last decade.

On the other hand, the extravagant promises of economy from large
trainloads have been considerably abated of late. It has been
effectively demonstrated that there is a limit to such growth. Only
low-grade and long haul carload traffic can profitably be concentrated.
In 1903, for instance, a general decrease in trainloads followed a
reduction in the relative amounts of low as compared with high grade
tonnage. Less iron, coal, and raw materials and more merchandise and
manufactures offered for carriage, necessitated a positive reduction
in the trainloads as already mentioned. Nor can local business in
less than carload lots profitably be concentrated beyond a certain
point. Grades must be uniform to attain such economy. The trainload
must not exceed the traction power on the heaviest inclines, or else
expensive pusher engines or breaking up of trains will offset all other
savings. Moreover, too great trainloads even on the best roadbeds
involve slower speeds. Not only is other traffic thus impeded, but
the economy in wages vanishes after a certain point with such slower
movement. The fashion had been set by James J. Hill, the master mind
in the transcontinental field. His notable results, due to a careful
working out of every detail, led to a frenzied imitation on all sides.
Many roads then discovered to their loss that while they had provided
rolling stock for heavy loading, ampler terminals, longer sidings
and heavier bridges also were a necessary accompaniment. Part of the
congestion of traffic in 1906-1907, already mentioned, and a portion
of the financial embarrassments of recent years, were undoubtedly due
to too great haste in seeking economies of this sort in rolling stock,
without at the same time making provisions for enlargement of other
portions of the plant. A more discriminating policy has consequently
resulted of late. Traffic is being sorted according to its availability
for concentration. The best utilization of the rails and terminals is
being more considered. Business demands for quick delivery also enter
into the calculation. Instead of a few huge slow-moving leviathans
blocking other trains, the line may perhaps better be kept full of many
smaller trains moving more nearly together. Such are certain of the
details now being worked out. None of them, however, weaken the main
proposition that a discriminating concentration of traffic conduces
very greatly to economy of operation.

This concentration of traffic units is largely due to technical
improvements of various kinds. Foremost among these has been the
development of the steel rail. In 1880 more than seven-tenths of our
mileage was still equipped with iron rails. Rapid progress ensued
during the next ten years, upward of eighty per cent. being in
steel rails by 1890. At the present time, the proportion is above
ninety-eight per cent. In fact, no iron rails have been made for many
years, except for repairs and on insignificant branch lines in remote
parts of the country. A steady increase in the weight of the rails has
ensued. The standard rail for main lines until the Civil War weighed
fifty-six pounds to the yard. In the seventies this was increased to
sixty-three and above; in the latter eighties the best practice was to
use seventy-five pound sections. Since 1900, they frequently run as
high as one hundred pounds, in regions of dense traffic. Few main lines
of track now average less than seventy-five pounds. It is this increase
in the use and size of steel rails which has permitted improvements in
rolling stock. But, on the other hand, grave dissatisfaction with the
quality of the rails manufactured of late years, particularly since
the establishment of practical monopoly under the United States Steel
Corporation has become manifest. Numerous accidents due to breakage
of rails, especially since 1905, have revealed either defects in
manufacture or an undue load imposed by heavier rolling stock, too
high speed, or both. The matter has become steadily worse. In 1902 the
Interstate Commerce Commission ascribed seventy-eight accidents to
broken rails. Nine years later the number had risen to 249. The need
of improvement is now fully recognized on all sides.

The power and efficiency of locomotives has increased, perhaps, more
since 1890, and particularly since 1895, than in any previous period.
Superior materials particularly have contributed to this result, such
as the substitution of cast steel for cast iron and of nickel steel for
wrought iron in axles, crank pins, etc. Some of the improvements which
may be mentioned are, for instance, an increase in the average heating
surface from 2,000 in 1890 to nearly 3,000 square feet at the present
time, and an increase in the average steam pressure from 160 pounds
to 210 pounds per square inch in the same period. The maximum weight
has also increased very rapidly. The average weight of a locomotive
at the close of the Civil War was approximately 90,000 pounds. This
has increased in somewhat the following proportions: To 1881, 102,000
lbs.; to 1893, 135,000 lbs.; to 1895, 148,000 lbs.; to 1898, 230,000
lbs.; rising in 1900 to 250,000 lbs. Passenger locomotives since 1892
have almost doubled in weight, and freight engines have more than done
so. Compound and double or Mallet locomotives are also supplanting
those of simpler type for peculiarly heavy service. The first compound
engine was built in 1899, only one being constructed in that year. In
1900 a single locomotive works turned out 500--a number constituting
two-thirds of the entire output of that company--for use in the United
States. Such locomotives cost more in first instance; but the greater
weight and steam capacity, together with the considerable saving in
fuel, amounting to perhaps twenty per cent., more than offset this
objection. The traction efficiency of these improved locomotives may be
shown by the statement that in 1885 the decapod Baldwin locomotives,
made to haul 3,600 tons on a level, represented the maximum capacity.
Five years later the same company built locomotives to haul 4,000 tons,
not only on a level, but on any ordinary grade. As indicative of late
advances in locomotive construction, we may instance those built about
1900 for the Illinois Central and the Union Railroad at Pittsburg,
both low-grade roads, carrying exceedingly heavy train loads. The
first of these weighed, including its tender, 365,000 lbs., the Union
Railroad consolidation engines weighing 334,000 lbs. Such locomotives
are stated to be twice as powerful as the best which were manufactured
twenty-five years ago. This record is surpassed by engines which have
just been built for pusher service on the soft-coal Virginian Railway.
They are of the Mallet type, weighing 540,000 pounds; with a train
capacity of 4,230 tons. The evaporative surface is 6,760 square feet.
As summarizing the increased efficiency of American locomotives, we may
instance the figures of the Interstate Commerce Commission, showing
the average performance of locomotives for the United States. Whereas
in 1894 the average number of tons of freight carried per locomotive
was about 32,000 tons, this rose to 46,000 tons in 1899, and to 54,600
tons in 1906. At the same time the number of tons of freight hauled one
mile for each freight locomotive in the United States increased from
4,000,000 in 1894 to approximately 6,000,000 in 1899, and to 7,300,000
in 1910. In other words, the average performance of each freight
locomotive in the United States has increased by more than fifty per
cent. in the last decade.

The economy of large freight cars has been amply demonstrated. Marked
advances in the average capacity have taken place in the last few
years. In the sixties a 15,000 pound freight car represented about
the normal capacity. This has increased, as measured by maximum load,
to 28,000 pounds in 1873; to 40,000 pounds in 1875; to 60,000 pounds
in 1885; to 70,000 pounds in 1895; while at the present time 80,000
to 100,000 pound cars are in everyday use. Cars of this latter type,
built to carry forty to fifty tons, are necessarily of pressed steel
construction, and are mainly useful for the carriage of coal and
ore and similar low-grade commodities. It seems to be questionable
whether a maximum capacity has not been about reached, in view of
the exceedingly great wear and tear imposed upon track, bridges, etc.
Up to this point the economy of heavy loading is indisputably proved.
Increased size of cars far more than proportionately increases the
paying load. Thus, for instance, an 18,000-pound car will carry 20,000
pounds load, while a 22,000-pound car will carry a load twice as great.
It is stated on good authority, for example, that a car of forty tons
capacity can be built which will weigh but 3,000 pounds more than a
thirty-ton car, and cost hardly fifty dollars more. This is undoubtedly
the reason why at the present time the average load per car is at least
one hundred per cent. greater than the maximum which was possible
twenty years ago.

A steady increase in the freight performance of American equipment
is shown by official data of the Interstate Commerce Commission.
Whereas in 1894 it required on an average 1,888 freight cars for every
1,000,000 tons of freight transported their capacity has so increased
that the same amount of traffic in 1906 was carried by only 1,127 cars.
In other words, an enormous increase in the freight service had been
attained. On the other hand, the actual mileage performance of much of
this equipment is extraordinarily low. It averages only about 9,000
miles annually or an equivalent of thirty miles a day. At a speed of
fifteen miles an hour, this means that actual movement under a paying
load, allowing for one-third of its journeyings empty, occupies but
little over an hour and a quarter a day. The actual performance is,
however, not quite as poor as appears. For, of course, this average
includes the non-movement of all cars in bad order (sometimes one-tenth
of the total); and also all idle equipment. This latter consideration
is of great moment. Special cars, suitable only for seasonal business;
and especially demurrage delays, often forty-eight hours or more,
adversely affect the result. Where separate mileage records of
"foreign" cars are kept, as on the Wabash system, it appears that
their mileage is twice as high as for "home" cars. The difference is
due to the fact that cars off their own rails, mainly are in actual
demand and are kept moving. Probably the daily performance of loaded
cars is not less than 150 miles. But a journey of this length, with two
days' delay at each end at terminals, would bring the average down to
about thirty miles. The public does not always appreciate these facts;
and is often querulous. It is certain that the problem how to secure
greater efficiency in the use of this equipment is as yet imperfectly
solved.[61]

[Illustration: Revenue and Cost Per Train Mile.]

The discussion of the nature of railroad expenditure may be concluded
by a comparison of the net effects of the developments of the last few
years; that is to say, of steadily expanding costs of operation and of
slowly and tardily rising rates chargeable for service on the one hand,
as over against the results obtained by mechanical improvements and
increasing economy of operation coupled with growth of tonnage, on the
other. The average cost of transportation has greatly increased. This,
according to the statistics of the Interstate Commerce Commission, is
shown upon the diagram herewith by the middle curve.[62] The average
cost of running all trains per mile, which had fallen from 96 cents
in 1891 to 91.8 cents in 1895, rose to $1.07 in 1900, and in 1911
increased by more than one-third, to $1.54 per mile. Against this
should be set the fact that while the trains thus cost more to haul per
mile, their paying load has increased in somewhat smaller proportion.
This is shown by the upper curve on the diagram above mentioned.
For freight trains the increase has been from $1.65 to $2.89 per
mile. Passenger revenues per train mile have increased less rapidly.
This follows from the well-known fact that freight rates have been
increased, while passenger rates have not changed for the better during
this period; and also that economies in concentration of traffic are
necessarily confined to the carriage of freight. The immense gain in
trainloads has probably been the main element, among these, as already
observed.

Among other things this diagram also brings out the effect upon
revenue of the substantial rate increases after 1900, coupled with the
elimination of rebate losses. It will be observed how sharply the upper
curve of revenue per train mile slants upward after 1899, by comparison
with the lower line denoting cost. The same thing apparently occurs
again after the set-back of 1907.

The interrelation between these various factors may be more readily
shown by confining our attention to the period during which a
practically uninterrupted development of business ensued, thus
eliminating the confusion due to the four years of depression
after 1893. The data on our various charts for the years 1898-1906
demonstrate that during this period the ton mileage, measuring the
freight traffic handled, has practically doubled. To transport this
doubled tonnage, a growth in freight train mileage of only eighteen
per cent. was necessary. This was due, of course, to the notable
concentration of train loading, already described, as well as to a
density of traffic per mile of line almost sixty per cent. greater. As
a consequence of these economies in operation, the revenue per freight
train mile has increased by about fifty per cent.; while the average
cost of running all trains per mile has grown less rapidly, namely, by
42 per cent. Had we data for freight trains alone it would surely be
lower than this. In the meantime during this period of eight years, the
rate of return in revenue per ton mile received, remained practically
unchanged.[63] From all of which it would appear that even despite all
these confusing factors, the law of increasing returns, so far at least
as 1898-'06 was concerned, was making itself appreciably felt.

Attentive consideration of the available figures, especially as shown
by diagram on page 97, shows apparently that the various economies in
operation, heavier trainloads and the like, have not since 1906 yielded
any greater profit from mere operation, with the ever increasing volume
of business. In other words, the increase in the margin between cost
of operation and revenue per train mile,--measuring profitableness
per unit of movement--has not kept pace with the augmentation of the
size of that unit,--the trainload. Thus it follows, as one would
expect, even making allowance for all changes in rates, wages and
other expenses, that the law of increasing returns as applied to
railroads, does not arise primarily from economic considerations
as to mere physical operation. The law originates primarily in the
fiscal conditions attaching to the heavy capital investment,--the
fact, namely, that fixed charges up to a given point of saturation
tend to remain constant, absolutely; but become proportionately
less, therefore, as the volume of business expands. From this fact,
therefore, rather than because of any marked economies of large-scale
production, may it be affirmed that railroads offer a notable example
of the law of increasing returns. The important bearing of this
distinction will appear in due time in connection with the problem of
the determination of reasonable rates. Added significance, also, is
given to the relation between the cost of new capital, measured by the
rates of interest on bonds and dividends on stocks, and the supply
necessary to provide adequate extensions and improvements in future.


_Appendix_:

The subjoined chart, reproduced by the _Railway Age Gazette_ from a
bulletin of the Bureau of Railway Economics, brings out forcibly the
manner in which, within the short time limits of full utilization
of plant, a large increase of business can take place without a
commensurate growth of expenses. The phenomenon for railroads is of
course cyclical. Annually, as here indicated for 1911, the second
half of the year is marked by a much heavier movement of traffic,
principally, of course, the crops. But expenses never rise in
proportion. This is most evident for the eastern group of roads, as
here shown. This causes the net revenue curve, also, to vary much more
than in proportion to the volume of traffic, in consequence.

[Illustration: Monthly Revenues and Expenses per Mile of Line from 1911
and 1912.]

FOOTNOTES:

[50] Illustrated by the seasonal variation of business. _Vide_ appendix
to this chapter at p. 100.

[51] Webb, Economics of Railway Construction; originally in
Wellington's Economic Theory of the Location of Railways.

[52] Webb, _op. cit._; originally from Wellington.

[53] _Wall Street Journal_, March 25, 1908.

[54] Eaton, Railroad Operations, etc., pp. 44-58.

[55] Investigation in 12th Ann. I.C.C. Rep., 561.

[56] From Report of Commission to Investigate the Postal Service, 1901,
p. 220; brought down to 1906 when local disturbances in wages, other
costs of operation and rates outweigh all general considerations.

[57] Between 1890 and 1910 freight ton mileage rose three times over.
Operating expenses grew by about two and one-quarter times.

[58] _Cf._ data as to revenue per ton mile on p. 413, _infra_.

[59] Other data as to density on p. 413, _infra_.

[60] Also known as "average tons per train mile." Obtained by dividing
the ton mileage by the sum of the freight and mixed train miles.

[61] _Cf. Quarterly Journal of Economics_, XVIII, p. 299; on _per diem_
reform. Also, _Railway Age_, 1903, p. 136; 15th Ann. Rep., I. C. C., p.
79; and Circular Letters, 1901, Chicago Bureau of Car Performances.

[62] Using the right hand scale.

[63] Diagram on p. 413, _infra_.



CHAPTER IV

RATE MAKING IN PRACTICE

    Evolution of rate sheets, 101.--Terminal v. haulage
        costs, 102.--Local competition, 104.--What the traffic
        will bear, 107.--Trunk line rate system, 111.--Complexity
        of rate structure, 113.--Competition of
        routes, 114.--Competition of facilities, 116.--Competition
        of markets, 118.--Ever-widening markets, 119.--Primary and
        secondary market competition, 121.--Jobbing or distributive
        business, 124.--Flat rates, 127.--Mississippi-Missouri
        rate scheme, 128.--Relation between raw materials
        and finished products, 134.--Export rates on
        wheat and flour, 135.--Cattle and packing-house
        products, 139.-- Refrigerator cars, 140.--By-products
        and substitution, 142.--Kansas corn and Minnesota
        flour, 143.--Ex-Lake grain rates, 145.--


The task of constructing a freight or passenger tariff is an eminently
practical one. The process must be tentative and experimental. Little
can be calculated in advance. Tariffs are not made out of hand; they
grow. Not until a rate has been put into effect, can its results be
known. The lower limit of charges, however, is more or less fixed.
Obviously the rate must not be less than that portion of the variable
expenses incident to each particular unit of business. This variable
expense is divisible into two parts, one for loading and unloading,
and the other for actual movement. The first step in constructing a
tariff, therefore, is to separate these two portions of the variable
outgo. General experience fixes the terminal outlay for loading and
unloading at an average figure of about twenty or twenty-five cents per
ton at each end of the line; that is to say, at an average of about two
and one-half cents per hundred pounds as the total terminal cost.[64]
Just where, above or below this average, the figure for any particular
tariff will lie, depends upon a multitude of details.

This terminal expense is obviously quite independent of the length of
the haul. It costs no more to load for a carriage of 3,000 miles than
for one between two adjoining stations. It is the second portion of
the specific costs, namely, the movement expense, which varies with
the distance. This movement cost is more difficult of determination,
as affected by a multitude of variable factors, such as the grades,
curvature, number of stops, the size of train load, and above all,
the volume of the traffic. Assuming the simplest physical conditions,
one would expect the movement expense, aside from the initial cost
of getting up steam in order to move at all, to rise proportionately
to the distance traversed. Graphically represented, the tariff would
appear somewhat as follows:

[Illustration: Relation of Cost of Carriage to Distance.]

In this diagram the distances of carriage are represented along the
horizontal line, A B; while the rate charged is laid off vertically.
The distances A C and E B represent the constant terminal cost; while
the steadily rising rates with increasing distance, due to movement
expenses, are shown by the sloping dotted line C D. This chart at
once demonstrates why under the very simplest physical conditions a
straight mileage tariff is unscientific and unreasonable. For the
constant terminal expense, spread evenly over the mileage traversed
as the movement expenses grow, becomes progressively less and less
in proportion to the total of the two, which constitutes the real
rate. The longer the haul, the lower the ton-mile cost as a matter of
necessity. As Chanute calculated on the New York Central a generation
ago,[65] while the average cost per mile of hauling a ton ten miles
was 4.062 cents, it descended progressively to less than one cent per
mile for distances over five hundred miles. A common rule is that
the rate rises as the square root of the distance, rather than in
proportion to it. A hundred-mile haul represents a cost approximately
only twice as great as one of twenty-five miles, instead of being four
times as much. For thrice a given cost the haul may be increased nine
times. The course of such a tariff with increasing distance would be
represented by the parabolic curved lines on the preceding diagram.[66]
The particular curve would depend upon the commodity and local physical
conditions. In territory where movement expenses were heavy or
operation difficult, the curve would obviously rise more rapidly. Such
a mathematical tariff does not depart widely from the one traced by
the heavy dotted line C D first described. The progressive decline of
the per mile rate with increasing distance may be illustrated by the
rough estimate of allowing two and one-half cents per hundred weight or
fifty cents per ton for terminal cost, with one-half cent additional
per mile for movement expenses. For a ten-mile haul this would cost
fifty-five cents, or an average of 5.5 cents per mile. Were the
distance 500 miles, the average cost would be only (50+250)/500 cents
or 0.6 cents per ton mile.

[Illustration: Diagram of Belgian Tariff Sheets.]

Thus far the problem has been seemingly simple. The next step
introduces new complications. Our hypothetical railway line at a point
one hundred miles out, may cross a navigable river or canal, or may
intersect another railway. Engineering considerations of absolute cost
of operation now no longer predominate. Relative costs by rival lines
enter into the case. Water lines or more direct railways compete for
the traffic. One cannot even fall back upon the cost of carriage by
any of these lines, either the weaker or the stronger. An entirely
new principle comes into play. The alternative is presented of taking
the business at a rate lower than, and out of line with, rates on
general traffic, rather than to lose it to another line. At first
sight it would appear that it were better to abandon the traffic than
to take it for less than a fair average return or profit. This is a
serious matter. The tonnage offered is large. The existence of active
competition for it, is proof of its importance. Railways meet at large
towns, and large towns become larger because the roads meet there. The
main reason for not abandoning the traffic, however, arises from that
primary fact, to which one constantly recurs, that all expenses are not
alike in their nature. A concrete example will make this plain.

Suppose, for instance, the normal rate to yield a fair average return,
all expenses considered, be thirty cents per hundredweight. Two-thirds
of the cost of this, or twenty cents, would not cease as outgo, were
this business abandoned. The rails would rust, the ties would rot, and
trains would move but with lighter loads, and the fixed charges would
still go on inexorably night and day. Ten cents per hundredweight will
meet the variable and extra cost incident to this particular business.
A fifteen-cent rate would at least repay these extra outlays. It
would do more. It would contribute five cents per hundred pounds to
the twenty cents outgo per hundredweight, which, without the traffic,
would have to be borne _in toto_. Even a rate of eleven cents would
contribute something to this end. For it would leave a surplus of one
cent per hundredweight to lighten the other burden. Adopting Hadley's
phraseology,[67] if you take at eleven cents, freight that costs you
thirty cents to handle, you lose nineteen cents on every hundredweight.
If you refuse to take it at that rate, you lose twenty cents on every
hundredweight you do _not_ carry. For your constant expenses go on,
while the other road gets the business. There is only one course open.
The rate at the competitive point must be cut; if not to make a profit,
at least to stop a greater loss. And one comfort may be uncovered in
so doing. The lowered rate may so stimulate new business and enlarge
the volume of traffic, that it may be handled at much lower cost. In
fact, this consideration alone in absence of all competition, may
induce a lowering of rates at certain points out of line with the
general schedule. This incentive, conditioned by the fact of increasing
returns, is always in the background. The destiny of many places is
manifested in terms beyond the control of the carrier. Soil may be
poor, climate or population adverse to progress. But some particular
places enjoy peculiar advantages for growth. Not to stimulate new
business at these points where traffic might be cultivated, even
without rivals in the field, is little better than allowing it to
escape over a competitor's line of rails, were they present.

[Illustration: Effect of Competition at Certain Places on Rates.]

Cutting the normal rate at competitive points or at important points
in order to stimulate traffic, in conformity with the principle above
stated, transforms our tariff diagram as shown herewith. The rate
rises steadily with the increasing distance from A, except at E and F.
At these points it is fixed at a lower point, determined not primarily
by the cost of service at all, but by the available demand for it.
Traffic at these points is charged what it will bear; not as much but
as little as it will bear: which, being translated, means that the
charge is set as high as possible, still holding the volume of business
constant, or even increasing it if that can be accomplished. The total
profit is constituted of the profit per unit of freight multiplied into
its volume. The centre of interest is here shifted from the average
profit per unit considered alone, to the total profit thus obtained.
At this point another difficulty presents itself. Although, as set
forth elsewhere, local discrimination,--charging a lower rate for
a more distant point,--may sometimes not only be not injurious but
actually beneficial to all parties concerned, it is the exception, not
the rule.[68] Ordinarily to accord a remote point a lower rate without
patent cause, is an economic anomaly, and, moreover, a political
blunder. It violates the democratic principle of cost of service as
underlying rate schedules. Most legislative bodies have prohibited it
by law. The United States and most of the American commonwealths do not
permit it, other than in exceptional cases. The result is that on our
hypothetical tariff, the rates from A to points intermediate between A
and B and B and D must be cut to the levels, E and F, fixed for those
latter places. Such was the action taken by the trunk lines in 1887 in
conformity with the requirements of the long and short haul clause of
the Federal Act to Regulate Commerce. An original progressively rising
tariff is thus at once transformed to a series of level grades or
platforms, the shifts of level corresponding to the location of large
towns or competitive centres; and the grade of each platform being
fixed by the rate determined under competition at those points.[69]
This ascending series of grades may be most irregular, as conditioned
by local circumstances. The general steepness of the gradation is low
on eastern roads like the New York Central, with a large volume of
traffic and easy operating conditions. On western lines like the Denver
and Rio Grande, in rugged territory, with a sparse population and light
tonnage, the per mile rate rises rapidly and the gradation of the
general tariff is steep. But always it will be found that the changes
in rates occur at competitive points, with transition to a new level of
rates determined by the conditions at the next competitive point beyond.

An important fact concerning this tariff thus far developed, is that,
of course, the height of the upper level at the most remote point must
never exceed what the particular traffic will bear. In other words,
supposing that the traffic consist of grain or coal, not more than a
certain amount could ever be charged, no matter how great the distance,
without so far diminishing the profit in the transaction as to render
the business impossible. This is shown by the diagram opposite the next
page, whereon it appears that each commodity, coal, wheat, cement,
lumber, or oil, having attained a certain level of rates, never rises
thereafter, no matter what the distance. Each attains the maximum of
what it will bear. That level it can never exceed. This immediately
leads to another consideration. No single tariff is applicable to
any large number of commodities. Each one must be regarded as a law
unto itself. Not only does the ultimate amount which each is able to
bear depend upon the value of that commodity, but also the conditions
determining competition with respect to it must be different all along
the line.[70]

[Illustration: RATES BETWEEN CHICAGO AND ST. PAUL. DISTANCES IN MILES
FROM CHICAGO.

RATES IN CENTS PER 100 LBS.

[_Facing page 108_]]

Thus it appears that the height of the extreme upper level in our
diagrammatic series of rates is fixed by the highest charge which that
particular traffic will bear.[71] Beyond a certain point, no matter
how great the distance, the rate cannot be increased above this level.
This maximum varies, of course, with each commodity. On cotton it may
be fifty-five cents per one hundred pounds; on grain or coal it will
be much lower, and on sand or cement lower still. The problem of the
traffic manager is to attain this highest rate as speedily as possible
with increasing distance, and to grade his rates with distance up
to this level as quickly as possible, consistent, of course, with
maintenance of a full volume of business. But not only may the final
limit of what the traffic will bear be different for each commodity;
the steps or stages by which the rate progresses up to this maximum,
are quite independently determined. The actual tariffs of local class
rates in general are much simpler than the commercial conditions of
rate making often warrant. Probably the major portion of tonnage on
American railways moves under special or commodity rates. Even in
Prussia over three-fifths of the traffic is of this exceptional sort.
These special rates are made with a view to particular circumstances
prevalent at the time. Bids from a quarryman in Vermont on stone for
a public building in Chicago, may be dependent upon the grant of a
low rate on his marble in competition with a quarry in North Carolina,
also able to supply the particular stone required. The various
ascending series of rates are thus rendered bewilderingly complex.
This is also shown by the foregoing diagram of rates between St. Paul
and Chicago.[72] The rate on a cheap, heavy commodity like coal,
probably rises rapidly at first, and soon attains a maximum beyond
which it can never go. On this diagram, for instance, the freight rate
on soft coal for points up to 180 miles out is lower than that on
flour. Beyond that point the coal rate in turn exceeds that on flour.
Cement is higher than lumber for the first 150 miles; but after that
point the relatively greater value of lumber holds it steadily above
cement. On heavy cheap commodities the relatively high cost of cartage
in competition enables the railway to reap the full measure of its
advantage and to charge well up to the maximum of what the traffic
will bear, within a comfortably short distance. Furthermore, variable
costs for terminal charges have to be considered. Wherever they are
high the rate must rise at once sufficiently to cover these, no matter
how short the distance; but thereafter the rate may not need to be
increased greatly for some time. On light higher-grade goods the wagon
is an effective competitor for longer distances.[73] Moreover, the
competitive points at which rates rise from stage to stage are seldom
the same for all classes of goods. A river crossing brings competition
for coal, lime, or cement, but does not affect the rates chargeable on
high-class freight which seldom goes by water in any event. A railway
specially interested in the development of some particular industry,
wherever it crosses our hypothetical line, effectively holds down
the rate on the product of that business. Junction points with other
railways having no such interest may have no influence upon that rate,
but may cause modifications in other directions. Another railway being
in need of back loads over its line, as the result of a predominant
movement, let us say, of beef cattle at certain seasons of the year,
may introduce competition in all the tonnage capable of being carried
on cattle cars. Such a road holds down the rates on this traffic
wherever it happens to cross, but has no effect upon any other rate.
Thus it comes about in practice, as the last diagram well illustrates,
that the tariff lines cross and recross one another, generally rising
with increasing distance, but at all sorts of different times and
places.

Few generalizations are possible in this connection. Rate making
must in a growing country ever be a matter of infinite detail. It is
generally true, however, that beyond a certain point the tariff on
different grades of commodities will separate more and more widely
with increasing distance. For, obviously, after the low-grade goods
have reached the maximum which they can bear--and this they tend to do
speedily--they must remain practically constant; while those of higher
grade continue progressively rising. And for very short distances
the rate on the low-grade goods may even exceed that imposed upon
higher-class tonnage. The coal rate for a ten-mile haul may exceed that
upon some commodity worth twice as much; but for a 200-mile haul the
coal rate may be only one-eighth of the rate on the other goods. Long
experience on the part of the carriers has, however, enabled them to
arrange their tonnage in classes; for each of which the conditions are
more or less uniform. By reserving the exceptional traffic for special
treatment under commodity rates, a fairly consistent scheme of charges,
rising by stages with increasing distance may be evolved.

Few standard railway tariffs in the United States develop beyond the
point covered by the preceding paragraph. Many of them are unable even
to reach this stage of logical growth. In the South, for instance, they
have never got beyond the stage of progressively rising local rates,
with independent and often radically reduced charges at all large towns
or competitive points.[74] Each traffic manager, particularly since
the effective prohibition of working agreements between competing lines
by the Trans-Missouri Freight Association decision of the Supreme Court
in 1896, has been left to work out his own salvation, not aided by, but
in spite of, the efforts of his rivals. There is, nevertheless, one
example of further development in the so-called trunk line territory,
lying east of the Mississippi and north of the Ohio and Potomac rivers.
Conditions here, in general, are most favorable by comparison with the
West and South. Both population and traffic are dense, and the state
legislatures are conservative in making grants for the construction
of new lines. The companies are historically mature. The good fruits
of coöperation had already appeared in the evolution of a scientific
and logical scheme, long before such coöperative action had been
frowned upon by the law and the courts. All the railways in trunk line
territory have worked in harmony, so far as general classified local
tariffs are concerned--however much they may have fought one another
over differentials to seaboard cities, or export and import rates.
Their system is comparatively simple in principle, although it has
required the experience of many years to work out in detail. Fully
described elsewhere,[75] it will suffice for present purposes to say
that all rates from intermediate points between Chicago and New York,
are fixed at a definite proportion of the Chicago-New York rate both
for east-and westbound shipments. Thus, for instance, as shown by the
map of trunk line rate distribution, at page 365, the rate from Detroit
to New York is seventy-two per cent. of the Chicago-New York rate.
The percentages from the following points are as indicated, namely:
Cincinnati, eighty-seven per cent.; Indianapolis, ninety-three per
cent.; Grand Rapids, ninety-six per cent.; Peoria, Ill., one hundred
and ten per cent.; Louisville, Ky., one hundred per cent.; Milwaukee,
one hundred per cent.; and even points in Canada, such as Toronto,
seventy-eight per cent., etc. Every place, no matter how small, has
a certain percentage of the New York-Chicago rate assigned to it.
This rate changes with any variation of the standard or basic charge.
Thus when the Chicago-New York rate, first-class, is seventy-five
cents, the rate from Indianapolis is ninety-three per cent. of that
figure. Any change of Chicago-New York first-class rates modifies
every intermediate rate in exactly the same proportion. This was well
exemplified in the rate wars of 1893. These percentages have been
fixed after a long process of compromise among conflicting interests.
Another point of special interest is that these rates are adjusted on
the basis strictly of the long and short haul principle, namely, that
all intermediate points enjoy a somewhat lower rate than the terminal
points, although the percentage may not be exactly upon a mileage
basis. Consideration of the distribution of these percentages points
to many apparent inequalities in the adjustment; but, as a matter of
fact, it will be found that the existence of competing routes, of water
transportation or of other factors, offers a partial explanation in
most instances.

[Illustration]

Such being the general character of this comprehensive trunk line
system, the relation of it to the tariffs described heretofore is not
difficult to demonstrate. Each separate railway having developed a
well-ordered rate schedule, they have all met and agreed upon a unified
scheme; which as far as possible harmonizes all conflicting interests.
The gradation of rates rising with increasing distance from New York
on each separate road, is adjusted to the corresponding gradation of
rates of its neighbors on either side. The result is a series of rate
zones, lying more or less concentrically about the terminal point.
These zones are highly irregular in width and area, but possess one
feature in common. Each remoter zone is one stage higher in rates than
its predecessor. This relationship is indicated by the cross section
diagram herewith. This cross section, of course, differs from the
diagrams heretofore shown. It is purely geographical, being taken, not
along one single railway but as the crow flies--straight across the
whole trunk line territory. But in order to appreciate the significance
of this elaborate scheme, one should imagine a whole series of such
progressively rising rates, radiating out along the different lines
of railway. Connecting the corresponding levels or stages upon each
one with those of its neighbors, the concentric zones are immediately
outlined. The advantage of such a broad scheme is that it generalizes
the single line tariff; taking into view every place, no matter how
small and irrespective of its location whether upon a through line or
merely a local transverse one. Every town, no matter how insignificant,
is assigned a place in a logically evolved plan. Such would seem to
be the ideal of rate construction, toward which all traffic managers
should strive.

       *       *       *       *       *

The foregoing description of the development of a mileage tariff is
applicable to only a part of the traffic. A very large volume of
tonnage,--said to be not less than seventy-five per cent. in America,
sixty-three per cent. in Prussia and fifty per cent. in the United
Kingdom,--moves under special rates made in quite another way in
response to the exigencies of commercial competition. The making of
these freight rates in practice is an extremely complicated matter.
No single road is independent of rates made by its rivals--rates
applicable not only to competing commodities and markets, but also as
affected by apparently the most remote and disconnected contingencies.
Thus railway rates, as has well been said, are not a set of independent
threads; they form a fabric. They are so interwoven everywhere that if
one thread be shortened, it will cause a kink in the fabric that may
run almost anywhere. In order to understand this it will be necessary
to describe somewhat in detail the nature of competition as applied
to transportation; and then to show by a few concrete illustrations,
the various factors which actively enter into the determination of
specific rates. Laymen and legislators do not sufficiently appreciate
the extremely delicate nature of the work. Much discussion relative
to railway competition seems to be based upon the assumption that it
consists in the main of the competition of railway lines more or less
parallel or else operating under substantially like conditions. As a
matter of fact competition in transportation is to a large degree far
more complex.

Railway competition is of three entirely distinct sorts. These may
be denominated, respectively, competition of routes, competition
in facilities and competition of markets.[76] The first of these,
competition of routes, as the name suggests, is limited to the
activities of the carriers alone. It occurs whenever two railways
are exposed to identical commercial conditions both at the point of
origin and of destination. The rivalry is direct and physical. The only
competition possible is that concerning the route by which traffic
may move between those two points. Such competition is most likely to
arise between more or less parallel lines, as for instance between the
various trunk roads from New York to Chicago. The classic instances
in our history are of the rate wars due to the West Shore and the
Nickel Plate, which were built for the express purpose of engendering
competition with the then existing lines,--the New York Central and the
Lake Shore, respectively. The same sort of simple competition prevails,
of course, between a railway and a parallel canal or other waterway,
as, for instance, between the Erie canal and the trunk lines, or the
Illinois Central and the Mississippi river. Such simple competition as
this, where confined to railways alone, almost inevitably leads to one
of two results: the roads may remain independent, preventing ruinous
rate wars by pooling; or else, as a result of long continued cut-throat
competition, the bankrupt road may be bought up and merged with the
solvent one. This was the fate of the old New York and New England
railway, finally purchased by the New Haven system; of the West Shore
and Nickel Plate lines; and of the Kansas Pacific, unloaded on the
Union Pacific by Jay Gould. The nature of railway competition is indeed
such that no other result than consolidation or pooling can ensue.
Weyl is right in his observation that,--"Strictly speaking, permanent
competition can exist, not between railroads struggling for the same
traffic; but solely between those railroads which have no territory in
common."

This first form of competition of routes or, as it has been called, of
alternative routes, often obtains where conditions of competition are
more obscure than in these simple instances above named. In the rivalry
for the imported plate glass or crockery traffic between the trunk
lines and the Gulf roads, the competition is none the less of routes
between Liverpool and Chicago, although the water carriage by way of
New Orleans or Galveston is so much more roundabout. Freight actually
moves from Boston to Chicago by a line 1786 miles long, via Asheville,
N. C., while the direct distance is only 1004 miles.[77] From St. Louis
to Meridian, Miss., is 512 miles by direct rail line; yet traffic
may move over 2000 miles going to New York and then around.[78] The
map on p. 271, showing the various rail and water lines concerned in
traffic between New York and the little town of Troy, Ala., shows
how widespread are the ramifications of competition of this sort.
Manifold instances of such roundabout carriage have been elsewhere
described in full.[79] They differ from the competition of parallel
routes, however, in the important regard that absorption of the long
lines by the short ones becomes both physically and financially
impossible. Whenever a large area like the Pacific slope is devoid
of manufactures, and wherever the source of supplies is sufficiently
concentrated, as, for instance, in the manufacture of agricultural
implements which are almost exclusively made in or about Chicago, we
still have to do with a clear case of competition of routes, although
a great number of carriers may participate in the business. When
molasses or rice are only to be had from New Orleans, the centre of
such business, the carriers to all tributary consuming points compete
for the routing of it over their own respective lines. These carriers
may operate either by land or sea or by a combination of both; and
they may transport commodities by the most roundabout ways.[80] The
determinant feature, however, distinguishing this class of competition
is neither the mode or carriage nor its length; but is found in the
fact that the commercial conditions at both ends of the line, points
of origin and destination, are identical for each participant in the
business. Direct competition of routes, therefore, has to do with pure
transportation,--the creation of place values,--and this being the
case, the relative cost of service is always a factor of moment.

Competition of facilities, the second of the three phases of railway
competition above mentioned, deals, as its name implies, not at
all with the rates charged but with the facilities or conveniences
afforded. Such competition is confined solely to rivalry for
business at the established rates. Immediately on the appearance
of any departure from these conditions the question becomes one
of competition of either of the other two sorts. An instance of
competition of facilities would be the introduction of reclining
chairs or of a superior service in passenger business. When the Rock
Island system offered such facilities without an extra charge, it
became necessary at once for others to meet this competition in the
same way that they would meet a reduction of rates. Any reduction in
time of transit for freight business between two given points without
extra charge, would in the same manner give rise to competition
of facilities. Such facilities, however, as might have a distinct
money value, as, for instance, free storage, cartage, demurrage or
milling-in-transit, any one of which practically amounts to giving
value without charge, are, of course, equivalent to a reduction of the
rate; and do not belong in this class of considerations at all. Only
those conveniences or facilities, which, while attempting to secure
business may not be compounded for money, should be classified in this
group. It should also be observed that competition of facilities may as
readily arise between parts of the same railway system or under pooling
agreements to maintain rates, as between distinct and independent
companies.[81] And such competition between parent and child often
arises. Thus, for instance, business was as actively solicited as ever
by the Pennsylvania and the Baltimore & Ohio in competition during the
several years of financial control of one by the other prior to 1907.
The New Haven railway may compete with its own water lines around Cape
Cod or on Long Island Sound. But in all of these instances the cardinal
feature to note is that the competition is always at the established
rate. For New England, although the New Haven system and the Boston
and Maine do not compete on rates at their points of contact, there
is constant rivalry in respect of facilities or service. The same
thing is undoubtedly true of the Atchison and the Southern Pacific
in the carriage of California fruits. Although operated under pooling
agreements, yet they were competitors in the matter of the service
offered. Each sought an enlarged volume of tonnage, but not by cutting
the agreed rate.

The third form of competition in transportation is dependent upon
the competition of markets; and is not in reality direct competition
between carriers at all. This is the most difficult of all forms to
understand.[82] It is certainly in many cases more than a "euphemism
for railway policy."[83] Yet although indirect and often obscure,
it is of fundamental and conclusive importance in the determination
of freight rates. Commercial competition deals not with a mere
choice of routes, but with alternative markets. The carriers act,
not independently and of their own volition, but only as agents or
representatives for their constituents, the shippers. They may become
tools or weapons in the hands of merchants or manufacturers who are
the real contestants. It is largely in this sense that it is so often
alleged, and rightfully, that railway traffic managers oftentimes do
not _make_ rates at all. Their energies are bent to the analysis of
those circumstances by which their rates are made for them.

The production or preparation of commodities for final consumption
falls naturally into two distinct parts; the creation of form value,
succeeded by the conferring of place value. Transportation is concerned
alone with the latter process. Of these two operations, the latter,
the creation of place values, is by far the more elastic and adaptable
process. The grower, the miner or the manufacturer has his first costs
more or less rigidly fixed by natural or human conditions; such as the
fertility of the soil, the grade of ore, the prevailing scale of wages,
and so on. His proximity to the status of a marginal producer depends
upon his relative position in these respects. With the carrier, matters
are more contingent. Including within its reach, as it does, many
grades of producers and consumers, each more or less rigidly held bound
by his own circumstances and conditions, as above said, the carrier is
able to exercise a wide range of choice in fixing that margin of value
created which it reserves for itself. And at all times, by reason of
the factors set forth elsewhere, primarily its subjection to the law
of increasing returns, this intermediate share of the carrier tends to
adjust or accommodate itself to the end that it may discover or produce
a wider margin between values in the hands of producer and consumer,
respectively. This may be best accomplished by a progressive widening
of its field of activities, that is to say, by an enlargement of its
physical reach and scope. It is always striving to lower the cost of
production made by the marginal producer. Its motto must ever be, to
get more business, if not right at home by search for it abroad--and
this always with the chance that the greater the distance between the
producer and the consumer, the greater the possible margin of place
value remaining as its individual share.

This ever-present incentive to widen the market carries with it a
direct consequence. A market is a commercial area characterized by a
prevalent equality of prices. Phenomenal development in this respect is
characteristic of the United States. For many commodities the market
is coextensive with the national domain. It is the chosen function of
transportation agents, by rail and water, to ensure this result; to
preserve an equality of prices, despite the variety of producing and
consuming conditions. The railway is the agent by which the market is
thus widened and rivalries are thus equalized. In railway parlance
this is what is known as "keeping everyone in business." The following
quotation from the Senate Committee Hearings of 1905 adequately
describes the process: "I am interested in the erection of a mill
that has just been completed, and sometime since I was figuring on
the question of a smokestack. I wanted to have that stack built out
of brick that is burned in New Jersey, and that is several hundred
miles away. It is a long way to ship freight from New Jersey to North
Carolina. A quotation was made me by the stack builder, whose office
is in New York, and I remarked to him, 'That price is prohibitive; I
cannot pay that price for that stack.' He said, 'That is the best I
can do; but if you will tell me what you can afford to pay for that
stack, in competition with home-burned brick, I will see what I can do
with the railway people.' He said, 'All right; I will take it up with
the railway people.' His quotation included the delivery of the brick
and the erection of the stack at my plant. It would require something
like about fifty carloads of brick to build that stack. Within a week
he had his price revised, and gave me a satisfactory quotation and
took my contract for the stack. Of course he had to get a special rate
from the railway people, because there is no regular tariff on brick
from New Jersey to North Carolina." In this instance the railways
actually created this new business by so adjusting the margin between
the minimum cost of making brick in New York and in North Carolina,
as to make it possible for the traffic to move. The special rate here
mentioned, however, should be carefully distinguished from a secret
rebate offered to one contractor as against another in the same place.
This commodity rate, while special to meet a particular contingency,
was open to any other shipper similarly circumstanced. The student
cannot too carefully discriminate between these two sorts of special
rates. They are constantly confused in the public mind. The effect of
these open commodity rates, is not to create difference of opportunity
between individuals, but to generalize economic conditions and equalize
prices throughout wide areas.

The most satisfactory way to describe commercial competition as applied
to carriers is by concrete illustrations. There are two distinct
varieties or degrees of it, which may be denominated primary and
secondary. These might as properly, perhaps, be called simple and
complex, or direct and indirect. Of these, the first concerns those
cases wherein a commodity undergoes no physical transformation between
producer and consumer. Shipments are usually direct. Only one rate is
involved. Shall St. Louis and the South, for example, be supplied with
salt from the Kansas or Michigan fields?[84] This is a case of pure
transportation,--the creation of place value, alone. The Aroostook
farmers of Maine compete in prices with the potato growers of Michigan
in the New York market. Each district is usually represented by a
railway, dependent upon the prosperity of its particular constituency.
Competition of markets is usually more keen where a number of
carriers are concerned, each representing its own clients; but it
may conceivably arise as between several markets served by the same
company, especially with the growth of great railway systems. The
Southern Pacific must insure a rate from California on oranges to
eastern markets, as compared with the rates over the southern roads
from Florida, sufficiently low to warrant the venture of capital in the
industry.[85] Marble from the quarries of Vermont and North Carolina,
and paving blocks from the Lithonia district in Georgia and from
Wisconsin or South Dakota, must meet in Chicago on even terms. Such
competition, although simple and direct, recognizes no national bounds.
Copper from Montana must be laid down in Liverpool at rates to permit
of meeting the price on Chili bars from South America. Our entire grain
and cotton crops must be transported at rates which will enable them
to hold their own in European markets. The California raisin has, in
this manner, had to make its way into Eastern markets in the United
States against the pressure of importations from Spain, as described
in another place.[86] The cotton mills in New England and in the
South must have their output carried to China under conditions which
will enable them to meet the price made by the British manufacturer.
This last instance, however, introduces us to the second form of
competition; inasmuch as a double transportation is involved first from
the fields to the mill, and thereafter from the mill to the consumer.

Secondary or indirect forms of commercial competition in
transportation, concerning, as has been said, not one but two distinct
carriages of entirely different goods, needs to be in turn subdivided
still further. The products of agriculture and mines afford the best
instances. The lumber business is peculiarly suggestive in this
connection, owing to the fact that in the United States a vast treeless
area in the Middle West is surrounded with forest tracts available
for development. The market again in this case is limited only by our
national frontier. Omaha is supplied with yellow pine and cypress from
Louisiana after a 1,200-mile haul; Oregon fir brought 1,800 miles in
each instance for fifty cents per hundred pounds; and with Michigan
hemlock and pine transported less than 500 miles for eleven and a half
cents. These various sorts of lumber are all more or less competitive.
And in each case the final cost of laying down the product in Omaha is
determined; first, by the rate from the stump to the mill, and then,
as sawed lumber, thence on to destination. The Eau Claire, Wisconsin,
lumber case[87] before the Interstate Commerce Commission, fully
describes the intricacies of adjustment needed to hold a number of
such producers on a parity. In this instance Eau Claire, "next the
stump," as an important lumbering centre was shown to be declining in
importance relatively to Mississippi river towns, which received their
logs by raft down stream. A differential of a few cents was threatening
the welfare of a considerable population. The Wichita, Kansas, cases
are suggestive in a similar way.[88] Sugar is laid down at this market
from every point of the compass. From Hawaii it is shipped in the
raw state to San Francisco, and then brought East, like the Oregon
lumber, cheaply, as a back-load to counter-balance westbound shipments
of grain and manufactures. From New Orleans refineries comes the
Louisiana product, and from the Atlantic sea ports the Cuban sugar; but
in each case the carriage is broken at an intermediate point, at which
manufacture or jobbing ensues. A large class of operations analogous to
this, known as "milling in transit" and "floating cotton," elsewhere
described in detail, involve the same complexity and interrelation of
rates.[89] The point to carry forward is that commercial competition
demands that in every case not single rates but the sums of all the
connecting rates for each competing person or region shall be properly
adjusted. If this be not done, some one will be excluded from the
market and "put out of business."

By this time in our ascending scale of complexities, it will be
observed that manufacture now begins to outweigh mere transportation
in importance. With low-grade products, like salt or sugar, the
increment of value due to transportation is relatively high as
compared with manufacturing costs. As the grade of product rises,
however, the differences in value and in form between the raw and the
finished product, render the problem of location of the manufacture
more difficult as affected by the relative adjustment of rates of
transportation for the two. According to the data of the Federal Bureau
of Corporations, the cost of refining crude petroleum, worth three to
four cents a gallon at the wells in Pennsylvania, should not exceed
one-half cent a gallon. This sum would barely pay for the first hundred
miles of its carriage by rail, as ordinarily shipped. The market is,
of course, extraordinarily extensive; hence the persistent flagrancy
of the practices of secret rebating by the Standard Oil Co.[90] To
obtain such special favors in transportation outweighed in importance
the incentive to introduce economies in production. In this industry,
where little waste occurs in manufacture, the refineries may well be
located at the consumers' door. The manufacture of furniture for the
Pacific states, on the other hand, must be located "next the stump," in
North Carolina or New England. The long carriage must be applied, not
to the bulky lumber but to the finished product. The freight rate on
lumber from Oregon to Pittsburg is just about equal to the value of the
logs at the mill. Obviously, the large proportion of waste or common
lumber will not bear a high addition to its cost by carriage to any
distance. In the manufacture of fur hats a shrinkage of weight occurs
of one-half between the fur scraps and the finished product. In such
a case it is imperative, either that the factory be near the source
of supply or that the rate on the two distinct commodities be nicely
adjusted. The decision of the United States Steel Corporation to build
a large plant at Duluth for supplying the northwestern market is the
outcome of such considerations. The main point is that the adjustment
of a number of rates may determine, not only the general welfare of the
industry but even its specific geographical location with reference to
the raw material on the one side and the market on the other.

The jobbing or wholesale business of the United States exemplifies the
most highly involved and complex details of commercial competition.[91]
In this field it appears most clearly that, as is so often alleged,
railway traffic managers hold the welfare of entire communities, as it
were, in the palms of their hands. In all the cases heretofore cited,
great natural forces outweighed the purely personal and human ones.
Soil, climate and mineral resources more or less completely determined
the final outcome of commercial competition. But the distributive
business of a country is more largely artificial. It is more subject
to human control, and may be influenced by personal considerations.
Shall the economically dependent southern planter be supplied with
manufactures of all sorts,--from harnesses to tin dippers--from
mid-western cities like Cincinnati and Chicago or from eastern centres,
such as New York and Baltimore? This is the underlying economic issue
raised in the notable Cincinnati Freight Bureau Case in 1894; in the
course of whose determination the Supreme Court of the United States
raised the more immediate and pressing question of the authority of the
Interstate Commerce Commission to regulate rates at all. In the dust
raised by the controversy over this purely legal question, the basic
economic dispute was lost to view.[92] Shall the people of the Pacific
slope be supplied with hardware and analogous products from their own
large cities which buy at wholesale from the East, break bulk at San
Francisco or Seattle and ship out to smaller towns in less than carload
lots; or shall the distribution take place at the hands of jobbing
houses located several thousand miles away at Chicago or St. Louis?
This is the economic dispute raised in the St. Louis Business Men's
League case.[93] The very existence of San Francisco as a commercial
centre may depend upon it. For the primary and secondary operations of
commerce are often complementary. At the large cities, concentration
of raw staples moving inward naturally entails back loads outward at
low rates for manufactured goods distributed by jobbers. Or, taking
the smaller places, the farmer will of necessity buy his cotton cloth,
sugar and coal in the town to which he drives by wagon to deliver his
cotton, corn or wheat.[94]

The entire puzzling class of cases dealing with the southern basing
point system are primarily concerned with such issues as these.[95]
Three distinct classes of cases arise. There is, first, the competition
between cities of equal size, be they large or small, such as Memphis,
Tenn., and Little Rock, Ark.; Danville, Va., and Lynchburg; or
Cleveland, and Cincinnati, Ohio: secondly, the rivalries between large
cities and what may be called secondary local centres in the same part
of the country,--such as Seattle, Wash., _v._ Spokane; Chicago _v._
Burlington or Dubuque, Iowa; or Atlanta, Ga., _v._ Macon: and thirdly,
the intense rivalries between the great first-class cities, like New
York, Philadelphia, and Chicago, and the rest of the field, big and
little.[96] The mail order houses, the express business and the parcels
post intervene at this point. But in all of these issues, series of no
less than three separate transportation costs have to be totalized and
kept more or less on a parity. The intricacy is increased by reason
of the fact that shipments must be made, first at wholesale to the
jobbers, and thereafter usually in less-than-carload lots to retailers.
If the carload rate be relatively too low, with reference to the rate
on small lots, the jobbers near the market will be upbuilt and the
jobbers at a distance cannot compete. If the opposite relation obtains,
the jobber in a distant great city will be able to ship out small
orders cheaper than the local dealer can obtain them by carload and,
breaking bulk, peddle them from his own town. So narrow is the margin
of profit on staple goods that a difference of a fraction of a cent per
pound may exclude a dealer from the field entirely. This question of
carload ratings is, however, treated elsewhere; impinging, as it does
upon matters of freight classifications.[97]

The rivalries of jobbers and middlemen in different cities are
inevitably borne into the offices of traffic managers. Were all
railways equally interested in all cities alike, the matter need not
go further, engendering railway rivalries. But such is seldom the
case. Hardly a road can be named, whose interests are not more or less
identified with some particular city. Commercial rivalry thus at once
leads to railway competition. Four or five railways, like the Chicago
and Northwestern, radiate out to the west from Chicago, and have no
interest in St. Louis. Almost as many, like the Missouri Pacific, go
out from St. Louis without entering Chicago. Others, like the old Union
Pacific and, formerly, the Atchison system, only come to the Missouri
river, and consequently wish to upbuild their eastern termini, Omaha
or Kansas City. Only a few, like the Illinois Central, reach them
all. Such a road is usually called upon to act as a mediator in all
disputes. "It is a continual struggle between the line from Kansas City
to St. Louis with no interest in Chicago, and the line from Kansas
City to Chicago with no interest in St. Louis," as one witness before
the Industrial Commission phrases it. Compromise is the only outcome.
And in this manner an involved structure of differentials is built
up, oftentimes top heavy and always susceptible of collapse on the
defection of any party to the agreement. When a truce was patched up
between the trunk lines and the Gulf roads after the sugar rate war of
1905, it is said to have taken twenty experts three entire days merely
to "line up" rates on a parity between the competing jobbing centres.

[Illustration]

The simplest compromise in any dispute over rates between competing
centres is the concession of absolute equality or, as it is called, of
flat rates between all points irrespective of distance. This shifts
the burden from the carriers and places competition entirely upon
the shoulders of the merchants. Oddly enough, also, this result of
equal rates regardless of distance between various competing centres,
especially when they are secondary distributing or concentrating points
rather than original sources of traffic, may sometimes evolve naturally
out of commercial conditions imposed by tariffs built up upon the
basis of distance. The accompanying theoretical diagram, based upon
actual traffic conditions prevalent in Missouri river territory, serves
to illustrate the way in which, under certain circumstances, such
equalization of rates may take place. Two groups of cities are here
represented as though lying respectively along two river valleys north
of their separation at a point G. Let us call them the Mississippi
and the Missouri for purposes of identification. The starting point
is equality of rates from such a distant point as New York (O) to
all places along the Mississippi from A to G. Such equality properly
arises in theory from the substantially equal distance from New York.
In practice also, under the trunk line rate system,[98] such equality
prevails, inasmuch as the rates from New York to such a series of
Mississippi river crossings is fixed at 125 per cent. of the rate from
New York to Chicago. By a similar course of reasoning, namely, the
approximately equal distance from New York (O), rates from that place
to a second series of points along the Missouri river should be and are
in effect made equal. From these two facts it logically follows that
the balances of the rates from all points on the Mississippi river out
along an extension of their lines from New York toward the west should
also be equal. This is obviously in conformity with the mathematical
principle that equals subtracted from equals leave equal balances.
Thus the rates B X, D Y and F Z are compelled to equality. From this
relationship in turn follows still another. All rates from any point on
the inner series of towns to any point whatsoever on the outer western
series of places along the Missouri river must remain equal regardless
of distance. For each line from New York to A, B, C, D, etc., wishes,
of course, to participate in business not only on the direct extension
of its own line, but to as many other points as possible.[99] Without
some agreement, however, it would normally enjoy traffic only on the
direct extension of its own line. The point Y would most naturally be
reached by way of C, D or E, over the shortest routes. Competitors on
either side would similarly enjoy an advantage in more direct lines
from New York to the places immediately beyond them. Thus for business
from New York to Z, the more direct lines through E, F or G would
obviously have an advantage over lines which passed around through A,
B, C or D. An almost irresistible incentive to cut-throat competition
would exist. The only way the lines east of the inner circle can
peaceably partition business to the outermost western points is by an
agreement to make all rates between the inner and outer circles the
same. In this manner the rates from A to Z or from G to X are reduced
to an equality with the rates offered by the shortest route between the
two rivers, which, in this case, is E Z. The rate for this shortest
line then becomes the basic one, upon which all the others depend.

[Illustration: Traffic Conditions in Missouri River Territory]

The foregoing economic reasoning underlies the actual tariff system
prevailing in what is known as Missouri river territory.[100] Two
great streams separating at St. Louis form the eastern and western
boundaries of Missouri and Iowa. All along the two edges of these
states are located important river cities, each of which has more or
less direct communication with every other crossing on the other river,
over a complicated system of interlaced lines. There are no physical
barriers, the country being plain and open. The starting point and
basis of the whole scheme is the shortest direct distance between the
two nearest points, namely Hannibal on the Mississippi, and St. Joseph
and Kansas City on the Missouri. The situation is shown by the map
herewith. At these points the two rivers are approximately two hundred
miles apart. For this distance the base rate of sixty cents per hundred
pounds, first class, is fixed by common agreement. Were local business
only to be considered, and were the railways not competing, the rate
between other points on the two rivers at greater distances apart,
such as for instance, Burlington on the Mississippi and Omaha on the
Missouri, might be determined on a relative distance basis, as in trunk
line territory. But the commercial fact is that a large proportion
of the business between all these points consists of long-distance
traffic from the eastern seaboard which may cross the Mississippi at
any one of these gateways between Dubuque and St. Louis on its way to
the cities on the Missouri river. All of these through long-distance
shipments must, of course, enjoy the same competitive rate to the
ultimate western destination on the Missouri river. And, inasmuch as
the rate from the east to the Mississippi crossings is everywhere the
same, namely 125 per cent. of the New York-Chicago rate, it follows
that the balance of the rate from these points on to the Missouri river
across Iowa and Missouri, irrespective of distance, must likewise be
the same. In other words, the rates between all these Mississippi and
Missouri river points must be equalized, irrespective of the length
of the intervening route, whether it be two hundred miles by the
shortest direct line from Hannibal to Kansas City across Missouri,
three hundred and fifty miles from Burlington to Omaha across Iowa,
or even seven hundred miles by the roundabout line of the Illinois
Central skirting both states. In brief, every railway which touches
both rivers, however circuitous its route, is compelled to quote the
same rate from every point on the Mississippi river to every other
point on the Missouri. This rate must be the one fixed, as already
described, for the shortest direct line, namely sixty cents per hundred
pounds first class. Furthermore, in precisely the same way that these
rates to Missouri river points from the eastern seaboard are built up
and equalized, the rates from Chicago to the same Missouri river points
must be kept even. The rate through from any one of the long chain of
Mississippi gateways must be the same irrespective of distance. This
figure, by common agreement, has for many years been twenty cents per
hundred pounds higher than the rate across Illinois to the Mississippi
river gateways from Chicago alone. The dominant note of this whole
tariff is equalization of rates between all points in competition with
one another over all possible routes. Freight thus moves freely in
every direction and all markets are held on an absolute parity.[101]
It is one of the most remarkable features of American commercial
organization, this practical elimination of the element of distance
from interstate trade over wide areas.

The possible evil lurking in too widespread an acceptance of the
principle of the flat rate is clearly apparent in the reasoning of the
Eau Claire, Wisconsin, lumber case.[102] This town complained of the
disability under which it labored in shipping lumber to Missouri river
points by comparison with other places round about. It appeared in the
evidence that as early as 1884, under arbitration, all the rates from
competing centres had been adjusted on the basis of differentials;
and that, as interpreted by the carriers, the purpose of these
differentials was to even up the differences between competing towns;
to the end that all manufacturers should be put upon an equality in
the consuming territory. But this necessarily involved the practice
of penalizing or nullifying in a way the advantages of location. "If
Eau Claire could produce lumber cheaper than Winona or La Crosse, then
the latter points were to have a lower rate in order to enable them to
compete." This practice the Interstate Commerce Commission condemned at
that time; and it has consistently adhered to the precedent then laid
down. Obviously, any other general course of action would be analogous
to hobbling the fleetest horse in a race to bring him down to the rate
of progress of the slowest laggard. The principle of the handicap
applied within moderate limits makes for an exciting athletic contest;
but if it be overdone, it eliminates all interest from the contest
whatever. The race becomes one, not of skill or endurance in running,
but of securing a sufficiently liberal handicap. Competition to be of
advantage in the way of progress must always have in view the survival
of the fittest and the elimination of the unfit.

The vast extent of the United States, the necessity of transporting
commodities great distances at low cost and the progressiveness of
railway managers, has led to an extraordinary development of the phase
of rate making above-mentioned. The principle of the flat rate, based
upon the theory that distance is a quite subordinate, if not indeed
entirely negligible, element in the construction of freight tariffs
under circumstances of competition, was fully accepted twenty-five
years ago.[103] J. C. Stubbs, traffic manager of the Harriman lines,
speaking of transcontinental business in 1898, clearly expressed it as
"the traditional policy of the American lines as between themselves to
recognize and to practise equality of rates as the only reasonable and
just rule ... regardless of the characteristics of their respective
lines, whether equal in length or widely different." It is the theory
upon which the southern basing-point system is founded; and it is the
common practice in making rates into and out of New England--being
in fact vital to the continued prosperity of this out-of-the-way
territory.[104] President Tuttle, of the Boston & Maine, has most
ably supported this principle of equality of rates irrespective of
distance. "It is the duty of transportation agents," he says, "to so
adjust their freight tariffs that, regardless of distance, producers
and consumers in every part of this country shall, to the fullest
extent possible, have equal access to the markets of all parts of this
country and of the world, a result wholly impossible of attainment if
freight rates must be constructed upon the scientific principle of
tons and miles." This is the principle of the blanket rate attacked in
the famous Milk Producers' Protective Association case in 1897;[105]
and it is the practice which has been so fully discussed of late, as
generally applied to lumber rates from the various forest regions of
the United States into the treeless tract of the Middle West. The
principle, while applied thus generally in the construction of tariffs,
is of far greater applicability in the making of special or commodity
rates. Wool rates afford one of the best examples. Under such rates
the bulk of the tonnage of American railways is at present moved. The
essential principle of such special rates, constituting exceptions
to the classified tariffs, is that of the flat rate; namely, a rate
fixed in accordance with what the traffic will bear, without regard
to the element of cost, that is to say, of distance. But a noticeable
trend away from the flat rate is evident in recent decisions of the
Interstate Commerce Commission; especially in the Intermountain
case,[106] revision of the wool and cattle rates,[107] and the general
disposition to lessen special tariffs all along the line.

       *       *       *       *       *

The intricacy of freight rate adjustment in response to the subtleties
of commercial competition depends only in small measure upon the
absolute freight rate imposed. The main problem is really that of
relativity. But this does not mean mere relativity as between directly
competing commodities or places. A strict relativity based upon
commercial conditions must often obtain as well between the rates on
raw materials and their own finished products; between all the various
by-products in an industry; and, of course, always as between goods
capable of substitution one for another. A few illustrations will serve
to make these details clear.

The matter of properly correlating the freight rate on raw materials
and the finished products made from them, is more far-reaching than it
seems. The location and development of manufacturing depends upon it.
The country may be broadly divided into agricultural and manufacturing
sections. The first of these is ambitious to develop its resources;
not only to feed, but to clothe itself and make other provision for
its needs. No sooner does it seek to develop local manufacturing than
it finds itself exposed to competition from the older established
manufacturers at a distance. Sometimes, even, these remote
manufacturers draw their supplies of raw material from its own fields
and forests. These supplies are then shipped long distances as raw
material; manufactured and thereafter returned to sell in competition
with the local product. The local market in relatively undeveloped
areas is probably insufficient to provide support for manufactures on
a profitable scale. It is essential to dispose of the surplus product
over a wider area. Thus there arise two classes of manufacturers: one
"next the stump," manufacturing at the source of the raw material and
desiring to ship the finished product; the other, remote perhaps from
supplies of raw material, but favored by long experience, by abundant
supplies of capital and of skilled labor and by other advantages.[108]
Neither class of shippers can prosper without overflowing into the
domain of the other. The outcome of this competition depends in part
upon the policy of the carriers. If the rate on the raw material be
relatively low, the remote manufacturer is aided. Cotton mills and shoe
factories in New England prosper in competition with establishments
in the South or the Middle West. If, on the other hand, the rate
on raw materials be inordinately high, while at the same time low
on outward-bound shipment of manufactures from the seat of the raw
materials, the tendency is in favor of the upbuilding of manufactures,
not near the historic centres of population and consumption, but
near the sources of natural wealth, which are the potential homes of
manufacturing.

The long-standing controversy over relative rates on wheat and flour
for export affords an interesting illustration of the difficulties of
properly correlating charges of this sort.[109] Originally the rates on
wheat and flour--the raw material and the manufactured product--were
the same. In 1890 the railways leading to the Gulf ports began to
discriminate by giving lower rates on wheat, but the trunk lines until
1899 held to the original equality between the two. Finally, however,
the struggle between the trunk lines and the Gulf roads for business
forced the former to lower their rates on wheat, leaving the flour
rates--not subject to Gulf competition--undisturbed. At times the rate
on wheat for export was as much as nine cents per hundred pounds lower
than the rate on flour. Thus the rate on wheat for export from the
Mississippi river to the seaboard was frequently twelve cents, while
the rate on wheat from the same points to Chicago added to the rate on
flour there manufactured and sent on in barrels or bags to New York,
was twenty-two cents--a clear discrimination against the domestic
manufacturer in this instance of ten cents per hundred pounds. For
his American-made flour, sent abroad in competition with flour made
in Liverpool from American wheat, would evidently cost that much more
at delivery. In other words, wheat could be transported to England
and there ground much cheaper than it could be ground here and then
shipped. This bore with particular severity upon small millers, partly
because their costs of manufacture were relatively high, and also
because any limitation of export business forced the large millers to
bid more keenly for local domestic trade. Inasmuch as a fair margin
of profit to the American manufacturer would not exceed two cents
per hundredweight, it is apparent that this discrimination operated
severely against the American miller. Minneapolis fortunately was
unaffected by this discrimination, much of its exports going out by
Canadian lines to the Lakes. The carriers defended this difference in
rates on the ground of water competition by the Lakes or combined rail
and water routes, which were alone open to wheat, and which thereby
unduly lowered the rate on that commodity; and also on the basis of the
lower cost of service in moving the raw material as compared with the
finished product. It is apparent that issue was really raised in such a
case between the interests of the farmer and of the manufacturer. The
United States, producing a surplus of wheat the price of which is made
on the Liverpool market in competition with the world, is compelled to
find an outlet for this product. It is obvious that any reduction of
the freight rate--the prices in Liverpool remaining fixed--would inure
to the benefit of the farmer, who would thereby receive a higher price
for his product. Viewed in this way the railways by discriminating
in favor of the rate on wheat were helping the farmers. But, at the
same time, by moving this wheat more cheaply than flour the railways
were encouraging the location of flour milling abroad and rendering it
impossible to manufacture flour for export at a profit in the cities
of the Middle West. In these export cases it does not appear clearly
why the rate on flour for export might not have been reduced somewhat.
The Interstate Commerce Commission finally rendered a decision to the
effect that the existing difference in rates constituted an undue
preference in favor of the foreign manufacturer, adding at the same
time that these discriminations seemed to be due primarily not to a
desire of the railways to aid the American farmer in disposing of this
surplus wheat, but to the bitterness of competition between the Gulf
and trunk line railways.[110] They decided that any discrimination
greater than two cents per hundred pounds in favor of wheat for export
as against flour was unreasonable. This difference was permitted,
however, on account of the greater cost of handling the manufactured
product. It is significant of the then state of the law that the
railways paid no attention to this order, and, although conditions
improved somewhat, there is still great complaint.

The relative rates on wheat and flour, even when for domestic
consumption, illustrate the same difficulty of commercial
competition--the necessity of adjusting the rate on raw materials to
that on the finished product.[111] The rate on wheat from Wichita,
Kan., for example, to California is fifty-five cents per hundred
pounds, while the rate on flour between the same points is sixty-five
cents. Is this difference in rates economically justifiable? California
wheat is soft, so that flour produced from it is much improved by the
admixture of hard wheat, such as may be obtained in Kansas. California,
formerly a large wheat exporting state, has of late years relied to
a considerable degree upon the Middle West for part of its supplies.
Kansas flour sells for seventy-five cents a barrel more than California
wheat flour. Shall this Kansas wheat, to be consumed in California, be
ground in Wichita or in California? Here is material for controversy,
not between one particular railway and another, but in reality between
the millers in Kansas and the millers in California. It is quite
analogous to the issue raised over export wheat and flour between the
miller in Chicago and his rival in Liverpool. In this instance, if
milled in Kansas, the railways enjoy the carriage of flour; while, if
ground in California, the railways carry the commodity in the form of
wheat. Owing to certain practical conditions, such as the percentage
of waste and relative differences in labor costs, the Kansas miller
appears to enjoy a certain advantage over his far western competitors.
At this point the interest of particular railway companies appears.
The Rock Island, if the milling industry in Kansas develops, obtains
the haul not only of the flour but also of the fuel and of supplies
for the communities engaged in the business. On the other hand the
Southern Pacific is more largely interested in the local development
of manufactures in California. The Rock Island by maintaining a lower
rate on flour than on wheat, would tend to hold its clients in the
field. The Southern Pacific, on the other hand, by securing the reduced
rate on the wheat from Kansas would materially advance the welfare
of its constituents. Thus the rivalries of the competing localities
immediately become the direct and immediate concern of rival railways.

Cases precisely analogous in principle to those concerning the
relativity of rates on grain and grain products have troubled the
carriers for years in respect to the rates upon cattle and packing
house products.[112] A low rate on cattle as compared with beef favors
Chicago today as against Missouri river points, the latter being
nearer the cattle ranges; just as a generation ago it enabled cattle
to be brought to New York and Boston to be there slaughtered and sold
on the spot. The history of this controversy throws much light upon
the difficulties of rate making in practice. Originally the railways
encouraged cattle raising by a rate which was only about one-third of
the rate charged for beef. Slaughtering was carried on in the East
adjacent to the great markets. To this policy the western packers
objected strenuously. They demanded a relatively low rate on their
finished product in order to enable them to bid against the local
eastern slaughter houses. The stockmen, on the other hand, naturally
desired a continuance of the low rate on cattle, as it perpetuated
competition between eastern and western buyers. The controversy between
the stock raisers and the packers was thus shifted onto the shoulders
of the traffic managers of the railways. The dispute culminated in
1883 when the Trunk Line Association appointed a special committee to
consider what the proper adjustment should be.

This committee in turn referred the matter to Commissioner Albert
Fink, "Seeking a relativity of rates so as to make the charges for
transportation, including the expenses incident to the transportation
of dressed beef, the same per pound as the charges per pound of
dressed beef transported to the East in the shape of live stock." A
difficult task this, considering the variety of by-products emerging
into value year by year. Cattle rates had been for some time fifty-two
per cent., and then later sixty per cent. of the dressed beef rates.
This was relatively higher for cattle than had been charged during the
seventies. But the western packers demanded that the relativity in
favor of the finished product be still further advanced until cattle
rates should equal seventy-five per cent. of the rates on beef. This
would effectually discourage the shipment of cattle to eastern centres,
and would tend to upbuild Kansas City and Chicago at their expense.
In 1884, the matter being still in dispute, was referred to Hon. T.
M. Cooley, afterward chairman of the Interstate Commerce Commission.
He decided that a fair compromise would be forty cents on cattle from
Chicago to New York with coincident rates of seventy cents on beef.
This would make the cattle rate about fifty-seven per cent. of the beef
rate. It was a victory for the stockmen as against the western packers,
who at once raised a great outcry.

It would have been difficult to predict the final outcome had not an
entirely new factor appeared, which transformed the conduct of the
beef packing industry.[113] Specially constructed stock cars owned by
private companies began to be built. These favored the perpetuation of
competition between eastern and western packers. To checkmate this,
the western packers had already embarked in 1879 upon the ownership of
privately owned refrigerator cars for the carriage of their finished
products. The custom was adopted by the railways of paying for the use
of these cars by making an allowance of so much a mile as a deduction
from the established tariffs. This at once opened the way to secret
rebates of all sorts. The refrigerator traffic in these private cars
was large in volume, very regular and highly concentrated as to source.
A large tonnage could be diverted at any time to that road which
could best show its appreciation of the favor. The Grand Trunk, for
instance, in 1887 swept the board, monopolizing this entire business
for a brief time, obtaining it by secret and discriminating rates. The
railways, jointly, sought to free themselves from the domination of
the large packers; but the phenomenal growth of their business, both
domestic and export, rendered them too powerful to resist. According to
expert data, during nine months to May 1, 1889, three shippers alone
received from one line of road $72,945 for the use of their cars. This
about equalled the initial cost of eighty new cars. For the fiscal
year 1895, $8,744,000 was paid by the railways of the United States
for the use of these cars--about $4,000,000 of this being in the form
of rental. At this rate, profits of from twenty-five to fifty per
cent. upon the investment accrued to the great packers. These virtual
rebates, of course, drove all competitors from the field. The story
of the gradual extension of this system of private cars to include
fruit and produce business belongs in another place. Suffice it to say
that the bondage was broken only by the passage of the Hepburn Act of
1906. The growth of these private refrigerator car lines caused the
disappearance of live stock shipments. Packing and slaughtering on a
large scale at the seaboard, either for domestic consumption or export,
was doomed. Meantime, however, the controversy over the relative rates
on beef and cattle continued just as if anything really depended upon
it. The issue was again submitted to the commissioner of the Trunk
Line Association in 1887. In the following year a select committee
of the United States Senate was appointed at the urgent request of
the cattle raisers. Testimony before this committee showed in detail
how eastern packers were striving to build up establishments near
the points of consumption, but were driven out of the business by the
relatively high costs of shipping cattle, as compared with the rates
at which dressed beef could be actually delivered from Chicago and
Missouri river points. This entire history, aside from its significance
as a study of personal discrimination, illustrates the effect of
a relatively increasing differential rate, partly open and partly
secret, against the raw material of an industry as compared with the
finished product. The result, at all events, has been to concentrate
the packing industry in the Middle West. Nor is the controversy closed
even yet.[114] But this time it is a question, not between the seaboard
and Chicago, but between Chicago and Missouri river points, or those
still nearer the southwestern ranges. Fort Worth and Oklahoma City now
become complainants against the Missouri river points.[115] Always and
everywhere the manufacture seeks to develop at or near the source of
the raw material. Whenever this tendency does not appear in an industry
it is pertinent to inquire how far the relative adjustment of rates is
responsible for the phenomenon.

Complexities in rate adjustment often arise from the fact that in
the manufacture of many commodities the marketing of by-products is
of increasing importance. The rate on the whole series of related
commodities must be taken into account at once. Thus in lumbering, a
large amount of waste or very low-grade lumber is necessarily produced.
This common lumber cannot bear long transportation; it must be utilized
locally, if at all. On the other hand, the choicest specialties will
command a price even in remote markets. A monopoly price is enjoyed in
such a case. The Pacific coast lumbermen can market their long timbers
anywhere in the United States; but the demand for the common lumber,
restricted to a sparsely populated region, tends to be exceeded by the
supply.[116] The real competition between the southern, the Michigan,
the Wisconsin and the Pacific coast manufacturers thus narrows down
to the sale of the medium-grade product. And the cost of production
of this is, of course, in part dependent upon the profit made upon
the other two sorts, each of which in its own field appears to be a
monopoly. A wide market and a good price for medium-grade lumber may so
lessen the cost of the cheapest by-products that they in turn may be
so reduced in price as to widen their reach to the consumer. Each rate
reacts upon the others. The situation can be successfully controlled
only by adjusting them all at once.

Not only are rates competitive as between raw materials and the
finished product made from them, but the circle of competition
immediately widens to include all commodities capable of substitution
one for another.[117] Coal rates, of course, are partly determined
by rates on cordwood, and _vice versa_. During the great coal strike
in Pennsylvania in 1903, soft coal rates and hard coal rates were
sadly disturbed. Such substitutions are always likely to occur. But
the conditions are not always so simple as this. An instance in
point is given by a witness before the Senate (Elkins) Committee on
Interstate Commerce in 1905.[118] This shows how a reduction in the
rate for transportation of corn from Kansas to Texas brought about
a corresponding reduction in the rate on flour from Minneapolis to
Chicago. There was a large crop of corn in Kansas; and the Chicago
lines anticipated brisk business in the carriage of this product. The
traffic managers of lines from Kansas to Texas, however, discovered a
large demand for corn in Texas at a price higher than then prevailed
in Kansas. Any rate less than the difference in prices between the
two districts would cause shipments of corn to flow from Kansas to
Texas, just as inevitably as water flows down hill. This rate would
needs be low; but the corn could be loaded on empty southbound cars
which had been used to haul cotton out of Texas to the north. This, of
course, entailed a diversion of corn from the Chicago railways, which
promptly reduced rates in order to hold their traffic. For years the
rates upon wheat and corn had been fixed in a definite relation to
one another, based upon commercial experience. Any reduction of the
corn rate compelled a reduction of the wheat rate. A fall in the wheat
rate brought about a drop in the rate on flour. These reductions in
corn started in southern Kansas; but parallel lines in northern Kansas
were compelled to follow suit. Grain in the territory between the two
roads could be hauled by wagon either north or south corresponding
to a fraction of a cent per bushel difference in the price. Thus the
reduction in rates spread from one line to another all over Kansas,
throughout Nebraska up into Dakota and finally to Minnesota. It not
only affected the corn rate everywhere but it caused a reduction in the
rate on flour from Minneapolis to Chicago. The reliance of Texas for a
portion of its corn supply upon the surplus product of Kansas sometimes
leads to odd results. This commodity is sometimes shipped as corn meal
and sometimes transported as corn to be afterwards ground in Texas.
The Texas millers at one time demanded a relative reduction of the
rate on grain as compared with corn meal, and the railway commission
of that state upheld them in that demand. For ten years down to 1905
the differential in favor of the raw product had been three cents a
hundred pounds. Then the railways, in connection with a general advance
of rates, increased the charge on corn meal until it amounted to about
nine cents per hundred pounds more than the rate on corn. One cent a
hundred pounds being a good profit in grinding corn meal, this change
shut the Kansas millers out of Texas business. Application was made
to the Interstate Commerce Commission for relief. It then appeared
on investigation that the carriers had made use of the Texas millers
in order to prevent a general reduction of _both_ grain rates and
rates on grain products. The Texas millers on general principles had
favored both these reductions. What happened is best described in the
evidence before the Senate Committee on Interstate Commerce of 1905.
"The railways went to the millers of Texas and they said to them,
'Is there anything you want here?' 'Why,' said the [Texan] millers,
'yes; we would like to have that differential between corn and corn
meal increased; we think you ought to put the rate on corn meal up.'
The railway said, 'All right; you just stay away from that meeting
down at Austin so that there will not be any excuse for the Texas
commission, and if it undertakes to reduce these rates we will raise
this differential; we will raise the rate on corn meal to the rate on
flour.' The millers kept away from Austin--they kept their part of
the bargain--and they stayed away, and the Texas commission was left
without any support for their proposition to reduce the corn rates, and
the railway kept their part of the bargain and lifted up the rate on
corn meal so that the differential was from nine to seven and one-half
cents, and that put the Kansas mills out of business."

Apparently insignificant details often determine the outcome of
commercial competition. Thus in the milling business, where the margin
of profit in the manufacture of flour may not be over three cents per
barrel, an infinitesimal change in the freight rate may mean success
or failure to long-established industries. And the conditions vary
indefinitely. Thus, as between flour milling in Duluth and Buffalo,
Duluth can buy its wheat from the farmer direct during the entire
winter, but must ship its product mainly during the period of open
water navigation on the lakes. The reverse is true with the Buffalo
miller who can ship out his flour during the entire season, but who
must accumulate his whole stock of wheat before navigation closes. And
then Minneapolis as a milling centre has to be taken into account.
Eighty per cent. of the spring wheat grown in the United States is
in territory from which the freight rates to Minneapolis and Duluth
are the same. But the basic rate to the East and Europe, fixing the
all-rail rates, is the combined lake and rail. By this route Duluth
is one hundred and fifty miles nearer the market than is Minneapolis,
and consequently enjoys a lower rate on its flour shipped out. A
three-cornered competitive problem exists, in which any change at one
point entirely upsets the commercial equilibrium.

The obligation on the part of a railway to protect its constituency,
not only in respect of particular rates, but in general conditions as
well, introduces still further complications. The freight business
of New England, for example, consists, first, of the carriage of raw
materials and supplies inwards; and, secondly, thereafter of the
transportation of the finished product out to the consuming markets.
Narrowly considered, it may seem expedient to crowd the rate on coal
as high as the value of service probably will permit; but viewed in a
large way, it may prove to be a far better business policy to maintain
the rate on coal, cotton, and other staple supplies so low, that the
growth of population and production may in the long run yield far
greater returns on the high-grade manufactures which the territory
produces. Turning to the southern field, where the economic conditions
are reversed, it may be the better policy to hold down the rate on
raw cotton in order thereby to stimulate this great basic industry
and thereby enhance the demand for the merchandise and foodstuffs
which depend upon general prosperity. A free hand afforded for the
suitable adjustment of such apparently independent services may
contribute far more to the general welfare than an insistence upon
a petty and near-sighted policy of extorting from each individual
service all the rate it can possibly endure. American railway managers
are gradually but surely coming to take a more liberal view of these
great possibilities and to consider the economic development of their
territories, not narrowly, but in a generous way.

FOOTNOTES:

[64] Testimony before the Hepburn Committee, in 1879, p. 2921, is
interesting on this point.

[65] U. S. Reports on Internal Commerce, 1876, p. 25.

[66] U. S. Industrial Commission, 1900, IX, p. 631. _Cf._ also diagram
of European tariffs in Senate (Elkins) Committee, 1905, V, App. p. 271.

[67] P. 165, _infra_.

[68] _Cf._ chap. VII, _infra_.

[69] Such a tariff on the Illinois Central is charted in Reports, U. S.
Industrial Commission, IX, p. 295.

[70] Such are commodity as distinct from class rates, described in
connection with classification in chap. IX.

[71] Tapering rates are discussed by J. M. Clark in Columbia University
Studies in History, etc., XXXVII, 1910, chaps. IX and X. _Cf._ also
Hammond, Railway Rate Theories, etc., 1911, p. 70.

[72] From A. B. Stickney, Railroad Problems, p. 69.

[73] _Cf._ note on p. 375.

[74] P. 380, _infra_.

[75] Chapter X, p. 360, _infra_.

[76] The voluminous record in _U. S._ v. _Union Pacific_, etc. (The
Merger case), U. S. Supreme Court, October term, 1911, No. 820 abounds
in concrete illustrations of all three. _Cf._ esp. Appellant's Brief of
Facts, p. 34.

[77] Senate (Elkins) Committee, 1905, Digest, App. II, p. 10.

[78] Cincinnati Freight Bureau case, 1910, p. 447.

[79] Chapter VIII, _infra_. _Cf._ also p. 255. Which line has the
advantage?

[80] Albert Fink's detailed description of the numberless alternative
routes by which traffic moved into the South, is perhaps one of the
best instances in print. U. S. Reports Internal Commerce, 1876, App.
pp. 1-16. The Danville, Va., case is an admirable instance. 8 Int. Com.
Rep., 409; reprinted in Railway Problems, chap. XVI.

[81] A notable instance between the Southern and Union Pacific roads
since their combination. Described fully in our Railway Problems, rev.
ed., chap. XXII.

[82] Albert Fink's description in U. S. Reports Internal Commerce,
1876, App. p. 38, is a classic.

[83] _Cf._ p. 621, _infra_. Also the dialogue in 21 I.C.C. Rep.,
356-359; and _Ibid._, 414.

[84] 5 I.C.C. Rep., 299; or 22 _Idem_, 407. Reprinted in Railway
Problems.

[85] 14 I.C.C. Rep., 476.

[86] P. 178, _infra_.

[87] 5 I.C.C. Rep., 264; reprinted in our Railway Problems.

[88] Discussed on p. 232, _infra_.

[89] Chapter IX.

[90] Details in chap. VI.

[91] _Cf._ Carload Minimum in chap. IX and the Texas system on p. 393,
_infra_.

The following cases best illustrate these principles: Burnham, Hanna,
Munger, etc., 14 I.C.C., 299; and 20 _Idem_, 141; later in 218 U.
S. Rep., 88. (P. 442, _infra_.) Greater Des Moines Committee, 14
_Idem_, 294. Indianapolis, Kansas City and Fort Dodge, 16 _Idem_, 57,
195, and 572. Warnock, 21 _Idem_, 546 and 23 _Idem_, 195. St. Louis
Business Men's League, 9 _Idem_, 318. And the Wichita cases in chap.
VII, p. 232, _infra_.

[92] Pp. 248, 392, and 588. Both cases are reprinted in our Railway
Problems.

[93] Pp. 125, 241, 398. Also in Railway Problems.

[94] I.C.C. Rep., No. 861; decided Aug. 23, 1906.

[95] Chapters VII and XI.

[96] Read testimony on p. 278, _infra_.

[97] P. 325, _infra_.

[98] Described in chap. X.

[99] Procedure is described at p. 282, _infra_.

[100] Admirably described in _Annals Amer. Acad. Pol. Science_, April
11, 1908; reprinted in our Railway Problems, rev. ed., Chap. XX.

[101] Similarly in the South, p. 246; and also Texas rates on p. 393.

[102] 5 I.C.C. Rep., 264; reprinted in Railway Problems, chap. VIII.

[103] Theoretical explanation of the flat rate is offered in Chapters I
and X.

[104] Best described in McPherson, Railroad Freight Rates, 1909,
pp. 67-70. The bitter opposition by New England senators in 1910 to
amendment of the long and short haul clause is thus explained.

[105] 7 I.C.C. Rep., 92.

[106] P. 610, _infra_.

[107] 23 I.C.C. Rep., 151 and 657. Also _ibid._, 404.

[108] _Vide_ chapter on Localization of Industry in the Twelfth Census
of Manufactures, I, pp. 190-214.

[109] Int. Com. Rep., 214; reprinted in Railway Problems. A typical
later one is 15 I.C.C. Rep., 351 and Opin. 817, 1909, p. 363. Also Ann.
Rep., I.C.C., 1901 and 1902. Hammond, Railway Rate Theories, etc.,
1911, p. 21; also, p. 160.

[110] _Cf._ p. 31, _supra_.

[111] I.C.C. Rep., No. 917; decided June 24, 1907. Later ones are in 10
_Idem_, 35 and 16 _Idem_, 73.

[112] Older cases in Hammond Railway Rate Theories, etc., 1911, p. 45;
such as 10 I.C.C. Rep., 428, etc. Later are 11 _Idem_, 296; 21 _Idem_,
491; 22 _Idem_, 77 and 160; and 23 _Idem_, 656.

[113] The best accounts are in connection with the history of private
car abuses. _Cf._ references on p. 192, _infra_.

[114] U. S. Supreme Court decision in the Chicago Live Stock Exchange
case in 1908; 209 U. S. 108.

[115] 22 I.C.C. Rep., 160; 22 _Idem_, 656.

[116] 14 I.C.C. Rep., 1-74.

[117] _Cf._ Hammond, Railway Rate Theories, etc., 1911, pp. 14-17,
mainly with reference to classification, however.

[118] Testimony, vol. II, p. 1676. 11 I.C.C. Rep., pp. 212 and 220.



CHAPTER V

RATE MAKING IN PRACTICE (_Continued_)

    Effect of changing conditions, 147.--Lumber and
        paper rates, 148.-- Equalizing industrial
        conditions, 148.--Protecting shippers, 149.--
        Pacific Coast lumber rates, 150.--Elasticity and
        quick adaptation, 152.--Rigidity and delicacy
        of adjustment, 153.--Transcontinental rate
        system, 154.--Excessive elasticity of rates, 155.--More
        stability desirable, 159.--Natural v. artificial territory
        and rates, 159.-- Economic waste, 159.--Inelastic
        conditions, 161.--Effect upon concentration of
        population, 162.--Competition in transportation and trade
        contrasted, 163.--No abandonment of field, 165.

    Cost _v._ value of service, 166.--Relative merits
        of each, 167.-- Charging what the traffic will
        bear, 169.--Unduly high and low rates, 171.--Dynamic
        force in value of service, 177.--Cost of service in
        classification, 179.--Wisconsin paper case, 181.--Cost
        and value of service equally important, checking one
        another, 184.


Not only must rates of all sorts be delicately adjusted to suit the
immediate exigencies of trade; they must be constantly modified
in order to keep pace with its ever changing conditions. This is
peculiarly true of a rapidly growing country like the United States.
An admirable instance is afforded by the complaint of the Lincoln
Commercial Club before the Interstate Commerce Commission.[119]
Lincoln, Nebraska, lies about fifty-five miles southwest of Omaha.
Originally all its supplies came from the East, as both cities were
for a time outposts of civilization. The coal supply came from Iowa
and Illinois, and the salt from Michigan. On these and most other
commodities the rates to Lincoln were made up of a through rate from
the East to the Missouri river, plus the local rate on to destination.
The city of Lincoln thus paid considerably more than Omaha for all of
its supplies. Gradually conditions have changed; until in 1907 it
appeared that over half the soft coal consumed in Lincoln was brought
from Kansas and Missouri; four-fifths of the lumber from the South and
nearly all the rest from the Pacific coast; glass and salt from the gas
belt and salt beds of Kansas; and a great deal of beet sugar from the
western fields. For a large proportion of these and other supplies,
Lincoln was actually as near or nearer the point of production than
Omaha, and yet the difficulties of effecting an adjustment between
rival carriers had prevented any modification of rates corresponding
to these changes in economic conditions. On every one of these
commodities the rate to Lincoln remained steadily higher than to Omaha,
regardless of the source of supply. Unanimous consent was necessary
for readjustment. So long as any single road refused assent, a general
rate disturbance might be precipitated by any independent action. The
beneficent effect of the exercise of governmental authority, powerful
enough over all interested parties to compel acquiescence, has been
clearly apparent in affording relief.

A similar instance in the state of Wisconsin is afforded by the
compulsory readjustment of the freight rate on wood pulp, lumber and
sawed logs.[120] On investigation it appeared that, despite a very much
lower commercial value for the raw material used in paper manufacture,
the rates on pulp wood were more than double those on logs to be sawed
up for lumber. It appeared, furthermore, that this apparent anomaly was
due not so much to high rates on the pulp wood as to very low rates
on sawed logs. These latter rates for many years had been fixed at a
very low figure because originally the bulk of such logs, cut in the
river bottoms, was floated down stream to mills along the Mississippi
river. Competition with lumber raft rates originally determined the
charges on lumber by rail. The paper industry did not begin until these
conditions of water competition had quite disappeared. Gradually, with
the progress of deforestation, all the timber is now found on the
uplands far from navigable water courses; so that the rates today
are not at all influenced by competitive rates on the lumber rafts
down river. Nevertheless the old tariffs on lumber remained in force
despite the changed conditions, while the new rates on pulp wood were
fixed independently of any rates by water. It was only after careful
investigation that the injustice to the paper manufacturers from the
disparity in charges appeared. Here again it was the rigidity and
interlocked complexity of adjustment which placed it in the power of
one road to block change of any sort.[121] The compulsory exercise
of governmental authority cut the Gordian knot with the result that
substantial justice now obtains.[122]

From the preceding statements it will be observed that carriers have
another important commercial function beside that of equalizing
industrial conditions.[123] They also act in a protective or insurance
capacity to the merchant or manufacturer. The policy of "keeping
everyone in business" implies not only variety but variability of
conditions. Capital is proverbially timid. It will not venture into a
new and uncertain enterprise unless either profits are immediate and
high or, if moderate, likely to endure. In any event some guarantee of
permanence is required. This guarantee the carrier is often able to
offer. It may assume the obligation of protecting its clients; that is,
of saving them harmless against the intrusion or irruption of hurtful
competition. It thus exercises in a certain sense the function of an
insurance company, but with this important difference: that while it
has the strongest interest in protecting its established industries
against ruinous competition from abroad, it may desire to share in
some degree in their development and prosperity by way of reward. In
this latter sense the relation of the carrier to its clients partakes
of a profit-sharing arrangement. One of the broadest issues between
American railways and the public at the present time is precisely this:
whether the carriers are to share in business profits; or merely, in
addition to furnishing transportation, are to collect a fixed fee for
a service in the nature of industrial insurance. That it lies in their
way to furnish such protection under modern economic practice is an
indisputable fact.

This nice question is almost daily pressing for solution at the
hands of the Interstate Commerce Commission. It arises every time an
increase of freight rates occurs. Take, for example, the Pacific coast
lumber cases of 1908. The dissenting opinions of the Commission show
how debatable the proposition is.[124] Up to about 1893 the lumber
interests of the Pacific coast were quite undeveloped and entirely
dependent upon water transportation for reaching markets. At this
time low rates of forty to sixty cents per hundred pounds on forest
products to markets in the Middle West were introduced, partly to
build up the industry and partly to create a back loading for the
preponderantly westbound tonnage of all transcontinental lines. Under
these rates the business has enormously developed until, on the
Northern Pacific road in 1906, the shipments of lumber east bound
amounted to one-third of its entire traffic both ways, and yielded
nearly one-fifth of its freight revenue. So greatly had this traffic
expanded that it aided, if not actually produced, a reversal of the
direction of transcontinental empties. Practically all these roads now
have an excess of tonnage to the east whereas ten years ago much the
larger volume of freight was moving westward. Meantime the lumbermen
under the stimulus of these lower rates, and of the phenomenal rise in
the price of lumber, had been wonderfully prosperous. The price of
logs had risen since 1893 from about $2.50 per 1,000 feet to $13.50
in 1906; partly in consequence of the extraordinary demand consequent
on the Valparaiso and San Francisco earthquakes. The mills had moved
in from the rivers and the coast, and had become absolutely dependent
upon rail transportation for reaching markets. At this stage, and
most unfortunately in November, 1907, just at a time of industrial
panic, the carriers raised their rates by about ten cents per one
hundred pounds. The market price of logs had already dropped from
$13.50 per thousand by approximately one-third. These two causes,
commercial depression and the increased freight rate, brought about a
complete collapse in the industry. And the increased freight rates were
contested before the Interstate Commerce Commission in the hope that,
as in the southern field the rate increases from Georgia points had
been annulled,[125] these might also be found unreasonable. The broad
question concerns the obligation of carriers, once having brought about
an investment of capital in the industry, to continue to give the same
rates as those under which the ventures had been undertaken, due regard
being had, of course, to such changes in costs of service as might have
ensued. The lumbermen demand that all the increment of profit due to
prosperous developments shall remain unto them; in other words, that
the carriers' share of the increased values shall remain fixed. On the
other hand, the railways defend their increases, partly upon the ground
of increasing expenses of operation, and partly upon the broader ground
that the freight rate being proportioned to the price of the product,
should rise in harmony with it. Upon this question the Commission was
divided, the majority holding in favor of annulling the increase,
while the chairman and one other member decided that the increase was
justifiable.[126]

Elasticity and quick adaptation to the exigencies of business are
peculiarities of American railway operation. Our railway managers
have always been most progressive in seeking, in and out of season,
to develop new territory and build up traffic. The strongest contrast
between Europe and the United States lies in this fact. European
railways more often take business as they find it. Our railways
_make_ it. Much of this business is made possible only by special
rates adapted to the case in hand. These need not be secret or
discriminating, as has already been observed. For although offered with
reference to particular cases, they may be open to all comers. The
economic justification lies in the fact that the railway can afford
to make a low rate, leaving a bare margin of profit above the _extra_
cost of adding this traffic to that which is already in motion. Such
rates cannot exceed a definite figure based upon what the traffic will
bear. A higher rate than this would kill the business. Something is
contributed toward fixed charges by the new traffic, so far as the
railway is concerned; and at the same time the shipper on his part
is enabled to enlarge his operations. Yet such a scale of rates if
applied to the whole traffic of the railway might be ruinous in the
extreme. The domestic shipper of wheat may conceivably be helped,
rather than injured, by a special rate on grain for Liverpool without
which the railway would lose the business entirely. To transport
California fruit for a mere fraction of the rate per ton mile which
is laid upon other traffic may actually enable those other goods to
be carried more cheaply than before. Of course, if the other traffic
be directly competitive, as for instance in this case, oranges from
Florida, that is an entirely different matter. Railway representatives
rightfully insist upon these special rates to develop new business as
a boon to the commercial world. They contrast them with the hard and
fast schedules of European railways. They allege that such elasticity
loosens the joints of competition, "keeps everyone in business,"
equalizes prices over large areas, and is in fact the life of trade.
One of the stock objections to railway regulation is that it may
lessen this elasticity, "substitute mile posts for brains," and produce
stagnation in place of activity.

Paradoxical as it may seem, a certain rigidity of rate schedules is a
natural consequence of the very delicacy with which individual rates
are adjusted to meet the demands of trade. Each road is jealously
and aggressively alert to protect its own constituency regardless
of the rights of others. No single traffic manager is free to grant
reductions of rates, even when considered to be just, by reason of
the opposition of competing lines. The consent of every one of these
interests is necessary in order to insure stability, and the penalty
for acting independently may be a rate war, disastrously affecting
relations with connecting lines. Thus, for example, in the South the
Southern Railway for some time was willing to concede, as a measure
of justice, a reduction of rates on cotton from Mississippi river
points to the mills in North and South Carolina.[127] The growth of
the textile industry had resulted in a demand for cotton far exceeding
the production of the Carolinas. At the same time the increasing
attention devoted to manufacturing of a higher grade had forced the
manufacturers to draw upon the long-staple supplies of the Mississippi
bottom lands. The Piedmont cotton was too short in fibre for the finer
sort of goods. The Carolina mills were, however, compelled to pay a
higher rate upon cotton from such points as Memphis than was paid for
the long haul up to New England. Thus, for instance, as late as 1900,
rates were fifty-nine cents to South Carolina, while they were only
fifty-five and one-half cents per hundred pounds from the same points
to New England mills. This was obviously unjust. But the Southern
Railway alone, interested in the welfare of its Carolina clients, was
powerless to act without the consent of its competitors operating
from Memphis west of the Alleghanies. These latter lines, having no
interest in the southern mills and a unity of interest in the long haul
traversed to New England, sought to prevent an equalization of the
differences. Controlling rates also on cotton for export to various
seaports, they were for a long time able to prevent a change. On the
other hand, in the same territory the railways operating south from
Cincinnati and Louisville desired to reduce rates on manufactured
products from the Central West.[128] These were the very lines which
in the former instance prevented the reduction of cotton rates on the
Southern Railway to Carolina points, by threats to meet such reductions
by cutting their own rates on cotton going north through the Ohio
gateways. Yet a reduction of their rates on manufactures for building
up western trade threatened the business of the Southern Railway, which
had been mainly interested in the traffic from Atlanta seaboard points.
It may readily be seen that this situation, extending to practically
every important point, "jacked up" all these rates, not because of
their inherent reasonableness and not even because the railways
independently acknowledged them to be just, but simply and solely
because any disturbance of this house of cards might lead to a general
downfall of the whole system.

Another interesting example of the difficulty of bringing about a
change in rate adjustment is afforded in the transcontinental field.
For some years a general agreement seems to have been adopted as a
sort of a compromise between the various conflicting interests. Under
present conditions Chicago and all points east of the Mississippi
from Maine to Florida enjoy precisely the same rate to the Pacific
coast.[129] Chicago has at various times contended before the
Interstate Commerce Commission for graded rates which should recognize,
for instance, that being 1,200 miles nearer San Francisco than Boston
on the basis of distance, it should have proportionately lower freight
rates. Apparently some of the transcontinental roads, such as the Great
Northern, have been willing to make this concession. They could not,
however, take any action without first obtaining the consent of every
railway and steamship company with which they compete. Inasmuch as
almost every railway in the country participates in transcontinental
business, an agreement was practically impossible. Entirely aside from
the merits of this particular intricate question, it must be borne in
mind that there is no such thing as independence of action on behalf of
any single carrier. It becomes exceedingly easy for one road to play a
dog-in-the-manger part. The shipper may be subjected to an extortionate
policy, not dictated by the road over which he ships, as a matter of
fact, but by roads operating perhaps a thousand or more miles away.

Praiseworthy as is the elasticity of railway rates in the United
States, there is, nevertheless, much to be said in support of the
contention that at times this has been carried to an extreme. Stability
and certainty have been treated as of secondary importance. Particular
shippers have been aided, but the general interests of trade have
suffered some injurious consequences. It is not entirely clear whether
the advantage gained from elasticity has at all times been worth the
cost. Certain of the disadvantages of instability of rates seem to have
been overlooked.

In the first place railway tariffs have in the past undoubtedly
been too voluminous and complex. The number of these filed with the
Interstate Commerce Commission is extremely large. Eleven railways
alone during the year to November 30, 1904, filed 30,125. The total
schedules of all American railways filed during the year to November
30, 1907, was 220,982. One single carrier had 15,700 tariffs in force
at the same time. The New York Central & Hudson River in December,
1899, had no less than 1,370 special commodity rates in force. There
were endless contradictions and conflicts. Secret rates were hidden in
devious ways in this mass of publications. Special tariffs "expiring
with this shipment"; rates quoted not numerically but by numbered
reference to tariffs of other carriers and applicable by different
routes; agreements to meet rates of any competing carriers, were among
the irregular methods of concealment adopted. Although literally
complying with the law by publicly filing all tariffs, conditions
were often such that not even an expert in rates could discover in
this maze of conflicting evidence what the rate at any time actually
was. The door was opened wide to personal discrimination and abuses
of all kinds.[130] Those conditions are not necessary. They do not
obtain on the best roads in other parts of the world. Nor is such
instability found in respect of some important lines of trade. No
agricultural product fluctuates in price more abruptly or widely than
raw cotton,--from five to seventeen cents a pound. Yet the rates on
that commodity have remained quite undisturbed throughout the southern
states for many years. But the best proof of all that rates have been
unduly numerous, is the great reduction in volume which has taken place
since 1910 under compulsion of law. This feature will be especially
considered in another connection.[131]

The second disadvantage of too great elasticity in freight rates
is that it may, at times, promote rather than lessen that state of
economic unrest inevitable in all business, especially in a new
country. Under a continual disturbance of rates, the merchant is unable
with security to enter into long-time contracts. Rates are sometimes
changed, not to suit the shipper but to serve the railway's interests.
Sometimes traffic may be diverted from its natural channels. The
spirit of initiative and self-reliance on the part of shippers may be
undermined. Persistent titillation of competition may be pleasant for
a time, but its final results may be injurious. Constant appeal to the
traffic manager of his road for aid and comfort may quite naturally
divert the shipper's attention from an aggressive commercial policy
which would render him independent of minor changes in freight rates.
The more responsibility the traffic manager assumes, the more may be
put upon him. And it must always be remembered that each move by one
road to protect a client, will probably be checkmated by the tactics
of rival lines. Economic peace, not warfare, should be encouraged
by the services of common carriers. One of the positive advantages
of governmental regulation of railway rates is that it contributes
to stability. That this view is shared by experienced railway men,
appears from the following testimony of President Mellen of the New
Haven road.[132] "I think that great trouble comes to the business of
this country through the fact of these little breaks in rates. During
November two new railways were opened into the city of Denver. They
sought to make themselves popular by lowering rates, and rates went
down very low. They went down legally, but they went down very low.
Just before the rates went down the merchants of the city had stocked
Denver with goods and the lowering of the rates demoralized their
prices; they lost a large amount of money, and dissatisfaction was
caused from Chicago to Denver. Lowering of rates demoralized business
generally. I think if those roads had known that the rates which they
made had to remain in force thirty days they would have hesitated
before they lowered them. I would increase the time required before
rates could be reduced."

The foregoing consideration suggests still another argument in favor
of stability of freight rates, even at the expense of a certain amount
of flexibility. Special rates which create new business should be
carefully distinguished from special rates which merely wrest business
from other carriers or markets. Any expedient which will make two
blades of grass grow where one grew before; which puts American wheat
into Liverpool in competition with India and Argentina; which cheapens
California fruit on the eastern markets; which offers a wider choice
of building stone for Chicago; which will establish new industries
for the utilization of local raw materials, deserves the greatest
encouragement. Our country has been unprecedentedly developed in
consequence of the energy and progressiveness of its railway managers.
But thousands of other special rates have no such justification, even
where they are public and open to all shippers alike. These are the
expression of railway ambition to build up trade by invading territory
naturally tributary to other railways or traders. A significant feature
of commercial competition is the utilization of distant markets
as available "dumping grounds" for the surplus products left over
from the local or natural market. In the St. Louis Business Men's
League case[133] the Pacific coast jobbers complained that the large
distributing houses in the Middle West thus invaded their territory.
Having met their fixed charges from their own natural territory, they
invaded the remotest districts by cutting prices to the level of actual
production cost per unit of new business. The Florida orange growers
protest against the relatively lower rate on California fruit, which
is carried twice the distance for less money per box. This, it is
urged, enables the western grower, having glutted his natural market
in the Middle West, to "dump" his surplus into the eastern field, to
which alone the Florida orange is restricted. This line of argument
is the same as that which upholds the systems under which lower rates
are given for exported or imported commodities than those on goods for
domestic consumption. It is always alleged that such sales at long
reach actually benefit the consumer or producer near at hand, inasmuch
as they contribute something toward the fixed expenses of the business,
which must be borne in any event. This raises at once the much broader
question as to what constitutes a "natural market" or the "natural
territory" which rightfully belongs to any given economic agent. It
is, however, too extended an issue to be discussed at this time.[134]

Too many special commodity rates, intended to meet the needs of
particular shippers instead of increasing new business, may merely
bring about economic waste through exchange between widely separated
markets or by causing an invasion of fields naturally tributary to
other centres.[135] Whenever a community producing a surplus of a given
commodity supplies itself, nevertheless, with that same commodity from
a distant market, economic loss results. Numerous instances could be
cited where identical products are redistributed after a long carriage
to and from a distant point in the very area of original production.
Dried fruits may be distributed by wholesale grocers at Chicago in the
great fruit-raising regions of the West and South. Cotton goods made
by southern mills may be shipped to New York or Chicago, and then sent
back again for final distribution with the addition of a middleman's
commission and a double freight rate. The Colorado Fuel & Iron Company
seeks special rates in order to sell goods over in Pittsburg territory;
while its great competitor, the United States Steel Corporation, has
an equal ambition for the trade of the Pacific Slope. In another case
it appeared that a sash and blind manufacturer in Detroit was seeking
to extend his market in New England. Manufacturers of the same goods
in Vermont were simultaneously marketing their product in Michigan.
The Detroit producer did not complain of this invasion of his home
territory, but objected to the freight rate from Boston to Detroit,
which, probably because of back loading, was only about one-half the
rate on his own goods from Detroit to the seaboard. Is not this an
economic anomaly? Two producers, presumably of equal efficiency, are
each invading the territory naturally tributary to the other and are
enabled to do so by reason of the railway policy of "keeping everyone
in business." The New England railways are compelled by reason of the
remoteness to their territory to defend this policy. As President
Tuttle, of the Boston & Maine, expresses it, "I should be just as much
interested in the stimulating of Chicago manufacturers in sending
their products into New England to sell as I would be in sending
those from New England into Chicago to sell. It is the business of
the railways centering in Chicago to send the products from Chicago
in every direction. It is our particular business in New England to
send New England products all over the country. The more they scatter
the better it is for the railways. The railway does not discriminate
against shipments because they are east bound or west bound. We are
glad to see the same things come from Chicago into New England that
are manufactured and sent from New England into Chicago." No one
questions for a moment that the widening of the sphere of competition
by transportation agencies is a service of incalculable benefit to
the country. But it should also be borne in mind that superfluous
transportation is economic waste. The industrial combinations in
seeking to effect a strategic location of their factories in order to
divide the field have apparently come to a full recognition of this
fact.

A fourth objection to undue development of special commodity rates is
that they may entail increased burdens upon the local constituency of
each railway. The proportion of such special rates is fifty per cent
greater in America than in the United Kingdom. It is plain that each
shipment which fails to bear its due proportion of fixed charges, even
though contributing something thereto, leaves the weight of interest
and maintenance charges upon the shoulders of the local shipper. To
be sure, those special rates which permanently create new business,
operate otherwise. But in the vast complex, each railway often wrests
from competing carriers only about as much tonnage as it loses. It
invades rival territory, but its own constituency is invaded in
retaliation. Thus there is rolled up an inordinately large proportion
of such special traffic, leaving the regular shipments and the local
trade to bear the brunt of fixed charges. Momentous social consequences
may result. Not only the cost of doing business, but the expense of
living in the smaller places is increased. One of the most dangerous
social tendencies at the present time is the enormous concentration
of population and wealth in great cities. Increased efficiency and
economy in production are much to be desired; but social and political
stability must not be sacrificed thereto. Is it not possible that a
powerful decentralizing influence may be exerted by checking this
indiscriminate and often wasteful long-distance competition, through
greater insistence upon the rights of geographical location?

Finally, an abnormal disregard of distance, which is always possible
in the making of special rates to meet particular cases, may bring
about a certain inelasticity of industrial conditions. This may occur
in either one of two ways. The rise of new industries may be hindered;
or the well-merited relative decline of old ones under a process of
natural selection may be postponed or averted. The difficult problem
of fairly adjusting rates on raw materials to finished products in
order that the growth of new industries may take place, while at the
same time the old established ones shall not be cramped or restricted,
has already been discussed. It is equally plain that at times there
may be danger of perpetuating an industry in a district, regardless of
the physical disabilities under which it is conducted. One cannot for
a moment doubt the advantages of a protective policy on the part of
railways; safe-guarding industry against violent dislocating shocks.
An inevitable transition to new and perhaps better conditions may
perhaps be rendered easier to bear. To New England, constantly exposed
to the competition of new industries rising in the West, this policy
has been of inestimable value. On the other hand, it is incontestable
that in the long run the whole country will fare best when each
industry is prosecuted in the most favored location, conditions of
marketing as well as of mere production being always considered. If
Pittsburg is the natural centre for iron and steel production, it may
not be an unmixed advantage to the country at large, however great its
value to New England, to have the carriers perpetuate the barbed wire
manufacturers at Worcester. If California can raise a finer or more
marketable variety of orange, and at a lower cost, than Florida, it
would be a backward step to counteract the natural advantage of the
western field by compelling the southern railways to reduce their rates
to an amount equal to the disability under which the Florida grower
works. The principle laid down by the so-called "Bogue differentials"
in the lumber trade[136] bears upon this point. In order to equalize
conditions between a large number of lumbering centres sending their
products to a common market, certain differentials between them
were allowed under arbitration, "to enable each line to place its
fair proportion of lumber in the territory." Did this mean that the
disability of any place in manufacturing cost, should be compensated by
a corresponding reduction in the ensuing transportation cost? This was
the view of some of the carriers who were zealous to keep the market
open to all on equal terms. Yet it is evident that, carried beyond a
certain point, such a policy would not only nullify all advantages of
geographical location, but it would also reverse the process of natural
selection and of survival of the fittest, upon which all industrial
progress must ultimately depend. Each particular case, however, must be
decided on its merits. Our purpose is not to pass judgment on any one,
but merely to call attention to the possible effect of such practices
upon the process of industrial development.

Centralization, or concentration of population, industry and wealth
is characteristic of all progressive peoples at the present time.
Great economic advantages, through division of labor and cheapened
production, have resulted; but, on the other hand, manifold evils
have followed in its train. Sometimes it appears as if American
railway practices, in granting commodity and flat long-distance
rates so freely, operated in some ways to retard this tendency. But
the influence is not all in that direction. Many staple industries,
utilizing the raw material at their doors, might supply the needs of
their several local constituencies, were it not that their rise is
prevented by long-distance rates from remote but larger centres of
production. Denver, in striving to establish paper mills to utilize its
own Colorado wood pulp, is threatened by the low rates from Wisconsin
centres. Each locality, ambitious to become self-supporting, is
hindered by the persistency of competition from far away cities. This
is particularly true of distributive business. The overweening ambition
of the great cities to monopolize the jobbing trade, regardless of
distance, has already been discussed. And it follows, of course, that
the larger the city the more forcibly may it press its demands upon the
carriers for low rates to the most remote hamlets. The files of the
Interstate Commerce Commission are stocked with examples of this kind.
The plea of the smaller cities and the agricultural states--Iowa, for
example--for a right to share in the jobbing naturally tributary to
them by reason of their location, formed no inconsiderable element in
the recent popular demand for legislation by the Federal government.

The marked difference between competition in transportation and trade
has long been recognized in economic writing, but has not as yet been
accorded due weight in law. The most essential difference arises from
the fact, already fully set forth, that a large proportion of railway
expenditures are entirely independent of the amount of business done.
This involves as a consequence, the exemption of carriers from the
fundamental law of evolution. Survival of the fittest does not obtain
as a rule in railway competition. The poorest equipped, the most
circuitous and most nearly insolvent road is often able to dictate
terms to the standard and most direct trunk lines. This has been
exemplified time and again in the history of rate wars the world
over.[137] The bankrupt road having repudiated its fixed charges has
nothing to lose by carrying business at any figure which will pay
the mere cost of haulage. The indirect line having no business at
the outset has nothing to lose, and everything to gain. The Canadian
Pacific, for example, was perhaps originally built without any
expectation of being able to participate in San Francisco business; and
yet, like the Grand Trunk, it has always been an active factor in the
determination of transcontinental tariffs.

The fact is that cost of production, while in trade fixing a point
below which people may refuse to produce or compete, in transportation
may merely mark the point at which it becomes more wasteful to stop
producing than to go on producing at a loss. Hadley's classic statement
is so admirable that it cannot be improved upon. "Let us take an
instance from railway business, here made artificially simple for the
sake of clearness, but in its complicated forms occurring every day. A
railway connects two places not far apart, and carries from one to the
other (say) 100,000 tons of freight a month at twenty-five cents a ton.
Of the $25,000 thus earned, $10,000 is paid out for the actual expenses
of running the trains and loading or unloading the cars; $5000 for
repairs and general expenses; the remaining $10,000 pays the interest
on the cost of construction. Only the first of these items varies in
proportion to the amount of business done; the interest is a fixed
charge, and the repairs have to be made with almost equal rapidity,
whether the material wears out, rusts out, or washes out. Now suppose
a parallel road is built, and in order to secure some of this business
offers to take it at twenty cents a ton. The old road must meet the
reduction in order not to lose its business, even though the new figure
does not leave it a fair profit on its investment; better a moderate
profit than none at all. The new road reduces to fifteen cents; so
does the old road. A fifteen cent rate will not pay interest unless
there are new business conditions developed by it; but it will pay for
repairs, which otherwise would be a dead loss. The new road makes a
still further reduction to eleven cents. This will do little toward
paying repairs, but that little is better than nothing. If you take at
eleven cents freight that cost you twenty-five cents to handle, you
lose fourteen cents on every ton you carry. If you refuse to take it at
that rate, you lose fifteen cents on every ton you do not carry. For
your charges for interest and repairs run on, while the other road gets
the business."[138]

Another peculiarity of railway competition, distinguishing it from
competition in trade, is that there is no such thing as abandonment of
the field. This is tersely expressed by Morawetz in his Corporation
Law. "It should be observed that competition among railway companies
has not the same safeguard as competition in trade. Persons will
ordinarily do business only when they see a fair chance of profit, and
if press of competition renders a particular trade unprofitable, those
engaged in that trade will suspend or reduce their operations, and
apply their capital or labor to other uses until a reasonable margin
of profit is reached. But the capital invested in the construction of
a railway cannot be withdrawn when competition renders the operation
of the road unprofitable. A railway is of no use except for railway
purposes, and if the operation of the road were stopped, the capital
invested in its construction would be wholly lost. Hence it is for
the interest of the railway company to operate its road, though
the earnings are barely sufficient to pay the operating expenses.
The ownership of the road may pass from the shareholders to the
bond-holders, and be of no profit to the latter; but the struggle
for traffic will continue so long as the means of paying operating
expenses can be raised. Unrestricted competition will thus render
the competitive traffic wholly unremunerative, and will cause the
ultimate bankruptcy of the companies unless the operation of their
traffic which is not the subject of competition can be made to bear
the entire burden of the interest and fixed charges." So profoundly
modified in short are the conditions of railway competition by contrast
with those in industry, that it is clear beyond a shadow of doubt
that a railway is essentially a monopoly. This requires no proof so
far as local business, in distinction from through or competitive
traffic, is concerned. It is equally true in respect to all traffic of
sufficient importance to bring about pooling agreements or a division
of the business, in order to forfend bankruptcy and consolidation.
To attempt to perpetuate competition between railways by legislation
is thus defeating its own end. The prohibition of pooling agreements
which refuses to recognize the naturally monopolistic character of the
business, can have but one result, namely, to compel consolidation as a
measure of self-preservation. Such legislation defeats itself, bringing
about the very result it was intended to prevent.

       *       *       *       *       *

Two general theories governing the rates chargeable by railways are
entertained, known respectively as cost of service and value of
service. According to the first, the proper rate for transportation
should be based upon the cost for carriage of the persons or goods,
with an allowance for a reasonable profit over and above the expenses
of operation involved. This line of argument is commonly advanced by
representatives of shippers and the public, who reason by analogy from
other lines of business. In several European countries when railways
were first built, and afterward, especially in Germany in 1867,
attempts were made to apply this principle widely in the construction
of tariffs. Practical railway men, on the other hand, usually adhere
to the second principle of value of service. This argument maintains
that, while theoretically cost of service should determine minimum
rates, owing to the nature of commercial competition, as a matter
of fact rates must be based upon the principle of charging what the
traffic will bear. This is accomplished by proportioning the rate to
the commercial value of the service. Practically the rate is found
by charging as much as the traffic will stand without evidence of
discouragement. Thus if the price per bushel of wheat in New York
is twenty-five cents higher than in Chicago, it would obviously be
absurd to charge a rate which would absorb all of that increment of
place value due to transportation. Enough margin must be left to the
shipper who buys wheat in Chicago and sells it in New York, to permit a
reasonable profit on the transaction, after payment of the freight rate.

These two principles of cost of service and value of service are
directly opposed in one regard; inasmuch as the cost of service theory
harks directly back to railway expenditure; while the value of service
principle contemplates primarily the effect upon the railway's income
account. Any charge is justified according to the latter view, which
is not detrimental to the shipper as indicated by a positive reduction
in the volume of business offered. No charge, on the other hand, may
be deemed reasonable according to the cost of service principle,
which affords more than a fair profit upon the business, regardless
of its effect upon the shipper. As a matter of fact neither of these
views is entirely sound by itself. Both have large elements of truth
in them. Each qualifies the other. In the first place, it is to be
noted that between them they fix the upper and lower limits of all
possible charges. Less than the cost of service cannot be charged;
else would a confiscatory rate result. This was the plea set up by
the railways in the now celebrated Texas Cattle Raisers' Association
case against the cancellation by the Interstate Commerce Commission
of an extra charge of $1 per car for switching charges at Chicago. At
the other extreme, more than the traffic will bear cannot be charged
without a disproportionate decline in volume of tonnage. This would
be bad business policy, as it could at once entail loss of revenue.
The railway could not submit to the former alternative; it would not
conceivably resort to the latter.

Attempts have been made by various authors to account for the phenomena
of rate making on other grounds. The German author, Sax, has sought to
trace an analogy between the imposition of taxes and railway charges,
alleging that both should be proportioned to what the shipper "can
afford to pay," from an ethical rather than an economic point of view.
Acworth interprets the phrase "charging what the traffic will bear" to
mean something analogous to this. His allegation is that rate schedules
are built up upon the principle of "equality of sacrifice," otherwise
characterized as "tempering the wind to the shorn lamb." High class
traffic contributes liberally of its abundance of value, while third
class passengers and low grade tonnage are let off lightly on the
ground of their poverty. Taussig in his memorable contribution to the
subject[139] has, however, shown how untenable this theory of "equality
of sacrifice" is. Not ethical but purely economic considerations are
applicable in such circumstances except, of course, in so far as common
carriers, enjoying privileges by grant of the state, may be considered
as imposing taxes for the performance of a quasi-public duty. This
latter test of a reasonable rate has underlaid a long line of Supreme
Court decisions since the Granger case.[140] Nevertheless, as so
frequently happens, legal and economic bases of judgment seem to be
lacking in harmony.

There can be no question that for an indispensable public service
like transportation, conducted under monopolistic conditions, the
ideal system of charges would be to ascertain the cost of each service
rendered and to allow a reasonable margin of profit over and above this
amount. To the application of this principle alone, however, there are
several insuperable objections both theoretical and practical. Such
cost is practically indeterminate, being joint for all services in
large part, as we have seen: it is highly variable, being perhaps never
twice the same, as circumstances change from time to time; cost is
unknown until volume is ascertained, and volume is ever fluctuating;
the cost of service, obviously, could never be ascertained until after
the service had been rendered, while, of course, the schedule of rates
must be known in advance, in order that the shipper may calculate his
probable profits; and finally the principle of increasing returns,
flowing from the dependence of cost upon volume of traffic, imposes
such an incentive for development of new business, which in turn
depends for its volume upon the rate charged, that cost of service is
subordinated at once to other considerations in practice.

Of these objections to rate making upon the principle of cost of
service alone, it would indeed appear as if the first should be
conclusive. If the cost is simply indeterminable, why bother about any
further refutation of the principle at all? But the persistency of the
idea that somehow railway operations are analogous to the business of
an ordinary merchant; and that cost and profits are ascertainable;
renders it necessary to pile proof upon proof of the limitations upon
its applicability to real conditions in service.

Not only is the mere cost of service indeterminable; if it could
be ascertained, it would not establish the chargeable rate in many
instances. The freight service of a railway comprises the carriage of
all kinds of goods simultaneously, from the most valuable high-priced
commodities, such as silks and satins, down to lumber, coal, cement,
and even sand.[141] To compel each of these classes of goods to bear
its proportionate share of the cost of carriage, would at once preclude
the possibility of transporting low-priced goods at all. One dollar a
hundred pounds may not be too much to add to the price of boots and
shoes for transportation from Boston to Chicago.

It would still form only a small part of the total cost of producing
and marketing them. But to add anything like that sum to the cost of
one hundred pounds of salt or cement would put an end to the business
at once. Only about so much can in practice be added to the price of
any given commodity for freight without widely limiting the area of its
available market. Thus raw cotton seems to be able to bear an addition
of about fifty cents per hundred pounds for freight to its total cost.
Experience demonstrates that anything more than this one-half cent per
pound charged on cotton, entails more loss than gain. In the case of
fancy groceries or fine furniture, there may be no considerable demand
in any event above a certain ascertainable level of prices. For boots
and shoes or cut building stone it may be that competition from some
other centre of production nearby, precludes any great addition to
the price for freight. The business simply will not bear more than a
certain proportion of charge. Not only would the rigid application of
the cost of service principle hinder all transportation of low-grade
traffic; it would also prevent any development of long distance
business. It is indubitable that sole reliance upon cost of service as
a basis for rate making is theoretically unsound, and impossible of
practical application.[142]

Cost of service, while unsound as a sole reliance, nevertheless affords
an important check upon the value of service principle. Without it
there is always grave danger that traffic managers, seeking to enlarge
their revenues, may push rates unreasonably high. At first sight it
would appear as if this could not occur, inasmuch as an inordinately
high rate would immediately reduce the volume of business offered.
It is constantly alleged by railway men that this must of necessity
occur. And it would indeed follow, were it not that the incidence of
the rate is rarely upon the actual shipper. He merely pays it, and at
once shifts it to the consumer. For low-grade or staple goods like
cement or kerosene, where transportation charges form a large part of
the total cost of production, it is conceivable that higher freight
rates might so far increase the price as to check consumption. Five
cents a hundredweight higher freight means $1.25 per 1,000 ft. added
to the price of soft lumber, $2 to hard lumber; three cents per bushel
added to the price of wheat, and $1 to the ton of pig iron or coal.
Such substantial additions might readily reduce the demand. Yet even
this would not be true of necessities of life like anthracite coal
or sugar, on which latter the freight rate amounts to about one-half
cent per pound. Is five cents a barrel added to the price of flour
likely to decrease the consumption of that staple commodity? Yet the
enhancement of railway revenues would indeed be enormous from such an
increase of freight rates. For these necessities of life, an increased
freight rate might become an actual charge upon the people, without
reducing their consumption, like a tax upon salt. Only upon goods the
use of which might be freely lessened, would higher freight rates
be reflected in a corresponding decline in the volume of business.
Moreover, with all high grade traffic, the value of service principle
fails utterly by itself alone to prescribe the upper level of a
reasonable charge. Competent testimony is ample upon this point. Thus
from the commissioner of the Trunk Line Association;[143] "The tonnage
of the higher class articles is an extremely difficult matter for
transportation companies to increase or decrease.... In that class of
articles the carrier can do but little to increase the transportation."
And the reason in part lies in the almost immediate diffusion of the
burden in the processes of distribution. That no complaints are made--a
defence often brought forward for higher rates--proves by itself the
uncertain incidence of the burden imposed.

That the principle of charging what the traffic will bear affords
no protection to the consumer against exorbitant rates on many
commodities, follows also from the relative insignificance of
transportation charges as compared with the value of the goods. This,
in fact, is naively conceded by railway managers themselves; when,
as in the case of the widespread freight rate advances of 1908-1909,
publicity agents flooded the country with calculations as to the
infinitesimal fraction which would be added to the price of commodities
by a ten per cent, rise in rates.[144] The rate from Grand Rapids to
Chicago on an ordinary dining room set of furniture, being $1.60, a
ten per cent. increase would add only sixteen cents to the cost. A
harvester transported one hundred miles would be enhanced seventeen
and a half cents in price; a kitchen stove carried from Detroit to
the Mississippi would only cost twenty-five cents more; and the price
of a Michigan refrigerator sold in New York, would be only seven
and one-half cents higher; were freight rates to be increased by
ten per cent, in each instance. On wearing apparel the proportions
were represented as even more striking. An ordinary suit of clothes
transported three hundred miles, under similarly enhanced rates, would,
it was alleged, cost only one-third of a cent more. For all their
apparel, made in New England, consisting of everything from hats to
shoes, each wearer in the Middle West would be affected by a ten per
cent. rise of rates by less than one cent apiece. True enough all this;
and a striking testimonial to the effectiveness of the railway service
of the country! But at the same time, if a ten per cent. increase of
rates is inappreciable to the consumer, why not increase them by twenty
per cent.[145]

And what becomes of the argument that charging rates according to
what the traffic will bear, is an ample safeguard against extortion?
Many of these small changes in price are diffused in the friction of
retail trade;[146] some of them are unfortunately magnified to the
consumer, especially under conditions of monopoly. When freight rates
on beef go up ten cents per hundredweight, the consumers' price is more
likely than not to rise by ten times that amount. But even assuming
the final cost to follow the range of transportation charges closely,
is it not evident that, so small relatively are many freight charges
by comparison with other costs of production, that consumption is
not proportionately affected by their movement one way or the other?
And yet the entire argument that the value of service principle is a
self-governing engine against unreasonable rates, is based upon this
assumption. Surely the increased income to the carriers when rates are
raised must come from someone. Because it is not felt, is no reason for
denying its existence as a tax. But the very fact that it is not felt,
undermines the argument that a safeguard against extortion obtains. The
theorem that value of service in itself affords a reliable basis for
rate making, pre-supposes that freight rates and prices move in unison;
a supposition which a moment's consideration shows to be untenable
in fact.[147] Such cases must be finally settled by some reference,
indefinite though it be, to the cost of conducting that particular
service; or rather, as Lorenz puts it, to the extra cost incident to
that service. This extra cost may oftentimes be segregated, where the
total cost could not be ascertained.[148]

That the problem is, however, a most difficult one is evidenced by the
periodic controversies over railway mail pay.[149]

Of course in order that any change of rates should be reflected in
prices, all carriers must of necessity agree upon the matter. The price
is made by the least expensive source of supply. So that any carrier
refusing to raise rates, might aid in the continuance of an already
established price. Under conditions of transportation prevalent in
the United States twenty years ago, the likelihood of an increased
freight rate becoming a tax upon the community, was lessened by the
probability that either by means of secret rebates, or by special
and perhaps open commodity rates, some roads might choose to protect
their clients against enhancement of prices. Markets were local--not
reached by great systems operating from remote sources of supply.
The policy of the northern transcontinental lines in making lumber
rates from Oregon to the Middle West, might be quite independent of
any policy in force on the southern hard pine carrying roads. But
under present day conditions, the entire area of the United States is
one great market. Hence, with rebates eliminated and with practical
monopoly established through actual consolidation, control or harmony
of policy, the carriers have the consumers much more completely at
their mercy. Only two safeguards for the public interest remain. One is
government regulation, or at all events supervision, of charges. The
other is "enlightened self-interest"--which in transportation matters
means a full appreciation of the possibilities and limitations in the
application of the value of service principle to the determination of
rates.

Considerations of cost of service afford protection, not only against
unreasonably high rates, but also against unduly low charges. The evil
in such cases is not only that the carriers operate at a loss, but that
inequality and discrimination are inevitable concomitants of too low
rates. No railway conceivably, of course, will charge unremunerative
rates for a long time. But it sometimes happens that managements may be
led to the adoption of policies of temporary expediency, not compatible
with the long-time welfare of stockholders. During the presidency of
Charles Francis Adams on the Northern Pacific in 1890 an unaccountable
and unnatural diversion of traffic from this road to the Atchison,
Topeka & Santa Fe suddenly occurred.[150] A large volume of freight
from the East to Oregon was diverted to the roundabout route _via_
Southern California. On investigation it appeared that the English
banking house of Baring Brothers, having become involved in unfortunate
Argentine speculation, and being obliged to force a market for its
investments in Atchison securities, demanded an immediate showing of
large gross earnings regardless of the net profits. Orders to get
traffic at any price went forth. A market was made for Atchison stock;
although it was powerless to prevent the firm's final bankruptcy.
In such a case the only safeguard against unreasonably depressed
rates by the Atchison road, which, of course, immediately compelled
corresponding reductions by the natural routes to the Northwest, should
have been consideration of the actual cost of moving traffic by so
long and roundabout a route. And yet this consideration was entirely
ignored. Another illustration of the same danger occurred in April,
1903.[151] A gang of western speculators unobtrusively acquired control
of the Louisville & Nashville road, by taking advantage of the issue
by that company of a large amount of new stock. This they did by the
use of borrowed money. They had no intention, even had they been
sufficiently well financed to do so, of permanently controlling the
road as an investment. They bought the stock merely in order to resell
it at a higher figure. They threatened the railway world with a general
disturbance of rate conditions throughout the South. Their plan was
to cut rates and steal traffic from other roads in order to make a
large show of gross earnings; and to unload their stock holdings on
the market thus made, before the public learned the truth. This was
prevented only by repurchase of their stock at very high prices. In
such a case, what guidance would the principle of charging what the
traffic would bear, afford? Cost of service must be invoked in order to
determine the reasonableness of the low rates in force.

In any industry where rates are made under conditions of monopoly
rather than of free competition, it is imperative that cost of service
be constantly held in view. Under conditions of free competition it
is bound to obtrude itself automatically; but under monopoly it must
oftentimes be forcibly invoked. The shipper whose manufacturing plant
has once been located in a certain place is no longer free to accept or
reject a certain rate. He can afford neither to move nor to abandon his
works. In order to continue in business he must meet the prices made
by competitors. This price may be made elsewhere under more favored
circumstances. To a manufacturer an increase of freight rates instead
of curtailing output, may lead to attempts to lessen the costs of
production per unit by an enlarged output sold at cut prices. Under
such conditions an enhanced freight rate is a positive deduction from
profits without any gain to the consumer. It is impossible to trace any
safeguard against extortion in the operations of a value of service
law under such circumstances. An instance in point is afforded by a
complaint of the Detroit Chemical works in 1908.[152] This company
imported iron pyrites through Baltimore from Spain; that being the
source of the bulk of the material used here in the manufacture of
sulphuric acid. The Detroit Company sold its product throughout the
West in competition with companies at St. Louis, Chicago and Buffalo.
The companies at Chicago and St. Louis enjoyed low import rates by way
of the Gulf ports. The Buffalo concern used to be favored by a low rate
said to be due to canal competition on shipments from New York. Since
1903, however, the rate on pyrites from Baltimore to Detroit had been
steadily increasing, from $1.56 to $2.72 per long ton. Even this latter
rate by itself does not seem absolutely excessive, yielding a revenue
of less than four mills per ton mile. But here again, it was not the
absolute but the relative rate upon which the continued welfare of the
industrial concern depended. The question had to be decided, not on the
basis of cost, but from the point of view of the value of the service
to the user. The carriers after this petition was filed voluntarily
reduced the rate fifty-one cents per ton in January, 1908. The relative
rate as compared with that to other competitive points was thus more
equitably adjusted. The Interstate Commerce Commission on a review of
the evidence held that this increase to $2.72 was unreasonable and
unjust so long as it had been in effect; and awarded reparation to the
amount of fifty-one cents per ton on all shipments made during its
continuance.

It is indisputable that the great dynamic force in railway operation
inheres in the value of service idea. The traffic manager who is always
considering how much it will cost to handle business, will seldom
adventure into new territory. The United States, as a rapidly growing
country, is consequently the field in which charging what the traffic
will bear, has been most ardently upheld as the only practicable basis
for rate making. A few detailed illustrations will serve to show
the results of its application in practice. Not infrequently does
it happen that rates are different over the same line for shipments
between two given points in opposite directions. Where this is due
to a preponderance of traffic in one direction, and a consequent
movement of "empties" which invite a back loading at very low rates,
the difference of charges according to direction may actually be due to
differences in the cost of carriage.[153] An empty train, which must
be returned from New York to Chicago for another loading of grain,
or to Georgia or Oregon for shipments of lumber, if loaded with
merchandise, can be moved with no allowance for dead weight of cars
or locomotives; inasmuch as the train must move in any event, whether
loaded or empty. But even where this defence of difference in the cost
of service fails, the practice may be entirely proper from every point
of view. By increasing the total tonnage a special rate may ultimately
contribute to lower charges all along the line. Raisin culture began in
California in 1876. Prior to that time the Spanish product had supplied
the American market. The first thing to do was to find a market for
the California raisins in the East. They would not bear the freight
rate which had previously been charged for Spanish raisins moving over
the transcontinental lines westward. A very low rate was all that the
new traffic would bear. During the year 1876 therefore 70,000 lbs. of
California raisins were carried east at one and three-fourths cents
per 100 lbs., while simultaneously 1,000,000 lbs. of Spanish raisins
were carried west over the same lines at a rate of three cents. No
such difference in the cost of service in opposite directions existed,
although a preponderance of empties moving eastward undoubtedly
cheapened the service from California. The aim of the commodity rate
was to upbuild a new industry. How far this succeeded appears from the
fact that in 1891, no Spanish raisins were carried west at all; while
the eastbound shipments amounted to 37,600,000 lbs.[154] The preceding
illustration leads us then to this further conclusion. The cost of
service principle might most conceivably be applied to a railway in
a purely static state. But, dynamically considered, as involving the
growth and development of business, it fails utterly by itself to meet
the necessities of the case.

At times it is inevitable that cost of service and value of service
considerations come flatly into opposition. Usually, as in the
California raisin case or in the grant of low rates on Oregon lumber
east bound about 1893, they reinforce one another; that is to say,
the lower rate given to build up business obtains on a service given
at lower cost. But it sometimes happens that shipments of the same
commodities over a line in opposite directions may occur and that the
lower rate applies to the (presumably) more costly service. In 1906 a
manufacturer in Menasha, Wis., complained to the Interstate Commerce
Commission[155] that his rates on woodenware to the Pacific slope
were ten cents per 100 lbs. higher than were rates on the same goods
between the same points east bound, _notwithstanding_ the fact that the
empty car mileage west bound was then three times as great as in the
contrary direction. The movement of empties west bound would certainly
seem to justify as low if not lower rates on the basis of comparative
cost of operation, supposing that there was coincidence in time.
Only one satisfactory explanation for this apparent anomaly suggests
itself; viz., that this low eastbound rate was given to build up a new
industry in the West. In other words, the cost of service, a dependable
guide for a road in a static condition, failed of effect upon a line
possessed of great dynamic possibilities. Occasionally opposition of
principles like this may occur in questions of classification. It may
temporarily be worth while, in order to build up a new industry, to
accord a lower rating to a commodity actually more valuable or more
expensive to handle than others. Here again the dynamic force in the
value of service principle out-weighs all other considerations of
relative cost of service.

The value of service principle in general fails, not only in the
determination of absolutely reasonable rates, but it is inadequate
also to the solution of perhaps the more difficult problem of relative
rates. This question of relativity is twofold; first as between
different places, and secondly as between different commodities.
These are, in other words, the problems respectively of distance
tariffs and of classification. The manner in which distance tariffs
evolve, has already been discussed, and it is evident that the cost
of service principle is of fundamental importance, even though it be
tempered by considerations of commercial expediency, that is to say,
by the necessity of at all times under stress of competition, charging
only what the traffic will bear. But while the value of service
principle--charging according to demand in other words--applies at the
competitive points, the other principle of relative cost should be the
fundamental one in fixing upon the scale of local non-competitive rates.

The second phase of the problem of relativity arises in connection
with classification.[156] How shall goods be graded in respect of
their freight charges for identical services in carriage? Besides
illustrating the interplay of the two fundamental principles, this
topic serves also to clear up another possible confusion of terms.
Proportioning transportation charges to the value of the service must
always be clearly distinguished from basing them upon the mere value
of the goods. Nothing is more certain than that no direct causal
relation between freight rates and the intrinsic value of commodities
is traceable. On wire the freight rate between two given points may
be about one-fourth of the commercial value; on sheet iron one-third;
on lumber somewhat more, and on hay two-fifths; while on cattle and
hogs the freight rate may range as low as one-tenth to one-eighth of
their commercial value. On coal, on the other hand, the freight rate
often more than equals the price of the coal at the mine, and on very
low grade commodities like bricks, the transportation charges may
equal two or even three times the worth of the goods.[157] For each
locality or even direction, these percentages will change. Positive
reasons for these varying relationships are discernible in local trade
conditions. While in general cheap goods are rated lower; if for any
reason--bulkiness or risk--they cost relatively more to transport,
they may very properly be advanced in grade. Normally, raw products
move at lower rates than finished products--for instance, wheat and
flour or cattle and beef. This is in accord with charging what the
traffic will bear in relation to value. But in the making of export
rates, it may be to the interest of the carrier to reverse this order,
actually according to the finished product the lower rate, thereby
encouraging the development of manufactures at home rather than
abroad.[158] Classification committees and regulative commissions are
thus compelled to waver between the two opposing considerations of cost
and value. One cannot avoid the conclusion, however, that, contrary
to the usual rule, in this field of classification undue weight is
often accorded by railway managers to that small element of total
cost of service arising from risks of damage in transit--insurance
cost, in other words--to the neglect of the financially more important
consideration of what the traffic will bear. This emphasis upon the
cost side of the account by classification committees, oddly enough is
peculiarly characteristic of ratings in the higher class commodities.
Among low grade goods, like grain, lumber or coal, the risk of damage
is small, so that insurance cost becomes almost negligible. The
insistent consideration among these low grade commodities is much more
apt to be that of relative demand; arising from the necessity of close
and constant adjustment to the behests of trade. Special or commodity
rates, based directly upon what the traffic will bear, rather than upon
the element of cost, are likely to prevail in these cases. But the very
large revenue which could be obtained from increasing the rates upon
the higher grade of goods seems not to be fully appreciated.

A valuable instance of the play of opposing considerations of cost and
value of service in the classification of freight rates is afforded by
the complaint in 1908 of the pulp paper makers in Wisconsin, already
cited in another connection.[159] It appeared that for similar service
over the same roads, the rates per carload on saw logs for lumber were
only about one-half those charged for carriage of logs to be ground
into paper pulp. Judged on the basis of commercial value, hemlock and
spruce bolts, too short and often otherwise unfit for lumber, were
worth much less than saw logs; and yet they paid double the freight
rates. This was not because the pulp wood was less desirable as
traffic. In many ways it was more so. The haul was twice as long as for
saw logs. The paper mills brought relatively more supplementary tonnage
in the form of coal, food stuffs and supplies for workmen and their
families. Fully as much of the finished product to be reshipped to
consumers resulted. While smaller in volume, the pulp wood business was
far more permanent. It was growing rapidly while the lumber business
was declining. Moreover, the actual cost of service in hauling pulp
wood was fully as low as for lumber logs. Carloads were much heavier,
and were more regular in movement. In practice they involved no
milling-in-transit obligation, that is to say, no obligation to re-ship
the finished paper out over the same road; while all the saw log rates
carried this obligation--a matter of some moment to the railways. And
finally the value of the service to shippers of pulp wood was less than
to mere lumbermen; in other words, the paper makers were operating
under closer margins of profit; their plants were more costly, and
depreciated more rapidly. The defence of the carriers in this case was
not that the rates on pulp wood were too high in themselves, but that
the rate on saw logs was perhaps unduly low--the latter having been
crowded down to a minimum figure by competition in the early days of
the business by the lumber raftsmen who floated the saw logs downstream
from the forest to the saw mills. But of equal importance probably in
perpetuating the higher rates on pulp logs, was the assumption that
while the value of the bolts themselves was perhaps even less than
that of saw logs, the value of the resultant product, paper, was much
greater than that of lumber. But the Wisconsin Railroad Commission, in
entire harmony with the principle repeatedly laid down by the Federal
commission, held that the carriers must be guided by real distinctions
of cost from a transportation standpoint and not by gradations
of value. If the goods were bulky, awkward, or risky to handle,
perhaps requiring special appliances or equipment, relatively high
classification was permissible. But if they were substantially similar
for purposes of carriage, no gradation in rates based upon differences
in the ultimate uses to which the commodity might be put would be
upheld. Such was the reasoning of the Interstate Commerce Commission
in a decision, holding that fire, building and paving brick must be
accorded equal rates, regardless of their differing values.[160]
That the element of value is, however, not negligible is brought out
in a later Federal case,[161] wherein it was recommended that cheap
china, to be given away as premiums in the tea trade, be rated nearer
ordinary crockery or earthenware, even though shipped in the same
manner as high grade china ware. Under the official classification,
chinaware is rated first class if in boxes, and second class in casks.
Earthenware or crockery is carried at twenty per cent, less than third
class, in small packages (L. C. L.). On the basis of mere cost of
service, it would seem as if boxes of chinaware should have a lower
rating than casks. Boxes stow better than casks, with less risk of
breakage. But the commercial practice being to ship the finer grades
of chinaware in boxes, such shipments are graded higher because the
traffic will usually bear a higher rate. Thus considerations of cost of
service yield to those of value. The Interstate Commerce Commission,
however, noting the exceptional circumstances under which the tea
company distributed its cheap chinaware, recommended a revision of the
classification to meet the needs of the case; in other words ordering
a greater emphasis upon the elements of the value of the service, even
at the expense of relative cost of operation.

Our final conclusion, then, must be this: That both principles are of
equal importance; and that both must be continually invoked as a check
upon each other. The tendency to the elevation of cost of service to
a position of priority--rather characteristic of regulative bodies
and of legislators--is no less erroneous than the marked disposition
of railway managers to insist upon the universal applicability of
the principle of charging what the traffic will bear. Neither will
stand the test of reasonableness alone. Whether the one or the other
should take precedence can only be determined by a careful study of
the circumstance and conditions in each case; and in practice, the
instances where either principle becomes of binding effect to the
entire exclusion of the other, are extremely rare.

FOOTNOTES:

[119] 13 I.C.C. Rep., 319. The general investigation of wool rates is
another admirable instance. 23 _Idem_, 151.

[120] Wisconsin Railroad Commission, 1908. _Cf._ p. 181, _infra_.

[121] The diverse interests to be reconciled must also include the
lumbering centres once "next the stump," but now placed at a relative
disadvantage. The Eau Claire lumber case [reprinted in Railway
Problems, pp. 203-233] should be read in this connection.

[122] The remarkable rise of the sash, door and blind industry in
the South, as prejudiced by comparison with Chicago under an outworn
schedule of rates, is given in 23 I.C.C. Rep., 110.

[123] On the parity cases, consult Hammond, Railway Rate Theories,
etc., 1911, pp. 120 and 149.

[124] 14 I.C.C. Rep., 1-74 and Ann. Rep. I.C.C., 1911, p. 46. The later
judicial history will be found at p. 543, _infra_.

[125] P. 489, _infra_.

[126] Rates must not vary with profits. 13 I.C.C. Rep., 429; and
consistently held ever since.

[127] Arbitration of Cotton Rates, etc., Nov. 15 and 16, 1900; pamphlet
arguments of Southern v. Illinois Central Railways. Wool rates are the
same. 23 I. C. C. Rep., 151.

[128] This was the gist of the complaint in the Cincinnati Freight
Bureau case; pp. 248, 392 and 588, _infra_.

[129] Chapters XI and XIX, _infra_.

[130] Now covered by law since 1910. Pp. 512 and 571, _infra_.

[131] Pp. 324 and _infra_.

[132] Senate Committee on the Transportation Interests of the United
States and Canada, 1890, p. 362.

[133] 9 Int. Com. Rep., 318; in our Railway Problems, chap. XVII.

[134] Hammond, Railway Rate Theories, etc., 1911, p. 82, cites cases.

[135] Chapter VIII, _infra_.

[136] 5 Int. Com. Rep., 264; in our Railway Problems, chap. VIII.

[137] _Cf._ p. 255 _et seq., infra_.

[138] A carload of bamboo steamer chairs from San Francisco to New York
for $9.40 in the course of a rate war, would seem to be rather below
bed-rock. 21 I. C. C. Rep., 349.

[139] _Quarterly Journal of Economics_, V, 1891, pp. 438-65; reprinted
in Railway Problems, chap. V.

[140] _Cf._ Int. Com. Reports, 1903, p. 436.

[141] The Hepburn Committee testimony in 1879, p. 2893, is eloquent
upon this aspect of the question.

[142] 1st Annual Report, I.C.C., 1888. _Cf._ Strombeck, Freight
Classification, pp. 35-60.

[143] C., N. O. & T. P. case, testimony, vol. II, pp. 332-333.

[144] _Cf._ The Freight Rate Primer, bearing no authors or publishers
name, but largely compiled from addresses by President W. C. Brown of
the New York Central & Hudson River. Similar arguments and computations
occur in the testimony before the Senate (Elkins) Committee of 1905,
pp. 1162 and 2276.

[145] Now who will say that it is unreasonable to charge 7-1/2 cts. to
carry a suit of clothes from Chicago to New York.... Railways could
charge three or four times the cost of transportation for a pair
of drawers and the rates would still be reasonable.... But all the
first-class rates are of that nature.--Albert Fink, testimony, C., N.
O. & T. P. case, p. 290.

[146] Senate (Elkins) Committee, 1905, p. 1162.

[147] In _re_ Proposed Advances in Freight Rates, I.C.C., April 1, 1903.

[148] An interesting illustration of such determination of separable
or extra cost was the computation by which the movement expenses of a
train load of 50 cars of grain, 80,000 lbs. to the car, from Buffalo to
New York were fixed at $520. I. C. C. Reports, 1903, p. 397. Or again
in the estimation of the costs of operation in the express service
from New Orleans to Kansas City in the banana trade. I. C. C. Rep.,
No. 1235, 1908. The able Wisconsin Railroad Commission has carefully
studied a number of such cases, notable in its Two-Cent Fare decision
of 1906.

[149] _Cf._ Tunell, Railway Mail Service, Chicago, 1901.

[150] Personal correspondence.

[151] Details in vol. II.

[152] 13 I.C.C. Rep., 357.

[153] 5 I.C.C. Rep., 299.

[154] On raisins compared with citrus fruits: 22 I.C.C. Rep., 1.

[155] Interstate Commerce Commission, No. 797.

[156] More in detail in chap. IX.

[157] Senate (Elkins) Committee, 1905, testimony of Mr. Bird, Traffic
Manager of the St. Paul road. This is best measured, of course, by
revenue per ton mile, chap. XII, _infra_.

[158] Flour _v._ wheat, p. 135, _supra_.

[159] P. 148, _supra_.

[160] More in detail at p. 318, _infra_. Also Hammond, Rate Theories of
the I. C. C., 1911, p. 32.

[161] U. P. Tea Co.; I.C.C. Rep., No. 1569, 1908.



CHAPTER VI

PERSONAL DISCRIMINATION

    Rebates and monopoly, with attendant danger to carriers, 185.--
        Personal discrimination defined, 188.--Distinction between
        rebating and general rate cutting, 188.--Early forms
        of rebates, 189.--Underbilling, underclassification,
        etc., 190.--Private car lines, 192.--More recent
        forms of rebating described, 195.--Terminal and
        tap-lines, 196.--Midnight tariffs, 197.--Outside
        transactions, special credit, etc., 198.--Distribution
        of coal cars, 199.--Standard Oil Company
        practices, 200.--Discriminatory open adjustments from
        competing centres, 202.--Frequency of rebating since
        1900, 204-6.--The Elkins Law of 1903, 205.--Discrimination
        since 1906, 207.--The grain elevation
        cases, 211.--Industrial railroads once more, 212.


The philosophy of rebating has perhaps never been better described than
in the following quotation from the Cullom Committee investigation of
1886:

    "Mr. WICKER. I am speaking now of when I was a railroad man.
    Here is quite a grain point in Iowa, where there are five or
    six elevators. As a railroad man, I would try and hold all
    those dealers on a 'level keel,' and give them all the same
    tariff rate. But suppose there was a road five or six or eight
    miles across the country, and those dealers should begin to
    drop in on me every day or two and tell me that that road
    across the country was reaching within a mile or two of our
    station and drawing to itself all the grain. You might say that
    it would be the just and right thing to do to give all the five
    or six dealers at this station a special rate to meet that
    competition through the country. But, as a railroad man, I can
    accomplish the purpose better by picking out one good, smart,
    live man, and, giving him a concession of three or four cents
    a hundred, let him go there and scoop the business. I would
    get the tonnage, and that is what I want. But if I give it to
    the five it is known in a very short time. I can illustrate
    that better by a story told by Mr. Vanderbilt when he and his
    broker had a deal in stocks. The broker came in and said, 'Mr.
    Vanderbilt, I would like to take in my friend John Smith.' Mr.
    Vanderbilt said, 'Let us see how this will work. Here are you
    and myself in this deal now. We take in John Smith; that makes
    a hundred and eleven. I guess I won't do it.' When you take in
    these people at the station on a private rebate you might as
    well make it public and lose what you intend to accomplish. You
    can take hold of one man and build him up at the expense of the
    others, and the railroad will get the tonnage."

    "SENATOR HARRIS. The effect is to build that one man up and
    destroy the others?"

    "Mr. WICKER. Yes, sir; but it accomplishes the purposes of the
    road better than to build up the six."

The force of this description of the underlying motive for personal
discrimination, so far as the carrier is concerned; namely to build
up one man at the expense of his competitors and to attach him in
interest indissolubly to the company, is well exemplified in a case
which occurred in 1908 at Galveston, Texas.[162] Practically all
railway traffic entering Galveston was destined for export. Wharfage
facilities were limited to two concerns, one of them being the Southern
Pacific Terminal Co. A uniform charge of one cent per hundredweight for
cotton seed meal and cake passing over the wharves of both companies
had been the rule for a long time. Yet it appeared on complaint that
one merchant had been granted wharfage space under discriminatingly
favorable conditions. Exemption from demurrage charges, free storage
room and other favors and a fixed rental of $15,000 per year
irrespective of the amount of his shipments, had enabled him, having
been in business only since 1898, to build up a very large traffic. The
export of cotton seed cake instead of meal had greatly increased since
1904. The business of all other competitors since this contract was
made had shrunk to insignificant proportions by comparison with that
done by this favored merchant. The margin of profit in the business
was so small that the difference between the charges and privileges
enjoyed by this individual and his competitors, was forcing them all
out of business. It was estimated by the Interstate Commerce Commission
that if the customary wharfage charges had been paid, the rental would
have been nearly $30,000 for the year 1907, irrespective of other
favors. The cotton planters complained also that this monopoly limited
their market and depressed business. It is clear that the larger the
business, that is to say the more nearly it became a monopoly, the
smaller became the wharfage charges per hundredweight under this system
of a fixed rental; and, in consequence, the greater was the disability
of the other shippers. The advantage to the railroad appeared in
a contract entered into, which provided that all traffic for this
individual should be routed over the Southern Pacific or its connecting
lines. As he had practically gathered in all the cotton seed export
business of Texas and the adjoining states within two years, it is
evident that this consideration was of great value to the railroad. The
economic motive in this case and in the one previously cited was the
same. It will be found in fact to underlie almost all cases of personal
favoritism and discrimination.

The supreme disadvantage in building up a great monopoly in order to
win traffic for a railroad is, of course, that the moment the shipper
becomes sufficiently powerful, he can play off one road against
another, thus becoming practically master of the situation. Sindbad is
soon overwhelmed by the old man of the sea. And the weaker the road
financially, the more powerful is the appeal, to which at last even the
strongest lines must succumb. The history of the Standard Oil Company
during the eighties clearly exemplifies this. The rapid rise of the
cattle "eveners" yet earlier, until, as the private refrigerator car
companies they controlled the situation, was primarily traceable to the
same causes. The late J. W. Midgly[163] gives a forcible illustration
in the attempt in 1894 of ninety-five railroads to reduce the mileage
allowance paid for use of oil tank cars owned by private companies
from three-fourths to one-half cent per mile, loaded and empty. The
Union Tank Line promptly replied that it would in that event at once
concentrate all its vast tonnage to points north and west of Chicago,
upon the single line--presumably the weakest one--which would continue
the old rate. This argument was irresistible; and in the old days of
unregulated competition was in the nature of things bound to be so.

Careful distinction must be made at this point, between personal
discrimination and general rate cutting. Rebating,--that is to
say, departure from published tariffs,--occurs in both cases. The
difference between the two is that in the one case it is special,
particular and secret; while in the other it is so general, if not
indeed universal, as to be matter of common knowledge. Rebating, in
other words, is a common feature of rate wars. But, on the other hand,
general harmony in the rate situation by no means implies the absence
of personal favoritism. During a wide-open rate war, indeed, the most
iniquitous aspect of rebating,--inequality of treatment as between
rival shippers,--may be quite absent. All may be getting the same
rate, namely a cut rate; although the chances are of course that the
bigger the shipper, the more substantial the concessions offered. It is
important to keep this distinction clear, especially since the railways
have awakened to the losses to themselves attendant upon rate wars.

All parties concerned are probably agreed in the hope of eliminating
the rate war forever. But there is not the same evidence of either
an intent or desire on the part of railway officials to get rid of
what, from a public point of view, is even more insidious and unjust;
that is to say, the secret concession of favors to a few chosen large
shippers. General rate wars, as will later appear, are probably a thing
of the past.[164] But secret rebating seems, on the other hand, to be
an evil which must be combatted vigorously and un-intermittently in
order to uproot it as a feature of American industrial life. And of
course it must cease. For it is the most prolific source of evil known
in transportation. It has probably had more to do with the creation
of great industrial monopolies than any other single factor. The first
feature of any reform of our intolerable "trust" situation, must be to
keep the rails open on absolutely even terms to all shippers, large or
small.

The keynote of discrimination is, as we have said, the creation of
monopoly, or, at all events, of so large an aggregation of shipments,
that a profitable partnership between the shipper and the railroad
results. This is clear in recent indictments which charge that the
railroads concerned, having selected one large firm of forwarders in
New York and Chicago are giving them a monopoly in respect of all
imports. In the case of the great beef packers, the railroad having
once built up a shipper by favored rates, may continue in the enjoyment
of this concentrated tonnage with greater security and profit than if
it moved in a multitude of small shipments by numerous competitors. Of
course there is another less common form of rebating which, so far as
its profit is concerned, is limited to the particular dishonest railway
official who arranges the matter. Such favoritism as this, however,
represents a loss to the company; and has always been stamped out by
the carriers when discovered. The principal form above described,
is much more difficult to uproot. And yet for some reason, it is a
distinctively American abuse. European countries seem never to have
suffered from it, to any such degree as has the United States. It is,
as has just been said, perhaps the most iniquitous, the most persistent
and until very recently the most nearly ineradicable evil connected
with the great business of transportation.

Rebating in the early days consisted in simply refunding by direct
payment to the favored shipper, a certain proportion of the freight
bill. This refund might be in cash, in presents to himself or his
family, in salary allowances to clerks, in free passes, or in free
transportation of other goods. In a recent case in New York it has
taken the form of importer's "commissions." But, since 1887 at least,
an inconvenience in all such transactions is their necessary entry
in some form or other upon the books of the company. Of course such
rebates could be covered up as a fictitious charge to operating
expenses; or, as in the case of the Atchison in 1893, might be
carried as an asset, as if such refunds would ever be paid. Nearly
$4,000,000 was thus entered as padding in Atchison assets, when it
went into a receiver's hands at that time.[165] Much of the flagrant
Standard Oil rebating in the eighties was almost openly, and certainly
boldly, carried on by these means. But public sentiment was always
against it; and of course, it was a breach of good faith as between
the railways themselves, in their endeavor to maintain agreed rates.
Secrecy, therefore, always attaches to these transactions; and the most
ingenious devices were invented to confer favors without detection.

Underclassification of freight was a very common device in the old
days. It has reappeared again since 1907 in much the same form. There
is a great difference between the freight on a keg of nails and of fine
brass hardware or cutlery. Who is to know whether a shipment be billed
as one or the other? Is every box of dry goods to be examined in order
to discover whether it contains silks or the cheapest cotton cloth? A
carload of lumber or cordwood might easily by prearrangement be filled
inside with high grade package freight. The utmost vigilance is in fact
necessary on the part of carriers, to prevent such fraudulent practices
by shippers. Under the Joint Rate Trunk Line Inspection Bureau in 1893,
183,575 such false descriptions or underweighings were detected on
westbound shipments from seaboard cities alone.[166] What the amount
of such Underclassification of freight by collusion between agent and
shipper was, can only be conjectured. Even more difficult to detect was
the practice of under-billing.[167] At a certain time, the rate on
flour from Minneapolis to New York was thirty cents per hundredweight,
divided between connecting roads in the proportion of ten cents from
Minneapolis to Chicago, and twenty cents from there on to destination.
In the meantime, as against this ten cent proportion of the through
rate to New York, the local rate from Minneapolis to Chicago was twelve
and one-half cents. As between two rival shippers, the one sending to
Chicago on a New York through rate instead of a local one, would enjoy
a clear advantage of twenty-five per cent. over his competitor. And
who was to know whether a car billed through to New York, was really
going beyond Chicago or not? In one period of three months, 1098 cars
thus through billed to New York were turned over at Chicago to a belt
line road; and only 468 actually went on to that destination. About
sixty per cent. of the traffic was being rebated by this means. Very
complicated arrangements of this sort were rife in the Missouri river
rate wars on grain in 1896. This was known as the "expense-bill"
system; or "carrying at the balance of the through rate."[168]

Many services or facilities are worth as much to a merchant as a direct
refund in cash. He may be given free cartage. This was a very common
expedient in the early days; being fully considered by the Interstate
Commerce Commission.[169] Or free storage on wheels or in freight
houses may be utilized as a cover for favoritism. A low carload rate
might be given, and then the goods be held, storage free, by the
railway at some central point; to be subsequently delivered piecemeal
as sold. The dealer would be relieved of all expense for warehousing
as well as of high less-than-carload rates from the initial point of
shipment. The competitor who paid the less-than-carload rate on an
equal volume of business would be sadly handicapped. Cases are on
record where fish was thus stored free from November to February,
being reshipped on order in small lots. Or an excessive allowance might
be made by the railway for some service or facility afforded by the
shipper. The beef interests first got their hold upon the carriers by
demanding liberal rebates in return for acting as "eveners" in the
partition of traffic between the trunk lines about 1873. Complaint
against excessive allowances to favored grain elevator owners, was
common all through the West for years. The elevator allowance cases
before the Interstate Commerce Commission in 1906-1910 concerning
practices on the Union Pacific lines illustrate the delicacy of the
issues involved.[170]

Deductions from the full tariff for the use of special equipment owned
by shippers, has been one of the commonest means of building up great
monopolies.[171] The allowances to the Standard Oil Company for the use
of its tank cars, before the construction of pipe lines, and especially
prior to 1888, were a source of great unrest.[172] But the construction
of pipe lines has not lessened their importance. It is on record that
the use of private cars in other lines of business has led to grave
abuses. When stock cars and beef refrigerator cars, owned by private
shippers, first began to be used about 1883-1884, they were much
sought after by the railroads as traffic. They moved regularly, not by
seasons; the volume of business was large and rapidly growing; it was
concentrated at a few large initial points; much of it was high class
and very remunerative. With the enormous extension of refrigeration
to cover the long-distance movement of fruit and vegetables, a still
more powerful encouragement came into play. These latter businesses
were highly seasonal. Few roads could afford to maintain highly
specialized equipment to care for a business of a few weeks length.
But a private company operating all over the country, could utilize
its cars first for early vegetables and fruits from the south, then
from the middle west or the Oregon-Washington region, and finally in
winter for oranges from California or Florida. The number of these cars
rapidly increased until by 1903 there were 130,000 in service,--in fact
about one-eleventh of all the freight cars in the United States were
privately owned. The so-called Armour interests, primarily engaged in
the packing business, were by far the largest single concern.

The system of payment for the use of these cars consisted of an
allowance, based upon the mileage performed. This used to be one cent
per mile, loaded and empty, for refrigerator cars. In 1894 a determined
effort was made by the carriers to reduce this below the point then
reached of three-fourths of a cent per mile. But the extraordinary
concentration both of ownership and traffic, rendered it easy for the
car companies to defeat the proposition. In the meantime the steady
increase in volume of traffic, making whole trainloads possible,
together with the growth of very long distance business, made it
imperative that these trains be operated at high speed with few stops.
This at once enormously enhanced the earning power of each car, as
based upon mileage. The performance was often as high as four times
that of the ordinary freight cars.

Under these new conditions, at the current rate of earnings, a car
would pay for itself in three years, besides paying all expenses of
maintenance. The burden of these allowances became very great. The
situation some years ago is well described by a former member of the
Interstate Commerce Commission, as follows:--

    "Investigations made by the Interstate Commerce Commission at
    different times have disclosed to some extent the very large
    sums received by shippers as mileage for the use of such cars.

    "By an investigation made in 1889 it appeared that on a single
    line of road between Chicago and an interior Eastern point--a
    distance of 470 miles--refrigerator cars owned by three
    shipping firms made in nine months, from August 1, 1888, to May
    1889, 7,428,406 miles, and earned for mileage $72,945.97, being
    about $8,112 a month or substantially at the rate of $100,000 a
    year.

    "By another investigation, made in 1890, it appeared that
    private stock cars to the number of 250 had been used upon
    a line made up of two connecting roads between Chicago and
    New York, beginning with 150 cars on September 1, 1880,
    increased 30 more a month later, 20 more another month later,
    and reaching the total of 250 in June, 1890; that the cars
    altogether had cost $156,500, and had earned for mileage in
    two years, from September 1, 1888, to September 1, 1890,
    $205,582.68; that the entire expense to be deducted during that
    period for car repairs and salaries for their management was
    $34,050.48, leaving net revenue to the amount of $171,532.20,
    being an excess of $15,032 above the whole cost of the cars.
    The cars were, therefore, paid for and a margin besides in two
    years, and, thereafter, under the same management and with a
    corresponding use of the cars, an income of upward of $100,000
    a year was assured on an investment fully repaid, or, in
    effect, on no investment whatever."

By 1903 the railroads were paying over $12,000,000 annually for the use
of such equipment.

With the growth of their power, the extortionate demands of these
private car lines, both upon the railroads and the shipper, steadily
enlarged. From the roads they often compelled fictitious mileage
allowances; and from the shipper the most outrageous charges were made
for icing and other services en route. The reports of the Interstate
Commerce Commission for 1903-1904 and of the Senate (Elkins) Committee
of 1905 deal fully with these abuses. Moreover the Armour company
gradually forced other competitors out of business, and with the growth
of monopoly, its exactions became even more extreme. The following
instance is typical.

    "In 1898 the Armour Car Lines Company was furnishing cars
    for the movement of Michigan fruits from points on the Pere
    Marquette Railroad to Boston in competition with other private
    car companies, and its charge for refrigeration to Boston was
    $20 per car. Its present charge to Boston is $55 per car.
    Before the present exclusive contract was entered into between
    the Armour Car Lines and the Pere Marquette Railroad Company
    the actual quantity of ice required was charged for at $2.50
    per ton. Under this system the cost of refrigerating cars from
    Pawpaw, Mich., to Dubuque, Iowa, averaged about $10 per car,
    while the present schedule of the Armour Car Lines is $37.50.
    The cost of icing from Mattawan, Mich., to Duluth was $7.50,
    as shown by an actual transaction in the year 1902, while the
    present refrigeration charge between those points is $45. The
    cost of icing pineapples from Mobile to Cincinnati under an
    exclusive contract with the Armour Car Lines is $45, while
    the cost of performing the same service from New Orleans to
    Cincinnati over the Illinois Central is $12.50 per car."

Fortunately the progressive enlargement of Federal powers of
supervision has tended to check these exactions. But the system of
special allowances for the use of privately owned equipment, is one
which needs the most careful watching by the authorities.

With the passage of time, and especially since 1896, new and even more
elaborate schemes for rebating have come to light. One of the most
ingenious, which was discovered about 1904 to be very widespread,
was the use of terminal or spur track railway companies.[173] In
Hutchinson, Kansas, for example, were salt works having a capacity of
some 6000 barrels a day. Two railways were available for shipments.
A new company was incorporated, all its stock being held by the salt
works owners, which constructed sidings to both railroad lines. The
spur track was less than a mile long and cost only about $8000 to
build. But the company was chartered as the Hutchinson and Arkansas
River Railroad. Its officers were the owners of the salt mills.
It owned neither engines nor cars. Yet it entered into a traffic
agreement with the Atchison road for a division of the through rate
to many important points, its share being about twenty-five per cent.
So substantial a pro-rate was this, that in a few months the H. and
A. R. R. received back some fifteen thousand dollars as its share of
the through freight rates. And every dividend declared by it was, of
course in effect a rebate enjoyed exclusively by this particular mill,
as against less favored competitors.

Obviously, rebates assuming the above-described form are open only
to very large shippers, to whom it is worth while to incur the
considerable expense. But many concerns have already such trackage in
or about their works. Nothing is needed except to incorporate them
separately, and then to enter into suitable traffic agreements with
standard roads. Many of the so-called trusts were implicated in such
transactions, about 1904-1905. The International Harvester Company
at Chicago had for years performed much of its own terminal service;
and until 1904 was allowed as high as $3.50 per car for switching
charges by connecting railroads. It then incorporated the Illinois
Northern Railroad, which was promptly conceded twenty per cent, of
all through rates, with the Missouri river rate as a maximum. On this
traffic it would be allowed as high as $12 per car, instead of $3.50
as before. The Illinois Steel Company afforded in 1905 an even more
flagrant example. Apparently it had enjoyed extra-liberal proportions
of through rates since 1897, by means of its separately incorporated
and, in fact, really important terminal road. But an allowance of $700
to $1000 for hauling a trainload of coke some seven miles, yielded a
profit on the business of perhaps ninety per cent. It was an advantage
which no competitor could hope to equal. No doubt the practice of
switching allowances was properly used at the start. But the large crop
of cases discovered in 1904-1905 proved that they had come to be very
widely used as a cover for rebating. It is not always easy, however,
to decide when such an allowance ought to be made to a privately owned
terminal company. The Anheuser-Busch case, decided in June, 1911, with
a dissenting opinion by Commissioner Harlan, shows how intricately
involved such issues may become.[174]

The so-called "midnight tariff" was a strictly legal way of conferring
favors upon certain shippers. It was much in evidence during the grain
wars between lines serving the Gulf ports about 1903. And it seems
to have been a device used at times all over the country. A traffic
manager wishing to steal all the business of a large shipper from some
competing road, and to build him up at the expense of his rivals,
secretly agrees to put into effect a low rate on a given date. The
shipper then enters into contracts calling for perhaps several hundred
carloads of grain to be delivered at that time. This reduction is
publicly filed, perhaps thirty days in advance, with the Interstate
Commerce Commission at Washington. But who is to discover it, in the
great medley of new tariffs placed on file every day? Yet this is not
all. A second tariff, restoring the full rate, is also filed to take
effect very shortly,--perhaps only a day,--after the reduction occurs.
All these are public, and open to all shippers alike. But only the one
who was forewarned is able to take advantage of them. He rushes all
his shipments forward while the reduced rates are in effect. Before
other competitors can assemble their grain or other goods, the brief
reduction has come to an end; and rates are restored to their former
figure.

The President of the Chicago Great Western Railway has concisely
described the commercial effect of one of these midnight tariffs.

    "A clean profit, he says, over all expenses of one half of a
    cent per bushel is a satisfactory profit to the middleman;
    and a guaranteed rate of transportation of even so small a
    sum as one-quarter of a cent per bushel less than any other
    middleman can get, will give the man possessing it a monopoly
    of the business of handling the corn in the district covered by
    the guaranty. Why? Such are the facilities of trade by means
    of bills of lading, drafts, telegraphs, banks, etc., that
    to do an enormous corn trade, the middleman requires only a
    comparatively small capital to use as a margin. A capital of
    $50,000 is ample thus to handle 15,000,000 bushels, and with
    activity, double that amount, per annum. One quarter of a cent
    per bushel profit on 15,000,000 bushels would amount to $37,500
    which is equal to .75 per cent. per annum on the capital
    employed."

A similar device was used by the Burlington road in its dealings with
the Missouri river packing houses on export traffic. They signed an
agreement making a rate to Germany of twenty-three cents per hundred
to last until December 31, 1905. Before the expiration of this time,
however, the roads concerned, publicly filed an amended tariff
presumably for all shippers of thirty-five cents per hundred. They
nevertheless continued the old rate to the packers. This case went to
the Supreme Court which decided in 1908 that the device was unlawful
and discriminatory.[175]

And then again there are all the possibilities of the printer's art to
be used, in connection with the preparation of elaborate tariffs.[176]
The tariff of "33 cents per hundredweight" may conceivably be a
typographical error, to be speedily corrected in a supplementary
hektograph sheet filed the next day. Involved and elaborate rate
sheets may be reprinted with only one little change among a thousand
items left as before. Different tariffs may interlock with complicated
cross references. In one case in 1902 it took seven different tariffs
to enable one to compute the rate for a given shipment. In twelve
months, to December 1907, there were filed with the Interstate Commerce
Commission 220,982 such tariffs, each containing changes in rates or
rules. Some "expire with this shipment,"--and some agree to "protect"
any rate of any competing carrier, that is to say, to meet it if it
happen to be lower.

An entirely different plan of rebating,--and a most effective one,--has
to do with apparently unrelated commercial transactions.[177] Many
shippers are large sellers of supplies to the railroad. How easy then
to make a concession in rates to an oil refinery for example, by
paying a little extra for the lubricating oil bought from a subsidiary
concern. The Federal authorities in recent years and especially
in connection with the prosecution of the Standard Oil Company in
1908-1911, have discovered the most extraordinary variations in the
prices paid by railroads for supplies. Independent concerns were often
not allowed to compete in the sale of lubricants at all. It would be
difficult to prove any connection between so widely separate sets of
dealings; and yet it is clear that rebates are often given in this way.
Or even more fruitful as an expedient, especially in these later days
when rebating is a serious offence, why not confer a favor by extra
liberality in allowances for damages to goods in transit? In 1909 the
so-called Beef Trust was specifically ordered by the Attorney General
of the United States to desist from such practices. Positively the only
way to detect such fictitious allowances for damages, is to ferret out
each case by itself. This is a slow and necessarily expensive process.
Damage allowances and _quid pro quo_ transactions in the purchase of
supplies, are indeed almost "smokeless rebates," as they have aptly
been termed.

Personal discrimination may be as effective upon competition through
denial of facilities to some shippers, as through conferring of special
favors upon others. Practices of this sort have been quite common in
the coal business, especially in the matter of furnishing or refusing
to furnish an ample supply of cars or suitable spur tracks to mines. In
the well known Red Rock Fuel Company case in 1905,[178] the railroad
definitely announced its policy, "not to have a lot of little shippers
on its line who would ship coal when prices were high and then shut
up shop and go home and let the large shippers have the lean years."
The development of over 4,000 acres of coal lands was thus denied in
favor of the large companies, until the Interstate Commerce Commission
took the matter up. A year later came the startling revelations upon
the Pennsylvania Railroad as to the practice of discrimination in
furnishing cars to coal mines.[179] A comprehensive investigation by
the company itself resulted in the discharge of a number of high
officials. It appeared, for example, that the assistant to President
Cassatt had acquired $307,000 in stock of coal companies without cost;
that a trainmaster for $500 had purchased coal mine stock which yielded
an annual income of $30,000; and that one road foreman was given three
hundred shares of the same company stock for nothing. In all these
cases the object was to secure not only an ample supply of cars for
the favored companies, but perhaps even the denial of suitable service
to troublesome competitors. In this regard, the old practices of the
Standard Oil Company in the eighties are recalled. Not only, as in
the celebrated Rice case,[180] did it demand heavy refunds on its own
shipments, but it also compelled the imposition of a surtax on its
competitors' traffic which was to be added to its own special allowance.

Yet other means of favoring large shippers at the expense of small
ones, are almost impossible to eradicate. Certain of these may be
illustrated by recently discovered practices of the Standard Oil
Company. They are fully described in a special report of the United
States Commissioner of Corporations in 1905. Upon the basis of this
evidence, extraordinary efforts were made by the Federal authorities
to secure convictions and to impose heavy fines for violation of the
Elkins law. But the company escaped heavy penalties, in the main, by
reason of legal technicalities. The prosecutions of 1906-1909, however,
cannot be regarded as valueless, merely because the company escaped
the imposition of fines aggregating millions of dollars. The moral
effect of it was thoroughly good; and it is now clear that laws can be
so drawn as to apply in future. Nor can any student of the evidence
doubt for a moment, that, whether strictly an infraction of the law
or not, the net result of these practices was to confer an advantage
upon this large shipper, not open to its smaller competitors. Certain
of its advantages, such as the ownership of pipe lines from the
wells to the seaboard refineries and the strategic location of its
plants, are the fruit of great resources and keen business acumen. But
other advantages, particularly the relative rates on refined oil from
Standard Oil plants and from centres of independent refining, are,
according to the report of the Bureau of Corporations, due to pressure
brought to bear upon the carriers. Whether they are or not, the result
is discriminatory just the same.

The reason for the persistent pressure for low rates on petroleum
products is, of course, that the cost of manufacture is so low
relatively to the expense of transportation. An ample manufacturing
profit is one-half cent per gallon of crude oil; and the average cost
of refining does not exceed that amount. Yet a half cent will scarcely
pay freight for more than one hundred miles. Hence it follows that
for distances greater than this, the question of profit or loss may
entirely depend upon the delicate adjustment of the freight rate. In
this regard, a great company shipping all over the country has a great
advantage over smaller competitors with a strictly local market, in
that it can play off one rate against another. Thus, in one notable
case, cited by the Bureau of Corporations, the Burlington road gave
an absolutely unremunerative rate from the Standard refinery at
Whiting near Chicago to East St. Louis, thereby enabling troublesome
competition to be subdued; but it was recompensed by the payment of
heavier charges on shipments to other points on the Burlington system,
where, there being no competition, the high freight rate could be
shifted on to the consumer. The Commissioner of Corporations gives
one instance on the Northwestern road of a carload rate from Whiting
to Milwaukee in order to meet water competition from independents at
Toledo, which netted the carrier just ninety-two cents for the carriage
of 24,000 pounds of oil a distance of eighty-five miles, with free
return of the empty car.

The peculiarity of many of these rate adjustments of the Standard Oil
Company of late years was that they were publicly filed; and hence not
open to legal attack. This does not however detract in the least from
their discriminatory character. One example, right here in New England,
now happily corrected, may be cited from the records of the Interstate
Commerce Commission for 1906.[181] The southern half of New England
was mainly supplied with kerosene from the great Standard refinery
at Bayonne, New Jersey. The oil was brought there from the fields by
pipe line; and, being refined, was distributed by tank vessels all
along the coast, with a short rail haul thereafter to inland points.
The total cost to the Standard company was estimated by the Bureau of
Corporations at between fourteen and sixteen cents per hundredweight.
To meet this, the independent western refiners had to ship all the
way by rail. This was more expensive in any event; but for some years
they found their handicap greatly increased by the refusal of the New
Haven road to join in any joint through rate. The western independents,
therefore, had to pay the sum of two local rates, up to and beyond the
Hudson river, thereby bringing their transportation up to approximately
thirty cents per hundred pounds. In other words, their cost of carriage
per gallon was enhanced more than enough to constitute a fair refining
profit in itself. The result was the practical exclusion of competition
from this source. Fortunately, however, after this investigation the
New Haven was ordered to pro-rate with the western roads, thereby
overcoming about half of this disability. This case clearly evinces
the necessity of effective Federal regulation of such matters as joint
rates; and it also shows how possible it may be to so adjust tariffs,
openly and even legally, as to favor one shipper over another.

Unlike the preceding instance, most of the Standard's rebates have
been, in fact if not technically, secret. Perhaps the most flagrant
case occurred in the rates from Whiting to the southeastern states. The
Bureau of Corporations estimated that $70,000 a year was saved by this
device; and all competition from independent sources was eliminated
within that territory. The Illinois Central and Southern roads cross at
an obscure point in Tennessee known as Grand Junction. This was made a
centre of distribution for the entire South.[182] But the rate under
which the oil moved,--and in one given month 169 carloads were thus
carried,--was given on a special tariff, publicly filed at Washington,
to be sure, but prescribing the rate, not from Whiting but from Dalton,
Illinois, to Grand Junction, Tennessee. Dalton was an almost unknown
station, near the refinery. Of course any other shipper who happened to
know of it, and who happened to have oil to ship from Dalton to Grand
Junction, could have had the same rate of thirteen cents a hundred
pounds. But he would find it moved over a roundabout route, over four
different connecting lines, instead of over the rails of a single
company. As against this rate of thirteen cents, the only routes known
to the Ohio independent producers charged from nineteen to twenty-nine
and one-half cents per hundred pounds. Meantime the Standard's oil was
by this devious means reaching every point in the South at prices which
no competitor could hope to meet. In one case, the oil going by way of
Grand Junction, travelled over one thousand miles when the direct route
from Chicago was only a little over five hundred miles. The adjustment
was everywhere such that, even on the commonly known tariffs, Whiting
enjoyed a special advantage over the sources of independent oil.
Atlanta, Georgia, is only 733 miles by short line and 1003 miles by
way of Grand Junction from Whiting. Toledo, with its independent
refineries, is distant only 687 miles. Yet despite this fact, the
commonly known rates were shown to be, from Whiting, 33.2 cents as
against 47.5 cents from Toledo. So, even without the Grand Junction
contrivance, the Standard was seemingly favored more than enough. It
should be added, in conclusion, that while the Grand Junction rate was
publicly filed, its discriminatory character stands proven by the fact
that all the actual shipments were "blind billed;" that is to say, no
local agent knew what was the rate actually paid. Such blind bills
of lading are photographically reproduced in the report above named.
Moreover the ill repute of the transaction was indicated by the prompt
cancellation of the rate when discovered in 1905. But in the meantime
it had done its work, and fixed monopoly prices for an indispensable
product over a quarter of the territory of the United States.

Aside from the palpably dishonest secret rebating, the real root of
the difficulty with many of the other big shippers beside the Standard
Oil Company,--and an abuse moreover exceedingly hard to correct,--is
the open adjustment of rates from competing centres of manufacture
or distribution in such a way as to confer favors. The Bureau of
Corporation's report on the Transportation of Petroleum Products deals
fully with this. Relative rates, as above stated, always seem to favor
Chicago (Whiting) as against the centres of independent refining such
as Cleveland, Pittsburg, or Toledo. Formerly, before the great refinery
was established in 1890 at Whiting,--which, by the way, produces
one-third of all the kerosene used in the United States,--the roads
from these centres made joint through rates all over the country. They
still do so on many other commodities. But on petroleum products they
have been withdrawn. The result is that everywhere, except where they
can secure entrance by water, the disability in rates against the
independent refiner is most effective. That much the same conditions
prevail in other lines of business is affirmed on the highest
authority. The _Railway Age Gazette_ has repeatedly protested against
the pressure which is now brought to bear against the carriers by such
organizations as the Illinois Manufacturers' Association to substitute
open but discriminatory local rates for the old secret favors upon
which the great shippers throve for so many years. Fortunately,
however, this situation in some cases relieves the Federal government
of the burden of detection of maladjustments of this sort. For the
communities aggrieved are constantly on the watch to protect their
interests against rival cities. This factor clearly appears in the
sugar and cement lighterage cases in 1908.[183] Carriers at New York in
order to equalize rates with carriers serving Philadelphia refineries,
grant "accessorial allowances" for the use of lighters or for cartage,
in order, as they aver, to overcome the disability against their
clients. But Philadelphia shippers are ever on the alert to detect
such favors given at New York; and substantially aid the government in
eradicating the evil. In the grain elevator allowance cases, likewise,
at Omaha and Council Bluffs in 1906-1909, not only unfavored shippers
at these points but St. Louis grain merchants as a body, intervened as
complainants against the system. The powerful motive of self-interest
thus invoked is of great service.

Before dismissing these recent and widely "muck-raked" oil cases,
it may not be out of place to mention the new interpretation of the
Elkins law which has resulted therefrom. One concerns the definition of
separate offences. In the notorious $29,000,000 fine case, the Federal
Circuit judge applied the maximum penalty of $20,000 for each offence
to each separate carload in a large aggregate of shipments. On review
of the case, each separate settlement of freight rates was defined as
the unit of an offence. As entire train loads had been forwarded or
paid for at one time, this materially reduced the aggregate of possible
penalties. And, in the second place, the question of legally provable
intent was raised. The turning point in the $29,000,000 fine case, was
the ruling of the judge on review, that it was necessary to prove that
a standard rate, higher than the one actually paid, had actually been
filed at Washington; and that the defendant had knowingly accepted a
concession from this figure. These points the government was unable in
fact to establish; and this ended the case.[184]

While general rate cutting has been less common since 1900, partly also
because the roads were rapidly forming great combinations especially
in order to eliminate it, subsequent developments have proved that
personal and secret favoritism to large shippers was still very common.
Despite all they could do to withstand pressure, traffic managers
seemed powerless without the aid of the law. Perhaps the greatest
revelation of the extent of personal rebating was afforded by the great
Wisconsin investigation under the leadership of Governor La Follette in
1903.[185] The original purpose of this inquiry was fiscal; namely, to
examine into the subject of railroad taxation. But its scope speedily
widened, and at last skilled accountants were put into the books of all
the railroads traversing Wisconsin.

The facts elicited by the Wisconsin investigation were startling. For
the years 1897-1903, the direct rebates appearing in the accounts of
the Wisconsin lines alone,--taking no account of other forms of rebates
such as excessive damage allowances and the like,--were $7,000,000.
The Chicago and Northwestern alone had allowed more than half of this
amount. And from what is now known of other forms of allowance, the
total must have been indeed very great. In one year recently, there
was evidence to the effect that rebates on the New York Central lines
amounted to $1,000,000. According to its own admission, the Michigan
Central road, in 1902-1903, made allowances of $586,000. The rebating
to the beef packers, especially on export business during 1902, was
notorious. No wonder the progressive railroad leaders desired to put
an end to this leakage of revenue. And at their request, the wise
legislation known as the Elkins Amendments to the Act to Regulate
Commerce was passed in 1903.[186]

The Elkins law of 1903 not only came at a time when the carriers were
in need of every cent of revenue to tide over a hard year, but it also
followed demonstration under the test of judicial procedure, that
convictions for rebating were practically impossible under the old
law. To convict for unjust discrimination it was necessary to show,
not merely the allowance to one favored shipper, but the fact also had
to be proved that no such allowances were made to others on the same
sort of traffic under similar conditions. This could scarcely ever be
done. In fact, during almost twenty years, there had been less than
a score of convictions. Most of the prosecutions had failed utterly.
Both government and carriers pressed for legislation. This was promptly
given in the Act of February 19, 1903. There were four important
features of this law. Railway corporations, not merely individuals as
before, were now made directly liable to prosecution and penalties. The
tariff filed became the lawful standard. The fact that all shippers got
the same low rate was, therefore, no longer a defence. In the third
place, the shipper as well as the carrier could be held accountable. In
other words, accepting as well as giving rebates, became unlawful. And,
finally, jurisdiction was conferred upon the Federal courts to restrain
any departure from published rates or any "discrimination forbidden
by law" by writ of injunction. This fully legalized a rather doubtful
course of procedure to which the Interstate Commerce Commission had
been compelled to resort as a last weapon in the rate wars on grain and
beef since 1901. It also abolished the penalty of adjustment; imposing
fines instead. But this action was subsequently rescinded in the law
of 1906.

The record of the vigorous prosecutions against rebating under the
Elkins law,[187] affords conclusive evidence, not only as to the
widespread extent of the evil, but as to its identification with many
of the large industrial combinations. The history of the activities
of the Interstate Commerce Commission is to be found in its file of
annual reports. But little seems to have been done for the first two
years; but great activity was displayed during 1905. The ensuing year
was rather notable by reason of the success in securing convictions.
Besides the Standard Oil cases, there was collected in fines for
rebating between October, 1905, and March, 1907, the sum of $586,000.
Several men were sent to jail, for from three to six months. Among the
trusts implicated were the beef packers, who have been indefatigable
in concocting rebating devices; the tin plate combination; and, most
notable of all, the American Sugar Refining Company. Nearly $300,000
in fines was imposed upon this concern alone. The secret allowances
in these cases were most ingeniously arranged. Some were "refund
of terminal charges;" some were "lighterage demurrage;" some were
allowances for damages. Many were paid by drafts instead of checks so
as to preclude identification of individuals; some were by special
bank account; but the sums involved were very large. Shipments of
sugar on which rebates of four to six cents per hundred were given,
amounted within a relatively brief period to upwards of 70,000,000
pounds on one line alone. As sugar shipments westbound from New York
constituted nearly one-third of the total tonnage, the importance of
these prosecutions appear. The following quotation from a letter from
an agent of the sugar trust accompanying a claim for overcharge of
$6,866 on shipments of syrup, introduced in evidence in one of these
cases, aptly describes the situation, both then, now, and always. "We
hope to devise some means to enable us to conduct our freight matters
with the transportation companies satisfactorily even under the new
conditions imposed by the Elkins bill; but there may be some cases that
cannot be taken care of, in the event of which we will, like all other
shippers, have to take our medicine and look pleasant." The Interstate
Commerce Commission reported as to the conditions in 1908 that "many
shippers still enjoy illegal advantages." Many convictions were,
however, secured. And investigations in California showed the existence
of an extensive system of preferential rates.[188] A list of 108 firms
was discovered on the Southern Pacific road alone, who were enjoying
"special inside rates" which often aggregated $50,000 per month. Many
of these assumed the form of refunds upon claims for damages.

Thus the rebate as an evil in transportation, even since amendment
of the law in 1906-1910, while under control, is still far from
being eradicated. Favoritism lurks in every covert, assuming almost
every hue and form. Practices which outwardly appear to be necessary
and legitimate, have been shown to conceal special favors of a
substantial sort. Among the latest forms, undue extension of credit
may be mentioned. It appeared, for instance, in 1910 that the Hocking
Valley Railroad was favoring the Sunday Creek Coal Company to the
extent of credit for transportation on its books to the amount of
$2,400,000.[189] Another device which amounted to favoritism whether
so intended or not, has been brought into court upon prosecution of
the so-called Beef Trust. Substantial concessions in the rate from
Kansas City to various foreign countries prevailed by reason of the
fact that long time contracts for shipments at an established rate
continued after a new higher general tariff had been put into effect.
This increase of rates in general, leaving the trust rates at the old
figure, of course created an undue and unlawful preference.[190] The
chapter might be further amplified by details concerning "substitution
of tonnage at transit points;"[191] excessive allowance for claims,
and, as in a recent important case against the New York Central,
exorbitant rates paid for advertising in a theatrical publication, in
order to secure transportation for an itinerant troupe of travelling
players.[192]

The extreme subtlety of personal favoritism was recently brought to
light in connection with the selling price of coal in the little
town of Durham, North Carolina.[193] Complaint was entered that
a certain retailer was charging but five dollars a ton while his
competitors were unable to dispose of theirs at a profit for less
than six dollars. The explanation offered, that this person employing
no bookkeeper and, paying no rent, was enabled to do this because of
these savings, proved inadequate. Investigation developed the fact
that no direct preference from railroads existed, but that there were,
nevertheless, various peculiar features as to division of rates which
invited further examination. Thus, for example, while the Norfolk
& Western received $30.80 for hauling a carload of coal 160 miles,
the Durham & South Carolina Railroad received $24.80 for hauling the
same car one mile. This little railroad was owned by a lumber company
which seemed in effect to have set up the defendant coal merchant in
business. An arrangement between this little switching road and the
Seaboard Air Line, as well as the Norfolk & Western, also favored the
Durham & Southern. The key to the situation lay in the fact that the
Dukes,--powerful financial interests controlling the American Tobacco
Company, the Southern Power Company and large cotton mills,--also
controlled the Durham & Southern through the lumber company. The
Seaboard Air Line, therefore, when it gave to this little switching
road for a twenty-mile haul, about forty per cent. of its division on
through business, surreptitiously conferred a heavy bonus upon its
little connection. It must have lost money under such a division of
rates. The only conclusion possible is that this little railroad was
specially favored in order to purchase the goodwill of financiers
controlling a large traffic in other lines of business. The rebate,
however, was not given to the American Tobacco Company, but constituted
a comfortable profit "on the side" for powerful interests in its
management.

The elevation cases concerning the legitimacy of a special payment
for unloading grain in private elevators, have been under dispute for
years. Their validity has recently been affirmed by the Supreme Court
in an important decision in 1911.[194] This litigation illustrates
the difficulty of defining rebates as an expression of personal
favoritism. In 1899, the Union Pacific Railroad made a contract
with Peavey & Company at Council Bluffs to erect an elevator and to
transfer grain for a charge of one and one-quarter cents a hundred
pounds. This arrangement was objected to by competing railroads on
the ground that it gave compensation to a private concern, engaged
in general grain business for the handling of its own property. The
Union Pacific insisted that the expedient was necessary and proper
as a means for promptly unloading its cars at Omaha. The Commission,
after investigation, sanctioned the contract. In 1907, the matter again
came before the Commission upon complaint of other railroads competing
with the Union Pacific along the Missouri river. It was alleged that
the continuance of the elevator allowance by the Union Pacific would
virtually compel all other roads to make similar allowances. Still the
Commission adhered to its former conclusion that undue discrimination
did not result. The practice, however, gradually spread until all the
roads at Missouri river points put in an allowance of three-fourths of
one cent as an elevator charge. This brought forth a complaint from the
lines at St. Louis that traffic was being diverted from that point as
a result; and the Commission, once more considering the matter, held
that the practice was prejudicial to public interest. Conditions, in
fact, had changed, mainly through the increase of through shipments
to the East without transfer at the Missouri river. The Commission,
therefore, held that when such transfer took place, it was for the
accommodation of local grain merchants, who ought to pay for the
service rendered. At this stage of the proceedings, the matter went
to the Supreme Court of the United States upon appeal. The decision
finally upheld the Commission, in holding that the payment of an
elevation allowance was not unlawful, but that if paid to one elevator,
it must be paid to all. The bearing of this case upon the larger issue,
of payments by railroads for special services rendered by, shippers
cannot fail to be of great importance in the future.

The use of the industrial railroad as a means of preferential treatment
still occasions difficulty.[195] The case is simple where but one
shipper makes use of the terminal plant; but where a number of shippers
may utilize it jointly, it becomes difficult to draw the line between
pro-rating allowances and actual rebates. The Manufacturers' Railroad
Company, with twenty miles of track, four locomotives and one hundred
and ten employees, serves a considerable manufacturing section in
South St. Louis. A majority of the stock of this terminal railroad is
held by persons controlling the Anheuser-Busch Brewery. The enormous
traffic of this concern, equal to about one-thirtieth of the total
tonnage of St. Louis, is handled over the line of the Manufacturers'
Railway. Almost nine-tenths of its business consists of shipments of
beer; but in 1910 some 5,424 carloads belonging to other patrons moved
over its rails. For this terminal service the Anheuser-Busch Company,
through the Manufacturers' Railway, got a very substantial allowance
for the service rendered. For example, in one month on ten carloads of
beer, the Louisville & Nashville allowed $45 out of a total revenue
of $391.60 for moving the traffic something less than four thousand
feet. The disparity is obvious between this allowance and the balance
remaining as compensation for moving the traffic 477 miles, including
three first-class railroad tolls and terminal charges at the other
end.[196]

A prime difficulty is to determine whether unduly low commodity rates
amount practically to special favors granted to large shippers. Much
evidence recently tends to show that the trusts enjoy advantages of
this sort not extended to other competitors. The Steel Corporation,
through its ownership of railroads and steamships, certainly has a
great advantage over its rivals.[197] But other trusts not controlling
common carriers of their own, are also accorded what seem to be unduly
low rates upon their products. Recent evidence before the Interstate
Commerce Commission seems to show that sugar, beef, and coffee do
not bear their proper share of transportation costs.[198] Copper,
the product of a powerful trust, enjoys a lower ton mile rate than
grain,--a rate, despite its high intrinsic value, actually below that
on soft coal.[199] The discrimination is too palpable to be passed over
without explanation.

From the survey of rebating and rate wars,--which latter of course
afford the most favored soil in which personal favoritism may
flourish,--one cannot avoid the conclusion that a great improvement in
conditions has been brought about. The strengthened arm of the Federal
government has come to the support of the carriers; and has assisted
them to a material enhancement of their revenues, by putting a stop to
serious leakages in income. But the carriers could undoubtedly do much
on their own account, could they be granted the right to make traffic
agreements, subject always, of course, to the approval and supervision
of the Interstate Commerce Commission. Whether Congress will ever
permit this, remains to be seen. The most important result of all
this Federal activity so far, has been the moral stimulus toward fair
business dealing which has been given. Thousands of shippers today,
quite apart from the fear of fines or imprisonment, would disdain to
ask or accept favors which a decade since would have been regarded
as entirely proper. No one can doubt that the morale of business is
distinctly higher than it used to be. Could such higher standards
become universal, the Department of Justice would be relieved of a
substantial part of its present duties.

FOOTNOTES:

[162] 14 I. C. C. Rep., 250. Upheld by the Supreme Court in 1911; 219
U. S., 498. Also 23 _Idem_, 535.

[163] Circular Letters of the Chicago Bureau of Car Performances;
undated.

[164] The latter half of chap. XII.

[165] The chapter on reorganizations in vol. II will afford other
instances with full references. Com. & Fin. Chron., LIX, p. 232.

[166] 55th Cong., 1st Sess., Sen. doc., 39, p. 29.

[167] Ann. Rep., I. C. C., 1896, p. 82: and 1897, p. 53. Fine cases in
1 I. C. C. Rep., 633-656.

[168] Investigation of grain rates at Missouri river points; 54th
Cong., 2nd Sess., Sen. doc. 115, pp. 17-22, etc.

[169] 167 U. S. Rep., 633.

[170] P. 211, _infra_.

[171] On private car lines, Columbia University Studies, etc., LXXXI,
1908, p. 185. J. W. Midgley's Circular Letters as chief of the Bureau
of Car Performances in 1901, costing him his position, by the way,
are most significant. Car service reform resulted nevertheless. _Cf.
Quarterly Journal of Economics_, 1904, p. 299. See pp. 96 and 140,
_supra_.

[172] U. S. Bureau of Corp., Rep. on Trans, of Petroleum, pp. 36, 60,
81, 88.

[173] 10 I. C. C. Rep., 1, 148, 385 and 661: 18th Ann. Rep., I.C.C.,
19 and 42: Senate (Elkins) Committee, 1905, pp. 2424-2495. Later cases
discussed at p. 212, _infra_.

[174] P. 212, _infra_.

[175] P. 209, _infra_.

[176] 11th Ann. Rep., I.C.C.; 16th _Idem_, p. 13; and 21st _Idem_, p.
14.

[177] Bureau of Corp., Rep. on Trans, of Petroleum, 1905, p. 105 _et
seq._

[178] 11 I.C.C. Rep., 438; _Cf._ 13 _Idem_, 70; and 19 _Idem_, 356.

[179] Report on Discriminations and Monopolies in Coal and Oil; Jan.
25, 1907, pp. 1-81.

[180] Ripley, Railway Problems, chap. II, fully described.

[181] 11 I.C.C. Rep., 558; U. S. Bureau Corp'ns Rep., p. 148.

[182] Routes shown by the map on p. 647, _infra_.

[183] 20 I. C. C. Rep., 200, with dissenting opinion. Reviewed by the
U. S. Commerce Court 1912; _Railway Age Gazette_, chap. LII, p. 1550.
P. 586, _infra_.

[184] U. S. Circuit Court of Appeals, decided March 12, 1902. The
history is in Ann. Rep., I.C.C., 1907, p. 114; 1908 pp. 26 and 36; and
1909, p. 26.

[185] Never published. Outlined in Wisconsin _Assembly Journal_, 1905,
chap. II, pp. 1463-1497.

[186] _Cf._ p. 492, _infra_.

[187] _Cf._ 59th Congress, 1st Session, Senate Doc. 526.

[188] 13 I.C.C. Rep., 123.

[189] Ann. Rep., I.C.C., 1910, p. 10.

[190] _Idem_, 1909, p. 32. Circuit Court of Appeals decision, April 29,
1911, Ann. Rep., I.C.C., 1908, p. 32.

[191] 18 I.C.C. Rep., 280. _Cf._ p. 401, _infra_.

[192] _Boston Transcript_, Feb. 20, 1912.

[193] 22 I.C.C. Rep., 51.

[194] 222 U. S., 42. The system is described in the _Railway Age
Gazette_, June 4, 1909.

[195] 21 I.C.C. Rep., 304. Compare also before the U. S. Commerce
Court; the Stock Yards case, 192 Fed. Rep., 330; the California
Switching case, 188 Fed. Rep., 229; and the Crane Iron Works case, No.
55, April session, 1912. The tap-line decision, 23 I.C.C., 277, most
fully discussed the general policy to be observed toward industrial
roads in the lumber business. _Cf._ also the use of boat lines. 23
_Idem_, 358.

[196] _Railway Age Gazette_, LII, pp. 269 and 340.

[197] Evidence before the Stanley House Committee on Steel Corporation,
Feb. 28, 1912, p. 3667; and Bureau of Corporations on U. S. Steel
Corporation, II, p. 72.

[198] _American Economic Review_, 1911, p. 789.

[199] S. O. Dunn, American Transportation Question, pp. 62, 81.



CHAPTER VII

LOCAL DISCRIMINATION

    Concrete instances, 215.--Hadley's oyster case not
        conclusive, 217.--Two variants: lower long-haul
        rates by the roundabout route, as in the Hillsdale,
        Youngstown, and some Southern cases, 221; or by the
        direct route, as in the Nashville-Chattanooga and
        other southern cases, 225.--Complicating influence of
        water transportation, 232.--Market competition from
        various regions, a different case, 234.--The basing
        point (southern) and basing line (Missouri river)
        systems, 238.--Their inevitable instability and probable
        ultimate abandonment, 242.--Postage-stamp rates,
        illustrated by transcontinental tariffs, 245.--Which
        line makes the rate? 255.--Cost not distance,
        determines, 256.--Fixed charges v. operating
        expenses, 257.--Proportion of local business, 259.--Volume
        and stability of traffic important, 261.--Generally the
        short line rules, but many exceptions occur, 263.


Any unreasonable departure from a tariff graded in some proportion
according to distance is known as local discrimination. It constitutes
one of the most difficult and perplexing problems in transportation.
Personal discrimination now happily having been practically eliminated
since the enactment of the Elkins Amendments to the Act to Regulate
Commerce, this issue of local discrimination under the rehabilitated
long and short haul clause, has recently assumed an added significance.

A merchant of Wilkesbarre, Pennsylvania, purchased a carload of
potatoes at Rochester, New York, and had the freight bill made for a
delivery to Philadelphia, because the freight to Philadelphia was less
than it was to Wilkesbarre, which is 143 miles nearer. He stopped the
potatoes at Wilkesbarre, unloaded them, and paid the freight. A few
days later he received a bill from the Lehigh Valley Company for twelve
dollars additional freight. If the potatoes had gone to Philadelphia,
he would have paid forty-eight dollars freightage. As they stopped at
Wilkesbarre, he had to pay sixty dollars; that is, twelve dollars for
not hauling the carload 143 miles.[200]

A merchant in Montgomery, Alabama, shipped two carloads of fruit jars
from Crawfordsville, Indiana, to Montgomery. He shipped them to Mobile
and then paid the local rate from Mobile back, those fruit jars going
through Montgomery on the way out. By having them hauled 350 miles
farther, he saved seventy-five dollars on the two carloads.

On first-class goods, at one time, the rate from Louisville to
Montgomery, was $1.26 per hundredweight. On to Mobile, 180 miles
further south, it was only ninety cents. In the same territory the rate
on kerosene oil from Cincinnati at times has been three times as much
to interior points as to New Orleans, three times as far. West of the
Missouri river and in the Rocky mountain area similar complaints are
common. Denver, Colorado, pays $1.79 per hundredweight on cotton piece
goods, in small lots, hauled 2,000 miles from Boston; while the rate
to San Francisco, 1,400 miles further away, on the same line, is only
$1.50. This discrepancy is even greater in wholesale rates. No carload
rating is given to Denver; while for similar shipments to the coast the
rate is only one dollar per hundredweight. In the opposite direction,
sugar is carried from San Francisco through Denver to Kansas City for
sixty-five cents per hundredweight, as compared with a rate of one
dollar if the sugar is stopped at Denver. Smaller places in the West
afford equally striking instances. The rate on rope from San Francisco
to Independence, Kansas, is seventy-five cents; while the same goods
are hauled on through Independence, Kansas, much farther, to Missouri
river points for sixty cents per hundred pounds. Wichita, Kansas,
complains that cotton piece goods from New York by way of Galveston
are rated at $1.36; while by the same route Kansas City, 225 miles
longer haul by that route, the charge is only ninety-three cents. The
Southwestern Lumberman's Association complains,--

    "that a train of cars of lumber starts from Camden or other
    common point in Texas via Atchison, Topeka and Santa Fe
    Railway, and one car is dropped off in Oklahoma at 27-1/2 cents
    per 100 pounds; one each also at Wichita and Emporia, Kansas,
    at 27-1/2 cents per 100 pounds; one at Kansas City at 23 cents,
    and two cars also set off this same train at Kansas City,
    destined for Omaha and Lincoln, Nebraska, at 23 and 24 cents
    per 100 pounds, respectively. The balance of this train, now at
    Kansas City, runs on to Chicago, and 24 cents per 100 pounds is
    the charge then for most of the train which is left there....
    Why should builders of homes in Wichita and Emporia, Kansas,
    pay higher freight than builders in Kansas City, Omaha, and
    Chicago when using yellow pine from Texas?"[201]

Such instances as these might be multiplied indefinitely. They are
often striking in character. The first impression is of intolerable
abuse. The simplest tenets of justice and fair dealing appear to be
violated. Careful analysis should, however, always be made before
drawing such conclusions. Railroad practice seldom departs so
flagrantly from the fundamental consideration of cost of service
without very substantial economic justification.

The reasoning underlying local discrimination is admirably set forth
by President Hadley in the following passage from his _Railroad
Transportation_:--[202]

    "On the coast of Delaware, a few years ago, there was a place
    which we shall call X, well suited for oyster-growing, but
    which sent very few oysters to market, because the railroad
    rates were so high as to leave no margin of profit. The local
    oyster-growers represented to the railroad that if the rates
    were brought down to one dollar per hundred pounds, the
    business would become profitable and the railroad could be sure
    of regular shipments at that price. The railroad men looked
    into the matter. They found that the price of oysters in the
    Philadelphia market was such that the local oystermen could
    pay one dollar per hundred pounds to the railroad and still
    have a fair profit left. If the road tried to charge more, it
    would so cut down the profit as to leave men no inducement to
    enter the business. That is, those oysters would bear a rate
    of one dollar per hundred, and no more. Further, the railroad
    men found that if they could get every day a carload, or nearly
    a carload, at this rate, it would more than cover the expense
    of hauling an extra car by quick train back and forth every
    day, with the incidental expenses of interest and repairs. So
    they put the car on, and were disappointed to find that the
    local oyster-growers could only furnish oysters enough to fill
    the car about half full. The expense to the road of running
    it half full was almost as great as of running it full; the
    income was reduced one-half. They could not make up by raising
    the rates, for these were as high as the traffic would bear.
    They could not increase their business much by lowering rates.
    The difficulty was not with the price charged, but with the
    capacity of the local business. It seemed as if this special
    service must be abandoned.

    "One possibility suggested itself. At some distance beyond
    X, the terminus of this railroad, was another oyster-growing
    place, Y, which sent its oysters to market by another route.
    The supply at Y was very much greater than at X. The people
    at Y were paying a dollar a hundred to send their oysters to
    market. It would hardly cost twenty cents to send them from Y
    to X. If, then, the railroad from X to Philadelphia charged
    but seventy-five cents a hundred on oysters which came from
    Y, it could easily fill its car full. This was what they did.
    They then had half a carload of oysters grown at X, on which
    they charged a dollar, and half a carload from Y on which they
    charged seventy-five cents for exactly the same service.

    "Of course there was a grand outcry at X. Their trade was
    discriminated against in the worst possible way--so they
    said--and they complained to the railroad. But the railroad men
    fell back on the logic of facts. The points were as follows: 1.
    A whole carload at seventy-five cents would not pay expenses of
    handling and moving. 2. At higher rates than seventy-five cents
    they could not get a whole carload, but only half a carload;
    and half a carload at a dollar rate (the highest charge the
    article would bear) would not pay expenses. Therefore, 3. On
    any uniform rate for everybody, the road must lose money,
    and 4. They would either be compelled to take the oyster car
    away altogether, or else get what they could at a dollar, and
    fill up at seventy-five cents. There was no escape from this
    reasoning; and the oyster men of X chose to pay the higher rate
    rather than lose the service altogether."

The logic of this oyster case seems convincing in its simplicity. But
it presents more complications than appear at the outset.

[Illustration]

First of all, what is the nature of the competition at the more distant
point which is alleged to "compel" the lower rate? Is it merely of
rival routes or of competing markets? It will be advisable to keep the
two distinct so far as possible. Under the first heading, competition
of routes, the subjoined sketches represent two possible situations. In
both instances, however, Y, enjoying the lower rate, is more distant
from Philadelphia than X. The difference between the two arises from
the fact that in the one case X is nearer Philadelphia than Y on a
roundabout line; while in the other X is actually nearer than Y by
the shortest direct route. We may safely assume that the compelling
competition alleged at Y as justifying the lower rate is by rail; as,
the commodity being a marine bivalve, both places presumably enjoy
equal facilities for water carriage. At all events, assuming that we
have to do with competing rail routes alone, what differences obtain
between the two sets of circumstances above sketched? Not insignificant
inequalities in the length or power of the two routes are implied by
the diagrams. They are supposed to represent substantially different
lines, which may, for the purpose of the argument, be denominated
strong, natural, or standard, and weak, unnatural, or abnormal,
respectively, so far as the particular traffic in hand is concerned.
That this distinction is not irrelevant, but frequently of determinant
force, is shown by an analysis of concrete cases which have arisen for
adjudication.

This proposition is clear beyond dispute. The actual cost of service,
which fixes an irreducible minimum rate between Y and Philadelphia, is
less on the short line than by the roundabout one. For either road to
accept less than the portion of the cost traceable to this particular
traffic, that is to say, the extra cost incident to its acceptance,
is economically inconceivable. From this it follows, other conditions
being equal, that the shortest line between Y and Philadelphia
rules the rate in the last instance. This is normally the case. The
roundabout route thereafter merely accepts the rate thus compelled.
To permit the roundabout line to rule the minimum rate would not only
violate a fundamental principle of operation: it would inevitably
lead to chaos. The analogy with cut-throat competition in business is
obvious. It is equally plain that the mere acceptance of a short line
rate by a roundabout road, so long as this rate is adequate to yield
some profit over the extra cost, while of advantage to some, may not
work positive injury to any one. This condition normally corresponds
to the state of affairs represented by diagram A. The nearer point, X,
as Hadley avers, has no just grievance against Y because the latter
has the good fortune to have a direct service to Philadelphia at a
low rate. For Y to withdraw shipments from the line via X might even
destroy the only chance of X for a market. It would also deprive Y
of whatever benefit it might have derived from competition either of
routes or of facilities. Of course, we have expressly omitted market
competition as a factor, reserving it for separate treatment. Yet
one objection arises. Normally, the direct line ought to maintain
a tariff conforming in some degree to the distance principle. The
roundabout line can compete at Y only by a violation of it, unless,
indeed, its local tariffs be graded much more gradually. In other
words, its progression towards the maximum must be distributed over
a much longer line. Even this would, on Hadley's statement of fact,
eliminate X from the Philadelphia market. Such reduction of local
rates upon the roundabout route would in turn discriminate against
places like Z on the direct line, equally distant with X from
Philadelphia. For the latter places would necessarily be assessed at
a higher rate per ton-mile.[203] This would constitute another form
of local discrimination, which will be discussed in due time. There
is, therefore, at best, only a choice of adjustments, either of which
leads to some form of inequality. But, upon the whole, balancing the
evil with the good, the first variant of our oyster case appears to be
best solved by according all shippers at Y a somewhat lower rate than X
enjoys.

Conditions corresponding to diagram A have frequently given rise to
complaints before courts and administrative tribunals. An interesting
illustration is afforded by the Hillsdale ice case in Michigan.[204]
Ice was moved from this town to Springfield and Columbus, two
neighboring Ohio cities, over several different routes. (See map on
next page.) To Columbus the shortest road was by the Hocking Valley
Railroad directly through Toledo. Another route by way of Sandusky
existed; and even a third through Sandusky, thence over to Springfield,
and in by the side door, so to speak, to Columbus. This last routing
was due to the fact that the Big Four road from Sandusky diagonally
across to Springfield had no access to Columbus except through a branch
line from Springfield. This last-named zigzag route was 295 miles in
length as against 190 miles by the direct line through Toledo. To
Springfield, on the other hand, no direct route from Hillsdale existed;
but freight might move either _via_ Sandusky by the Big Four road or
through Sandusky and around by way of Columbus. The shortest of any of
these lines to Springfield, however, was twenty-nine miles longer than
the shortest line to Columbus. This established Columbus, therefore,
as normally the nearer point. Complaint arose from the fact that ice
carried over the zigzag route to Columbus actually passed through
Springfield and forty-five miles beyond to reach its destination. For
such shipments over the Big Four road, Springfield instead of Columbus
was the nearer point. But, contrariwise, for ice coming to Springfield
through Columbus, the latter in turn became the intermediate
point.[205] The specific complaint was that the rate by all routes
to Springfield was one dollar per ton, while to Columbus it was only
eighty cents. Originally, the rate was higher ($1.25 per ton), but was
the same to both points. Is this a case of local discrimination or not?

[Illustration]

The Big Four road operating through Springfield answered that it was
not responsible for the eighty cent rate to Columbus; that this was
made by the direct line; and that it obviously must meet this rate or
withdraw from the ice business. It alleged, moreover, that the rate of
one dollar was reasonable in itself as compared with other rates in the
same territory, and was in fact substantially less than it formerly
was; nor would its withdrawal from Columbus ice business evidently be
of any advantage whatever to Springfield, but would indeed deprive it
of some small contribution to joint expenses of operation on all its
tonnage. No evidence being offered that Springfield was positively
injured by this adjustment, the Commission properly dismissed the
complaint.

The distinctive feature of this class of cases, as has been said, is
that the intermediate point preferring the complaint is always on a
roundabout route.[206] St. Cloud, Minnesota, and Wichita, Kansas, whose
contentions are described hereafter in detail, were thus situated. The
so-called "rare and peculiar" case of Youngstown, Ohio, cited in the
original Louisville and Nashville decision of 1889, was in no sense
different. It was a case of pure competition of routes.[207] Traffic
to New York was starting its journey from Pittsburg, over the rails of
the same company, in exactly opposite directions. Some of it went east
by the direct line; while other freight first moved due west, thence
north, by way of Youngstown, Ohio, until it reached the main line at
Erie, which took it on to New York. This traffic, therefore, described
three sides of a rectangle in reaching its destination, traversing a
route 172 miles longer than by the direct line. The issue was raised
by a demand for as low a rate to New York from Youngstown as Pittsburg
enjoyed, on the ground that it was nearer New York by this indirect
line; Pittsburg traffic, in other words, passing through it _en route_
to the seaboard. The reply, of course, was that, although nearer by an
indirect road, it was more distant by the natural and shortest route,
and consequently should pay more for the service. What the roundabout
line was really demanding was permission to compete at Pittsburg for
New York business, without being compelled to reduce its local rates
from intermediate points like Youngstown. In other words, the long line
was demanding exemption from the long and short haul clause, while the
direct short line conformed to it. Without such exemption it could not
continue to reach out for Pittsburg business, as the loss incident
to reduction of its local rates would outweigh the profit in the
competitive tonnage.

One side of the Savannah Freight Bureau Fertilizer case[208]--namely,
the complaints of local stations on a roundabout road--brings it
within our first category. The roundabout line from Charleston to
Valdosta, shown upon the map at p. 648, was 413 miles long as against
a direct route of only 273 miles. Kathleen, Georgia, is only 288
miles out from Charleston on this indirect line,--approximately the
same distance as Valdosta, which thus corresponds to Y in the oyster
case. Yet Kathleen paid a rate of $3.32 per ton on fertilizer from
Charleston as against $2.48 charged to Valdosta, 125 miles beyond.
But this excess distance is by an indirect route. Most of the notable
English cases concerning local discrimination appear to be of the same
stamp.[209] The complaints of a number of smaller places in the St.
Paul-Milwaukee territory, like Cannon Falls, Lacrosse, and Northfield
some years ago, reduce in part to the same thing.[210] Whether the
Troy, Alabama, and Wichita, Kansas, cases belong here or in the next
group is indeterminate, owing to the difficulty of comparing conditions
of carriage by rail and by water, respectively.

On the other hand, the set of circumstances shown in diagram B (page
219, _supra_) is of quite a different sort. The justification for
the local discrimination is much less clear. Here, as before, the
distant point Y enjoys a lower rate than X because of the presence of
competition; but it is important to inquire both as to the nature and
the amount of it. In the first case, competitive traffic from Y was
_extra_ rather than normal in character, so far as the line serving
X was concerned. It was relatively small in amount. Whatever surplus
revenue resulted from it aided the local tariffs, including those
at X, in supporting the burden of fixed expenses. This burden they
were bound to bear entirely in the absence of competitive business
picked up at Y. The distant point Y of course had no complaint in any
event, and the chances are that X was benefited, as we have seen.
But in the second case the great bulk of the traffic from Y belongs
naturally to the direct line through X. It constitutes the mainstay
of its business. The direct line, unlike the roundabout one, cannot
withdraw from the field when rates become unremunerative. It is in
this business passing directly through X to stay. Nine-tenths of the Y
traffic, perhaps, moves through X in this latter case; in the former
one, one-tenth would perhaps measure the proportion of the indirect
line. Under this assumption, it is obvious that the question of the
level of rates at Y, as determined by the presence of competition,
assumes a ninefold greater importance in the eyes of X, so far as the
effect upon local rates in supporting the fixed and joint expenses of
the road is concerned. In any event, even the line operating under
a disability supposedly earns some small net return on competitive
traffic, else it would withdraw from the field. This it is in fact free
to do at any time; and, however small the net return, it is at least
all gain. On the other hand, when the net return on a large volume of
its natural business becomes unduly small, the financial stability
of the direct line is put in jeopardy. The danger of local rates (as
at X) being actually enhanced or at least prevented from reduction,
because of an unduly low level of competitive rates at more distant
points, is thus much greater when X is a way station on a direct line
than when, as in our first instance, it is an intermediate point on
a roundabout route. For this reason the direct line through X is at
the outset put to a justification of its local tariffs, as to whether
they are inherently reasonable or not; first, by comparison with the
general level throughout the surrounding territory; and, secondly, as
yielding a return on the capital actually invested. This seems to have
been the line of reasoning which the Interstate Commerce Commission
adopted in the recent important Spokane, Washington, cases.[211] The
low through rates to the Pacific coast were established as reasonable
by the competition of sea routes round the Horn, and especially by the
newly-opened Tehuantepec Railroad. The only ground for finding there
was discrimination against Spokane was an inherent unreasonableness in
its rate. This was, in fact, the outcome; the decision being rendered
notable, further, by reason of the prominence given to the valuation of
the railroads' property as a basis of judgment.

The first important point to be established, then, in this second
variety of the oyster case was as to the relative distribution of
traffic from the more distant competitive point by the several lines
open to it. The next concerned the absolute reasonableness of the rate
at the intermediate point. In the third place, we must inquire whether
the rate at the more distant point may not be unreasonably low. This
was a contingency not possible, as we have just seen, in the Spokane
case. But others may be different in this regard. One is thus forced
to consider the effect of the presence of roundabout competitive lines
upon the level of rates at the more distant point. An indirect rival
road may, as in the St. Cloud case, carry only seventy-three carloads
a day as compared with a daily movement of one thousand cars by the
direct lines. On the other hand, as in the Savannah Freight Bureau
case, Valdosta, Georgia, may receive nine-tenths of its supply of
fertilizer by indirect roads. But in any event it is the potential,
not the actual, movement of tonnage, which may count in the long run.
It is indisputable that the short line between two points never pares
its rates down to an irreducible minimum except under compulsion.
The presence of a roundabout route affords just this pressure to
reduction. Even allowing that in the last analysis the long line will
strike bed-rock of no profit first, it is indisputable that such lines
frequently, instead of merely meeting rates made for them by the direct
routes, seek to divert business by actually undercutting those rates.
Having only a small share of the tonnage, they take risks which would
be fatal to others. To transport at an absolute loss is of course no
more defensible than the argument of the merchant that the only way
to compensate for selling goods below cost was to enlarge the volume
of his business. But, of course, there is always the chance that, by
enlarging this volume sufficiently, operating expenses may be so far
cut down that a loss may be transformed into a profit. The diversion
of enough traffic from the direct railroad line to accomplish this end
would, of course, reduce the volume of its traffic and thereby unduly
burden it, to the manifest injury of all local points like X.

Suggestive illustrations of lower rates at the more distant point
than are under the circumstances actually "compelled" by competition
of routes are to be had. In a recent case[212] the rates on bananas
from Charleston, South Carolina, to Danville and Lynchburg, Virginia,
respectively, were called in question. The traffic moved through
Danville on its way to Lynchburg, sixty-six miles beyond, at a rate
of forty-three cents to Danville as compared with a rate of twenty
cents to Lynchburg. The reason for the low rate at Lynchburg was the
presence of a rival route,--bananas, coming in through Baltimore. But
the lowest rate "compelled" by this competition was in fact thirteen
cents higher than the Danville line charged at Lynchburg. In other
words, the long-distance rate was that much lower than it need have
been. This instance is analogous in another way to our oyster case,
inasmuch as the demand at Danville being limited, one-half of the
same carload paid the Danville rate of forty-three cents, while the
other half went on at the lower rate of twenty cents enjoyed at the
more distant point. It is in this connection, of rates unduly low at
so-called competitive points, that the partial weakness in the railroad
arguments in many of the southern basing point cases appears. Since the
Supreme Court of the United States had held that competition at the
more distant point justified its lower rates, the Interstate Commerce
Commission was powerless to give effect to whatever opinion it might
entertain that at times it is neither water nor commercial competition
which actually brings about the low rate at the basing point; but
merely a consensus of opinion among carriers that that place will
respond quickly enough to favors granted, to make it worth while to
try the experiment.[213] This conviction is vastly strengthened, of
course, since entire monopoly among all the southern railroad lines
has become an established fact. It is an absurdity to speak longer of
any competition between rail carriers existing in a large part of this
territory.[214]

[Illustration]

Actual illustrations of this second variant of the oyster case, free
still from the complications of competition of markets, are not
common, but occasionally arise. Chattanooga, which aspires to be the
commercial and industrial centre of eastern Tennessee, is about 150
miles southeast of Nashville, as shown by the accompanying sketch map.
Owing to the southwestern trend of the Appalachian Mountain valleys,
it is only 846 miles from New York by rail, almost as the crow flies;
while Nashville has access to the North principally through Ohio river
gateways, over lines, at the best, 1,058 miles in length. By these
lines, therefore, the latter is 212 miles further from New York than
Chattanooga. But the two competitive places are only 151 miles apart;
whence it follows that the shortest possible all-rail line from New
York to Nashville, swings around to the south by way of Chattanooga.
The situation is complicated by other combined rail and water routes
from New York through Norfolk, Savannah, and Charleston. But all these
lines also reach Nashville by coming up through Chattanooga. From every
point of view, therefore, Chattanooga, on the basis of mileage, is the
nearer point to New York--151 miles nearer by the direct line, all
rail; equally nearer by all combined rail and water routes: and 212
miles nearer than is Nashville by the roundabout all-rail lines through
Louisville or Cincinnati. Its location corresponds to X in our second
variation of the oyster case; namely, an intermediate point on the
direct line to another more distant point Y, which latter enjoys the
competition of more roundabout routes.

[Illustration]

The disability against Chattanooga, against which it protested, was
substantial.[215] Its first-class rate from New York was $1.14 per
hundred pounds, while Nashville paid only ninety-one cents. On various
commodities the Chattanooga rates were from twenty-five to seventy-five
per cent, above those to Nashville. The effect of such differences
upon jobbing business at the places intermediate between Nashville and
Chattanooga is shown by the subjoined chart. The two upper sloping
lines represent the through rates from New York to each distributing
centre, plus the local rates out to way stations. Even at Bolivar, the
nearest place to Chattanooga, the Nashville combination is slightly
lower than that based upon Chattanooga. This disability steadily
increases as Nashville is approached, rates from Chattanooga rising
while those from Nashville fall, until at Kimbro the jobber located
at Chattanooga--the nearer point to New York on the direct line--must
lay down his New York goods at a rate of sixty-three cents a hundred
pounds higher than his competitor in Nashville enjoys. This adjustment
is partly an historical product. Nashville, by the old river routes
from Pittsburg down the Ohio and up the Cumberland, was formerly nearer
the Eastern cities than Chattanooga. Then, the trunk lines through
Cincinnati with heavy traffic and low rates shortened the distance;
and, finally, the Louisville & Nashville Railroad, supplanting the
river routes, undertook to build up Nashville as against Cincinnati
and Louisville. Historically, on the other hand, Chattanooga was long
an unimportant point. It took, as it still does, the same rate from
the North as prevailed at some twenty-three other southern cities from
Atlanta to Memphis. Here is the crux of the difficulty. The rates
at Nashville must be assumed as historically fixed. Whatever remedy
may apply must come from a reduction of the rates to Chattanooga,
the nearer point. This place has now become an important centre, the
meeting point of a number of rail and water lines. The long prevalent
grouping of all the southern cities with equal rates from the North
must be replaced by a system of differentials, if the discrimination
against Chattanooga is ever to be ameliorated.

By this time it will be observed that in the discussion of the
Chattanooga case we have drifted far beyond the mere competition of
rival routes. Commercial competition, which affords the justification
for grouping all these twenty-three important southern cities together,
is a topic to be treated elsewhere by itself. The difficulty in many
of these cases is to distinguish between the really strongest line and
the one which is merely the shortest. Upon this point one's decision of
the Chattanooga case might actually depend. The Louisville & Nashville
contends that Nashville even today is, from an operating point of view,
nearer New York than Chattanooga, although the distance is 212 miles
more. All the trunk lines compete at Ohio river points, and bring them
relatively much closer to New York. The density of traffic on these
lines is far heavier than on the air line to Chattanooga.

It happens that Chattanooga meets this allegation of greater trunk
line density and cheapness by proof of the still greater economy
of operation by the coastwise steamers to southern ports, traffic
coming thence north by rail through Chattanooga. The appearance of
water competition in any of these cases always introduces an almost
insuperable difficulty in the way of comparison of long and short
lines. Shipment by vessel differs from rail carriage, primarily in
the relatively high terminal costs, the absence of all maintenance of
way costs, and the low cost of actual propulsion. With a cargo once
securely stowed, the distance traversed by a vessel is of relatively
little importance, much less so than in the case of carriage by rail.
A powerful factor in determining water rates, moreover, especially
by sea, is the absence of local traffic. Wharves and terminals being
expensive to build and maintain, and the method of loading in a ship's
hold not being conducive to ease in access or assortment, vessels
are confined largely to bulk traffic at a few important points. The
expenses of operation must be more uniformly distributed over the cargo
than in the case of a trainload. The water line, therefore, is deprived
of one advantage in cutting rates. It cannot, so readily as a railroad,
recoup itself for losses on competitive business or at competitive
points by falling back upon its earnings from way stations.

From all these considerations it not infrequently comes about that,
unlike carriage by rail, the longest way round may indeed be the
shortest way home. This is clear in the highly involved Wichita,
Kansas, cases.[216] Wichita, a commercial centre of southern Kansas,
is 200 odd miles southwest of Kansas City. Its all-rail rates from
the East are higher than to Kansas City. Yet by the water route from
New York to Galveston and thence up by rail, as compared with Kansas
City, it is a nearer and intermediate point. The Interstate Commerce
Commission well expresses the difficulty:

    "It is quite probable that the actual cost of transporting
    cotton piece goods from New York to Wichita _via_ Galveston
    does not exceed that of carrying them from New York to
    Kansas City via the cheapest route. The all-rail haul is to
    the latter point 1,300 miles and over. The ocean and rail
    movement involves a rail carriage of from 1,100 to 1,300 miles,
    depending upon the route selected. If the goods move through
    some Gulf port, there is a rail carriage of not less than 850
    miles. If, therefore, the rate were to be measured by the
    expense of the service, it is probable that Wichita would today
    enjoy as low a rate as the Missouri river."

The Wichita complication, moreover, works both ways. Wichita and Kansas
City form two angles of a narrow triangle with its apex at the Gulf
ports; but the distance from Kansas City is longer than from Wichita.
Railroad competition brought it about, however, that the rate on export
grain from Wichita _via_ Kansas City to the Gulf came to equal the
rate from Kansas City to the Gulf _via_ Wichita. But the former was a
much longer and more roundabout haul; and, moreover, was less than the
shorter haul rate from Wichita to the Gulf direct. The analogy to the
Hillsdale case, above-described, will appear clearly on inspection of
the map.

Summarizing the results so far reached, in all that concerns the
two sorts of cases considered in the preceding paragraphs, our
conclusion is that, when competition by rail at the distant point is
alone present, and when the nearer point is on a roundabout route, a
railway "is entitled to carry the traffic past X to Y (Philadelphia)
for considerably less than nothing"; but, when the nearer point is on
a direct line, the case is debatable. Proof that normal competition
compels the lower rate at the remoter station must be uncommonly clear
and conclusive. In other words, the facts that the rate at Y is not
unduly low and also that the rate at X is not unreasonably high must
both be firmly established.

A distinct class of cases of local discrimination is suggested by
the recent case of Montgomery, Ala., in the United States Commerce
Court.[217] These like other cross line cases, akin to that of Wichita,
Kansas, above-mentioned, arise in connection with practices as to the
division of joint rates. They will be discussed in connection with
pro-rating in our second volume.

The question has forced itself forward constantly as to whether the
existence of the alleged discrimination in rates is merely a matter of
relativity in cost of operation or whether it inflicts positive injury
upon the nearer point. Would it benefit the nearer point if the lower
rate beyond were withdrawn? It is here that the complexity of some of
these cases of local discrimination becomes apparent. To understand
this phase of the matter, the factor of commercial competition, as
distinct from mere rivalry of routes, must be introduced. Hadley's
analysis of the oyster case is quite inadequate on this point. Rates
in that instance were on commodities (oysters) produced at practically
uniform cost at both X and Y. They were, moreover, rates _from_ two
places out to a common market. Would it, however, make any difference
if the controversy concerned the rates in the opposite direction;
or, in other words, from a common centre of distribution out to two
competing consuming points? Would it make any difference whether
the goods were to be consumed at X and Y; or were to be used as raw
material in manufactures at those two points; or were to be distributed
throughout the countryside from X and Y as jobbing centres? It is at
once evident that these issues are more complicated than in the first
case. The two points X and Y being commercial and industrial rivals, is
it not possible that the growth of one may take place at the expense
of the other? At any given time there is only a fixed demand for the
goods consumed, manufactured in or redistributed from the two places.
Trade won by one is quite lost to the other. Of course, in a measure,
this might also have been true of the oyster production. But, inasmuch
as in that case the rate from Y was not affected by the entry of X,
its prosperity would not probably be disturbed. The Hillsdale ice case,
above described, is also one where the commodity (ice) is of relative
unimportance for Columbus and Springfield, respectively. How would
matters stand if the rates in question were on lumber or coal for
manufacturing purposes? The difference, no doubt, is merely of degree
and not of kind. Magnitudes, however, must not deceive us. The rights
of Kathleen or Danville are just as sacred as those of Youngstown and
Pittsburg.

[Illustration]

St. Cloud, Minnesota, is located upon a line of the Northern Pacific
Railroad, seventy-six miles northwest of St. Paul.[218] It is a
competitor not only with St. Paul, but with other local centres in
the vicinity, like Elk River, Princeton, and Anoka, either for flour
milling or for distributive jobbing business. It is about the same
distance as these other places from Duluth or Superior; through which
the entire district obtains its supplies, such as coal from the East
by lake boats; and by way of which its flour must be shipped to the
Eastern markets and to Europe. And yet the rate on flour made at
St. Cloud to New York in 1899 was twenty-eight and a half cents per
hundredweight, as against a rate of twenty-one and a half cents from
St. Paul, this latter rate being enjoyed also by Milaca, Princeton,
Elk River, and Anoka. The rates on coal and other supplies from the
East were likewise proportionately higher than to St. Paul and these
neighboring towns. The specific complaint in this case is of local
discrimination. The Northern Pacific Railroad operates the long line
between St. Paul and the head of Lake Superior by way of Brainerd.
On this business, passing through St. Cloud, it has to meet a rate
compelled at St. Paul by the competition of no less than three direct
lines to Duluth. It avers that this business, taken either way for
longer distances and at lower rates than are accorded to St. Cloud,
in no way affects the rates at that point; and that whatever it can
earn as a contribution to joint expenses decreases the burden of these
upon St. Cloud rates. This is all entirely true from the transportation
point of view; but, viewed in a large way, the situation is altered.
Wheat of local production about St. Cloud is rendered of less value by
practically the excess of the St. Cloud rate per hundredweight over
the rate enjoyed from St. Paul. The Interstate Commerce Commission
found that this was equivalent to a difference of fully $1 per acre
in the value of wheat lands tributary to St. Cloud. And on the other
hand, of course, the cost of all its supplies is enhanced above the
level of rival manufacturing centres. On soft coal this equalled no
less than eighty-five cents per ton. To this the Northern Pacific
replied that the discrimination against St. Cloud was not of its
creation, but had existed before its entry into any St. Paul business
by its indirect route. The Commission found, however, that in fact the
participation of this indirect line on St. Paul-Duluth business did
affect the short-line rate; and that its withdrawal would at least tend
to prevent any further reduction of the St. Paul and related rates. If
the withdrawal did not remove the discrimination against St Cloud it
would not at all events aggravate it. The vital point, differentiating
this case from that of the Savannah Freight Bureau, previously stated,
was the actual damage to the intermediate point due to the existence of
commercial competition between it and the place more distant.

An important feature in commercial competition is its entire
dissociation from all considerations of cost of service by long or
short routes. Neither strong nor weak lines make the rate. The business
is there. Market conditions are fixed. The carriers are free to take
traffic or leave it. Single-handed, at least they cannot rule the
price of transportation. The price of sugar at Kansas City is made
by competition of Louisiana sugar coming from New Orleans, of beet
sugar and Hawaiian sugar from Colorado and San Francisco, and of the
world's sugar from New York. This is why Kansas City, in the complaint
stated in the opening paragraph, enjoys a lower rate on sugar from San
Francisco than the transcontinental lines can accord to Denver. The
only possible justification for the apparent anomaly in lumber rates
from Texas points, cited in the same paragraph, is that, as the heart
of the Middle West is approached, lumber supplies from every point of
the compass converge upon common markets. As is so frequently averred
in such cases, no carrier makes the rate. The rate is made for all of
them by conditions beyond their control. The only rates, therefore,
which it is in their power to fix in some accordance with average costs
of operation, are the rates at local stations. For these rates alone
can they be brought to book.

Just here another characteristic of commercial competition as distinct
from rivalry of routes is to be noted. Local discrimination, wherever
it is alleged to occur, frequently assumes the form of complaint
against rates to various places, not on the same line but by different
and often widely separated lines. Complaints of this class might
arise, for instance, referring back to our diagrams of the oyster
cases, between X and Z. Philadelphia, we will assume, as before, to
be the common market. A multitude of different varieties of protest
are distinguishable. Point X equally distant from Philadelphia with Z
may pay a higher rate than Z. Or X may be less distant than Z, and yet
be called upon to pay the same rate. It may even be less distant than
Z and yet actually be charged a higher rate than Z. But in all these
instances the two points (X and Z) are not on the same route, but on
divergent routes. The issue remains the same. The conditions imposed
at the point of convergence being fixed, each line must exercise its
own ingenuity in conforming thereto. Methods in each case must differ,
according to the length of line, the direction and composition of the
traffic, and other factors.

       *       *       *       *       *

Three general schemes of rate-making are distinguishable in American
practice. The most satisfactory one is that which obtains in trunk
line territory, of zone tariffs with a gradation in some degree
corresponding to distance.[219] At the other extreme is the system of
the flat or postage-stamp rate, exemplified in the Missouri-Mississippi
river territory,[220] and in Pacific coast rates from all points east
of the Mississippi.[221]

Intermediate between the two are the systems of basing lines and
basing points. The first of these, the basing line system, prevails
throughout the country west of the Missouri river. The second, the
basing point system, is found throughout the southern states east of
the Mississippi. In both the principle is the same. The two differ
only in detail. Through rates are made to certain designated places;
and from there on, a local rate to all other places, large or small,
is added. This local charge rises, of course, with distance. Thus the
first-class rate to Denver, Colorado, is made up of a rate of eighty
cents from Chicago to the Missouri river, plus $1.25 for the balance
of the haul. From Chicago to a point in central Nebraska the only
difference would be a lower local. In southern territory the rate to
Troy, Alabama, equals the sum of the through rate to the nearest basing
point, Montgomery, and of the local rate from there on to destination.
The only difference in detail between these two systems is that in
the western territory, all competing lines being parallel (until
the routes around by sea and back from the Pacific coast are met),
rates rise in all cases progressively with distance. The complaint of
local discrimination rests merely on the allegation that the rate of
progression with increasing distance is too rapid. In the South, on the
other hand, owing to the encircling seacoast with deeply penetrating
navigable rivers, the competing routes from the East or North converge
from different and even from directly opposite directions. Hence it
is impossible to base rates upon extended boundary lines, like the
Missouri river. Rates must be based upon certain designated points.
This introduces a serious complication. Points, instead of lines, being
used for basing purposes, in the South, local rates rise outward in
every direction around each basing centre until the sphere of the next
basing point is met. And local rates to points even back on the same
line, through which the traffic has already passed to reach the basing
point, are thus of necessity higher than rates to points beyond.

[Illustration]

The economic anomaly of rates actually falling progressively as the
length of the haul increases is graphically well illustrated in
the accompanying diagram, based upon data in the Georgia Railroad
Commission cases.[222] The charges from Cincinnati to local points
on all lines converging upon Atlanta equal the sum of the rates to
Atlanta plus the local charges out. This holds good even on the direct
line from Cincinnati through Chattanooga, as the diagram shows; yet
of course it also follows that rates must again decline as the next
basing point is approached in any direction; be it Montgomery to the
west, Macon to the south, or even Chattanooga to the north. The only
condition analogous to this in the Far West appears in those places
whose rates are made up by a combination of the low water rates to the
coast plus a local back eastward into the mountains. The transition
from this Pacific coast combination to the system based upon the
Missouri river occurs at those places where the aggregate charges from
either direction become equal. Viewed as a large matter of principle
the whole western system is analogous to the southern system. It is
inevitable in both that intermediate points should in all cases be
assessed at a higher rate than those adopted as bases.[223]

The reason advanced in support of these basing point or basing line
systems is that they are an outgrowth of commercial competition; in
other words, that they are compelled by conditions beyond the carriers'
control. Sometimes it may be the competition of widely encircling water
routes--as from New York around to Galveston and up to Kansas City in
the southwestern field, or to Mobile and up to Montgomery, Alabama, in
the southeastern states. But, in many other cases, market competition
from other centres of supply set the limit to the rate at the basing
point. Missouri river cities enjoy a great advantage over all
competitors, as meeting places of the ways. Generally, the low rates
to the base points have been originally accorded in order to build up
local distributive or industrial centres in the face of competition
from older places. Nashville undoubtedly owes a large measure of its
present prominence to the fact that in the old days its principal
railroad gave a foothold and made a clientage for its merchants as
against older rivals in Cincinnati and Louisville. Nor can it be said
that this was an injury to that clientage, composed of consumers all
through the adjacent countryside. Rates for these consumers were not
put up, in order to build up Nashville. On the contrary, Nashville
was given perhaps inordinately low rates, in order that the sum of
these low rates and of the local rates out to Four Corners should be
at least as low as those from Cincinnati and Louisville direct. This
last argument is the main economic defence of the southern basing point
system.[224] It applies equally to the advocacy of a low basing line at
Missouri river cities for rate making to points beyond.[225]

The main difficulty with any system of basing points or lines, which
so flagrantly violates the distance principle, is first of all to
determine at what points to base; and thereafter to accommodate the
system to the normal growth and development of the country. The system
is inelastic. It tends to break down of its own weight. It must
enlarge, if at all, by fits and starts, in each case with violent
dislocation of trade. A generation ago towns in Iowa complained that
the Mississippi river was a basing line. Then, when the Missouri river
line was substituted, an outcry rose from all the points in Nebraska.
The persistent complaint from Denver against its rate adjustment as
compared with Kansas City,--a competitive distributing centre,--well
exemplifies it. The Denver Chamber of Commerce intervenes, and proposes
that the basing line be moved from the Missouri river out to Colorado
common points (like Denver). Indeed, in each case the argument in favor
of the change is identical. Each tier of complainants--thriving cities
which have recently come to more or less commercial maturity--plead
their inability to compete with the centres adopted some years ago for
basing purposes. Denver, for example, wishes to sell goods throughout
Utah. But its total charges there on goods purchased in the East amount
to eighty cents from Chicago to the Missouri river, plus $1.25 on to
Denver, plus $1.64 on to destination,--a sum of $3.69 per hundred
pounds. The Kansas City dealer, on the other hand, gets a low base
rate of only eighty cents with a single additional rate directly out
to Utah of $2.05. In other words, the latter can lay down his goods
in Utah for $2.85 as against $3.69 paid by the Denver competitor. The
point to be carried forward, however, is not so much the disparity
against Denver, as the fact that the moment Denver is promoted to be
a basing point it becomes defendant in a complaint of precisely the
same sort, brought by the places still further west. This inelasticity
of basing point schemes, together with their inability to expand
without abrupt dislocations of trade, is apparent everywhere in the
South. Just as Chattanooga complains against Nashville, so the little
intermediate stations between Chattanooga and Atlanta, as our diagram
on page 240 showed, become restive under rates of $1.27 as compared
with a rate twenty-one cents lower charged on to Atlanta. The system of
basing points or lines may be an inevitable concomitant of industrial
immaturity; but it is none the less difficult to defend as a permanent
system or as one inherently just. And its final relegation to the scrap
heap, in favor of a system of rates graded more or less according to
distance, is ardently to be desired.[226]

       *       *       *       *       *

Does a constant rate applied over a long stretch on the same line
constitute local discrimination? May the nearer points rightfully
protest against the fact that equally low rates are accorded to remoter
points? This is the gist of the controversy in the very suggestive
Milk Rate cases in 1897.[227] Here the conflict of interest between
producer and consumer is obvious. The city of New York naturally
desires a wide market from which to draw its supply. On the other hand,
the nearby producers wish to enjoy the advantages of nearness to the
market to the fullest degree. Study of the evolution of rate sheets
clearly shows how such grouping of charges over long distances may be
in the nature of a compromise to avoid actual violation of the long and
short haul principle. Oftentimes places scattered along over a hundred
miles of railroad enjoy absolute equality of charges. Obviously, the
ton-mile rate steadily falls within such a group with progressive
remoteness. Yet it is an inevitable feature of tariff building.[228]
It is the kernel of the admirable trunk line rate system. Such an
equalization of rates between points unequally distant from a given
centre, not infrequently arises in connection with mere competition of
transportation routes. Referring back to the diagrams on page 219, it
may happen that a complainant at X, the nearer point, recognizing the
inevitableness of a low rate at Y, may succeed in securing an agreement
that, while its charges cannot be less than at Y, at least they shall
not be more. This was all that was asked in the "rare and peculiar"
case of Youngstown, Ohio.[229] But it is apparent that such a solution
differs only in degree from those previously discussed. The question of
principle remains the same. The roundabout route to New York up back
by way of Youngstown could continue to compete at Pittsburg for as low
a rate as on direct shipments, even if it observed the long and short
haul principle to which the Pennsylvania direct route was committed,
only by charging much lower rates per ton mile on Pittsburg traffic
through Youngstown than was levied on business there originating. This
raises precisely the same question of distribution of joint expenses
between local and competitive traffic, already discussed. In certain
contingencies under the second variety of the oyster cases, such a
solution might apply. Would Chattanooga, for example, assuming it to
belong in the second class of oyster cases, be contented with an
equality of through rates with Nashville, leaving its local rates out
to smaller towns as they are?

The most extreme instance of uniform or postage-stamp rates applied
over long distances occurs in the transcontinental tariffs from
different points in the East. These differ radically from the
adjustment of rates between different points on the Pacific slope,
already described. At the far western end the lowest rates are accorded
to coast cities, because of water competition by sea. Rates to interior
points progressively rise by the addition of locals inward toward the
interior. The rates thus compelled by water competition are accepted
by the all-rail lines. Thus the Pacific coast end is practically built
upon a basing line. It might be expected that in consequence of water
competition by sea a similar system would prevail at the eastern end
of the line; that rates to the Pacific coast from interior cities
would rise progressively according to distance inland, until at all
events the direct all-rail charge became as low as by the combined
rail-and-water rates. But such is not the case, and for two reasons.
The first is that in the East interior cities are large and powerful
factors in trade. There were no such interior cities in the Far
West, until Spokane came into its own. These inland eastern cities,
Pittsburg, for example, demanded equality of opportunity with the
seaboard cities in Pacific coast trade. They succeeded in obtaining it
by a grant of as low rates as New York or Boston enjoyed. In the second
place, all the Pacific coast carriers enjoy monopoly as far east as the
Missouri river. But east of that line there are many routes interested
in middle western cities, but having no interest in those in the East.
They, too, have insisted upon giving their clients in such places as
St. Louis and Chicago as low rates as Philadelphia or New York. Little
by little the equality of rates was extended until for many years
the blanket rate has covered the entire United States east of the
Mississippi river.

Does not this constitute local discrimination against the middle
western cities? This was one of the main contentions in the St. Louis
Business Mens' League case. Being one thousand miles nearer San
Francisco, it demanded recognition of that fact in its tariffs. The
difficulty is accentuated when both eastern and western point rates
are considered together. St. Louis enjoys no lower rate than New
York, although one thousand miles further east; and inland points in
the Rocky mountain area may be one thousand miles further east than
San Francisco and yet pay a higher rate. Thus it is possible to lop
off one thousand miles at each end of the line without affording any
recognition of it in the tariffs. The situation is too involved to
discuss in detail in this place; but one finds it difficult to avoid
the conclusion that the whole system will demand revision before
long. Geographical conditions are immutable. Trade conditions are
not. Perhaps it was inevitable that the former should by force of
circumstances have been somewhat overlooked during a period of rapid
growth. But, as commercial affairs approach a condition of stability
and permanence, the matter will call for most careful examination.

[Illustration]

Constant rates applied over long distances on the same line almost
inevitably tend to pass over into a system of equality of rates over
_different lines_.[230] The necessity was evident enough in the
Milk Rate case. This phase of the matter may theoretically best be
discussed by reference to the following diagram. Suppose A, B, C, and
D to represent any four inland "common points." It remains to show
how it comes about that they all finally enjoy equal rates to all
four seaports, regardless of location. Each appears to be naturally
tributary to some one of the seaports by a dominant or short-line
route. In each instance this route properly rules the rate. Moreover,
the four seaports may be considered for traffic purposes as equally and
interchangeably distant from one another without regard to location.
This follows from the fact that, except in extreme instances, rates
by water do not vary according to distance, so small is the cost of
mere propulsion by comparison with the terminal costs. In other words,
the rate is the same from Wilmington to Brunswick or Savannah as to
its next neighbor Charleston. From this it follows, further, that
Wilmington, Savannah, and Brunswick can all reach B--the point to which
Charleston is nearest--on even terms. They may each have a direct line
to B; but, as compared with a possible combined low water rate to
Charleston and a low direct rail rate inland to B, the Charleston route
may be at least able to hold its own. All three outside competitors,
then, are on even terms with one another in respect of access to B.
But how does Charleston stand towards B as against the field? We have
already concluded that a roundabout route must be allowed to meet,
though not to undercut, the ruling rate. Such a roundabout route from
Wilmington on this diagram to its own natural tributary A could be, and
as a matter of fact is, made by passing around by way of Charleston
or any other seaport. Charleston wishes to share in this trade at A,
and may reach it by similar tactics. It stands towards A precisely
as Wilmington stands towards B. They finally agree to enjoy both A
and B on even terms. But, as we have already seen, the admission of
Wilmington to B is equivalent to the admission of all the rest. Whence
it comes about that all four establish B as a "common point." And of
course the same procedure fixes all the others, A, C, and D in the same
way. In the Savannah Fertilizer case[231] it appeared that there were
no fewer than 148 points in ten states from Louisiana to Kentucky,
to which rates on fertilizers were absolutely the same from each of
the four seaports. The degree of local discrimination of course was
negligible at the remoter places; but it augmented in proportion as the
immediate neighborhood of each seaport was approached. The apparent
anomaly was greatest in a north and south direction along the seacoast.
Thus Dinsmore, Florida, was 275 miles from Charleston and only 160
miles from Savannah, yet the rates from both points were the same. The
governing feature usually was the entire equality of coastwise water
rates, regardless of distance, which in turn compelled the land lines
to follow suit.

The Cincinnati Freight Bureau case, otherwise known as the Maximum
Freight Rate case,[232] affords the best example of the difficulty in
practice of adjusting rates over different and widely separated lines
on a distance basis, in order to satisfy the demands of commercial
competition. Atlanta, Georgia, the key to the southern market, is 876
miles by rail from New York, but only 475 miles from Cincinnati and 733
from Chicago. In other words, Cincinnati is fifty-four per cent. as
far from Atlanta as is New York; and even Chicago is only eighty-four
per cent. as remote. In general, this valuable southern territory, on
the basis of mere distance, is really nearer to the leading middle
western cities than to those on the Atlantic seaboard. Yet this
geographical situation is not reflected in the railway tariffs. Rates
from the West, especially on manufactures, were much higher, always
relatively and often absolutely. Thus first-class goods in 1894 paid
$1.47 per hundred from Chicago (733 miles), while from New York
(876 miles) the rate was only $1.14. At points like Chattanooga the
disparity was even greater. This city is only 595 miles from Chicago
as against 1,060 miles from Boston. Yet the rates were actually lower
($1.14) from New England than from Chicago ($1.16). The principal
reason for this of course was the cheap coastwise water competition
by way of Charleston and Savannah. The eastern all-rail routes could
charge no more than the combined rail-and-water lines. The difference
in relative cost of operation by water was recognized by means of
so-called "constructive mileage." From New York to Savannah by sea is
about 750 miles; yet the allowance to the steamers was proportioned
upon a distance of only 250 miles. Water cost was thus fixed by
comparison with rail cost in the proportion of one to three. Yet, even
with this allowance in favor of eastern cities, New York remained more
distant from Atlanta than Cincinnati; the "rate-making" distance from
the former being 538 miles as against only 475 miles from Cincinnati.
The arbitrary reduction of the New York distance left Chicago more
remote (733 miles), but not in so great degree as its tariffs implied.
These tariffs were also peculiar in another regard. The handicap
against the western cities was much higher in respect of manufactures
and high-class freight than upon foodstuffs and raw produce. This in
turn was clearly due to a long-established agreement between the lines
east and west of the Alleghanies, as to a division of the field.
Originally each set of lines was harassed by roundabout competition
from the other. Western foodstuffs and raw produce were reaching the
South by way of the Atlantic seaboard; and eastern manufactures from
New York, for instance, were rambling about over western lines in order
to reach places like Atlanta and Augusta, naturally served by direct
routes from the East. The agreement to divide the field, dating from
1878, steadily became more irksome, however, to the West, with the
development of manufactures of its own. The problems raised by this
change are too large to be considered here. The main question for
the present inquiry is as to the relative fairness of rates from two
widely separated centres to a common market, those rates not being
proportioned to distance. The final settlement of this knotty question
is suggestive of the extreme difficulty of attempting to apply mileage
or distance rates over different railroads too rigidly. The complaint
being as to relativity, there were only two possible solutions.[233]
One was to increase the eastern rates, the other to order a reduction
of the charges from the West. The former course was impossible, owing
to the presence of water competition by sea, not under control. The
latter alternative was, therefore, chosen by the Interstate Commerce
Commission in its decision in 1894. The rates from western cities were
always composed of two parts. The charge from the Ohio south was kept
distinct as a local rate. The other portion of the rate applied from
Chicago, for example, down to the Ohio river. Of these two parts, the
trunk line portion appeared reasonable enough. It was the southern
local, often one hundred per cent. higher than the other, which seemed
most unreasonable; and which, according to all appearances, had been
used to bring about a closure of the market to western manufactured
goods. Consequently the Commission ordered a reduction of the southern
local rates, cutting them drastically, but leaving the northern
locals unchanged. This decision was never carried into effect; as
the Supreme Court of the United States held the Commission to have
no such rate-making power. Nothing was done apparently to remedy the
disparity in charges against the West, although the railroads serving
that territory urgently pressed for action. Every time they threatened
a reduction of their western rates, the eastern line came down in
proportion. This left the relative rates as before, although the
general scale would be lower all round.

At last, in 1905, the eastern lines from Baltimore south agreed to
permit a reduction of five cents in the rates from western cities by
lines _north_ of the Ohio river; but they refused to accede to any
change in the rates from the Ohio south. This was the exact opposite
of the Interstate Commerce Commission's proposition, although both
plans were intended to compass the same object; namely, to place
western shippers more nearly on a parity with the East. The Commission,
in 1894, laid all reduction upon the southern portion of the rate;
the railroads, in 1905, placed it all upon the northern part. This
obviously afforded no relief to the original complainant, Cincinnati.
In fact, it actually operated to its great disadvantage, inasmuch as it
let its two powerful rivals, Chicago and St. Louis, into the southern
field on distinctly more favorable terms. Such was the outcome as a
result of the friction of railroad competition. The reasonableness of
some reduction was clear. But to the layman, the fairness of laying the
reduction entirely upon the northern locals, already relatively low,
instead of upon the extremely high southern part of the rate is not by
any means so clear.[234]

One further detail of this adjustment of southern rates raises a
question:

    "Rates between Richmond, Virginia, and Atlanta, Georgia, are
    less than the rates between Richmond, Virginia, and Greenwood,
    South Carolina (an intermediate point). This is due to
    indirect competition between Richmond and Western jobbing
    points; and in order to permit the jobber or manufacturer
    in Richmond to do business as against his competitor in
    Cincinnati, it has been necessary to fix the rates from
    Richmond to Atlanta with some reference to the rates from
    Cincinnati to Atlanta. At Greenwood, South Carolina, we find
    that the Cincinnati shipper pays a very much higher rate than
    to Atlanta, and that the rates from Richmond are already
    sufficiently low to enable the Richmond shipper to compete at
    Greenwood with the Cincinnati shipper."[235]

Is this not in a measure well described in the passage, "unto him that
hath shall be given; but from him that hath not, shall be taken away
even that which he hath"? This railway argument contains dangerous
possibilities. In effect, upon the theory of charging what the traffic
will bear, it means that a railway (in this case the Seaboard Air
Line) may increase its own local rates, not in proportion to the
length of its own haul (from Richmond to Greenwood), but according
to the remoteness of that local point from another competing market.
The inevitable effect of the general adoption of such a policy must
be to erect arbitrary barriers to the free and widespread movement
of commerce. The great advantage of the flat rate or of commodity
rates is that, placing all competing centres upon an absolute parity
irrespective of distance, they encourage the utmost freedom of trade.

       *       *       *       *       *

Certain general conclusions seem to be warranted by the analysis
of these cases of local discrimination. The first is that they all
show the extreme delicacy of commercial adjustment and the existence
of conditions well beyond the control of the carriers, jointly or
singly. Trade jealousies in particular--the rivalry of producing and
consuming centres--render relativity of rates of paramount importance
to shippers. This class in the community is interested comparatively
little in the absolute level of rates, that being more directly the
concern of the general consuming public. To the public, as represented
by State and Federal legislatures, it is difficult to make these
complicated matters of commercial competition clear. The only basis
of rate making that is easily understood is one founded in general
upon the distance principle, or, in other words, correlated with
considerations of cost of operation. Any departure from this basis is
apt to breed suspicion, and at all events puts the carrier upon the
defence. It is bad policy, in their own interest, for railroads to
permit a continuance of such violations of the distance principle in
their general tariffs (commodity rates as a special resource to meet
the special needs of commercial competition may be set aside), except
in extreme cases. This was recognized by the trunk lines when they
almost unanimously acquiesced in the long and short haul provisions of
the Act of 1887. The people of the United States have the same right
that they had then, to expect that at the earliest possible moment
the wise provisions of the trunk line rate adjustment shall be widely
accepted in the West and South. Whether those regions, and the railways
that reach them, have yet sufficiently developed to warrant the change
is a matter requiring careful consideration in detail.

The necessity of some exercise of governmental control over these
carriers of the country, in order to mitigate, if not to eliminate,
local discrimination as far as possible, is evident. Many of the
instances previously cited have clearly shown how impossible it
often is for any railroad, single-handed, to deal with an involved
situation in a large way. Take the Cincinnati Freight Bureau case, for
instance. Conceding, as many would, the claim of western cities to some
readjustment of tariffs in their favor, is it not an anomaly that the
lines south from Baltimore, several hundred miles away, should finally
dictate the means to be employed to remedy the situation at Cincinnati
and Chicago? Who else but the Federal government could ever hope to
disentangle the almost hopeless snarl of competition involved in the
controversy over differentials to and from the Atlantic seaboard?[236]
This controversy is at bottom one of local discrimination. And yet
how is the Interstate Commerce Commission to aid in the solution of
these intricate problems under present conditions? Its hands formerly
doubly tied, are now in part freed by rehabilitation of the long and
short haul clause. But it cannot yet deal with minimum rates, nor is
it clear that it can prescribe differential rates.[237] True, the
commission may, in some cases, accomplish by indirection its purpose of
establishing a proper relativity between rates through the exercise of
its newly granted power to fix maximum rates. This, as we shall see,
was done in the recent Spokane and Denver decisions. Holding that the
charges at interior points were out of line with through rates to the
Pacific coast; and being unable to govern the long-distance tariffs,
it simply ordered a reduction of certain rates at Spokane and Denver
as inherently unreasonable. This solution is not, however, always
practicable. Not infrequently the lower rate at the remoter point will
drop as soon as the intermediate rate is lowered. Thus the former
relativity of charges is re-established on a generally lower scale. The
complaint in the Eau Claire lumber case required the exercise of such
power over minimum rates, in order to remove the disability against a
particular centre. And then, finally, it is indubitable that commercial
competition as a "compelling" factor has been somewhat over-emphasized
by the railroads. Too often conditions in part brought about by
themselves, or in which at least they have acquiesced, have been set up
as a defence for rates favoring certain points. This is especially true
of the southern basing point cases.[238] Whether any further grant of
powers to the Interstate Commerce Commission by Congress is necessary
at this time in order to enable progress to be made in this connection,
it is as yet too soon to predict. The course of affairs for the next
few years will at all events bear attentive watching.

       *       *       *       *       *

In the case of competition between a direct and a longer, more
roundabout line, which one "controls" or fixes the rate? It is an
important matter, involving as it does the economic, if not the legal,
right of a carrier to participate in any given traffic. Concerning this
question the greatest diversity of opinion prevails. On the one hand,
both writers[239] and practical railway men[240] aver that the short
line makes the rate, while the long line merely meets the rate thus
made. This is probably the more prevalent opinion. Yet expert evidence
of an opposite sort is to be had for the seeking. The Interstate
Commerce Commission has repeatedly held that the short line is at
the mercy of the longer line under certain circumstances;[241] and
traffic managers not infrequently plead their inability to control rate
situations in the face of irrepressible, roundabout competition.[242]
There is evidently a confusion of thinking, or else a loose use of
terms where statements are so conflicting. As a matter of voluntary
agreement among roads, or of prescribed rates under government
regulation, the issue often assumes the form of controversy as to
whether a road operating under a physical disability shall be permitted
to participate in a given business by a concession in rates or not.
Thus in the notable Milk Rate cases it was a question whether roads
with heavy grades should be allowed to make concessions in rates. This
issue really also underlies the question of enforcement of the long
and short haul clause. In the recent Spokane case the Harriman lines to
St. Paul asked that they, being long lines, should not be compelled to
reduce their rates to the figure prescribed for the direct Hill roads.

It is clear in the first place that "short line" and "long line" are
merely used as convenient terms to designate differences in the cost
of operation. This was well put by James J. Hill before the Elkins
Committee of 1905.

    "We will say that the distance from Cincinnati to New York is
    800 miles, and that they haul 800 tons behind one locomotive
    on one per cent. ruling grades. Now somebody else builds a
    road with a 0.3 grade, and he can haul 2,000 tons--twice and
    a half the amount; but that line is 200 miles longer. You can
    see readily that to move a given number of tons the second road
    runs less than half the train miles, so that the farthest way
    round is the nearest way home in that case."

The problem should really be stated thus in terms of cost not of
distance. Suppose the roundabout line to be in part or wholly by
water, as in competition between the transcontinental roads and the
Isthmian or Cape Horn routes, or as between the direct all-rail line
from Boston to Nashville, Tenn., and the steamer line from Boston to
Savannah, and thence up to Nashville by rail. In such cases the rail
lines allow the water routes a differential or constructive mileage in
recognition of their relatively cheaper per mile expenses of operation.
The differential may sometimes exist, where, judging by the bulk of
traffic the advantage, irrespective of the differential, lies with
the line giving the lower rate. In other words, as measured by volume
of business, the stronger line and not the weaker one enjoys the
benefit of the differential. This is the case in the coastwise traffic
between Atlantic and Gulf ports; where the bulk of the tonnage goes
by steamer and at lower rates than by all-rail lines. The difficult
point to settle in all such cases is whether the allowance is made as a
voluntary _concession_ to the roundabout line because it _costs_ more
to operate; or whether it is a toll or tribute, because, irrespective
of the cost, the long line rate is made on the basis of value of
service. The problem, then, resolves itself into this: how far in
practice does cost of operation really "control" the rate in cases of
competition between two lines differently circumstanced in this regard?
If cost is of fundamental importance, the "short line," using the term
as above said in a figurative sense, "controls" the rate. If cost is
an entirely secondary matter, rates being made in accordance with
considerations of value of service, the "long line" holds the upper
hand, and the short one is at its mercy.

It is important, moreover, in the comparison of costs of operation,
to keep in view the interrelation between fixed charges and operating
expenses. This point is often neglected. Any well-considered outlay
upon permanent improvements, of course, increases fixed charges
according to the extent of the new capital investment; but at the
same time it presumably lessens the direct cost of operation. The
interest upon funds spent for heavier rails, reduction of grades,
straightening of curves, better terminals or heavier rolling stock,
must be set over against the direct economies resulting from heavier
train loads, lessened expenditure for wear and tear, for accidents and
claims or for wages. This relation between current expense and capital
cost was clearly emphasized in an arbitration decision by the late S.
R. Blanchard, already cited in another connection. Two roads were in
competition for business at New Orleans. One had costly but convenient
terminal facilities. The other was so far from the heart of the city
that the drayage expenses were an important item. This second railway
began by offering free cartage to shippers in order to even up with
its more favored competitor; but this soon gave way to the practice of
private teaming by shippers with an allowance on the freight bill for
"drayage equalization." The other road objected to this on the ground
that it constituted a virtual rebate; that in other words the weaker
line was taking business at an abnormally low rate. The arbitrator,
however, upheld the practice, on the ground that the heavier operating
expense for cartage was merely an alternative for increased interest
charges, had the road elected to construct costly and more convenient
terminals. One road virtually paid money for team hire, the other paid
it in interest on bonds.

Analyzing the main question two propositions are certain. Firstly,
the long line can never charge _more_ than the short line; whence it
follows that as the short line reduces its rate, the long one must
accept that rate as made; and, secondly, the long line, costing more
to operate, is, in the process of reduction of rates, bound to be
the first to strike the bed-rock of cost incident to that particular
service. To go below this point of particular cost would obviously be
indefensible from every point of view. The general rule, then, is that
"the short line rules the rate." This is accepted widely in practice,
as for example throughout trunk line territory and between the
so-called Missouri-Mississippi river points, where the short line from
Hannibal to St. Joseph determines all rates by longer routes.[243] But
the problem yet remains unsolved. The long line may never be able to
charge _more_ than the short line--may it, however, charge _less_ under
certain conditions? The moment it is enabled to do so, the long line
and not the short line, for the moment, "controls the rate." If, now,
we use the technically proper terms, the question becomes this: Under
what circumstances is average cost of service in railway competition
set aside in favor of other considerations; or, otherwise stated, when
may a line, operated under a disability as to cost, properly give
a lower rate than its competitors notwithstanding? Does disability
justify a handicap or the reverse? This was the form which the question
assumed in the notable Milk Rate case: as to whether the weaker lines
in respect of distance or grades should be allowed compensation
therefor by permission to charge higher rates.

One of the common instances of rate control by a line operating
under a disability as to distance or normal cost is the competition
of a bankrupt with a solvent property. The "roundabout" line, like
the Erie or the old New York and New England, having repudiated its
fixed charges, undoubtedly "makes" the rate which the other roads must
meet or lose the traffic. Usually they prefer to absorb or control
it otherwise, financially, thus substituting monopoly for a ruinous
condition of competition. Yet such instances resolve themselves,
evidently, into questions of relative cost of operation after all. The
bankrupt road holds the whip hand, because, having repudiated its fixed
charges, its average costs of operation are correspondingly reduced.
The validity of operating cost as a basis of charges is surely not
shaken by this exceptional case.

The relative proportions and the distribution of local and through
traffic upon two lines of differing length in competition with one
another are primary factors in determining the ability of either one
to "make the rate." This is, of course, especially true under the
operation of any long and short haul law, under which any reduction
of the competitive rates would necessitate a lowering of the charges
at intermediate points. No road is going to sacrifice lucrative rates
upon a large volume of local traffic unless it can gain either a large
volume of business or a very long haul from a competitive point.
Many of the notorious rate disturbers in our industrial history have
been "short cut" roads--the shortest lines between given important
points, regardless of the nature of the intervening territory--like
the old New York and New England, the Erie or the Canada Southern.
Other roads, like the Chicago Great Western or the Central Vermont,
were more roundabout, and yet enjoyed but little local business,
depending almost exclusively for their livelihood upon long hauls
between termini. On the Central Vermont at one time, through business
constituted seventy-nine per cent. of the total; and only five per
cent. was strictly local in origin. On the other hand, the Louisville
& Nashville, in its original petition for exemption from the long
and short haul clause, stated that eighty per cent. of its income
was derived from local business. This consideration, as applied to
competition between the two primary trunk lines, may not be without
significance. As compared with the Pennsylvania Railroad, rich in
local business, the New York Central, running along the narrow Mohawk
and Hudson valleys, has not inaptly been described as operating
"between good points, but not through a good country." Under a strict
enforcement of the long and short haul clause, the dilemma on the
former road would be more serious than on the latter. To choose
between its rich local traffic in iron and steel or coal and the long
haul business from the West, would be a more difficult matter for the
Pennsylvania, than for the New York Central management to weigh its
through grain business against the local traffic from interior New York
points.

In one way the persistence of locally high rates in the South and West,
irrespective of the low charges at competitive points, is defensible on
the ground that local business is scanty.[244] The roads cannot live
upon it. Their mainstay is the long-distance traffic from important
points.[245] On the other hand, where there is no obligation to
maintain a distance tariff, of course the road with rich local business
enjoys a great advantage in making rates at competitive points. It
can practically subsist upon its revenue from its own particular
constituency, meeting all its fixed charges thereby; and can afford to
cut rates on the competitive tonnage down to the bone. Such a road,
quite irrespective of the length of its line, would obviously "control"
the rate at competitive points, as against any rival without such a
subsidiary and independent source of income.[246]

Volume of traffic is another fundamental element in the determination
of cost of operation. No matter how short the line or how easy its
curves and grades, unless it can handle its tonnage in large bulk
it will operate at a disadvantage. Hence a most important factor to
be reckoned with, in deciding which of two competing lines is in a
commanding position as to rates, is the volume of traffic, both in
gross and as susceptible of concentration on either line. In the
notable Chattanooga case, for example, although the line from New York
to Nashville, passing around to the south by way of Chattanooga, is
212 miles shorter than the lines _via_ Cincinnati or Louisville, the
latter, by reason of the density of traffic in trunk line territory,
seem to stand at least on an even footing. On the other hand, the
enjoyment of the bulk of the tonnage sometimes places its possessor
at the mercy of a petty rival. The Fall River water line to New York,
carrying an overwhelming preponderance of the business, obviously could
not afford to cut rates to prevent the Joy Line from stealing a small
portion of the traffic. The same principle holds good in other lines
of business. The Standard Oil Company can better afford permanently to
concede a small fraction of business to a small independent dealer,
so long as he knows his place and refrains from ambition to enlarge,
rather than to attempt to drive him out entirely by cutting prices on a
huge volume of business. Occasionally independents are shrewd enough to
take advantage of this; and so to distribute their business that they
shall in no single place menace a powerful rival, and yet comfortably
subsist on the gleanings over a wide area.[247] In no single locality
are they important enough to exterminate, at the cost of cut rates
applied to a large volume of business; and yet in the aggregate they
may make quite a fair livelihood. The only difference between the
status of a railway and other lines of business in this regard is
that the railway may not be quite so free to deploy its forces. Its
territory and tonnage are more definitely circumscribed by physical
conditions of location.

A point to be noted in this same connection is the relative stability
of the traffic. Is it concentrated in a few hands or does it arise
from many scattered sources? In the former case either road by making
a bold stroke may so entirely capture the business that, by reason
of the enhanced volume, a handicap in operation may be overcome.
Thus, in the notable instance of trunk line competition for the beef
traffic some twenty years ago, the Grand Trunk, although much more
roundabout, besides being handicapped in other ways, by securing
_all_ the business, could afford to make rates impossible under other
circumstances.

Whether the business in question is natural or normal to a road, or
is an extra, diverted from other more direct lines, is still another
factor of importance affecting ability to compete successfully for any
given traffic. The best statement of this is found in the argument
of J. C. Stubbs before the Arbitration Board on Canadian Pacific
Differentials in 1898.[248] "These are differentials in favor of
weaker lines--lines which upon the merits of their service cannot
successfully compete for the business, but claim a share of it as the
reward of virtue, the price of maintaining reasonable rates.... For
example, the Canadian Pacific road was not projected or built for
the purpose of developing, fostering, or sharing the carrying trade
between San Francisco and the eastern part of the United States....
After they were built and the various connections made, then, and not
until then, it was seen that there was a business opened. The route
having been opened, the newer and longer lines entered the field of
competition against the older, shorter, and more direct lines by
cutting the latter's rates.... In a fight of this kind, paradoxical
as it may seem, the stronger line always got the worst of it.... The
weaker or longer line, not having any business at the outset, had
nothing to lose. Everything was gain to it, which appeared to show
an earning above the actual cost of handling the particular lot of
freight. Quite a distinction between that and the average cost of
handling all business. Such an unequal warfare could not long continue,
and the common result was that the stronger line sought for terms, and
ultimately bought the weaker line off, ... this class of differentials
is and always has been obnoxious."

Our final conclusion must therefore be that the outcome in cases of
unequal competition in respect of cost of operation can seldom be
predicted with certainty. Everything depends upon local circumstances
and conditions. Sometimes the long line and sometimes the short line
will dominate. Careful analysis of every feature of the business
must be made before positive affirmation is possible. This result is
at all events worth noting. A due appreciation of the complexity of
the business of rate making may safeguard us against the cocksure
statements of the novice, who has never closely examined into the
subject. President Taft has recently emphasized the need of expert
service in the field of customs and tariff legislation. It is greatly
to be hoped that a similar appreciation of the care with which railway
legislation should proceed may prevail at Washington during the present
session of Congress.

FOOTNOTES:

[200] Cullom Committee, Report, Testimony, p. 532. _Cf._ instances in
Hudson's Railways and the Republic; and Parson's Heart of the Railway
Problem as showing popular misunderstanding.

[201] Senate (Elkins) Committee Report, 1905, p. 1892.

[202] Pp. 116-117.

[203] Another instance is afforded by the Savannah Freight Bureau case:
7 Int. Com. Rep., 458. See our Railway Problems, chap. XII.

[204] Interstate Commerce Commission Reports, decided May 14, 1903.
_Cf._ the extraordinary diversion of traffic over the long route in
Troy-Chatham, N. Y. case: 23 I. C. C. Rep., 263.

[205] This recalls Traffic Manager Bird's testimony relative to
Wisconsin controversies before the Senate (Elkins) Committee, 1905.

[206] Using this term technically as described on p. 256, _infra_.

[207] Chapter XIV, p. 480, _infra_. The original correspondence setting
forth these conditions is reprinted by the Senate (Elkins) Committee,
1905, Digest, App. III, p. 46. 21 I. C. C. Rep., 64, and 17 _Idem_, 335
are analogous cases.

[208] 7 Int. Com. Rep., 458: reprinted in our Railway Problems, chap.
XII.

[209] Brief of Ed. Baxter, Alabama Midland Railway case, U. S. Supreme
Court, p. 71; and Acworth, p. 83. Details in chap. XIV and XIX, _infra_.

[210] 14 I. C. C. Rep., 299.

[211] Details at pp. 245 and 610, _infra_.

[212] Interstate Commerce Reports, No. 696, decided June 25, 1904.

[213] _Cf._ the opinion in the Savannah Fertilizer case in our Railway
Problems, chap. XII.

[214] Chapter XI, _infra_, also in volume II.

[215] 10 Int. Com. Rep., 111; reprinted in full in our Railway
Problems, chap. X. Also the Commerce Court decision in chap. XVI,
_infra_.

[216] The leading Wichita cases are as follows: 9 I.C.C. Rep., 507, 534
and 558.--10 _Idem_, 460. (Lehmann Higginson Co.).--13 _Idem_, 389.
Also 189 U. S. Rep., 274.--Also Senate (Elkins) Committee, 1905, IV. p.
2874 _et seq._

[217] Chapter XVIII, p. 590, _infra_.

[218] 8 Int. Com. Rep., 346; reprinted in full in our Railway Problems,
chap. XI.

[219] Chapter X, _infra_.

[220] Chapter IV, _supra_, p. 128.

[221] Chapters XI and XIX, _infra_.

[222] 5 I.C.C. Rep., 324; p. 480, _infra_.

[223] _Cf._ Commissioner Fifer's dissenting opinion in the St. Louis
Business Men's League case, 9 Int. Com. Rep., 318; reprinted in our
Railway Problems, chap. XVII.

[224] Chapter XI, _infra_.

[225] 11 I.C.C. Rep., 495; 15 _Idem_, 555; U. S. Industrial Commission,
IV, p. 264 and IX, p. 287. Also pp. 129, _supra_, and 442, _infra_.

[226] The feasibility of doing this in the South could all parties
concerned be whipped into line, is demonstrated by the ingenious
adaptation of the trunk line system to local conditions by a special
committee of the Southern Railway and Steamship Association in 1880.
Report of meeting August 12, 1880, in Proceedings, VII.

[227] 7 I.C.C. Rep., 92. The report and opinion is reprinted in full by
the Senate (Elkins) Committee, 1905, as Appendix H.

[228] P. 103, _supra_.

[229] Pp. 223, _supra_; and 296, _infra_.

[230] Similar cases are 12 I.C.C. Rep., 564; 14 _Idem_, 476 on oranges;
16 _Idem_, 276; 22 _Idem_, 93 and 115; and 23 _Idem_, 195; are local
but identical problems of distances. Also the Superior Commercial
Club case, just handed down June 25, 1912, on grain rates. _Cf._ also
Hammond, Railway Rate Theories, etc., p. 94.

[231] 7 Int. Com. Rep., 458; reprinted in our Railway Problems, chap.
XII.

[232] Chapter XIV, _infra_, discusses its legal aspect. Reprinted in
full in our Railway Problems, chap. VI.

[233] _Cf._ testimony in Elkins Committee Report, 1905, p. 2726. The
Commerce Court case on page 588, _infra_, brings it to date.

[234] _Cf._ Answer of Receivers' and Shippers' Association of
Cincinnati to statement of W. J. Murphy, etc., March 15, 1907.

[235] Senate (Elkins) Committee Report, 1905, Digest, Appendix III., p.
231.

[236] 22 I.C.C. Rep., 99 is a case of conceded injustice for fourteen
years; yet of a complete deadlock between carriers, broken only by
Federal intervention.

[237] _Infra._

[238] Chapter XI, _infra_.

[239] Acworth, "Elements of Railway Economics," p. 125.

[240] Testimony of J. J. Hill, Senate (Elkins) Committee, 1905, p.
1507; certainly in the Missouri-Mississippi river territory, the
Hannibal-St. Joe distance rules.

[241] Especially in the Danville and St. Cloud cases; 8 Int. Com. Rep.,
357 and 429. _Cf._ the Vermont Central case, 1 _Idem_, 182 and 82: and
7 _Idem_, 481.

[242] An especially notable instance was the Canadian Pacific
differential arbitration in 1898. Proceedings, etc., p. 73, argument of
J. C. Stubbs.

[243] It is also the rule in France. Senate (Elkins) Committee, V,
p. 273. _Cf._ the Superior grain case. I.C.C., decided June 25, 1912.

[244] _Cf._ Mr. Fink's testimony in Hearings Senate Committee on
Interstate Commerce, 51st Cong. 1st session, Sen. Rep., 847, p. 29.

[245] Solution of transcontinental dilemma depends upon this choice.
_Railway Age Gazette_, Nov. 25, 1910. _Cf._ chaps. XI and XIX, _infra_.

[246] 19 I.C.C. Rep., 218 affords an excellent example as between the
Union Pacific and the Denver and Rio Grande. Also the Montgomery, Ala.,
case in the Commerce Court, p. 590, _infra_. Also the Union Pacific
Merger case, Brief of Facts for Appellants, 1912, p. 276.

[247] For an instance in the tobacco business: _Cf. The Atlantic
Monthly_, 1908, p. 487.

[248] Page 72.



CHAPTER VIII

PROBLEMS OF ROUTING

    Neglect of distance, an American peculiarity, 264.--Derived
        from joint cost, 265.--Exceptional cases, 265.--Economic
        waste in American practice, 268.--Circuitous
        rail carriage, 269.--Water and rail-and-water
        shipments, 273.--Carriage over undue distance, 277.--An
        outcome of commercial competition, 278.--Six causes
        of economic waste, illustrated, 280.--Pro-rating
        and rebates, 281.--Five effects of disregard
        of distance, 288.--Dilution of revenue per ton
        mile, 289.--Possible remedies for economic
        waste, 292.--Pooling and rate agreements, 293.--The long
        and short haul remedy, 295.


The general acceptance, both in practice and theory, of the principle
that distance is a relatively unimportant element in rate making[249]
is significant at this time, in connection with the recent amendment
of the Act to Regulate Commerce. It is important also because of the
marked tendency toward the adoption by various state legislatures of
the extreme opposite principle of a rigid distance tariff. The old
problem of effecting a compromise between these two extreme theories
by some form of long and short haul clause--the original section 4 of
the act of 1887 having been emasculated by judicial interpretation--is
again brought to the front. For these reasons it may be worth while
to consider certain results which inevitably follow the widespread
acceptance of this principle of the blanket rate. Its benefits are
indeed certain; namely, an enlargement of the field of competition, and
an equalization of prices over large areas, and that too at the level
of the lowest or most efficient production. But these advantages entail
certain consequences--of minor importance, perhaps, but none the less
deserving of notice.

The subordination of distance to other factors in rate making is a
logical derivation from the theory of joint cost. This theory justifies
the classification of freight, namely, a wide range of rates nicely
adjusted to what the traffic in each particular commodity will bear,
while always allowing each to contribute something toward fixed and
joint expenses. In the same way it explains a close correlation of
the distance charge to what each commodity will bear. It assumes
that any rate, however low, which will yield a surplus over expenses
directly incidental to the increment of traffic and which thus
contributes something toward indivisible joint costs, serves not
only the carrier by increasing his gross revenue, but at the same
time lightens the burden of fixed expenses upon the balance of the
traffic. This principle of joint cost, so clearly set forth by
Professor Taussig,[250] is fundamental and comprehensive. It pervades
every detail of rate making. But it rests upon two basic assumptions
which, while generally valid, are not universally so. In the first
place each increment of traffic must be new business, not tonnage
wrested from another carrier and offset by a loss of other business
to that competitor. And secondly, each increment of traffic must be
_economically suitable_ to the particular carriage in contemplation.

The first of these assumptions fails wherever two carriers mutually
invade each other's fields or traffic. Each is accepting business at
a virtual loss, all costs including fixed charges on capital being
taken into account, in order to secure the increment of business. Each
gain is offset by a corresponding loss. It is the familiar case of
the rate war. A less familiar aspect of the matter is presented when
traffic is disadvantageously carried by two competing roads, each
diverting business from its natural course over the other's line. The
sum total of traffic is not increased. Each carries only as much as
before but transports its quota at an abnormal cost to itself. This
may, perhaps, swell gross revenues; but by no process of legerdemain
can the two losses in operating cost produce a gain of net revenue to
both. And each increase of _unnatural_ tonnage, where offset by a loss
of natural business, instead of serving to lighten the fixed charges,
becomes a dead weight upon all the remaining traffic. The commonest
exemplification of this is found in the circuitous transportation of
goods, instances of which will be given later.

The second case in which the principle of joint cost fails to justify
charges fixed according to what the traffic will bear may arise in the
invasion of two remote markets by one another; or, as it might be more
aptly phrased, in the overlapping of two distant markets. A railroad
is simultaneously transporting goods of like quality in opposite
directions. Chicago is selling standard hardware in New York, while
New York is doing the same thing in Chicago. Prices are the same in
both markets. Of course if the two grades of hardware are of unequal
quality, or if they are like goods produced at different cost, an
entirely distinct phase of territorial competition is created. But we
are assuming that these are standard goods and that there are no such
differences either in quality or efficiency of production. What is the
result? Is each increment of business to the railroad a gain to it
and to the community? The goods being produced at equal cost in both
places, the transportation charge must be deducted from profits. For it
is obvious that the selling price cannot be much enhanced. The level of
what the traffic will bear is determined not, as usual, by the value of
the goods but by other considerations. The traffic will bear relatively
little, no matter how high its grade. The result is that the carrier,
in order to secure the tonnage, must accept it at a very low rate,
despite the length of the haul.

This is the familiar case of the special or commodity rate granted to
build up business in a distant market. Special rates confessedly form
three-fourths of the tonnage of American railways, as has already been
said. The assumption is usually made that such traffic is a gain to
the railways, justified on the principle of joint cost as already
explained. But does it really hold good in our hypothetical case? There
is a gain of traffic in both directions, to be sure. But must it not
be accepted at so low a rate that it falls perilously near the actual
operating cost? It is possible that even here it may add something to
the carriers' revenue, and thereby lighten the joint costs in other
directions. But how about the community and the shipping producers?
Are any more goods sold? Perhaps the widened market may stimulate
competition, unless that is already keen enough among local producers
in each district by itself. The net result would seem to be merely that
the railroads' gain is the shippers' loss. There is no addition to, but
merely an exchange of, place values. Both producers are doing business
at an abnormal distance under mutually disadvantageous circumstances.
It may be said, perhaps, that the situation will soon correct itself.
If the freight rates reduce profits, each group of producers will
tend to draw back from the distant field. This undoubtedly happens in
many cases. But the influence of the railway is antagonistic to such
withdrawal. It is the railway's business to widen, not to restrict,
the area of markets. "The more they scatter the better it is for the
railroads." "Keep everyone in business everywhere." And if necessary
to give a fillip to languishing competition, do so by a concession in
rates. Is there not danger that with a host of eager freight solicitors
in the field, and equally ambitious traffic managers in command, a good
thing may be overdone, to the disadvantage of the railway, the shippers
and the consuming public?

An objection to this chain of reasoning arises at this point. Why need
the public or other shippers be concerned about the railways' policy
in this regard? Is not each railway the best judge for itself of the
profitableness of long-distance traffic? Will it not roughly assign
limits to its own activities in extending business, refusing to make
rates lower than the actual incidental cost of operation? And are not
all low long-distance rates, in so far as they contribute something
toward joint cost, an aid to the short haul traffic? The answer will in
a measure depend upon our choice between two main lines of policy; the
one seeking to lower _average_ rates, even at the expense of increasing
divergence between the intermediate and the long distance points, the
other policy seeking, _not so much lower rates as less discriminatory
rates_ between near and distant points. In the constant pressure for
reduced rates in order to widen markets it is not unnatural that the
intermediate points, less competitive probably, should be made to
contribute an undue share to the fixed sum of joint costs. The common
complaint today is not of high rates but of relative inequalities as
between places. It is a truism to assert that it matters less to a
shipping point what rate it pays than that its rate, however high,
should be the same for all competing places. This immediately forces
us to consider the consumer. What is the effect upon the general level
of prices of the American policy of making an extended market the
touchstone of success, irrespective of the danger of wastes arising
from overlapping markets? That the result may be a general tax upon
production is a conclusion with which we shall have later to do. Such
a tax, if it exists, would go far to offset the profit which unduly
low freight rates in general have produced. In short, the problem is
to consider the possible net cost to the American people of our highly
involved and most efficient transportation system. Our markets are
so wide, and our distances so vast, that the problem is a peculiarly
American one.

Having stated the theory of these economic wastes, we may now proceed
to consider them as they arise in practice. Concrete illustration of
the effect of disregard of distance naturally falls into two distinct
groups. Of these the first concerns the circuitous carriage of goods;
the second, their transportation for excessive distances. Both alike
involve economic wastes, in some degree perhaps inevitable, but
none the less deserving of evaluation. And both practices, even if
defensible at times, are exposed to constant danger of excess. It will
be convenient also to differentiate sharply the all-rail carriage from
the combined rail and water transportation. For as between railroads
and waterways, the difference in cost of service is so uncertain and
fluctuating that comparisons on the basis of mere distance have little
value.

Recent instances of wasteful and circuitous all-rail transportation are
abundant. A few typical ones will suffice to show how common the evil
is. President Ramsay of the Wabash has testified as to the roundabout
competition with the Pennsylvania Railroad between Philadelphia and
Pittsburg by which sometimes as much as fifty-seven per cent. of
traffic between those two points may be diverted from the direct route.
"They haul freight 700 miles around sometimes to meet a point in
competition 200 miles away."[251] Chicago and New Orleans are 912 miles
apart, and about equally distant--2,500 miles--from San Francisco.
The traffic manager of the Illinois Central states that that company
"engages in San Francisco business directly _via_ New Orleans from the
Chicago territory, and there is a large amount of that business, and we
engage in it right along."[252] Wool from Idaho and Wyoming may move
west 800 miles, to San Francisco; and thence _via_ New Orleans over the
Southern Pacific route to Boston.[253] This case, therefore, represents
a superfluous lateral haul of nearly a thousand miles between two
points 2,500 miles apart. The Canadian Pacific used to take business
for San Francisco, all rail, from points as far south as Tennessee and
Arkansas, diverting it from the direct way _via_ Kansas City.[254]

Goods moving in the opposite direction from San Francisco have been
hauled to Omaha by way of Winnipeg, journeying around three sides of a
rectangle by so doing, in order to save five or six cents per hundred
pounds.[255] Between New York and New Orleans nearly one hundred
all-rail lines may compete for business. The direct route being 1,340
miles, goods may be carried 2,051 miles _via_ Buffalo, New Haven
(Indiana), St. Louis and Texarkana.[256] A generation ago conditions
were even worse, the various distances by competitive routes between
St. Louis and Atlanta ranging from 526 to 1,855 miles.[257] New York
business for the West was often carried by boat to the mouth of the
Connecticut river, and thence by rail over the Central Vermont to a
connection with the Grand Trunk for Chicago. To be moved at the outset
due north 200 miles from New York on a journey to a point--Montgomery,
Alabama--south of southwest seems wasteful; yet the New York Central
is in the field for that business.[258] The map herewith, prepared in
connection with the Alabama Midland case, shows the number of lines
participating in freight carriage between New York and the little town
of Troy, Alabama. It is nearly as uneconomical as in the old days when
freight was carried from Cincinnati to Atlanta _via_ the Chesapeake and
Ohio, thence down by rail to Augusta and back to destination.[259] It
was common for freight from Pittsburg to go by boat down to Cincinnati,
only to return by rail _via_ Pittsburg to New York at a lower rate than
on a direct shipment.[260] Even right in the heart of eastern trunk
line territory, such things occur in recent times. The Cincinnati,
Hamilton and Dayton prior to its consolidation with the Pere Marquette
divided its eastbound tonnage from the rich territory about Cincinnati
among the trunk lines naturally tributary. But no sooner was it
consolidated with the Michigan road than its eastbound freight was
diverted to the north--first hauled to Toledo, Detroit and even up to
Port Huron, thence moving east and around Lake Erie to Buffalo.[261] In
the Chicago field similar practices occur. Formerly the Northwestern
road was charged with making shipments from Chicago to Sioux City via
St. Paul. This required a carriage of 670 miles between points only
536 miles apart; and the complaint arose that the roundabout rate was
cheaper than the rate by the direct routes. I am privately informed
that the Wisconsin Central at present makes rates between these same
points in conjunction with the Great Northern, the excess distance
over the direct route being 283 miles. Complaints before the Elkins
Committee[262] are not widely different in character. Thus it appears
that traffic is hauled from Chicago to Des Moines by way of Fort Dodge
at lower rates than it is carried direct by the Rock Island road,
despite the fact that Fort Dodge is eighty miles north and a little
west of Des Moines. The Illinois Central, having no line to Des Moines,
pro-rates with the Minneapolis and St. Louis, the two forming two sides
of a triangular haul. An interesting suggestion of the volume of this
indirect routing is afforded by the statistics of merchandise shipped
between American points which passes through Canada in bond.[263] The
evidence of economic waste is conclusive.

[Illustration]

A common form of wastefulness in transportation arises when freight
from a point intermediate between two termini is hauled to either one
by way of the other. Such cases are scattered throughout our railroad
history. One of the delegates to the Illinois Constitutional Convention
of 1870, cites, as an instance of local discrimination, the fact that
lumber from Chicago to Springfield, Illinois, could be shipped more
cheaply by way of St. Louis than by the direct route.[264] And now a
generation later, it appears that grain from Cannon Falls, forty-nine
miles south of St. Paul on the direct line to Chicago, destined for
Louisville, Kentucky, can be hauled up to St. Paul on local rates and
thence on a through billing to destination, back over the same rails,
considerably cheaper than by sending it as it should properly go.[265]
The Hepburn Committee reveals shipments from Rochester, New York, to
St. Louis, Minneapolis or California, all rail, on a combination of
local rates to New York and thence to destination.[266] Presumably the
freight was hauled three hundred miles due east and then retraced the
same distance; as New York freight for southern California is today
hauled to San Francisco by the Southern Pacific and then perhaps three
hundred miles back over the same rails. Even if the rate must be based
on a combination of low through rates and higher local rates, it seems
a waste of energy to continue the five or six hundred miles extra haul.
Yet the practice is common in the entire western territory. From New
York to Salt Lake City by way of San Francisco is another instance in
point.[267] Of course a short haul to a terminal to enable through
trains to be made up presents an entirely different problem of cost
from the abnormal instances above mentioned.[268]

Carriage by water is so much cheaper and as compared with land
transportation is subject to such different rate-governing principles,
that it deserves separate consideration. Mere distance, as has already
been said, being really only one element in the determination of cost,
a circuitous water route may in reality be more economical than direct
carriage overland. Yet beyond a certain point, regard being paid to
the relative cost per mile of the two modes of transport, water-borne
traffic may entail economic wastes not incomparable to those arising
in land transportation. In international trade, entirely confined
to vessel carriage, a few examples will suffice for illustration.
Machinery for a stamp mill, it was found, could be shipped from
Chicago to San Francisco by way of Shanghai, China, for fifteen cents
per hundredweight less than by way of the economically proper route.
Were the goods ever really sent by so indirect a route?[269] It would
appear so when wheat may profitably be carried from San Francisco to
Watertown, Massachusetts, after having been taken to Liverpool, stored
there, reshipped to Boston, thereafter, even paying the charges of a
local haul of nearly ten miles;[270] or when shipments from Liverpool
to New York may be made _via_ Montreal to Chicago, and thence back to
destination.[271] I am credibly informed that shipments of the American
Tobacco Company from Louisville, Kentucky, to Japan used commonly to go
_via_ Boston. Denver testimony is to the effect that machinery, made
in Colorado, shipped to Sydney, Australia, can be transported _via_
Chicago for one-half the rate for the direct shipment; and that on
similar goods even Kansas City could ship by the carload considerably
cheaper by the same roundabout route. Conversely straw matting from
Yokohama to Denver direct must pay $2.87 per hundred pounds; while if
shipped to the Missouri river, five hundred miles east of Denver, and
then back, the rate is only $2.05.[272]

As a domestic problem, water carriage confined to our own territory has
greater significance in the present inquiry. Purely coastwise traffic
conditions are peculiar and in the United States, as a rule, concern
either the South Atlantic seaports or transcontinental business. As
to the first-named class, the volume and importance of the traffic is
immense. Its character may be indicated by a quotation from a railroad
man.

    "Now a great deal has been said, chiefly on the outside, about
    the Canadian Pacific Railway seeking by its long, circuitous
    and broken route to share in a tonnage as against more direct
    and shorter lines all rail, and I propose to show to you
    gentlemen that not only have we a precedent on which to claim
    differentials, many of them, and that we also have numerous
    precedents to show that there are numerous broken, circuitous
    water and rail lines operating all over the country that are
    longer and more circuitous than ours, and still they do operate
    with more or less success.... In saying this I do not wish
    to be understood as criticising the right of any road to go
    anywhere, even with a broken and circuitous line, to seek for
    business, so long as they are satisfied that taking all the
    circumstances into account such business will afford them some
    small measure of profit. * * *

    "The distance by the Chesapeake & Ohio Road, Boston to Newport
    News, is 544 miles by water; Newport News to Chicago, 1071
    miles, total 1615 miles from Boston to Chicago, against 1020
    miles by the shortest all-rail line from Boston, showing the
    line _via_ Newport News, 58 per cent. longer. The distance by
    the Chesapeake and Ohio from New York to Newport News is 305
    miles, to which add 1071 miles, Newport News to Chicago, total
    1376 miles, against the shortest all-rail line of 912 miles,
    50.87 per cent. longer. Again the distance between Boston and
    Duluth by all-rail is 1382 miles, against 2195 miles _via_
    Newport News and Chicago, 58.82 per cent. longer by the broken
    route.

    "The Southern Pacific Co., or System rather, in connection with
    the Morgan line steamers, carries business, _via_ New York, New
    Orleans and Fort Worth, to Utah points at a differential rate.
    The distance from New York to Denver _via_ water to New Orleans
    thence rail to Fort Worth is 3155 miles, against 1940 miles by
    the direct all-rail line, showing it to be longer _via_ New
    Orleans 62.61 per cent."[273]

Allowing a constructive mileage of one-third for the last named
water haul,[274] many of these even up fairly well with the all-rail
carriage; although a route from New York to Kansas City by way of
Savannah, Georgia, would appear to be an extreme case, owing to the
relatively long haul by rail.[275] The increasing importance of
Galveston and the necessity of a back haul to compensate for export
business make it possible for that city to engage in business between
New York and Kansas City, although the roundabout route is two and
one-half times as long as the direct one.[276] As compared with these
examples, it is no wonder that the competition for New York-Nashville
or New England-Chattanooga business by way of Savannah, Mobile, or
Brunswick, Georgia, is so bitter. The roundabout traffic thus reaches
around by the southern ports and nearly up again to the Ohio river.[277]

The second great class of broken rail and water shipments consists
of transcontinental business. Goods from New York to San Francisco
commonly go by way of New Orleans or Galveston,[278] as well as by
Canadian ports and routes.[279] In the opposite direction, goods are
carried about 1000 miles by water to Seattle or Vancouver before
commencing the journey east. But more important, as illustrating this
point, is the traffic from the Central West which reaches the Pacific
coast by way of Atlantic seaports. As far west as the Missouri, the
actual competition of the trunk lines on California business has since
1894[280] brought about the condition of the "blanket" or "postage
stamp" rate. The same competitive conditions which open up Denver or
Kansas City to New York shippers by way of New Orleans or Galveston,
enable the Southern Pacific Railroad or Cape Horn routes to solicit
California shipments in western territory to be hauled back to New
York, and thence by water all or part of the way to destination.
How important this potential competition is--that is to say, what
proportion of the traffic is interchanged by this route--cannot readily
be determined.

Transportation over undue distances--the carriage of coals to
Newcastle in exchange for cotton piece goods hauled to Lancashire--as
a product of keen commercial competition may involve both a waste of
energy and an enhancement of prices in a manner seldom appreciated.
The transportation of goods great distances at low rates, while
economically justifiable in opening up new channels of business,
becomes wasteful the moment such carriage, instead of creating new
business, merely brings about an exchange between widely separated
markets, or an invasion of fields naturally tributary to other centres.
The wider the market, the greater is the chance of the most efficient
production at the lowest cost. The analogy at this point to the
problem of protective tariff legislation is obvious. For a country
to dispose of its surplus products abroad by cutting prices may not
involve economic loss; but for two countries to be simultaneously
engaged in "dumping" their products into each other's markets is quite
a different matter. In transportation such cases arise whenever a
community, producing a surplus of a given commodity, supplies itself,
nevertheless, with that same commodity from a distant market. It may
not be a just grievance that Iowa, a great cattle raising state, should
be forced to procure her dressed meats in Chicago or Omaha;[281] for
in this case some degree of manufacture has ensued in these highly
specialized centres. But the practice is less defensible where the
identical product is redistributed after long carriage to and from a
distant point. Arkansas is a great fruit raising region; yet so cheap
is transportation that dried fruits, perhaps of its own growing, are
distributed by wholesale grocers in Chicago throughout its territory.
The privilege of selling rice in the rice-growing states from Chicago
is, however, denied by the Southern Railway Association.[282] An
illuminating example of similar character occurs in the Southern cotton
manufacture, as described by a Chicago jobber:

    "Right in North Carolina there is one mill shipping 60 carloads
    of goods to Chicago in a season, and a great many of these same
    goods are brought right back to this very section.... I might
    add that when many of these heavy cotton goods made in this
    southeastern section are shipped both to New York and Chicago
    and then sold and reshipped South, they pay 15 cents to 20
    cents per hundred less each way to New York and back than _via_
    Chicago. This doubles up the handicap against which Chicago
    is obliged to contend and renders the unfairness still more
    burdensome."[283]

The overweening desire of the large centres to enter every market is
well exemplified by recent testimony of the Chicago jobbers.[284]

    "A few years later, when the railroads established the relative
    rates of freight between New York and Philadelphia and the
    Southeast, and St. Louis, Cincinnati and Chicago and the
    Southeast, giving the former the sales of merchandise and the
    latter the furnishing of food products, the hardware consumed
    in this country was manufactured in England. At that time
    we, in Chicago, felt that we were going beyond the confines
    of our legitimate territory when we diffidently asked the
    merchants in western Indiana to buy their goods in our market.
    Today, a very considerable percentage of the hardware used
    in the United States is manufactured in the Middle West, and
    we are profitably selling general hardware through a corps
    of travelling salesmen in New York, Pennsylvania and West
    Virginia, and special lines in New England.

    "What we claim is that we should not have our territory stopped
    at the Ohio river by any act of yours. It is not stopped,
    gentlemen, by any other river in America. It is not stopped
    by the greatest river, the Mississippi. It is not stopped by
    the far greater river, the Missouri. It is not stopped by
    the Arkansas; it is not stopped by the Rio Grande. It is
    not stopped even by the Columbia; and, even in the grocery
    business, it is not stopped by the Hudson. There are Chicago
    houses that are selling goods in New York city, groceries that
    they manufacture themselves. Mr. Sprague's own house sells
    goods in New York city, and Chicago is selling groceries in New
    England. As I say, even the Hudson river doesn't stop them."

All this record implies progressiveness, energy, and ambition on
the part of both business men and traffic officers. Nothing is more
remarkable in American commerce than its freedom from restraints.
Elasticity and quick adaptation to the exigencies of business are
peculiarities of American railroad operation. This is due to the
progressiveness of our railway managers in seeking constantly to
develop new territory and build up business. The strongest contrast
between Europe and the United States lies in this fact. European
railroads take business as they find it. Our railroads make it. Far be
it from me to minimize the service rendered in American progress. And
yet there are reasonable limits to all good things. We ought to reckon
the price which must be paid for this freedom of trade.

One further aspect of economic waste may be mentioned, especially as
bearing upon Federal regulation so far as it affects carload ratings
and commercial rivalry between remote middlemen in the large cities
and provincial jobbing interests. The actual cost of handling small
shipments being about one-half that of carriage by carloads, the
cheapest way in which to supply, let us say, the Pacific slope or Texas
territory, is to encourage the local jobber who ships by carload over
the long haul. For, obviously, distribution by less-than-carload lots
from New York, or even Chicago direct, direct to the cross-road store,
is bound to be a wasteful process by comparison.[285] But in addition
there are also, of course, the social factors to be considered, which
are of even greater weight.

The causes of economic waste in transportation are various. Not
less than six may be distinguished. These are: (1) congestion of
the direct route; (2) rate cutting by the weak circuitous line; (3)
pro-rating practices in division of joint through rates; (4) desire for
back-loading of empty cars; (5) strategic considerations concerning
interchange of traffic with connections; and (6) attempts to secure
or hold shippers in contested markets. These merit consideration
separately in some detail.

Congestion of traffic upon the direct line is a rare condition in
our American experience. Few of our railways are over-crowded with
business. Their equipment may be overtaxed, but their rails are seldom
worked to the utmost. Yet the phenomenal development of trunk line
business since 1897 sometimes makes delivery so slow and uncertain that
shippers prefer to patronize railways less advantageously located, even
at the same rates. The congestion on the main stem of the Pennsylvania
railway between Pittsburg and Philadelphia is a case in point.

Special rates or rebates often divert traffic. The weak lines, in that
particular business, are persistently in the field and can secure
tonnage only by means of concessions from what may be called the
standard or normal rate. The differential rate is an outgrowth of this
condition. The present controversy over the right of the initial line
in transcontinental business to route the freight at will involves such
practices. The carriers insist that they can stop the evil only by the
exercise of choice in their connections. An interesting recent example
is found in the Elkins Committee testimony. It appears that lumber
from points in Mississippi destined for Cleveland instead of going by
the proper Ohio river gateways was diverted to East St. Louis. The
operation was concealed by billing it to obscure points,--Jewett, Ill.,
near East St. Louis, and Rochester, Ohio,--and there issuing a new bill
of lading to destination:

    SENATOR DOLLIVER. And these people carry it up to this little
    station near St. Louis and then transfer it to another station
    near Cleveland?

    Mr. ROBINSON. Oh, no; to any point on the Central Traffic
    Association territory. In other words, it may go to Cleveland.

    SENATOR DOLLIVER. Why do they bill it to Rochester?

    Mr. ROBINSON. In order to get the benefit of keeping it in
    transit fifteen days without any extra cost, first.

    SENATOR DOLLIVER. I do not see how that would affect the
    question of billing it to Rochester.

    Mr. ROBINSON. Because that enables the wholesaler to have
    fifteen days extra time in which to sell the lumber.

    The CHAIRMAN. Why haul it all around the country and then
    reduce the rate on that long haul?

    Mr. ROBINSON. In order that roads that are not entitled
    naturally to this traffic may by this process get the traffic.

    SENATOR DOLLIVER. What roads from Mississippi to East St. Louis?

    Mr. ROBINSON. Any of the trunk lines--the Illinois Central,
    the Louisville or the Southern Railway lines. The roads
    in Mississippi south of the river are not parties to this
    arrangement, you understand. In fact, as fast as they find it
    out they break it up, or try to. They do not want their traffic
    diverted.

    SENATOR KEAN. Does it not come down to this, that some road is
    trying to cheat another on the use of its cars?

    Mr. ROBINSON. Not only that, but it is trying to get traffic
    that does not belong to it.[286]

Wherever a large volume of traffic is moving by an unnatural route,
the first explanation which arises therefore is that rebates or
rate-cutting are taking place.[287]

[Illustration]

A third cause of diversion of traffic is akin to the second; and
concerns the practices in pro-rating. Much circuitous transportation
is due to the existence of independent transverse lines of railway
which may participate in the traffic only on condition that it move
by an indirect route. This situation is best described by reference
to the following diagram. Let us suppose traffic to be moving by two
routes passing through points B and C, and converging on A, which
last-named point might be Chicago, St. Louis, New York or any other
railroad centre. Cutting these two converging lines of railway, we
will suppose a tranverse line passing through B and C. Obviously the
proper function of this railway is as a feeder for the through lines,
each being entitled to traffic up to the half-way point, D. But over
and above serving as a mere branch, this road, desirous of extending
its business, has a powerful incentive to extend operations. The longer
the tranverse haul, the greater becomes its pro-rating division of the
through rate with the main line. Traffic from C is of no profit to the
tranverse road so long as it is hauled directly to A. But if hauled
from C to the same destination by way of B, the profit may be enhanced
in two ways. In the first place the pro-rating distance is greater; and
secondly, such traffic from C not being _naturally_ tributary to the
main line B A but merely a surplus freight to be added to that already
in hand, the main line A B is open to temptation to shrink its usual
proportion of the through rate in order to secure the extra business.
This same motive may on proper solicitation induce the other main line
C A to accept traffic from B and its vicinity. The result is a greatly
enhanced profit to the cross line and circuitous carriage of the goods
in both directions around two sides of a triangle. Only recently in a
case in Texas the Interstate Commerce Commission found that two roads
thus converging on a common point were each losing to the other traffic
which rightfully was tributary to its own line. In a recent case,
ninety-nine per cent. of the business from Chatham to New York was
moving over a route 249 miles long, when it might have gone directly
only 144 miles, by pro-rating with another road.[288] Our illustrative
examples are not fanciful in any degree.[289]

This roundabout carriage becomes of course increasingly wasteful in
proportion to the width of angle between the main lines converging on
the common point. And several cases indicate that in extreme instances
the two main lines may converge on a common point from exactly opposite
directions, while the transverse or secondary road or series of roads
forms a wide and roundabout detour. The well known Pittsburg-Youngstown
case, cited in the original Louisville & Nashville decision in 1887,
serves as illustration. The Pennsylvania was competing from Pittsburg
directly eastbound to New York with certain feeders of the New York
Central lines which took out traffic bound for the same destination
but leaving Pittsburg westbound.[290] Other instances of the same
phenomenon occur at Chattanooga, where freight for New York may leave
either northward or southward, at Kansas City and in fact at almost any
important inland centre.

Another extreme form may arise even in the competition between two
parallel trunk lines cut transversely by two independent cross roads.
One of these latter may induce traffic to desert the direct route, to
cut across to the other trunk line, to move over that some distance
and then to be hauled back again to a point on the first main line
where it may find a "cut" rate to destination. Grain sometimes used
literally to meander to the seaboard in the days of active competition
between the trunk lines. Wheat from Iowa and northern Illinois finally
reached Portland, Maine, by way of Cincinnati in this manner, with a
superfluous carriage of from 250 to 350 miles:

    "Starting within 90 miles of Chicago, though billed due
    northeast to Portland, wheat has travelled first 97 miles due
    southwest to avail of the connection of the Baltimore and Ohio
    Railroad for Cincinnati, and thence north to Detroit Junction,
    a total of 716 miles to reach the latter point and save 5 cents
    in freight. The direct haul through Chicago would have been 340
    miles less, or a total of 376 miles only."[291]

Another witness describes the route as follows:

    Property billed for Portland, Me., started 90 miles below
    Chicago, although Chicago is on a direct line, and took a
    southeasterly course, then to Springfield, from Springfield
    to Flora, then to Cincinnati, and then over the Hamilton and
    Dayton system to Detroit, there to take the Grand Trunk road
    to Portland. This was owing to the billing system adhered to
    here with great tenacity. Property ran around three sides of a
    square, and I lost money on some of that property.[292]

This ruinous diversion of freight seems to have been dependent upon the
existence of active competition at Detroit and ceased when the Grand
Trunk came to an agreement with the American lines. But there can be no
doubt that wherever these cross lines exist there is a strong tendency
toward diversion. In the recent hearings of the Senate Committee on
Interstate Commerce on railway rate regulation, a railroad witness
again describes the operation:

    Mr. VINING. Well, for instance, take the time when I was on
    the Grand Rapids and Indiana Railroad. Its connection at the
    south was at Fort Wayne, with the Pittsburg, Fort Wayne and
    Chicago Road. We took lumber out of Michigan and wanted to
    send it east. We had to compete with lines that went by way
    of Detroit, that went perhaps through Canada and that in some
    cases were shorter. Of course, if we wanted to send lumber
    from Grand Rapids to New York we had to make at least as low
    a rate as was made by other lines leading from Grand Rapids
    to New York. That rate might be just the same from Fort Wayne
    as from Grand Rapids, so that we could not get any more than
    the low rate from Fort Wayne. We had to go in that case to the
    Pittsburg, Fort Wayne and Chicago Railway and say: "Here are so
    many carloads of lumber, or so much lumber, at Grand Rapids, a
    part of which could be shipped to New York if we had through
    rates that would enable us to move it. These other lines are
    carrying it for 25 cents a hundred pounds to New York. You join
    us in a through rate of 25 cents and we can give you some of
    that business." ... But if I were with a short line and wanted
    to negotiate with a long one, I should try to put my case just
    as strongly as possible before the long line. I should say to
    them: "We can not take 5 per cent. of a rate of 25 cents. It
    would not pay us. You know that; you can see that"; and they,
    as business men, would admit it. "Well," I would say, "give us
    5 cents a hundred pounds and we will bring the business to you,
    and if you do not, we can not afford to do it."

    SENATOR CULLOM. I think in some instances they have stated
    before us that they gave 25 per cent.

    Mr. VINING. They might.[293]

Whenever the cross road was financially embarrassed, the tendency to
diversion was increased. For then, of course, having repudiated fixed
charges, the cross line could accept almost any rate as better than the
loss of the traffic. And that this was in the past almost a chronic
condition in western trunk line territory appears from the fact that
eighteen out of the twenty-two roads cutting the Illinois Central
between Chicago and Cairo have been in the hands of receivers since
1874.[294]

It not infrequently happens that the initial railroad may entirely
control a roundabout route, whereas shipments by the most direct line
necessitate a division of the joint rate with other companies. In such
a case the initial line will naturally favor the indirect route, at the
risk of economic loss to the community and even to its own shippers. An
interesting illustration is afforded by a complaint of wheat growers
at Ritzville in the state of Washington concerning rates to Portland,
Oregon.[295] By direct line with low grades along the Columbia river
the distance was 311 miles. This was composed of several independent
but connecting links. The Northern Pacific on the other hand had a
line of its own, 480 miles long, which moreover crossed two mountain
ranges with heavy grades. It based its charges upon the cost of service
by this roundabout and expensive line; and insisted upon its right to
the traffic despite the wishes of the shippers. The Commission upheld
the shippers' contention for the right to have their products carried
to market in the most efficient manner.[296] Another instance on the
Illinois Central is suggestive, concerning shipments from Panola,
Illinois, to Peoria, a distance of about forty miles by the shortest
line of connecting roads. Yet the Illinois Central having a line of
its own _via_ Clinton and Lincoln transported goods round three sides
of a rectangle, a distance of 109 miles, presumably in order to avoid
a pro-rating division of the through rate.[297] Of course elements of
operating cost enter sometimes, as in the case of back-loading;[298]
but in the main, the pro-rating consideration rules.

Rebates may or may not be given in connection with circuitous routing.
Sometimes the same result may be obtained when one carrier merely
shrinks its proportion of a joint through rate, leaving the total
charge to the shipper unaffected. Of course it goes without saying that
an implication of improper manipulation of rates does not always follow
the diversion of freight from a direct line. The rate may be the same
by several competitive routes, shipments going as a reward for energy,
persistency, or personality of the agent. A recent case, concerning
rates on lumber from Sheridan, Indiana, to New York illustrates this
point.[299] Sheridan is twenty-eight miles north of Indianapolis on
the Monon road. Quoting from the decision:

    "In the division of joint through rates on percentages based on
    mileage, the defendant line naturally prefers arrangements with
    connections giving it the longest haul and largest percentages.
    Therefore, it carries this freight at rates based on a carriage
    through Indianapolis by a direct line eastward, while in fact
    it carries it in an opposite direction north and west by a
    longer route, the reduced ton mileage being accepted to secure
    the traffic."

The Iowa Central, cutting across the four main lines between Chicago
and Omaha, derives a large revenue from such diversion. Coal from
Peoria west, instead of moving by the shortest line to Omaha, is hauled
across the first three to a connection with the devious Great Western
line.[300] The motive is obvious.

A fourth cause of diversion of traffic has to do rather with the
operating than the traffic department. An inequality of tonnage in
opposite directions may make it expedient to solicit business for
the sake of a back load. The Canadian Pacific may engage in San
Francisco-Omaha business by way of Winnipeg, because of the scarcity
of tonnage east bound. The traffic to and from the southeastern states
is quite uneven in volume. The preponderance of bulky freight is north
bound to the New England centres of cotton and other manufacture;
while from the western cities, the greater volume of traffic is south
bound, consisting of agricultural staples and food stuffs. To equalize
this traffic it may often be desirable to secure the most roundabout
business. A disturbing element of this sort in the southern field has
always to be reckoned with. A good illustration elsewhere occurs in the
well known St. Cloud case.[301] The Northern Pacific accepted tonnage
for a most circuitous haul to Duluth, but seems to have done so largely
in order to provide lading for a preponderance of "empties." In this
case it did not lower the normal rate but accepted it for a much longer
haul.

Not unlike the preceding cause, also, is a fifth, the desire to be in
position to interchange traffic on terms of equality with powerful
connections. Mr. Bowes, traffic manager of the Illinois Central,
justifying the participation of this road in Chicago-San Francisco
business by way of New Orleans, well stated it as follows:[302]

    "Of course the Southern Pacific Railroad, as you gentlemen
    know, originate and control a very large traffic, which they
    can deliver at various junctions; at New Orleans, where they
    have their long haul to the Missouri river, and we naturally
    want some of that business, a long haul traffic to New Orleans,
    and in giving it to them we place them under obligations to
    reciprocate and give us some traffic. That is one of the things
    that occurs to a railroad man as to increasing the volume and
    value of his traffic for the benefit of his company."

A sixth and final reason for diversion of traffic from the direct line
may be partly sentimental, but none the less significant. It concerns
the question of competition at abnormal distances. We may cite two
railroad witnesses, who aptly describe the situation. "We can haul
traffic in competition, and we frequently do, as I stated, at less
than cost, or nearly so, in order to hold the traffic and our patrons
in certain territory--Kansas City for instance--but we do not like to
do it."[303] Or again, "The Charleston freight is not legitimately
ours.... We make on these through rates from Chicago to Charleston, for
instance, scarcely anything. But it is an outpost. We must maintain
that or have our territory further invaded."[304] In other words, the
circuitous or over-long distance haul is a natural though regrettable
outcome of railroad competition.

       *       *       *       *       *

What are the effects of this American practice of unduly disregarding
distance as a factor in transportation? Not less than five deserve
separate consideration in some detail. It inordinately swells the
volume of ton-mileage; it dilutes the ton-mile revenue; it produces
rigidity of industrial conditions; it stimulates centralization both of
population and of industry, and it is a tax upon American production.

One cannot fail to be impressed with the phenomenal growth of
transportation in the United States, especially in recent years.
It appears as if its volume increased more nearly as the square of
population than in direct proportion to it.[305] But do these figures
represent all that they purport to show? Every ton of freight which
moves from Chicago to San Francisco over a line one thousand miles too
long adds 1000 ton miles to swell a fictitious total. Every carload
of cotton goods hauled up to Chicago to be redistributed thence in
the original territory and every ton of groceries or agricultural
machinery exchanged between two regions with adequate facilities for
production of like standard goods contribute to the same end. How large
a proportion of this marvellous growth of ton mileage these economic
wastes contribute can never be determined with certainty. That their
aggregate is considerable cannot be questioned.

These practices must considerably dilute the returns per mile for
service rendered by American carriers--in even greater degree than they
enhance the apparent volume of transportation. Long-distance rates
must always represent a low revenue per ton mile, owing to the fixed
maximum for all distances determined by what the traffic will bear.
Furniture made in North Carolina for California consumption[306] cannot
be sold there in competition above a certain price. The greater the
distance into which the possible margin of profit is divided, the less
per mile must be the revenue left for the carrier. Yet this is not all.
Such would be true of simply over-long distance carriage. But to this
we must add the fact that some of this long-haul tonnage reaches its
remote destination over a roundabout line, which increases the already
over-long carriage by from twenty-five to seventy-five per cent. It is
apparent at once that a still greater dilution of the average returns
must follow as a result. From 1873 down to 1900 the long and almost
uninterrupted decline of rates is an established fact. Has the volume
of this economic waste increased or diminished in proportion to the
total traffic throughout this period? If it is relatively less today,
at a time when ton mile rates are actually rising, it would be of
interest to know how far such economies offset the real increases of
rates which have been made. Rates might conceivably rise a little, or
at all events remain constant, coincidently with a fall in ton mile
revenue produced through savings of this sort.

The third result of undue disregard of distance is a certain
inelasticity of industrial conditions. This may occur in either of two
ways. The rise of new industries may be hindered, or a well-merited
relative decline of old ones under a process of natural selection
may be postponed or averted. The first of these is well set forth as
follows:[307]

    "It is always considered desirable to have a long haul, and
    the rates on a long haul should be much less, in proportion
    to distance, than on a short haul. This is a principle of
    rate-making which has grown up as one of the factors in the
    evolution of the railroad business in this country, and it has
    greatly stimulated the movement of freight for long distances,
    has brought the great manufacturing centres in closer touch
    with the consumer at a distance and the producer in closer
    touch with centres of trade. It has been of undoubted benefit
    to both, though it may oftentimes retard the growth of new
    industries by a system of rates so preferential as to enable
    the manufacturer a long distance from the field of production
    of raw material to ship the raw material to his mills,
    manufacture it and return the manufactured goods cheaper than
    the local manufacturer could afford to make it, and thus, while
    building up the centres of manufacture, have retarded the
    growth of manufacturing in the centres where the raw material
    is produced."

The other aspect of industrial rigidity is manifested through the
perpetuation of an industry in a district, regardless of the physical
disabilities under which it is conducted. Another quotation describes
it well.[308]

    SENATOR CARMACK. Is it the policy of the roads, wherever they
    find an industry established, to keep it going by advantages in
    the way of rates regardless of changes in economic conditions?

    Mr. TUTTLE. I think in so far as it is possible for them to do
    so. It has not been possible in all cases. We could not keep
    iron furnaces running in New England; they are all gone.

One cannot for a moment doubt the advantages of such a policy as a
safeguard against violent dislocating shocks to industry. It may render
the transition to new and better conditions more gradual and easier to
bear. It has been of inestimable value to New England, as exposed to
the competition of newer manufactures in the Central West. But on the
other hand, it is equally true that in the long run the whole country
will fare best when each industry is prosecuted in the most favored
location--all conditions of marketing as well as of mere production
being considered. If Pittsburg is the natural centre for iron and steel
production, it may not be an unmixed advantage to the country at large,
however great its value to New England, to have the carriers perpetuate
the barbed wire manufacture at Worcester.[309] Each particular case
would have to be decided on its merits. My purpose at present is not to
pass judgment on any of them but merely to call attention to the effect
of such practices upon the process of industrial selection.

In the fifth place, every waste in transportation service is in the
long run a tax upon the productivity of the country. More men may be
employed, more wages paid, more capital kept in circulation; but it
still remains true that the coal consumed, the extra wages paid and the
rolling stock used up in the carriage of goods, either unduly far or
by unreasonably roundabout routes, constitute an economic loss to the
community. In many cases, of course, it may be an inevitable offset
for other advantages. In the Savannah Freight Bureau case[310] (map, p.
648, _infra_) Valdosta, Georgia, was 158 miles from Savannah, while it
was 275 and 413 miles by the shortest and longest lines respectively
from Charleston. Valdosta's main resource for fertilizer supplies,
other things being equal, would naturally be Savannah, the nearer
city. Yet in the year in question it appeared that nine-tenths of the
supply was actually drawn from Charleston; and much of it was hauled
413 instead of a possible 158 miles. No wonder the complainants alleged
"that somebody in the end must pay for that species of foolishness."
Whenever the Colorado Fuel and Iron Company succeeds in selling goods
of no better grade or cheaper price in territory naturally tributary
to Pittsburg, a tax is laid upon the public to that degree.[311] When
Chicago and New York jobbers each strive to invade the other's field,
the extra revenue to the carriers may be considerable; but it is the
people who ultimately pay the freight. The analogy to the bargain
counter is obvious. The public are buying something not necessary
for less than cost; while the carriers are selling it for more than
it is worth. Economies would redound to the advantage of all parties
concerned.

       *       *       *       *       *

What remedy is possible for these economic wastes? Both the carriers
and the public have an interest in their abatement. The more efficient
industrial combinations have taken the matter in hand, either by
strategic location of plants or, as in the case of the United States
Steel Corporation, by the utilization of a Pittsburg base price scheme,
with freight rates added.[312] But probably the large proportion of
tonnage is still shipped by independent and competing producers. To
this traffic the railways must apply their own remedies. Either one of
two plans might be of service. The right to make valid agreements for
a division either of traffic or territory, if conceded to the carriers
by law under proper governmental supervision, would be an effective
safeguard. This would mean the repeal of the present prohibition of
pooling. The amendment of the long and short haul clause in 1910 (p.
601 _infra_) seems likely to do much toward accomplishing the same
result.

Agreements between carriers previous to 1887 were often employed to
obviate unnecessary waste in transportation. The division of territory
between the eastern and western lines into the southern states is a
case in point. Thirty years ago competition for trade throughout the
South was very keen between the great cities in the East and in the
Middle West. Direct lines to the northwest from Atlanta and Nashville
opened up a new avenue of communication with ambitious cities like
Chicago, St. Louis and Cincinnati. The state of Georgia constructed
the Western and Atlantic Railroad in 1851 for the express purpose
of developing this trade. As western manufactures developed, a keen
rivalry between the routes respectively east and west of the Alleghany
mountains into the South was engendered. A profitable trade in food
products by a natural, direct route from the Ohio gateways was,
however, jeopardized by ruinous rates made by the warring trunk lines
to the northern seaboard. Corn, oats, wheat and pork came down the
coast and into the South through the back door, so to speak, by way
of Savannah and other seaports. On the other hand the eastern lines
into the South were injuriously affected by the retaliatory rates on
manufactured goods made by the western lines for shipments from New
York and New England. Freight from each direction was being hauled
round three sides of a rectangle. Finally in 1878 a reasonable remedy
was found in a division of the field and an agreement to stop all
absurdly circuitous long hauls into one another's natural territory. A
line was drawn through the northern states from Buffalo to Pittsburg
and Wheeling; through the South from Chattanooga by Montgomery, Ala.,
to Pensacola. Eastern lines were to accept goods for shipment only
from their side of this line to points of destination in the South
also on the eastern side of the boundary. Western competitors were to
do the same. The result was the recognition of natural rights of each
to its territory. This agreement has now formed the basis of railway
tariffs into the southern states for almost a generation. Similar
agreements, on a less extensive scale, are commonly used to great
advantage. Thus in the "common point" territory formerly tributary to
Wilmington, Savannah and Charleston, the first named city insisted upon
its right to an equal rate with the other two, no matter how great the
disparity of distance. The Southern Railway and Steamship Association
arbitrated the matter, fixing a line beyond which Wilmington was to be
excluded.[313] Obviously such agreements have no force in law at the
present time. The only way to give effect to them is for connecting
carriers to refuse to make a joint through rate. This effectually bars
the traffic. Moreover entire unanimity of action is essential. Every
road must be a party to the compact. Otherwise the traffic will reach
its destination by shrunken rates and a more circuitous carriage even
than before.

One cannot fail to be impressed in Austria and Germany with the
economic advantages of an entirely unified system of operation. No
devious routing is permitted. Certain lines are designated for the
heavy through traffic, and concentration on them is effected to the
exclusion of all others. Between Berlin and Bremen, for example,
practically all through traffic is routed by three direct lines. No
roundabout circuits occur because of the complete absence of railway
competition. No independent lines have to be placated. The sole
problem is to cause the tonnage to be most directly and economically
transported. And this end is constantly considered in all pooling or
through-traffic arrangements with the railway systems independently
operated.

The Prussian pooling agreements with the Bavarian railways are typical.
Each party to the contract originally bound itself not to route freight
over any line exceeding the shortest direct one in distance by more
than twenty per cent. Compare this with some of our American examples
of surplus haulage of fifty or sixty per cent! And within the last
year, the renewal of these interstate governmental railway pools in
Germany has provided for a reduction of excessive haulage to ten per
cent. The problem of economical operation in Austria-Hungary with
its mixed governmental and private railways is more difficult. But
no arrangements are permitted which result in such wastes as we have
instanced under circumstances of unlimited competition in the United
States.

A more consistent enforcement of the long and short haul principle
might provide a remedy almost as effective as pooling. The Alabama
Midland decision nullified a salutary provision of the law of 1887
by holding that railway competition at the more distant point might
create such dissimilarity of circumstances as to justify a higher rate
to intermediate stations. Turn to our diagram on page 282 and observe
the effect. Traffic around two sides of a triangle from A to C by way
of B is carried at a rate equal to the charge for the direct haul from
A to C; or it may be even at a lower differential rate. Complaint
arises from the intermediate points y and x of relatively unreasonable
charges. The roundabout route replies with the usual argument about a
small contribution toward fixed charges from the long haul tonnage,
which lessens the burden upon the intermediate rate. This is cogent
enough up to a certain point. It might justify a lower rate to D, on
the natural division of line territory. It might be defensible on
principle to accord D a lower rate than x or possibly even than y. To
deny the validity of lower rates to z or C would however at once follow
from the same premises.

Under the new long and short haul clause, what may be done by the
Interstate Commerce Commission? This body roughly determining the
location of D, a natural division point, would then refuse to permit
A B, B C to charge less to either z or C than to any intermediate
point, x, B or y. Coincidently it would bar the other road A C, C B
from any lower through rate to points beyond D, such as x, B or y
than to any intermediate station. Two courses would be open to the
roads. They must either mutually withdraw from all business beyond
D or reduce their rates to all intermediate points correspondingly.
In a sparsely settled region with little local business, they might
conceivably choose the latter expedient. But in the vast majority of
cases the roads would prefer to withdraw from the unreasonably distant
fields.[314] Simultaneously taken by each line, such action would put
an end to the economic waste. At the same time it would terminate one
of the most persistent causes of rebates and personal favoritism. To be
sure it would generally operate in favor of the strong, direct lines as
against the weak and roundabout ones. Great benefit would accrue to the
Pennsylvania, the Illinois Central or the Union Pacific railroads. The
activities of the parasitic roads and the scope of parasitic operations
by the substantial roads would inevitably be curtailed. Much justice
would be done and much local irritation and popular discontent would be
allayed.

FOOTNOTES:

[249] P. 133, _supra_.

[250] _Quarterly Journal of Economics_, V, 1891, p. 438.

[251] Senate (Elkins) Committee Report, 1905, III, pp. 2152-2153. The
transverse Buffalo, Rochester and Pittsburg seems to be the feeder for
the New York Central and the Reading.

[252] _Ibid._, IV, p. 2849.

[253] U. P. Merger case: Supreme Court, October term, No. 820,
Appellant's Brief of Facts, pp. 135-193 and also p. 493.

[254] Question of Canadian-Pacific Differentials, Hearings, etc., Oct.
12, 1898, p. 115. Privately printed. _Cf._ also the Sunset Route,
_ibid._, p. 116.

[255] 51st Congress, 1st sess., Sen. Rep., No. 847, p. 176.

[256] _Pubs. Amer. Stat. Ass._, June, 1896, p. 73.

[257] Reports Internal Commerce, 1876, pp. 54-59.

[258] Map in Brief of Ed. Baxter, U. S. Supreme Court in the Alabama
Midland case.

[259] Windom Committee, II, p. 795.

[260] Cullom Committee, p. 530. Hudson also cites similar cases from
the Hepburn Committee. _Cf._ also Report on Internal Commerce, 1876,
App. p. 57.

[261] New York _Evening Post_, Sept. 30, 1905.

[262] Senate (Elkins) Committee, 1905, III, p. 1831.

[263] Only once compiled in detail. U. S. Treasury Dept., Circular No.
37, 1898. The volume of traffic by tons between points in designated
states by way of Canada was as follows:

  From Illinois to California     11,800
  From Illinois to New Jersey     80,000
  From Illinois to Pennsylvania  123,000
  From Kentucky to Pennsylvania    1,005
  From Kentucky to New York        5,516
  From Missouri to Pennsylvania    5,000
  From Pennsylvania to Missouri   13,824
  From New York to Kentucky        3,357
  From New York to Missouri       12,869
  From New York to Tennessee         609
  From Ohio to Pennsylvania       26,801
  From Pennsylvania to Ohio        5,251
  From Ohio to New York          211,657
  From New York to Ohio           55,243

[264] Debates, II, p. 1646, cited in University of Illinois Studies,
March, 1904, p. 21.

[265] Senate (Elkins) Committee, 1905, I, pp. 32-34. _Cf._ also 10 I.
C. C. Rep., 650. Another good instance on Arizona is in 16 _Idem_, 77.

[266] Page 2031.

[267] Senate (Elkins) Committee, 1905, II, p. 921.

[268] Cullom Committee, II, p. 101.

[269] 10 I.C.C. Rep., 81.

[270] Senate (Elkins) Committee, 1905, II, p. 919.

[271] _Ibid._, p. 1624.

[272] 11 I.C.C. Rep., 508.

[273] Question of Canadian Pacific Freight Differentials, Hearings,
etc., Oct. 12, 1898, p. 17. Privately printed. See also pp. 72 and 116
on the same point.

[274] Record Cincinnati Freight Bureau case, II, p. 306.

[275] Hearings, Question of Canadian Pacific Freight Differentials,
Oct. 12, 1898, p. 55.

[276] U. S. Industrial Commission, IV, p. 134.

[277] 55th Cong., 1st sess., Sen. Doc. No. 39, p. 88.

[278] By water from New York, 1800 miles to New Orleans, with 2489
miles by rail. Or to Galveston 2300 miles with 2666 miles by rail, a
total of 4966 miles. The direct line, all rail, is about 3300 miles.
Allowing constructive mileage of 3 to 1 for water carriage, they are
far from equal.

[279] Texas cotton bound for Yokohama by way of Seattle.

[280] On these matters the Record of the Business Men's League of St.
Louis case before the Interstate Commerce Commission, 9 Int. Com.
Rep., 318; and the Hearings on Canadian Pacific Differentials are
illuminating.

[281] Senate (Elkins) Committee, 1905, III, p. 1830.

[282] Record before the I.C.C.; Cincinnati Freight Bureau case, I, p.
166.

[283] Senate (Elkins) Committee, 1905, III, pp. 2540-2541.

[284] Senate (Elkins) Committee, 1905, III, pp. 2538 and 2550.

[285] Briefly discussed in the St. Louis Business Men's League case: 9
Int. Com. Rep., 318.

[286] Testimony, III, p. 2495 _et seq._

[287] The Report of the U. S. Commissioner of Corporations on the
Transportation of Petroleum, 1906, affords admirable examples. _Vide_,
pp. 5, 7, 14 and the map at p. 256.

[288] 23 I.C.C. Rep., 263.

[289] Similar triangular cross-road competition is in evidence in the
Wichita, Kan., cases on export grain, p. 232, _supra_.

[290] 1 I.C.C. Rep., 32; and Industrial Commission, XIX, p. 442.

[291] Statements taken before the Committee on Interstate Commerce of
the U. S. Senate with respect to the Transportation Interests of the
U. S. and Canada. Washington, 1890, p. 616. _Cf._ chap. X, p. 363,
_infra_; also the Wichita cases, in chap. VII, p. 232, _supra_.

[292] _Ibid._, p. 631.

[293] Senate (Elkins) Committee, 1905, II, p. 1706.

[294] Quoted from Acworth, 55th Cong., 1st sess., Sen. doc. 39, p. 33.

[295] _Newlands v. Nor. Pac. R. R. Co._; 6 Int. Com. Rep., 131.

[296] _Cf._ the case of the C. H. & D. R. R. on p. 271, _supra_.

[297] Record, Illinois Railroad Commission, concerning Reasonable
Maximum Rates, 1905, p. 165.

[298] _Cf._ p. 287, _infra_.

[299] 10 I.C.C. Rep., 29.

[300] _Boston Transcript_, Oct. 14, 1905.

[301] 8 Int. Com. Rep., 346; reprinted in our Railway Problems, chap.
XI.

[302] Senate (Elkins) Committee, 1905, IV, p. 2850.

[303] President Ramsey of the Wabash; Senate (Elkins) Committee, 1905,
III, p. 1971.

[304] Windom Committee, II, p. 796.

[305] P. 78, _supra_.

[306] Senate (Elkins) Committee, 1905, III, p. 2008.

[307] Senate (Elkins) Committee, 1905, IV, p. 3115.

[308] _Idem_, II, p. 976.

[309] Specifically described in Senate (Elkins) Committee, 1905, II, p.
923.

[310] 7 Int. Com. Rep., 458; reprinted in our Railway Problems, chap.
XII.

[311] "Practically it may be declared that the public, considered as
distinct from railway owners, must pay for all the transportation which
it receives." ... H. T. Newcomb in _Pubs. Am. Stat. Ass._, N. S. Nr.
34, p. 71.

[312] Agreements for a scale of cross freights by wholesalers' or
jobbers' associations as in Ohio for groceries or hardware are equally
effective.

[313] 7 Int. Com. Rep., 458; in our Railway Problems, chap. XII.

[314] This problem is involved in the Youngstown-Pittsburg case already
mentioned. In the original Louisville and Nashville decision the
Commission apparently preferred to encourage competition even at the
risk of its being roundabout and "illegitimate." But after the railway
attorneys expanded the "rare and peculiar" cases to cover all kinds of
competition, the Commission apparently regretted its earlier position.
_Cf._ 1 I.C.C. Rep., 82; 5 _Idem_, 389; and especially the brief of Ed.
Baxter, Esq., in the Alabama Midland case, U. S. Supreme Court, Oct.
term, 1896, No. 563, p. 118.



CHAPTER IX

FREIGHT CLASSIFICATION[315]

    Importance and nature of classification
        described, 300.--Classifications and tariffs
        distinguished, as a means of changing rates, 301.--The
        three classification committees, 304.--Wide
        differences between them illustrated, 305.--Historical
        development, 306.--Increase in items
        enumerated, 309.--Growing distinction between carload
        and less-than-carload rates, 310.--Great volume of
        elaborate rules and descriptions, 312.--Theoretical basis
        of classification, 314.--Cost of service _v._ value of
        service, 315.--Practically, classification based upon
        rule of thumb, 319.--The "spread" in classification
        between commodities, 319.--Similarly as between
        places, 320.--Commodity rates described, 322.--Natural in
        undeveloped conditions, 323.--Various sorts of commodity
        rates, 324.--The problem of carload ratings, 325.--Carloads
        theoretically considered, 326.--Effect upon commercial
        competition, 327.--New England milk rates, 329.--Mixed
        carloads, 331.--Minimum carload rates, 322.--Importance
        of car capacity, 334.--Market capacity and minimum
        carloads, 336.

    Uniform classification for the United States, 337.--Revival
        of interest since 1906, 339.--Overlapping and
        conflicting jurisdictions, 340.--Confusion and
        discrimination, 341.--Anomalies and conflicts
        illustrated, 342.--Two main obstacles to
        uniform classification, 345.--Reflection of
        local trade conditions, 345.--Compromise not
        satisfactory, 346.--Classifications and distance tariffs
        interlock, 347.--General conclusions, 351.



         OFFICIAL (Trunk Line)
                 A            Subject to
                             Uniform Bill
                              of Lading
                              Conditions.
                              L.C.L. C.L.
   1 Academy or Artists'
     Board, in cases
     (C. L. min, weight,
     36,000 lbs.)                2    5
   2 Acetone, in iron drums      3    5
   3 ACIDS:

         *       *       *       *       *

   4 Acetic, liquid:
     In carboys, boxed
      (C. L., min. weight
      24,000 lbs.)
      (subject to Rule
      27 and Note 2)             1    5
     In bbls. or iron
      drums (C. L., min.
      weight 36,000
      lbs.)--                    3    5
     In tank cars (see
      Note 1)                   --    5
   5 Boracic, in bags,
     boxes, bbls. or
     casks (C. L., min.
     weight 36,000
     lbs.)                       3    5

         *       *       *       *       *

   7 AGRICULTURAL IMPLEMENTS
        AND MACHINES:
   8 Agricultural Implements
     and Machines, N. O. S.:
      S. U                      D1   --
      K. D. flat                 1   --
      Min. weight 24,000
       lbs. (subject
       to Rule 27)              --    5
   9 Axes or Hooks, Bush:
     In bundles                  1   --
     In boxes                   --    3
     Min. weight 24,000
      lbs. (subject
      to Rule 27)               --    5

         *       *       *       *       *

  23 ZINC:

  24 Pig or Slab (C.L., min.
     weight 36,000 lbs.)         4    6
  25 Plates (not Engravers'
     Plates) boxed (C. L.
     min. weight 36,000 lbs.)    4    5
  26 Scrap:
     In bags                     2   --
     In bales                    3   --
     In boxes, kegs,
       bbls. or casks
       (see Note)                4   --
     Min. weight
       36,000 lbs.               6   --

         *       *       *       *       *

  34 ZINC, SULPHATE OF:
     In boxes or kegs            2   --
     In bbls. (C. L., min.
     weight 36,000 lbs.)         4    5
  35 Zylonite Goods,
       in packages               1   --

         *       *       *       *       *

              WESTERN
                 A                   C.L.
   1 ADVERTISING MATTER           }
       printed, N. O. S.          }
       (exclusive of signs and    }
       show cards), boxed or      }
       in bundles prepaid (not    }
       otherwise specified)      1}
   2 Advertising Matter           }
       consisting of Almanacs,    }
       Circulars, and Pamphlets,  }
       for advertising purposes   }
       only and so stated on      }
       shipping ticket and bill   }  3 Min. wt.
       of lading, value not       }  24,000 lbs.
       exceeding 5c. per lb.      }
       and so receipted for, in   }
       bundles or boxes prepaid   }
       or guaranteed             2}
   3 Chinese, Japanese and        }
       Palm-leaf Fans, with       }
       advertisements printed     }
       on the face, and           }
       Catalogues, boxed or in    }
       bundles, prepaid          1}
   4 Advertising racks (sheet
       iron) nested solid,
       boxed or crated, min.
       C. L. wt. 30,000 lbs.     2    4

         *       *       *       *       *

   6 AGRICULTURAL IMPLEMENTS:
   7 Except Hand:
   8 Barrel Carts:                }
   9   Set up, on wheels     1-1/2}
  10   K. D. flat                1}
  11 Bean Pickers,                }
       S. U. crated          1-1/2}
  12 Beet Harvesters:             }   A
  13   Set up                    1}  Min.
  14   K. D., in bundles         2}   wt.
  15   K. D., boxed or crated    3} 24,000
  16 Boll Weevil Machines K.D.    }  lbs.
       flat                      3}
  17 Blue Grass Strippers:        }
  18   S. U.                   D 1}
  19   K. D., small parts boxed  3}

         *       *       *       *       *

  42 ZINC:

  43 Ashes, min. C.L. wt.
       40,000 lbs.               4    D
  44 Batts or Wainscoting
       enameled                  2
  45 Concentrates, in sacks,
       min. wt. 40,000 lbs.           C
  46 Dross, min. C.L. wt.
      40,000 lbs.                4    D
  47 Flue dust, min. C. L. wt.
       40,000 lbs.               4    D
                                  } 5
  48 Pigs or slabs               4} min. wt.
  49 Sheet, in casks             4} 36,000
                                  } lbs.
  50 Shavings, min. C. L. wt.
       36,000 lbs.               2    R
  51 Sheets, perforated for
       screens, boxed, min.
       C. L. wt. 36,000 lbs.     4    5
  52 Sheet or roll, not packed   1
  53 Strips (for weather
       strips), boxed or crated  3
  54 Sweepings, min. wt.
       40,000 lbs.                    E

         *       *       *       *       *

              SOUTHERN
  Item            A.              Class if
   No.                            Released
   1 Accoutrements, Military          1
   2 ACIDS (Carriers's Option) viz:
   3 Acetic, liquid, in bbls.,
       or drums, L. C. L.             3
   4   Same, C. L., min. wt.
       30,000 lbs.                    5
   5 Carbolic, crude, in
       bbls. or drums                 3
   6 Carbonic, liquid in
       drums or tubes

         *       *       *       *       *

  44 AGRICULTURAL IMPLEMENTS
     C. L., owners to load
     and unload, viz:
  45 Cleaners, Tobacco,
       min. wt. 15,000 lbs.           3
  46 Fodder Shredders and Corn
     Huskers, min. wt. 12,000 lbs.    4
  47 Fodder Shredders and Corn
     Huskers, in mixed C. L., with
     other agricultural implements,
     min. wt. 20,000 lbs.             6
  48 Harvesters and Pickers,
     Cotton, min. 15,000 lbs.         3

         *       *       *       *       *

  14 ZINC, viz.:

  15 In boxes, casks, sheets
       or rolls                       4
  16 In blocks or pigs,
       L. C. L.                       5
  17 Same, C. L., min. wt.
       30,000 lbs.                    6
  18 Scrap, packed                    5

  19 ZINC, CHLORIDE OF, viz.:

  20 In boxes, or in glass jugs,
       or carboys, packed,
       L. C. L.                       1
  21 In kegs, or bbls.,
       L. C. L.                       4
  22 Same, packed, or in tank
       cars, C. L. (see
       General Rule 3)                6
  23 Zinc Ashes or Residue,
       L. C. L.                       4
  24   Same, C. L.                    6
  25 Zinc Dust and Zinc Flue
       Dust; same as Paints.
  26 Zinc Oxide                       5
  27 Zinc Paints; same as Paints.
  28 Zinc, Sulphate of,
       in boxes                       1
  29   Same, in kegs, bbls. or
       drums                          4
  30 Zincs, Battery, in
       crates, boxes, or
       bbls., L. C. L.                3
  31   Same, C. L.                    6

Imagine the Encyclopædia Britannica, a Chicago mail-order catalogue and
a United States protective tariff law blended in a single volume, and
you have a freight classification as it exists in the United States at
the present time! A few selections from the first and last items of
such a document are reproduced on the preceding pages. They give some
idea of the amazing scope of trade. Such a classification is, first of
all, a list of every possible commodity which may move by rail, from
Academy or Artist's Board and Accoutrements to Xylophones and Zylonite.
In this list one finds Algarovilla, Bagasse, "Pie Crust, Prepared";
Artificial Hams, Cattle Tails and Wombat Skins; Wings, Crutches,
Cradles, Baby Jumpers and all; together with Shoo Flies and Grave
Vaults. Every thing above, on, or under the earth will be found listed
in such a volume. To grade justly all these commodities is obviously
a task of the utmost nicety. A few of the delicate questions which
have puzzled the Interstate Commerce Commission may give some idea
of the complexity of the problem.[316] Shall cow peas pay freight as
"vegetables, N. O. S., dried or evaporated," or as "fertilizer"--being
an active agent in soil regeneration? Are "iron-handled bristle
shoe-blacking daubers" machinery or toilet appliances? Are patent
medicines distinguishable, for purposes of transportation, from other
alcoholic beverages used as tonics? What is the difference, as regards
rail carriage, between a percolator and an everyday coffee pot?
Are Grandpa's Wonder Soap and Pearline--in the light of the claims
put forth by manufacturers, suitable either for laundry or toilet
purposes--to be put in different classes according to their uses or
their market price? When is a boiler not a boiler? If it be used for
heating purposes rather than steam generation, why is it not a stove?
What is the difference between raisins and other dried fruits, unless
perchance the carrier has not yet established one industry while
another is already firmly rooted and safe against competition?

The classification of all these articles is a factor of primary
importance in the making of freight rates both from a public and
private point of view. Attention has been directed of late to its
significance and importance to the private shipper, by reason of the
use made of it in the advances of freight rates which have taken place
throughout the country within the past decade. Its public importance
has not been fully appreciated until recently as affecting the general
level of railway charges. So little was its significance understood,
that supervision and control of classification were not apparently
contemplated by the original Act to Regulate Commerce of 1887. The
anomaly existed for many years, therefore, of a grant of power intended
to regulate freight rates, which, at the same time, omitted provision
for control over a fundamentally important element in their make-up.
The Interstate Commerce Commission, however, assumed jurisdiction over
the matter: and for more than twenty years, despite doubts expressed by
the Department of Justice as to its legality, passed upon complaints as
to unreasonable classification without protest even from the carriers
themselves. Control over it has now been assured beyond possibility of
dispute by the specific provisions of the Hepburn Act of 1910.

The freight rate upon a particular commodity between any given points
is compounded of two separate and distinct factors: one having to do
with the nature of the haul, the other with the nature of the goods
themselves. Two distinct publications must be consulted in order to
determine the actual charge. Although both of them usually bear the
name of a railway and are issued over its signature, they emanate,
nevertheless, from entirely different sources. The first of these is
known as the Freight Tariff. It specifies rates in cents per hundred
pounds for a number of different classes of freight, numerically
designated, between all the places upon each line or its connections.
Thus the tariff of the New York Central & Hudson River Railroad gives
rates per hundred pounds from New York to several hundred stations,
for first, second, third, etc., classes. This freight tariff, however,
contains no mention whatever of commodities by name. The second
publication which must be consulted supplies this defect. This is
known as the Classification. Its function is to group all articles
more or less alike in character, so far as they affect transportation
cost, or are affected in value by carriage from place to place. These
groups correspond to the several numerical classes already named in
the freight tariff. Thus dry goods or boots and shoes are designated
as first class. Turning back to the freight tariff, the rate from
New York, for example, to any particular place desired, for such
first-class freight, is then found in cents per hundred pounds. It
thus appears, as has been said, that a freight rate is made up of
two distinct elements equal in importance. The first is the charge
corresponding to the distance; the other is the charge as determined by
the character of the goods. Consequently, a variation in either one of
the two would result in changing the final rate as compounded.[317]

A concrete illustration or two may emphasize the commercial importance
of classification. So far as it may be used to effect an increase
of rates, the following case is typical, as given by a Boston
manufacturer, in evidence before the Senate Committee on Interstate
Commerce in 1905:

"From July 15, 1889, to January 1, of this year, the classification
(of carbon black, basis of printers' ink) continued to be once and a
half first class in less-than-carload lots, third class in carload
lots, approximately twice the freight required between 1887 and 1889.
Meanwhile, the price had declined.... On January 1 the classification
was again raised, to class 2, rule 25, an increase of about ten per
cent, in carload lots. Numerous efforts have been made by myself and
others to have this commodity classified where it belongs, as dry
color, but the only result has been the reverse of what we desired; and
the industry has been and is in a somewhat precarious condition, as we
have contracted for millions of pounds of black at prices fixed at the
point of delivery, and had no notice of the raise in freight rate until
subsequent to its going into operation."[318]

The Spokane Chamber of Commerce, in these same Senate Committee
hearings, gave an illustration of the use of classification to bring
about a change of rates without modifying the individual railway
tariff. "The Pacific Coast Pipe Company started to make wired wooden
pipe in the spring of 1900.... There was at that time but one factory
of the kind on the North Pacific coast, located at Seattle.... The
Seattle factory, backed by the big lumber firms on the coast, finding
a serious competitor in the Spokane field, got the railways to put
manufactured pipe under the lumber classification, thus reducing the
rate from Seattle to Spokane from forty-six to twenty cents per 100
pounds.... The Spokane factory at once filed a vigorous protest, with
the result that the railways put back the rate from Seattle to Spokane
to forty-six cents, but established a maximum rate of fifty cents for
Seattle pipe, which, of course, shut off all territory east of Spokane
from the Spokane factory.... The remnant of the Spokane factory ...
has been compelled to shut down, and the entire plant is being removed
to Ballard." Whether these facts are exactly as thus informally
stated or not, is by the way. If not done at this time, it is certain
that similar manipulation of classification rules often enters into
commercial competition.[319]

Freight tariffs and classifications are as distinct and independent
in source as they are in nature. Tariffs are issued by each railway,
by and for itself alone and upon its sole authority. Classifications,
on the other hand, do not originate with particular railways at all;
but are issued for them by coöperative bodies, known as classification
committees. These committees are composed of representatives from
all the carriers operating within certain designated territories.
In other words, the United States is apportioned among a number of
committees, to each of which is delegated by the carriers concerned,
the power over classification; that is to say, the right to assign
every commodity which may be shipped or received to any particular
group of freight ratings. This delegation of authority is always
subject, however, to the right of filing whatever exceptions to the
classification any railway may choose independently to put in force.
These exception sheets contain the so-called commodity tariffs, to
be subsequently described, which stand out in sharp relief against
the so-called class rates. Such exceptions are independently filed by
each railway at Washington and do not generally form integral parts
of the volume issued by the classification committee, except in the
southern states. New editions of these classifications are published
from time to time as called for by additions or amendments, the
latest, of course, superseding all earlier ones. Thirty-seven such
issues have already appeared in series in trunk line and southern
territory, while fifty have been put forth in western territory, since
the practice was standardized in 1888. At the present time freight
classification for all the railways of the United States is performed
mainly by three committees, known as the Official, the Southern and
the Western, with headquarters, respectively, in New York, Atlanta
and Chicago. Each of these three committees has jurisdiction over a
particular territory. Thus the Official Classification prevails east
of Chicago and north of the Ohio and the Potomac; the Southern, over
the remaining part of the country east of the Mississippi; and the
Western, throughout the rest of the United States. In addition to these
three primary classifications there is also another, issued by the
Transcontinental Freight Bureau, with headquarters at Chicago. This
committee has supervision over classification upon the Pacific coast
business. A number of the states also, notably Illinois, Iowa and most
of the southwestern commonwealths, promulgate state classifications
having relation, however, only to local business within their several
jurisdictions. These are prescribed by law and represent modifications
to suit peculiar exigencies or to foster local trade ambitions. There
are also a number of other coöperative local railway committees,
each dealing with the special concerns of its own territory, and
representing the joint interests of the railways therein included to
all the world outside. Thus, for instance, Southern Classification
territory is subdivided into local units, known, respectively, as
the Southeastern Mississippi Valley Association, the Southeastern
Freight Association, and the Associated Railways of Virginia and
the Carolinas.[320] But for all practical purposes, so far as the
larger problems of classification are concerned, our attention may be
concentrated upon the three principal committees above mentioned.

Some impression of the wide differences between these three main
classifications in different parts of the country may be derived from
the set of excerpts at the head of this chapter. In three parallel
columns the alpha and omega of each are reproduced, together with bits
of one of the most complicated schedules, viz., that dealing with
agricultural implements. Even where the same commodities occur in
each classification, the diversity in description, mode of packing,
carload and other requirements, renders any direct comparison almost
impossible. The mere fact that the class assignment, as shown at the
right in each column, happens to be the same, as in the case of acetic
acid in barrels or drums which moves both in Official and Southern
Classification territory, third class in less-than-carload lots (_L.
C. L._) and fifth class in carloads (_C. L._), shows nothing at all as
far as equality of charges is concerned. For, as has been said, this
is only half the statement of the rate. The spread between charges for
different classes yet remains to be determined. The actual relativity
between third-class and fifth-class rates, moreover, may be very
different in the two places. In the New York Board of Trade case[321]
this point was well exemplified. Comparative conditions as to rates in
the three main sections of the country, as they then existed, were as
follows:

                    RATES IN CENTS PER HUNDREDWEIGHT

                                                            Canned
                                                   Class     goods
                                                  ------  -----------
                                           Miles  I.  IV. L.C.L. C.L.
  New York to Chicago (Official class'n)    912   75  35   65     30
  Chicago to Omaha (West'n class'n)         490   75  30   28.5   25
  Louisville to Selma (South'n class'n)     490   98  63   63     52

On the trunk lines fourth-class rates were thus less than half those
charged for the first class; in the West they were even lower,
relatively; while in the South fourth-class rates were about two-thirds
as high as the first-class rates. These differences in the spread
between classes, as will be seen, interlocking as they do with a
multitude of other considerations, are a serious bar to any partial
modification in the direction of uniformity for the United States as a
whole. Only by consideration of every factor entering into any given
rate may comparisons safely be entertained.

       *       *       *       *       *

Historically considered, the development of freight classification has
been much the same in England and the United States. Early railway
practice was an outgrowth of the tariffs in force upon canals and
toll roads.[322] In America, freight charges were at the outset often
arbitrarily fixed by the state legislatures, as conditions precedent
to the grant of charter. In many instances they were based upon the
customary performance by wagon, distinguishing between light-weight
articles paying by the cubic foot, and heavy ones for which the tariff
was based upon weight. Thus in 1827 the charter of the South Carolina
Railroad established its tolls at one half the usual wagon charge. The
Southern Pacific in local rates on ore into San Francisco followed
along just below the charges by ox cart. The freight was proportioned
also according to the length of haul by an arbitrary mileage rate. It
soon developed, however, that railway rates were unique in the fact
that not only was there a great increase in the volume of trade, but
also in the diversity of articles offered for transportations as well.
Far more elaborate classifications were soon seen to be necessary.

The South Carolina Railroad tariff of 1855, described by
McPherson,[323] exemplified the primitive traffic conditions then
prevalent. Goods were divided into four classes. The first consisted
of articles of light weight or high value, including, for example,
such incongruities as bonnets, tea, and pianos. The remaining three
classes paid by weight with a descending scale of charges. It is
difficult to explain why coffee and sugar should be rated lower than
stoves and feathers; or why dry hides and rice should be charged a
higher rate than cotton yarn and bacon; but it is evident that a rough
classification according to weight, value, use and cost of service
was being attempted. There was in addition a considerable collection
of special rates on chosen commodities according to the method of
packing them, whether by barrel, bale or case. And there were also
what corresponded to modern commodity rates upon cordwood, lumber,
bricks, and similar goods. This tariff, though primitive, including
no less than three hundred items, was far more elaborate than those
commonly used at the time. The Louisville & Nashville originally
distinguished but three classes: one by bulk, another by weight and a
third applicable to live stock. Poultry was rated by the dozen long
after the Civil War, with a higher charge for Muscovy than for ordinary
ducks. The traffic manager of the Chicago, Milwaukee & St. Paul
testified before the Elkins committee in 1905, that the classification
in Illinois in his youth was printed on the back of a bill of lading
no greater than the size of an ordinary sheet of letter paper, and the
page was not full.

From these modest beginnings the development of classification in the
United States was rapid, responding to the ever-increasing intensity
of competition and the spread of markets, particularly after 1875. By
the middle of the eighties most of the large railways were working
under six or eight different classifications. It began to be apparent
that some check must be placed upon such increasing complexity. For
conditions were wellnigh intolerable, with one set of rules for
Illinois, and yet another west of Buffalo, divided into eastbound and
westbound sections, with still a third on westward shipments local to
territory between Chicago and the Missouri river. The first attempt
at a systematic scheme was made in 1882, but the agreements then made
proved unstable. By 1887 conditions had become insupportable, so great
was the number and the diversity of the classifications throughout the
country.[324] Some applied to local business only, and were peculiar to
each road. Some applied only to westbound business, others to eastbound
traffic. The traffic manager of the New York Central & Hudson River
testified before the Interstate Commerce Commission that there were at
one time 138 distinct classifications in trunk line territory alone.
The case of the Wabash in 1883 was typical. A shipper desiring to
determine freight rates over that road might be compelled to consult a
classification for the middle and western states in six classes; one
for the Southern Railway & Steamship Association territory in eighteen
classes; one for Mississippi valley business in five classes; one
known as the Revised Western in nine classes; the Trunk Line East in
thirteen classes; the Trunk Line West in five classes; a classification
for Texas points in eight classes; and two for the Pacific coast,
according to direction, in eight and nine classes, respectively. This
situation, rendering it almost impossible for any shipper to determine
in advance what his freight rates were going to be, as well as what
his competitor was paying, early impressed itself upon the Interstate
Commerce Commission. And it was doubtless due in part to its initiative
that classifications were shaken down into substantially their present
general form in 1888.

                     NUMBER OF RATINGS IN 1909[325]

                          Less than Carload   Carload
  Southern Classification           3,503       703
  Western Classification            5,729     1,690
  Official Classification           5,852     4,235

The natural growth of classification in a rapidly developing country
like the United States, has manifested itself in three distinct ways:
there has been a steady increase in the number of items of freight
separately enumerated; a growing distinction in rates between carload
and less-than-carload shipments; and a steadily enlarging volume of
the most elaborate special rules and descriptions. As for the mere
increase in distinct commodities enumerated, in the East in 1886
there had come to be about 1,000. The first Official Classification
in the following year increased to 2,800 items; and by 1893, in the
eleventh issue, there were twice that number. The latest Official
Classification, No. 34 in 1909, contained approximately 6,000 separate
enumerations--not many more, in fact, than fifteen years earlier.
The point of saturation, or else the limit of human ingenuity, seems
to have been about reached some years ago. The same thing was true
of the Western Classification. In 1893 this contained 3,658 items,
representing an increase of about 2,000 over the number of commodities
classified by name in 1886. By 1909, as the above figures show, it
comprehended 5,729, almost as many separate items, in fact, for
less-than-carload lots as were recognized in trunk line territory.
Only in carload ratings is the Western Classification less extensive.
The Southern Classification reflected somewhat simpler trade conditions
prevalent south of the Ohio river, by the relatively smaller number
of articles enumerated; but it should be added that the number of
exceptions--filling no less than 160 pages in the latest issue--is
indicative throughout of a lesser degree of standardization than is
found elsewhere. Perhaps the most striking feature of the southern
system is the very small proportion of carload rates. But it should
be noted in this connection that the basing point system afforded
preference to market towns in any event; so that jobbers in such places
did not need wholesale rates to the same degree. This phase of the
matter will be elsewhere discussed.[326]

The second natural tendency in the development of classification
above mentioned, is an increase in the number of separate ratings for
large and small shipments. The normal growth of trade ought to make
possible a steady increase in shipments by the carload, rather than by
the box, barrel, or case; and the increase in the number of separate
carload ratings--always, of course, at a reduced rate by comparison
with less-than-carload lots--conforms territorially to the growth
in the volume of trade. In 1877, even in trunk line territory, only
twenty-four commodities were accorded a special carload rate.[327] By
1880 the number had increased to 50, and seven years later to 160.
Just before the passage of the Act to Regulate Commerce there was no
distinction between carload and small lots in eighty-five per cent.
of the articles enumerated. A sudden change supervened in the first
Official Classification issued after the Federal Act. The number of
carload ratings was suddenly raised to 900, provoking a storm of
protest from eastern shippers who resented this advantage accorded to
jobbers in the West and South, because it enabled the latter to buy
their supplies directly at wholesale.

The dispute between dealers in the older and newer commercial
centres came to a head in the so-called New York Board of Trade and
Transportation case of 1888, elsewhere discussed. Yet notwithstanding
this protest of jobbers and manufacturers in eastern trade centres,
who insisted that they should be permitted to compete on even terms
with provincial jobbers by making their shipments direct from New
York or Boston in small lots as cheaply as the local jobber could buy
them by the carload, the number of separate carload ratings steadily
augmented year after year. By 1893 more than half of the articles
enumerated in the Official Classification were allowed a lower rate for
large shipments. Present conditions are set forth by the statistics
in the preceding paragraph. From these it appears that in trunk line
territory nearly three-fourths of the commodities now enjoy carload
ratings; while in the South, on the other hand, only about one-fifth
of them make such distinction between carload and less-than-carload
lots.[328] One reason is evident; namely, that throughout a large part
of the South few jobbers command a business of sufficient magnitude to
make use of carload shipments. It is but recently, to take a specific
illustration, that business has developed in volume sufficient to
permit of the shipment of fly paper in carload lots. Until such time no
distinction between large and small shipments could well be made.

Conditions in the West, according to these figures, are intermediate
between those in the East and the South. On the other hand,
transcontinental business, as carried on in competition with ocean
steamers, is almost entirely confined to shipment by the carload. The
Transcontinental Classification is unique, therefore, in offering but
very few opportunities for shipment by package, except under specially
onerous conditions.

The spread, in other words, between the two sorts of carriage operates
most unfavorably by contrast upon the intermountain centres. Denver,
for example, under the Western Classification enjoys no carload rates,
while competitors at San Francisco have a large number.[329]

A much more elaborate code of rules and regulations having reference to
local practices and conditions is the third accompaniment of the growth
of trade.[330] Prior to 1887, and again before the recent revival of
interest in uniform classification, conditions had become intolerable
in this regard. All sorts of details, covering relatively unimportant
differences in conditions of carriage, bill of lading contracts,
marking and packing, led to constant confusion and annoyance,
especially in cases of shipment from one classification territory to
another. An eastern shipper of iron bolts, having in mind that a gunny
sack is equivalent to a box or barrel in the East, orders a small
shipment in a bag to a far western point. He finds that bolts in bags
under the rules of the Western Classification, are specially enumerated
only for carload lots, and that he must pay a rate one class higher
for such shipment than if contained in a barrel, box or keg. This
difference in classification may more than absorb his profit. Recent
evidence before the Interstate Commerce Commission,[331] contained a
striking illustration of such local diversity in rules and descriptions
as applied to furniture.

    "_Western class_: 'Bank, store, saloon and office furniture,
    consisting of arm rails, back bar mirrors, bottle cases,
    chairs, counter-fittings, desk, foot rails, metal brackets for
    arm and foot rails, refrigerators, tables and work boards.
    Note--Door, window and bar screens, partitions, prescription
    cases, patent medicine cases, show cases, wall-cases,
    wainscoting, office railing and wooden mantels may be shipped
    with bank, store, saloon or office furniture in mixed carloads
    at third-class, minimum weight 12,000 lbs.

    "There is no such provision as this in the Official
    Classification. On the contrary, a shipment of that kind can
    only be made by figuring out the less-than-carload rate on each
    article, many of which take first, double first and even three
    times first ratings.

    "For example, mirrors over five feet in length are classified
    double first class in the official classification, while show
    cases, set up, take three times first. The natural result
    of this difference in classification has been to shut out
    competition of eastern dealers in these articles entirely in
    Western Classification territory."

Only in a customs tariff of the United States would one expect to find
any such complexity as is discoverable in railway documents of this
sort.

The mere interpretation of such classification rules is often
difficult; especially with reference to the mode of packing. Suppose a
tariff provides a certain rate on stamped metal ware in boxes, barrels
or crates and, furthermore, fixes the charge fifty per cent, higher for
shipment in bales, bags or bundles. If the consignment is encased in
corrugated straw-board, which of the two rates applies? The difference
in rates being so great, it becomes quite an item on a shipment of
fifteen carloads from Buffalo to the Pacific coast.[332] Or it may be
a question as to whether a crate for Colorado cantaloupes is actually
of such dimensions as to come in under a specially favorable commodity
rate.[333]

The growing diversification of manufactures and trade is, of course,
responsible for all three of the developments above indicated. Not only
the increasing refinement of commerce, but the technical nomenclature
or trade jargon, necessary for the specific and accurate description
of so many thousands of articles, have conspired to render these
documents extremely cumbersome in the absence of a general revision and
simplification. It is but natural that one item after another should
be added, each bearing a particular name or being classified upon
some new basis. A striking example of this increase of complexity was
afforded by the cotton goods schedule in the Southern Classification.
By 1900 there were upwards of thirty different names under which cotton
cloth might be shipped. Great complaint was occasioned, as well as
the possibility of fraud, by underclassification, etc. Most of these
thirty names did not represent different values of goods, but in
many instances were merely trade-marks of particular manufacturers.
At the urgent request of the shippers this complicated schedule was
superseded in 1900 by one comprehensive title of "cotton goods in the
piece" irrespective of color, particular method of weaving or other
subordinate details.

       *       *       *       *       *

From the point of view of economic theory, the warrant for a
differentiation of charges between various classes of commodities
offered for transportation, may be considered primarily from two
distinct points of view. The first is that of operation, which
determines cost. The second is from the standpoint of traffic whereby
the value of service, so-called, is measured. The reasonableness of
making a distinction in freight rates according to the character of
goods is easily apparent, as judged on the basis of cost of service.
A multitude of factors enter into consideration at this point. The
railway ought in self-protection to charge more for hauling a thing,
if it actually costs it more in the long run to perform that service.
Some of the factors which enter into this cost were well put by the
Interstate Commerce Commission in 1897.[334]

    "Whether commodities were crude, rough, or finished; liquid
    or dry; knocked down or set up; loose or in bulk; nested or
    in boxes, or otherwise packed; if vegetables, whether green
    or dry, desiccated or evaporated; the market value and
    shippers' representations as to their character; the cost of
    service, length and direction of haul; the season and manner of
    shipment; the space occupied and weight; whether in carload or
    less-than-carload lots; the volume of annual shipments to be
    calculated on; the sort of car required, whether flat, gondola,
    box, tank, or special; whether ice or heat must be furnished;
    the speed of trains necessary for perishable or otherwise rush
    goods; the risk of handling, either to the goods themselves
    or other property; the weights, actual and estimated; the
    carrier's risk or owner's release from damage or loss."

Instances of approval of classification on the basis of such cost of
operation are frequently found in the decisions of the Interstate
Commerce Commission. For example, special service or equipment, as
in the rapid transport of fresh vegetables and fruit from the South,
justify the carriers in a specially high classification.[335] Rates
on live hogs by comparison with rates on hog products, as well as on
live cattle and dressed beef, have likewise been adjusted in terms of
cost of carriage. A classification on hogs yielding a rate equal to
two-thirds of that on hog products has been held equitably to represent
the relative expense.[336] Even the indefinite element of risk has
been accepted as justifying a higher classification for live stock as
compared with other commodities.[337]

Classification is less easy to defend from the standpoint of the
traffic manager alone, than from that of the vice-president in charge
of operation. Value of service is at times difficult to understand. It
is not at first sight reasonable, that of two commodities which cost
the railway exactly the same amount to transport, one should be charged
twice as much as the other. For example, the rate on anthracite coal
is very much higher than upon soft coal; the rate upon wheat is higher
than the rate upon some other foodstuffs; the rate upon fine woollen
goods is very much higher than upon coarse cotton cloth, etc.[338] It
has been urged frequently that any discrimination in the freight rate
on the basis of difference, either in the value of the commodity itself
or in the value of the service rendered, is unreasonable and unjust.
The case, however, is entirely analogous to that of discrimination
between a long and short haul of the same goods. The principle is
perfectly defensible in both cases, and has been accepted in legal
decisions as well as by economic writers for many years. It is based
upon the fact, which confronts one at every turn in a discussion of
railway economics, that a large proportion of the expenses of a railway
is independent of the amount of traffic. These fixed expenses must be
met at all cost if the road is to remain solvent. They constitute a
charge upon the entire traffic of the line, and are not susceptible
of apportionment to each unit of transportation. Any rate which
will contribute a surplus, small or large, above the mere cost of
transportation,--that is to say, above the expenses incident to this
particular carriage,--and which thereby lessens by the amount of that
excess the burden of the fixed charges remaining upon other traffic,
is justifiable. But it is defensible only under two conditions. The
first is that the goods at any higher rate will go by another route or
not at all; and the second is that the effect may not be detrimental
to the general course of business,--that is to say, that it is not
opposed to the public welfare. Thus a long haul at a lower rate than
the rate charged for a shorter haul, if it must be lower in order to
secure the business, constitutes no injustice to the local shipper;
for the surplus remaining above the cost of haulage of that particular
increment of freight lessens thereby the charge which must be made
upon local freight for meeting interest on bonds, maintenance of way,
and equipment expenses, etc., all of which charges, as we have seen,
go on more or less independently of the traffic. On precisely the same
grounds a discrimination of freight rates in favor of the cheaper
commodity or the less valuable service may be defended. Coal or sand
may reasonably be carried at two and one-fourth mills per ton mile,
while the road is coincidently charging three or four times as much
for hauling dry goods or fine hardware. For if a quarter of a mill
per ton mile can be earned above the expenses incident to hauling
that sand or coal, it enables the rates on the dry goods or hardware
to be maintained at a lower point than they otherwise would be. It
is unnecessary to elaborate this principle further. It is everywhere
accepted as valid. And it in a measure substantiates Mavor's statement
that "freight rates, like rent, are rather the effect of price
movements than the cause of them." When tariffs are high because prices
are high, we are afforded a fair illustration of value of service as an
element in rate making.

Value of service, therefore, as affording a warrant for classification,
has also been recognized in a number of Interstate Commerce decisions
since 1887. A relation between the grade of the charge and fluctuations
in the market price of the commodity--in other words, charging what the
traffic will bear--is at times discernible. It is to the interest of
the public that carriers should be satisfied with relatively smaller
profits from the transportation of commodities of low price which are
in general demand.[339] Under these circumstances changes in price of
such staple commodities as iron and steel or the lower priced grains,
should be reflected in a corresponding modification of rates.[340]
Akin to this is recognition of a relation in general between the value
of a commodity and its classification. Where, for example, articles
representing different stages of manufacture have to be graded, it
is but fair that the raw material, or the partly-made product should
be graded lower than the finished article.[341] Similarly, articles
which may fairly be substituted for one another ought to be classified
with reference to their common market value.[342] The relative value
of commodities, as controlling classification, clearly governs the
treatment of hard and soft coal.[343] The practical difficulty, of
course, is to know where to stop in admitting such considerations.
Shall "small-vein" soft coal, because it cannot compete on even terms
with the "big-vein" product, be accepted for carriage on a more favored
basis?[344] Some rather nice questions, both of business and public
policy, would be suggested by such a precedent.

Different classification of the same commodity according to the use
to which it may be put, is evidently an attempt to grade according
to value rather than cost of service. Automobile parts may come in
from the wheel-maker at second-class rates, but when they go out to
jobbing houses they are rated three times first class.[345] A number
of cases of this sort have come before the Commission. Shall cow peas,
for example, be classed with corn and oats as agricultural products in
one case, while according them a rating with commercial fertilizers in
another, inasmuch as they may become an active agent in nitrogenizing
soil?[346] More recently the Commission has declined to recognize the
validity of classification on this basis. Thus brick is always to be
charged the same without regard to whether it is for fire, building
or paving purposes.[347] Unusually low rates for steam coal used by
carriers and open only to certain shippers for this or other particular
purposes, likewise have been forbidden.[348] The carriers have
attempted to distinguish in grade between dried fruit and raisins. For
the two industries call for relatively different protection against
old-established competitors.[349]

As actually effected in practice, classification of freight seems
to have been largely empirical--the result of long experience in
sympathetically feeling the pulse of the business community. In the
main, despite their denial of the validity of cost as an element in
rate making, traffic managers and the Interstate Commerce Commission
seem to have been swayed more commonly by this consideration in the
make-up of schedules. Nevertheless, charging what the traffic will
bear, as a principle, will suffice alone to explain many of the details
of classification now in force. Rates have been adjusted so as to
secure the largest amount of business possible at the highest rate
compatible with that volume. In other words, traffic managers have been
mainly influenced by the consideration well stated by a witness before
the United States Industrial Commission: that, "a freight tariff is
made as it is, not because it ought to be that, but because it must
be that." The procedure of classification committees seems, in other
words, to have been mainly based upon considerations of revenue, and
that, too, without any very positive evidence as to details.[350]
Rule-of-thumb experience, therefore, is mainly represented in
classifications of the present time; that is to say, an adjustment
of freight rates upon different commodities to suit the commercial
conditions which have happened to prevail at any given time. All of
which emphasizes still further the need of scientific revision of these
most important schedules, preferably by the carriers themselves, but by
public authority if commercial inertia be too powerful to be overcome.

The spread of a classification,--that is to say, the graduation of
rates as between all kinds of goods, from fine silks to lime and sand,
or from aeroplanes, "set up," to pig iron, "knocked down,"--is not
constant. How shall this be theoretically justified? At first sight
it would appear as if the relativity of charges between different
things, as determined by cost or value of service, ought to remain
fixed; that is to say, for example, that rates on raw hides fairly
standing at one-half of the charge for shoes, ought to remain always
and everywhere at this ratio. Advocates of a rigid classification
prescribed by public authority seem often to assume that this could be
brought about. But a moment's consideration of the nature of a tariff
as it has already been described will show that this is impossible. The
spread or gradation, far from being fixed, must in the nature of things
ever vary from place to place with change of trade conditions. The rate
on raw hides relatively to that on shoes in New England--the centre of
manufacture for footwear--should be very different at Kansas City or
Chicago, whence the raw hides are derived: different alone, if for no
other reason than because hides, moving east, progressively add the
cost of carriage the farther they go; while with shoes the augmentation
of value goes on in the opposite direction, geographically. True as
between commodities, the same inconstancy of ratio also holds good as
between different points along a given line. The rate from New York
to Durham, North Carolina, for example, on first-class freight may
be fifteen per cent. above that for freight of the second class; the
second class maybe twenty per cent. above that of third class for this
distance, etc.; yet the divergence between these same classes for
another distance, as between New York and Jacksonville, Florida, may
be quite different,--twenty per cent. between first and second class,
twenty-seven per cent. between second and third, and so on. This is
indeed rather a difficult matter to understand.

This ever-changing spread of rates from place to place, as between
different commodities and with all possible combinations of the two,
may be clearly explained by reference to the diagram at page 108,
showing the gradation of charges by distance for different goods. Is
it not plain that the spread between commodities at any given place is
indicated by taking a vertical cross section of the diagram at that
point? We have already seen that the curves, rising with increase of
the distance, do so by different degrees. They cross and recross,
making an intricate lace work of lines, because of the fact that
while cost, in general, may increase more or less proportionately to
distance, competition in its ever-varying forms, plays all sorts of
pranks with the rates from point to point. The rate at any station is
shown by the height of the curve on the vertical line for that place.
Even, however, if the curves never crossed, but rose by evenly spraying
out from the point of shipment at one end of the line, as in the case
of those for the three upper classes, their relative heights would
constantly change with distance. But owing to the complexities of
competition the onward and upward movement of the curves for particular
commodities is usually much more erratic than this. Some goods, like
children, "get their growth" early. They soon attain the level of all
the charge they can ever bear. Others distribute their development
over a much greater distance. Sometimes, as we have observed, the coal
curve will be above the wheat curve; sometimes it will be below. In
other words, the vagaries of these sloping lines cause the vertical
cross sections, indicative of spread, to vary from point to point all
along the line. Such a thing as constancy of ratio between classes
or particular goods is, in the nature of transportation things,
impossible. This is a matter of fundamental importance, especially
in its bearing upon the proposition, soon to be considered, of
substituting a single uniform classification under government authority
for the present threefold system. Moreover, it demonstrates the great
commercial disturbance which might ensue from a general advance of
freight rates by an indiscriminate transfer of commodities from lower
to higher classes, such as was attempted in 1900. Such procedure is
altogether illogical, and economically as upsetting to trade as a
general "horizontal" increase or reduction of a customs tariff.

       *       *       *       *       *

Commodity rates as a means for enabling shippers to reach beyond
their immediate territory and gain an entrance to new markets, form
an entirely distinct variety of charges from those quoted in the
classified tariffs. These are special rates made to suit particular
contingencies,[351] although, of course, under the law they must be
filed with the Interstate Commerce Commission in the same manner. Such
commodity rates, however, do not apply to persons but to localities.
Although granted to shippers in a particular place to build up an
industry, the privilege of shipment under the same conditions is
theoretically open, of course, to all others at that point. Such
commodity rates naturally apply to three sets of commercial conditions:
they either govern large shipments for long distances, as in the
case of live stock; or, if for short distances, they are confined to
commodities of the very lowest grade, such as lime, sand or paving
blocks; or else they are introduced to meet special conditions, such as
an irregular market or rapidly fluctuating competitive circumstances,
as in the case of goods for import or export. Such special rates are
almost invariably granted for carload lots alone. The reason is,
naturally, that it would not be worth while to make an exception to the
classified schedules for less than that amount. Moreover, it should
be observed, special rates of this sort are often introduced in order
to meet changeable competition, such as by steamship lines engaged in
export or import business. The classified ratings change but little,
and oftentimes remain the same for many years. But in all cases where
fluctuating conditions have to be met, commodity rates by the carload
are likely to appear. This is one reason why the transcontinental
tariffs, exposed to competition either by the Cape Horn or Panama
water routes, contain so large a proportion of commodity or carload
ratings.[352]

Exceptional or commodity rates are also commonly found in a territory
like the southern states, where manufactures are struggling to maintain
a foothold. If it appear that a new industry can maintain itself
in competition with already established industries elsewhere only
by a concession in charges, the traffic manager may elect to grant
a commodity rate until such time as the industry has been placed
firmly upon its feet. The tonnage moving under commodity rates in
such circumstances may be much greater than that included under the
classified schedules. Attention has already been drawn to this fact,
but it merits still further comment. Probably three-fourths of the
business of American railways is done under such special rates. This
is apparently a higher proportion than rules in foreign countries with
the possible exception of England. Yet it is important to notice that
the revenue obtained from such traffic is relatively much less than the
tonnage, inasmuch as most commodity rates are confined to low-grade
goods. Whether such exceptions to the classified tariffs are on the
increase or not is open to question. The evidence tends to show that
special rates granted in connection with industrial development tend
to increase up to a certain point. Commodity rates, for example, are
said to be much more important in the West than they were fifteen
years ago.[353] But, on the other hand, industrial conditions having
once become standardized and assured, the natural disposition of the
railways is to substitute regular schedules for a multiplicity of
special rates. The dilemma is that such a special rate once allowed,
is exceedingly difficult to withdraw. An earnest attempt was made by
the trunk lines in 1899 to retire a large number of these commodity
rates. It then appeared that the New York Central & Hudson River
Railroad had no less than 1,370 on file. Opposition naturally arose to
the cancellation of these--an opposition less easily overcome because
of the complication that the withdrawal of commodity rates meant
practically the abolition of carload ratings. Such action, therefore,
looking toward simplification of tariffs, threatened substantially to
disturb all the existing commercial adjustments. Nevertheless it is
encouraging to note that a distinct reduction in the number of separate
and independent rates put into effect is apparent since the recent
extensions of Federal authority. The following table, covering the
tariffs officially filed at Washington since 1906, is proof positive of
great improvement in this regard:

          FREIGHT SCHEDULES FILED WITH THE INTERSTATE COMMERCE
                               COMMISSION

  1896                                             131,597

  1906                                             193,995
  1907                                             187,041
  1908                                             161,584
  1909                                             129,294
  1910                                             109,550
  1911                                              93,821

A reduction of more than one half within five years is matter for
public congratulation.[354]

Special or commodity rates for the maintenance of equilibrium between
competing markets fall naturally into several distinct groups.[355]
In the first of these, concerning commodity rates on grain and grain
products and cotton, production takes place over a vast extent of
territory and the products are marketed in places widely remote from
one another. The problem under such circumstances is mainly that of
securing equalization through different gateways.[356] In the case
of wheat it is a question first of concentration at primary markets,
such as St. Paul, Kansas City, or Chicago; and thereafter of carriage
by competitive routes whether by the way of the Gulf, by any of the
various Atlantic seaports or by the St. Lawrence River. Commodity
rates are thus determined in this first class of cases mainly with
references to competition of routes. On the other hand, when production
is spread over a considerable territory, but when transportation is
thereafter effected along converging lines to a fairly localized centre
of manufacture, the problem of equalizing conditions, competitively,
by the resort to commodity rates, has mainly to do with competitive
conditions at the place of production. Rates on wool to the highly
localized markets of the world afford illustration of this second
type of commodity rate problem.[357] Commodity rates upon fruits and
vegetables to common markets from such widely separated sources of
supply as Florida and California or the equilibration of conditions of
production for coal or lumber from the most widely scattered sources of
supply, are perhaps the most difficult of all to settle satisfactorily.

       *       *       *       *       *

The amount of reduction to be allowed on shipments by carload as
against consignments in small lots is a nice and most perplexing
problem in classification. Attention has already been directed to
the great increase in distinct carload ratings which has accompanied
the development of trade. As affecting the interests of shippers in
different parts of the country, the question came up almost immediately
after the passage of the Act to Regulate Commerce. In the so-called
New York Board of Trade case,[358] complaint was entered by eastern
merchants against a great increase in the number of wholesale ratings
in 1888. More than five times as many commodities as before were
abruptly given lower rates when shipped out of New York by the
carload. Inasmuch as a very large proportion of groceries and other
supplies went by box or package, this reduction accorded on carload
shipments greatly benefited the jobbers all through the West and South.
Under new conditions provincial middlemen could buy in carloads; and
then re-distribute from local centres much more advantageously than
before. The Commission, called upon to decide as to the relative rights
of these two classes of jobbers, attempted to bring about an adjustment
which should, in the main, conform to the existing trade conditions;
and yet should take into consideration the relative cost of service
in the two cases. The competitive struggle between eastern and both
southern and western dealers revealed in these early proceedings, has
cropped out continually in official proceedings ever since that time.
In a modified form the same question came to the front in connection
with the general advance of freight rates in 1900.[359] The changes at
this time were twofold--not only modifications in the number of carload
ratings, but also an altered differential or spread between the charges
for the two sorts of shipments. The question is a vital one to all the
shipping interests of the country. It is one of the most troublesome
elements in the establishment of a uniform classification for the
United States as a whole. For inability to standardize reasonable
differences between carload and small shipments, under the widely
different trade conditions and practices in various sections of the
country, is an almost insuperable difficulty in the way of that reform.

The economic justice of allowing a carload shipper lower rates than one
who ships in small lots is apparent, on account of the difference in
the cost of such service to the railways. This has been recognized by
the Interstate Commerce Commission and the courts as beyond question.
Not only the amount of paying freight in relation to dead weight; but
the cost of loading and unloading, of billing or collection and of
adjusting damages--all of these elements of cost are noticeably less
in the case of a full carload. Turning from these considerations of
cost to those prescribed by what may be called traffic principles,
the difficulty in arriving at a just determination may be easily
appreciated. Glass battery jars in less-than-carload lots were at one
time charged from New York to Atlanta, Georgia, second-class rates,
namely ninety-eight cents per one hundred pounds. The same commodity
when in carload shipments (not less than 20,000 pounds) was rated as
fifth class; in which case the charge from New York to Atlanta became
sixty cents. Here was a plain difference of thirty-eight cents per one
hundred pounds--upward of sixty per cent. greater charge--to the small
shipper whose business or capital was insufficient to warrant shipments
to such an amount. Two results of such discrimination are possible. In
the first place, the large shipper is enabled to undersell his smaller
competitor and perhaps to drive him out of that class of business. This
may take place as between two dealers, both located in the South and
buying their supplies from New York. The second result is that under
such rates it is impossible for the manufacturer or northern jobber to
sell direct from New York to the retailer in the South in competition
with the provincial jobber there located, who ships his goods in at the
cheap carload rate and distributes them thereafter. The problem thus
concerns at the same time both the small local shipper or dealer, as
against a more formidable provincial competitor; and also the remote
jobbers as a class against the whole group of local middlemen. In the
latter case, sometimes, as in the South, the question is still further
complicated by a basing point system, under which the provincial jobber
re-distributes to the country stores the goods which have already been
shipped in on a low carload rate.[360] And, locally, there is also the
immanence in the South of water competition by sea and river to be kept
in mind. Boat charges are based upon space requirements rather than
weight. This introduces further important considerations in fixing the
spread of charges.

The problem as it affects the manufacturer is akin to that concerning
the jobber. Originally, as a matter of fact, the carload reduction was
essentially a manufacturers' rating, especially for goods in which
the cost of raw material formed a large part of the price of the
finished product. The relations of the carload rate on the former to
the less-than-carload rate on the latter, it is obvious, may readily
become an important element in industrial success. It is plain enough
that carload charges under such circumstances should be substantially
less than those upon small consignments; but that is far from affording
a satisfactory answer to the question as to the proper spread or
difference in charge to be allowed between the two.

Obviously, in any representation as to the reasonableness of the
discount which shall be allowed on carloads, either on the basis
of cost or of traffic principles, the interests of localities are
commercially pitted one against another. The New York or Chicago
jobbing house desiring to sell its goods directly to the retailers
throughout the West, wishes to have a relatively low rate on such
small shipments as the retailers in lesser places alone can afford to
purchase. Participation in this distributing business, however, is
resented by the middlemen located in western centres--Omaha, Denver,
Kansas City, etc.--who all insist that there should be so wide a
difference between carload and less-than-carload rates that they may
ship in their wholesale purchases at a low rate, and thus compete
in their own territory with the manufacturer in the East or the
jobber in New York who desires to sell direct.[361] Comparison of the
classifications in different parts of the country reveals the influence
of these local interests. The railways in Official Classification
territory desire, of course, to build up the manufacturing and jobbing
cities tributary to them. This can best be done by encouraging the
growth of eastern jobbing centres, stimulated by as low rates for
retail as for wholesale shipments. The railways in the western and
southern territory, on the contrary, are obliged to consider the claims
of their constituents, and to correspondingly minimize the advantages
which foreign competitors of their local wholesale dealers enjoy.
Another consideration must also be kept in view, namely, that carload
ratings can only be accorded when business has developed a magnitude
sufficient to permit shipments of that size. The growth of the volume
of business in general, therefore, might be normally expected to
produce an increase in the proportion of carload ratings. Experience,
as we have seen, confirms this view. The normal development, then, is
toward an increase in the number of lower rates quoted for carload
lots. This is retarded only by the influence of the jobbers and
manufacturers in the eastern trade centres, who insist that they shall
be permitted to compete on even terms with provincial middlemen by
making their shipments direct in small lots at rates approximately
as low as the local jobbers pay on carload lots. This question is an
exceedingly important one, requiring the balance of opposing interests
to a nicety.

Not unfamiliar aspects of the problem of carload rating are revealed
in a recent case before the Interstate Commerce Commission, concerning
milk rates in New England.[362] And yet the normal order is reversed.
Usually, complaint is made of the denial of carload ratings. In this
instance a plea was entered for a useable small unit rate as against
the wholesale charge. The dispute was precipitated by a deadlock in
1910 between the three large Boston milk contractors and the farmers'
associations of several states. The producers, failing in their demand
for an increased price, declined to furnish milk at the old figure.
A famine resulted, which drew the attention of the public sharply
to the system under which the Metropolitan district of Boston was
supplied. The belief prevailed that the peculiar transportation
conditions known as the "leased car system" which had existed for half
a century, was mainly responsible for the tight monopoly of the milk
supply. Under this arrangement specially low charges were allowed to
those who made shipments regularly by the carload. The Massachusetts
legislature, after an investigation, finally passed a law providing
that no carrier should charge more for the transportation of milk by
the can than was charged for larger quantities; and also that the same
facilities, icing, for example, should be furnished in the one case
as in the other. This settled the intrastate charges; but it left
matters as before for all the other New England states contributing
to the market. In this form the controversy was brought before the
Federal authorities, which exhaustively considered the methods of
transportation as affecting all parties concerned. The contrast with
the older elastic situation as to milk ratings in New York was sharp in
many respects.[363] This earlier controversy had to do mainly with the
relative rights of nearby and distant producers. It was a question of
the element of distance as affecting a local or territorial monopoly.
The Boston case, on the other hand, was rather a matter of carload
ratings than of graduation of charges according to the length of the
haul. The monopoly in this instance was that of contractors who had
succeeded in getting entire control of the business by reason of the
wide spread between charges for milk by the can and by the "leased
car." Shipments by the can from the independent farmer were rendered
practically impossible since they had to be carried in the baggage car
and were liable to spoil through lack of refrigeration.

By contrast with the New York "open car system," the New England plan
from the standpoint of cost of service alone seemed to offer several
advantages. A caretaker, hired by the milk contractor and in constant
personal touch with the farmers, exercised supervision both over milk
and cans; this insured a heavier loading and more prompt service at
terminals; resulted in the operators providing the best facilities
for handling the supply; and allowed surplus milk to be directed to
other uses without waste. A large investment had been made under this
system, dependent upon its continuance for a reasonable return. On
the other hand, denial of equally low rates with the same facilities
for refrigeration to the single-can shipper, had undoubtedly fostered
monopoly. The railways, conforming to the new Massachusetts law
above mentioned, offered to furnish and operate a car suitable for
independent shippers on condition that six hundred cans should be
tendered for shipment. But they denied obligation to furnish icing
facilities, which latter, of course, were absolutely necessary for
the success of the competitive service. To be sure, the leased car
controlled by the contractors had been theoretically open to all, on
condition of a small charge for icing; but the farmers contended that
independent shippers ought not to be compelled thus to deliver over
their property into the hands of competitors, with the accompanying
exposure of their business relations. In the light of all these
complications the Commission decided that a _per_ can rate with the
necessary refrigeration, and bearing a proper relation to the carload
rate, ought to be established. And there the matter rests at this time.

The problem of mixed carloads, also, is a difficult one to adjust
to the needs of primary and secondary distributing points.[364] It
is oftentimes of vital importance to a small jobber to be able to
make up a carload of miscellaneous packages. His business may not
be large enough to permit him to enjoy the advantage of a carload
rate on any single commodity. Or the independent meat packer may be
greatly benefited by a rule which permits him to bulk his soap and
other by-products with other goods in securing a wholesale rate. Why
may a paper manufacturer not combine paper bags and wrapping paper
in one territory as well as another? In this regard the rules in the
West and South are naturally much less liberal than in the East. The
privilege of mixture has been given only to a limited extent to jobbing
and manufacturing centres by means of commodity tariffs. Such mixture
is usually restricted to analogous articles, such as agricultural
implements, furniture or commodities intended to serve a joint purpose.
The recent bitter protest against the discontinuance of the right to
ship binder twine with agricultural implements is a case in point. On
the other hand, eastern railways are a unit in opposing the bulking
of separate shipments in carloads when owned by different shippers.
The western and southern roads do not specially forbid it. All such
differences come to the fore in any attempt to unify the practice of
all the carriers of the country under a single set of regulations.

       *       *       *       *       *

Assuming the reasonableness of a difference in charges between carload
and small shipments, where shall the dividing line as to size be drawn?
This is the important and perplexing problem of minimum carload rates.
Turning to our excerpt from the Western Classification on page 298,
it appears that 24,000 pounds of advertising matter, N. O. S. (not
otherwise specified), must be shipped at one time in order to warrant a
carload rate. Under such circumstances a consignment of 20,000 pounds
would be classified first instead of third class--the difference in
rate varying according to distance, but in all cases being substantial.
Between St. Louis and St. Joseph, Missouri, for example, the charge
would be sixty instead of thirty-five cents per hundredweight. Were
the minimum weight for carloads but 15,000 pounds, as in the case of
harvesters under the Southern Classification, this particular shipment
of advertising matter would have enjoyed the full benefit of wholesale
charges.[365] From this instance it is apparent that the point at
which the minimum carload weight falls, is of great importance in
the determination of the actual rate--an importance also dependent,
of course, upon the spread between carload and less-than-carload
charges. It is also evident that minimum carload ratings may readily
be used as a means of advancing charges. If, as appeared in a recent
case,[366] the minimum carload for wool in sacks was advanced between
1896 and 1912 from 15,000 to 20,000 pounds, the effect upon the shipper
of a consignment of 18,000 pounds, for example, would be as truly
an increase of charges as if the freight rates themselves had been
actually advanced. For under the new schedule, he would be compelled
to pay less-than-carload charges instead of the lower carload rates
formerly granted. Moreover, it is apparent that minimum carload weights
may enter seriously into commercial competition in a number of ways.
If 45,000 pounds of raw cotton by a special round-bale process can be
loaded upon a standard car; when but 25,000 pounds of the ordinary
square bales could be carried by the same equipment; it is evident
that tariffs based upon the higher minimum would especially favor
one set of competitors as against another.[367] They might, in fact,
be sufficient to turn the scale entirely in favor of the round-bale
system throughout the South. Granted, however, that such heavy loading
makes for economy in operation, it is clear, nevertheless, that the
carload minima must be so established as not to discriminate against
the great bulk of shipments of the more common sort. All along the line
one meets with such illustrations of the bearing of the minimum carload
upon rivalry in business. Large shippers are continually striving for
a high minimum. The small shippers oppose it for the same reasons. In
a similar way the interest of the manufacturer distributing his goods
direct, in competition with middlemen, is vitally affected.[368]

Car capacity, both as regards ability to load and carry economically,
is the principal factor in the determination of minimum carload rates.
It is largely a question of relative cost of operation.[369] Reference
has already been made to the great economy incident to the use of
large cars, whereby the paying load becomes less in proportion to the
deadweight. This, of course, largely accounts for the steady increase
in carload capacity in recent years. But the question is even more
complicated. An adjustment must be made between two main groups of
freight: first, that which is sufficiently heavy to be readily loaded
to the minimum weight in ordinary cars; and, secondly, light and bulky
goods of which the common car will contain but a small proportion in
bulk of its truck capacity by weight. Fortunately, we may evade the
moot point, theoretically, as to whether a carrier is entitled to the
same revenue from a given vehicle, whether it be loaded with heavy
or light goods; that is to say, whether the rate ought properly to
decrease per pound with increase in the density of the lading. This is
a technical matter as to cost. But it carries certain implications of
considerable importance commercially, as will shortly appear.

The difficulty of conforming carload minima upon light and bulky
articles to those on heavier goods has appeared with each attempt
to standardize equipment. Widely divergent rules in the three main
classification territories still cause great confusion in this
regard. There is a constant temptation to construct extra long or
wide cars, particularly in the western states, in order to assist
the manufacturers of such light and bulky products as furniture and
agricultural machinery in their competition with dealers in the
East, shipping under Official Classification requirements. In other
words, the penalty carried under the rules as to minimum carloads,
for the use of cars larger than the standard, has been much less in
the West than in the East and South. The situation has been further
complicated in some instances by the arbitrary action of state railway
commissions. The experience in this regard is illuminating, as again
showing the extreme delicacy of adjustment in such matters under the
stress of commercial competition. The short-line distance between the
Missouri and Mississippi rivers lies entirely within the state of
Missouri. It governs, as we have already seen,[370] the entire rate
structure in this part of the country. This commonwealth some years
ago by law fixed a carload minimum of 20,000 pounds for furniture,
agricultural implements and wagons.[371] As it is not practicable to
attain this minimum load on an ordinary standard car, the Missouri
shipper was stimulated to demand larger equipment in order that he
might avail himself of the lower rate for carload lots. The local
railways, accordingly, built such cars, which, of course, travelled
far beyond the limits of this single commonwealth. This forced other
western roads, in order to protect their clients in the same markets,
to adopt a similar policy. The result is that extra large equipment is
relatively more common throughout this territory; thereby conferring
a distinct advantage over their eastern competitors upon western
shippers of such light and bulky freight. In pursuance of this same
protective policy, the western roads have also enforced distinctly
favorable rules as to carload lots applied to several small cars
instead of one large one.[372] These troublesome details are given
in the hope that they may show how far the ramification of trade
competition extends. They re-enforce the conviction that any reform of
classification is a matter of extreme difficulty; and, if undertaken
at all, must be done under governmental compulsion and by a single
universal reform, rather than by any attempt at piecemeal improvement.

Next to ability to load and carry, as a determinant factor in fixing
minimum carload weights, the consuming capacity of the market must be
considered. A reasonable minimum carload in the East might well be
unfair in the West or South. An old-established factory in New England
might satisfactorily use a quantity of raw material which in a carload
lot would overwhelm a western or southern plant. Thus it comes about
that minimum weights on the same goods quite properly vary widely in
different territories; being higher in the East than in the West, and
least of all in the South. The problem, therefore, of standardizing
carload rates throughout the country, unfortunately becomes exceedingly
difficult. A compromise will fail to satisfy anybody; and, moreover,
such a change of minimum carload weights at once necessitates a
remodelling of the particular distance tariff to which it applies. This
point was well illustrated in a recent case.[373] A railway accepted
for the same carriage at different times two carload shipments of
lime from a given concern. On the one, a rate of thirty-four cents
per one hundred pounds was based upon a minimum carload weight of
24,000 pounds. On the other twenty-nine cents was assessed upon a
minimum of 30,000 pounds. The carrier alleged that these differences
in rates per pound were entirely compatible in view of the difference
in carload minima. It then appeared that these minima, especially
with a perishable commodity like lime, varied considerably according
to destination. Large distributing centres were given low rates on
high minima, while small towns, consuming relatively less, were best
served by a lower carload minimum to which a higher rate per pound was
applied. In other words, the close interrelation between the rate and
the minimum was a matter of great commercial importance.

The relation of carloads to consuming capacity of the market is an
element in the trade policy of protection to clients extended by
the railway. The difficulty of properly relating rates upon raw and
finished products has already been discussed. Carload minima must
also be considered in this connection. Why should 50,000 pounds be
prescribed as the carload limit on corn to Texas points, when the
limit on corn-meal is only 30,000 pounds? Evidently differences in
loading capacity are inadequate as an explanation. Nor can this be
accounted for on the ground of any difference in mere cost of carriage.
The explanation is purely commercial--springing from the competition
between northern mills and mills located in Texas, both making use
of raw material from the same fields. A heavy carload minimum is
entirely practicable on corn for the Texas miller; but an equally heavy
carload requirement on corn-meal would shut out the northern miller
entirely from many local points. For the market at these small places
is, of course, relatively restricted.[374] There can be no doubt that
every feature of classification, even down to the last minute details
of carload minima, stands in such intimate relation to commercial
competition, that to disturb it in one regard may entail the most
far-reaching consequences.

       *       *       *       *       *

Ever since 1888 the constantly increasing elaboration of the three main
classifications in force, with all the resulting inconsistencies and
overlappings, has led to a persistent demand for the introduction of a
single uniform classification for the entire country. Soon after the
passage of the original Act to Regulate Commerce in 1887, a resolution
passed the House of Representatives directing the prescription of such
a classification. Apparently the Interstate Commerce Commission was
fully alive to the difficulties of such an undertaking. The railways
were induced to move in the matter, but to no purpose.[375] This first
abortive attempt reflected the mutual jealousies of competing roads,
as well as the difficulties of suiting a single classification to
the variety of local conditions existing throughout the country. All
that was done was the recommendation of a "Board of Uniform Freight
Classification," comprising two members from each of the important
territorial bodies and including both the Mexican and Canadian
carriers. Changes were to be made by a two-thirds vote. Jurisdiction
over the tripartite division of territory, east, south and west, was
to be assigned to district chairmen. Final authority for the country
at large was to be vested solely in the whole board. The absolute
refusal of the New York Central & Hudson River to accede to this plan
prevented its acceptance. Apparently too many special or commodity
rates were in force upon its line, in order to hold its powerful
clients in markets all over the country, to make it practicable to
adopt the scheme. Efforts toward uniformity were renewed in 1890,
confined this time, however, to an attempt to merge the Official and
Western Classifications. But the same jealous regard of local interests
in each territory, especially with reference to the treatment of
carload ratings, once more proved an insuperable obstacle. The trunk
lines insisted upon such specially low charges on small shipments
as would enable manufacturers and jobbers in the East to hold their
markets in remote districts in competition with rivals in the Middle
West. The issue raised in the New York Board of Trade case, previously
discussed, led to the defeat of this plan.

A notable revival of interest in uniform classification under
governmental authority has taken place since the enactment of the
Mann-Elkins amendments to the Interstate Commerce Law in 1910. An
independent bill in Congress to authorize the enforcement of such a
schedule failed. The railways were stimulated, however, to make a
further attempt to solve the difficulty.[376] Protracted sessions
during 1907-1908 by a conference of five representatives from different
parts of the country, known as the Uniform Classification Committee,
led to many concessions and compromises in favor of harmony. The
committee expressed its belief that a uniform classification could
be drawn up in time; but it emphasized the important point that
all changes in classification must be accompanied by such advances
or reductions in the distance tariffs as to insure the prevailing
commercial adjustments.

The latest advertisement of the difficulties of uniform classification
took place in connection with the attempted introduction in 1912 of
various amendments and reforms proposed by this Uniform Classification
Committee.[377] Acting in conjunction with the National Association
of Railway Commissioners, an earnest attempt seems to have been made
to eliminate differences between the three great schedules. Few
articles were actually shifted from one class to another, the effort
being concentrated upon the establishment of more uniform rules
and descriptions. It was alleged by shippers that more often than
otherwise, these changes had brought about an advance rather than a
reduction of charges. It is difficult to decide as to this. But it is
clear that progress in the direction of uniformity is taking place.
For example, the minimum carload weight for paper, once varying greatly
in different parts of the country, was fixed at an intermediate figure
which fairly satisfied conflicting interests. Many opportunities for
personal discrimination were also eradicated. Grading according to
value, for instance, has in the past been a prolific source of abuse.
Candy at less than fifteen cents a pound rated third class, but if
of higher value moving on first-class rates, offered an incentive to
false declaration on the part of unscrupulous shippers which was very
properly eliminated. Abolition of the distinction between finished
stationery and flat paper, put an end to possible underclassification
in the same way. Naturally the carriers in abolishing such fine
distinctions, grade upward rather than downward. Much objection was
also made at this time to beneficial modification of the rules for
mixed carload shipments. Binder twine had for years been classified
with ploughs and harvesters rather than with ropes and cordage. Half
a carload of agricultural machinery, therefore, with half a carload
of twine, formerly moving under carload rates, was no longer, as
proposed, to be allowed the privilege of mixing. Similarly, abolition
of the right to bunch wood-working and iron-working machinery
naturally aroused protest. Such details are here offered, not because
of their intrinsic importance, but as illustrating the opposition on
behalf of shippers to any movement toward uniformity, even in these
minor details. What the force of this opposition would become, were
propositions advanced for shifting thousands of articles bodily from
one class to another, may be readily imagined. The experience thus far
obtained, emphasizes the point that any considerable improvement must
be carried through, if at all, by direct pressure from governmental
authority, not upon the carriers alone _but upon the shippers as well_.

The degree of complexity at the present day incident to overlapping
and conflicting jurisdiction of the several state and railway
classification committees and associations, may be best described
by means of a few examples.[378] Traffic originating in Southeastern
Freight Association territory, except Florida, destined to cities in
trunk line territory is governed by the Southern Classification all
the way if moving on through rates; if on local rates, the Official
Classification applies north of the Ohio river. From "Green Line
territory"[379] to Pacific coast terminals, the Southern Classification
governs to the Mississippi or other gateways; the Western
Classification beyond. But if it originate in Louisiana or Mississippi,
the Western Classification governs all the way. From most places in
Tennessee, Western Classification rules govern all the way, "subject to
commodity rates or less-than-carload consignments, classified not lower
than fourth class." To Wisconsin from points throughout the South,
the Southern Classification governs all the way. But to Minnesota,
generally, Southern rules govern to the Ohio river crossing, while
Western rules apply to the balance of the trip; unless the goods move
through trunk line territory by way of the Virginia gateways, in which
case the Official Classification is effective. These are only a few
samples chosen from a large collection. Is it any wonder that to the
uninitiated, rate making under such conditions appears to be almost a
superhuman task; and is it surprising that to the unscrupulous, such
complicated conditions give rise to more or less successful attempts at
evasion of published rates?

The present threefold territorial division of the country, for
the purposes of classification, naturally affords all sorts of
possibilities in the way of veiled discrimination, not merely as
between persons but as affecting the interests of different competing
markets. Not only is there liability to confusion, but the way is
paved for all sorts of favoritism. Wherever shipment is made from one
classification territory to another, it is always possible to adjust
the rates with a view to local advantage. For instance, one of the
principal causes of complaint in the South is the advantage which
Nashville, Tennessee, enjoys through having all of its rates from
eastern and northern centres made upon the Official Classification.
Inasmuch as the rates under the Southern Classification are
considerably higher, this operates to place other competing cities in
the South under a distinct disability in competition with Nashville. It
is possible, therefore, for the Louisville & Nashville by this means to
build up one community at the expense of another. The same device gives
Richmond, Norfolk and the other Virginian cities a great advantage
over their competitors.[380] Again, rates from New York to Memphis and
New Orleans are made upon the Official Classification, by whatever
route; while to intermediate points, such as Vicksburg, Natchez,
and Baton Rouge, they go on the rates prescribed by the Southern
Classification, which are considerably higher. From New York to St.
Paul through Chicago, shipments are made on the low rate basis of the
Official Classification; while from Chicago to St. Paul they go under
the Western Classification. From Birmingham, Alabama, to St. Paul,
the rates as far as Chicago are based upon the Southern schedule, and
from thence on under the Western. From San Francisco to St. Paul, the
Western Classification prevails, unless the freight is carried under
the commodity rates of the Transcontinental schedule. The peculiar
situation of Nashville on shipments from the Northeast has already
been stated. This immediately complicates the rates from so-called
Cook County Junctions--that is to say, from Chicago territory. All
consignments for the entire distance are governed by the Southern
Classification. This, in face of the low Official Classification
rates from trunk line territory, operates as a discrimination against
Chicago. Even more complicated still are the combinations by which
rates are made from local points in the North into the Far Southwest.
And still farther complexity results from the existence, as already
mentioned, in several parts of the country, such as Iowa, Illinois,
Georgia, etc., of state classifications, prescribed by the railway
commissions. These, to be sure, are intended for application only
to local rates. But by this means, the jobbing interests of the
localities are protected, without at the same time giving consideration
to an equitable adjustment as between all the remoter interests
concerned.[381] One of the primary advantages, therefore, from the
unification of the three systems now existing, would be the possibility
of readjusting not only definitely, but also equitably, the conflicting
interests of various shippers and communities now tied up by these
local arrangements.

A recent case[382] illustrates the bearing of classification rules upon
competition in trade as between rival cities. Chicago and most of the
Ohio river gateways enjoy a so-called "two-for-one-rule," permitting
the application of carload rates on part carloads in excess of full car
ladings. The complaint alleged that the denial of this privilege to
Indianapolis, whereby less-than-carload rates were charged on excess
fractional carloads, unjustly discriminated against this city in the
transportation of various light and bulky articles, such as vehicles
and furniture, in competition for trade throughout the Southwest.
The difficulty arose from a conflict between rules in the Western
Classification and the Southwestern Tariff Committee, the latter being
a subordinate body having jurisdiction over local practices in Texas
and the neighborhood. The rule in one case provided that where a car of
sufficient capacity to accommodate light and bulky shipments could not
be promptly furnished, two smaller cars would be provided, subject to
wholesale rates, however the consignment was divided between the two
cars. The Commission declined to interfere in this case, anticipating
the necessity for a thoroughgoing revision of all such rules which,
it is obvious, almost invite manipulation of rates and improper
discrimination.

Even a cursory examination of the classification a few years ago would
bring to light all sorts of petty anomalies and inexplicable conflicts
both of description and rates. Most of these doubtless had some warrant
originally, but it seems, indeed, as if many differences might be
eliminated.[383] For instance, "excelsior spring beds K. D. (knocked
down), sawdust, and leather belting, are all in the second class of
the Official Classification, when shipped in less-than-carload lots.
In the Western, only the belting and beds are in the second class,
excelsior is third and sawdust fourth; while in the Southern, beds are
first class, belting second class, excelsior fifth class, and sawdust
sixth." The recent complaint of the Greater Des Moines Committee[384]
disclosed an odd state of affairs under which old shoes were given a
carload rating to Des Moines--an advantage not extended to new and
unused footwear. Why should axes be given carload rating in trunk
line territory when the freight rate on hatchets is the same whether
the shipments are in 100 pound or 20,000 pound lots? Is it logical
that cotton piece goods from Atlanta to Boston should be differently
classified from the same commodity exchanged between the same two
cities in the opposite direction; or that goods should enter Richmond,
Virginia, on one classification and go out on another? Such anomalies
are sometimes difficult to account for. Their existence, however,
despite the efforts of the carriers to eliminate them and to keep them
eliminated, emphasizes strongly the need for such continual revision
as shall more generally standardize practice. Few carriers alone are
able to withstand pressure from powerful shippers. It is difficult, in
fact, even for the classification committees to oppose them. The strong
hand of the government should enforce harmonious action to the fullest
degree compatible with the growth of trade and conflicting commercial
interests. It would help the railways even more than the shippers.

And yet, bearing in mind all the disadvantages and evils of the
present threefold system, the obstacles incident to the substitution
of a single uniform classification for the United States grow more
impressive as one examines them in detail. Our vast territory and the
extreme diversity of agricultural and industrial conditions render the
problem far more difficult than in the compact and more homogeneous
communities abroad. The primary advantage of the present system is
that each of the three existing classifications more or less clearly
reflects local trade conditions in its own territory. From the point of
view of transportation, the same commodity may well be able to yield
widely different proportions of the total revenue levied upon the
traffic of that section. For example, cotton piece goods may be rated
first class in Western territory, fourth class in Southern, second
class less fifteen per cent. in Official territory, and one-third
of first class in the transcontinental tariffs. The reason for this
diversity of treatment is that such cotton piece goods both in the
South and the East are a staple product of the district. The rates,
therefore, in each case are intended to foster the manufacture of
cotton by according a relatively low freight rate upon its output. In
the West, on the other hand, where no cotton is raised and no cotton
mills exist, these goods become much more valuable, as classified,
relative to other commodities. Oranges or lemons in southern California
are favored by almost commodity rates in order to foster the industry
in that locality. But these citrus fruits reaching New England as a
luxury, may consequently there be made to contribute a much larger
proportion of the railways' revenue. The East, as a rule, classifies
manufactured products relatively low, inasmuch as it is the home
territory for industry of this sort. But these products, when they pass
beyond the Mississippi, rise almost automatically to a higher class as
they increase in value to the community in which they are consumed.
How different are the commercial conditions under which wool is rated
east and west! In one territory it is distributed to manufacturers in
small lots at way stations; in the other it moves long distances in
solid carload lots.

One further illustration may make our point clear. At first sight it
is anomalous that in the East the rates on cattle and shoes between
New York and Boston are not widely different, namely nineteen cents
and twenty-five cents, respectively, per one hundred pounds; while as
between Montana and Chicago, the rate on shoes west bound is almost
four times as great as the rate on cattle over the same haul eastward.
In other words, rates on shoes in the East are at bed-rock, whereas in
the West it is the cattle rates which are held at the lowest possible
point. Ton-mile rates on shoes, in other words, increase progressively
toward the west, while ton-mile rates on cattle rise, contrariwise, in
the direction of the stronghold of manufactures. The difference between
the two, however, is in the fact that the upper level of what the
traffic will bear is very much greater in the case of one than of the
other. Cattle, possibly, may never support more than seventy-five cents
per hundredweight; while shoes can be moved under rates four times as
high.

Obviously any mere compromise between divergent classifications, each
based upon the protection of a local constituency against competition
from outside its own territory, can hardly prove satisfactory. Cotton
piece goods, already instanced in this regard, if grouped as first
class in the West, second class less fifteen per cent. in the East,
and fourth class in the South, would hardly be adequately treated
in a uniform classification for the entire country by averaging
these different figures. For neither the West nor the South would be
satisfied--the rating being too high to fully protect the southern
mills against competitors in New England; nor, on the other hand,
would the classification be sufficiently high in the West to yield
the roads proportionately the revenue which goods of that character
ought properly to contribute. The East, alone, lying intermediate
between the other two, would not be greatly disturbed. The necessary
outcome, it is predicted, of the adoption of any such average or
uniform classification would be the quotation of exceptional commodity
rates wherever the uniform classification was at variance with local
interests. The increase in commodity ratings after 1887--now happily
reversed--may perhaps be in part accounted for in this way. Any such
stimulation of exceptional ratings would be a primary objection to
any uniform classification for the United States as a whole. As one
witness before the Interstate Commerce Commission testified, "If ever
there is a uniform classification, it will take a warehouse to hold
the commodity tariffs." Were such the case, far greater complexity and
possible discrimination might exist than at the present time.

A second equally important disadvantage of the prescription of
a uniform classification arises from the fact, already noted,
that classifications and distance tariffs are interlocking and
interdependent. Any change of the one involves a change of the other.
Therefore, a unification of the three existing classifications would
render it necessary to overhaul from top to bottom the distance tariffs
under which it was to be applied all over the country. For example,
the rate from New York to Atlanta, first class, being $1.14, while the
rate from New York to Chicago, about the same distance, first class,
was 75 cents; to choose a first-class rating which should apply on
both these lines would involve, not only a re-classification of the
commodities, but also that the new rates applying upon first-class
goods should be somewhere between $1.14 and 75 cents. Inasmuch as it
had taken many years to reach the present adjustment, it seems hardly
possible that a new arrangement could be made which would yield the
railways a satisfactory return upon their traffic. The difficulty
herein suggested was clearly instanced in the case of a comparison made
between the Southern Classification and the Uniform Classification
proposed in 1890. The difficulty, and always a prominent one, was that
the Uniform Classification was largely for carload lots, while the
practice was entirely different in the old Southern Classification.
Moreover, most of the Southern rates were given for goods "released";
that is to say, at the owner's risk. Cotton piece goods, non-released,
in less-than-carload lots from New York to Atlanta, were charged
sixty cents a hundredweight under the old Southern Classification. As
reclassified in the suggested Uniform Classification, the rate was
ninety-eight cents; and was given only for "released," that is to say,
at owner's risk. The difference for the same commodity from Louisville
to Atlanta was as fifty-six cents in the old Southern, to ninety-two
cents under the Uniform. Canned goods, not otherwise specified,
"non-released," in less-than-carload lots from Louisville to Atlanta,
were charged sixty-eight cents under the old Southern Classification.
The new Uniform Classification, in order to yield the same revenue,
made it necessary to charge a rate of eighty-one cents. Differences of
this kind were manifest in every one of the thousands of commodities.
In other words, the adoption of a uniform classification meant to
abolish by a stroke of the pen all the old rates which formerly
existed. An entirely new schedule of rates would have had to be worked
out; with the most uncertain results upon revenue and upon the rival
commercial interests concerned. The magnitude of such a task can be
scarcely appreciated. Years would be required to reach a condition of
relative stability once more.

The close interdependence of classification and distance tariffs, as
well as, incidentally, the differing spread of rates between various
groups of goods under the three existing classification systems, are so
fundamental in their bearing on reform that yet another illustration
may not be out of place. It is given in the following table. This shows
the rates from St. Louis--standing at the meeting point of the main
classification territories--for approximately equal distances out in
three different directions.

         Rates                  Cents per 100 lbs.

  Southern Classification--
    St. Louis to Nashville   1   2   3   4   5   6   A   B
                            ------------------------------
        (323 miles)         61  52  45  35  28  23  22  26

  Official Classification--
    St. Louis to Louisville  1   2   3   4   5   6
                            ----------------------
        (317 miles)         41  34½ 25½ 17½ 15  12

  Western Classification--
    St. Louis to St. Joseph  1   2   3   4   5   A   B   C   D   E
                            --------------------------------------
        (320 miles)         60  45  35  27  22  24½ 19½ 17  13½ 11

  Illinois Classification--
    St. Louis to Chicago     1    2    3    4  5    6    7    8    9   10
                            ----------------------------------------------
        (284 miles)         43.3 35.2 27.5 22 17.6 16.6 15.1 13.5 10.7 9.6

One line penetrates Southern territory 323 miles to Nashville; another
goes eastward 317 miles to Louisville under Official ratings; and
the third extends westward 320 miles to St. Joseph, according to the
schedules of the Western Classification. To these three there is also
added a set of rates north bound under the Illinois Classification
which applies between St. Louis and Chicago, 284 miles. This last
schedule, of course, is prescribed by the state railway commission.
The first point to notice is the widely different number of groups
in the four schedules. One is divided into eight classes; another
into six; while the last two are each spread over ten subdivisions.
Secondly, bearing in mind that the three upper schedules govern
approximately the same mileage, it will be noted that the Official
rate, first class, is only about two-thirds of that in the other
two classes. If one then compares the sixth group in each case, an
even greater divergence appears--the Official rate being only about
one-half of that in the other two cases. Or, taking the lowest rates
of all in the three upper schemes--always, be it noted, for equal
mileages--it now appears that the Official and the Western descend
to about the same figure, while the Southern is arrested at a point
more than twice as high. The primary significance of this showing
is, of course, that a single uniform classification in which all of
these three systems should be merged, means not merely a reassignment
of all possible commodities in a given number of classes; but also a
complete recasting of the distance tariffs as well. In other words, as
aforesaid, freight rates being compounded of the two factors, distance
charge and classification, all the delicate adjustments based upon
commercial competition throughout the country, would be thrown into
utter confusion; unless every modification of the grouping of classes
were accompanied by a corresponding change in the rates per mile. A
task sufficient indeed to appall the best of traffic experts!

To complete the demonstration of the complexity of present
arrangements, and yet of the danger incident to rudely disturbing them,
one should apply the classified rates in the preceding paragraph for
these equal hauls to particular commodities. Take household goods in
carloads, for example:--

                                        Cents          Per Cent. of
                                      per 100 lbs.   first-class rate.

  St. Louis to Nashville                 23                38
  St. Louis to Louisville                34.5              83
  St. Louis to St. Joseph                19.5              33
  St. Louis to Chicago                   15.1              35

Examination of the classification volumes thus assigns these the
following rates in the three directions for equal distances out of
St. Louis. Going east the charge would be 34.5 cents, going west
19.5 cents, and going south 23 cents per 100 pounds, respectively.
The hodgepodge is made more manifest by the right hand column in
this table, in which the percentage of first-class rates levied upon
household goods in carloads under the four classifications is shown.
Under the Official system, with the lowest first-class rates, as
above noted, the rate on household goods is higher than under any of
the other three. The result is that the relation between the rate
on household goods and first-class goods is eighty-three per cent.;
whereas in the other two cases it is substantially less than half this
percentage. This single illustration, it is hoped, may drive home the
conclusion that there is an immense mass of fortuitous and utterly
unreasonable allocation under the classification systems as they are at
present established.[385] But whether that may be used as an argument
in favor of substituting a single uniform classification is open to
serious doubt. Rather does it serve to emphasize the fact that rigid
revision of the present scheme under Federal control, perhaps, is more
necessary than an experiment in uprooting the entire system.

A few general conclusions may be drawn from this rather over-elaborate
description of present conditions as to classification in the United
States. It has been necessary, however, to reiterate details in order
to make clear the extremely unsatisfactory situation at the present
time. In fact, in this domain of classification, standardization of
practice so characteristic of American rate making and operation in
general, has noticeably lagged behind. Whether it will be possible,
in view of the wide extent of the country and the diversity of its
climatic and commercial conditions, ever to devise a single uniform
classification is open to serious doubt. Even the Interstate Commerce
Commission, once a leader in the demand for uniformity, now concedes
this fact in particular instances.[386] Thus:--"wool east of the
Mississippi is taken up at numerous points and is carried under
comparatively light loading. What would be a fair classification
there, would not be just in the Far West, where the movement is almost
entirely in carloads and where the actual loading is from two to three
times that in Official Classification territory. We are of the opinion
that wool should be classified under the Western Classification as
second class, l. c. l., and fourth class, c. l.," etc. The experience
of England is, of course, commonly cited as a precedent.[387] In that
little country the ever-increasing complexity of classification was
precisely parallel to our own. From simple schedules for a few hundred
articles, the number of items steadily increased until there were over
4,000. At this point the government intervened; and after tedious and
protracted sessions under the auspices of the Board of Trade in 1888
the whole schedule was brought down to 1,400 separate items. All the
complicated and confusing rules were harmonized and many anomalies were
cut out. Certain it is that matters should be firmly taken in hand in
this country in the same manner. The separate state classifications and
hundreds of conflicting rules and jurisdictions should be eradicated.
Even if a single uniform classification be proved impracticable, as
seems to me likely, it might still be possible to greatly simplify
the present intolerable mix-up. There should be a representative of
the Interstate Commerce Commission on each of the classification
committees, ready at all times to exert pressure for simplification and
uniformity.[388] The three main classification committees, supposing
that they shall continue to exist, should interlock by exchange of
representatives. The greater the reform flowing from the initiative
of the carriers themselves, the better. Thus, in time, matters may
become sufficiently standardized as between the three main committees
so that, under legal compulsion or otherwise, the final problem of
uniformity may be tackled by recasting the whole body of tariffs and
classifications together. But such a task at this writing appears
almost superhuman. Conditions may, of course, so shape themselves
ultimately that it may be brought about. But, in the meantime, steady
and persistent pressure should be exercised in the direction of this
final goal. Reform of classification practice is certainly the greatest
need of the time in the transportation field.

FOOTNOTES:

[315] 1901. Ripley, W. Z.; Report U.S. Industrial Commission, XIX, pp.
383-397.

1902. Interstate Commerce Commission, Railways in the U. S. in 1902.
Part II. [Fine data.]

1905. Acworth, W, M.; Elements of Railway Economics, pp. 99-118.

1909. Dunn, S. O.; Uniform Classification, _Railway Age Gazette_,
XLVII, pp. 413, 462, 497, 552.

1911. Hammond, M. B.; Railway Rate Theories of the Interstate Commerce
Commission.

1912. Strombeck, J. F.; Freight Classification. (Limited to classified
schedules.)

[316] 10 I.C.C. Rep., 281; 13 _Idem_, 111; 4 _Idem_, 32; 9 _Idem_, 264;
17 _Idem_, 511; 23 _Idem_, 242; 2 _Idem_, 1.

[317] Railways in the United States in 1902, by the Interstate Commerce
Commission, 1903. Part II, p. 24, gives much data on changes of
classification of specific articles since 1886.

[318] For the rate advances of 1900, mainly effected by this means; U.
S. Industrial Commission, IX, p. 859, and XIX, p. 282.

[319] _Cf._ underclassification as a means of rebating; p. 190, _supra_.

[320] The Official Railway Guide of the United States gives the
personnel of scores of these associations annually, with a definition
of the territory of each.

[321] 3 I.C.C. Rep., 473.

[322] Acworth's Elements of Railroad Economics, p. 104, is best on
England. _Cf._ McPherson's Railroad Freight Rates, p. 148.

[323] _Op. cit._, p. 149.

[324] Cullom Committee, Testimony, p. 759.

[325] _Railway Age Gazette_, September 8, 1911, p. 458.

[326] P. 385, _infra_.

[327] 3 I.C.C. Rep., 473.

[328] Railways in the United States in 1902, I.C.C., 1903, Part II, p.
39; In the South in 1876 only 6 per cent. of items had carload ratings;
while in 1902, 65 per cent. were so favored, as compared with 82 per
cent. in trunk line territory and 81 per cent. in the West.

[329] The Intermountain Rate cases are fully discussed at p. 610,
_infra_.

[330] Samuel O. Dunn, _Railway Age Gazette_, September 10, 1909, p.
462, is best on this. Cf. 8 I.C.C. Rep., 368.

[331] Proposed rate advances November 29, 1910.

[332] 22 I.C.C. Rep., 565.

[333] 22 I.C.C. Rep., 585. Cf. also 23 _Idem_, 395, on articles too
large to be loaded through the side door or too long to be loaded
through the end window.

[334] Hammond, Railway Rate Theories, etc., 1911, p. 42, analyzes
interstate commerce decisions as to these. Strombeck, Freight
Classification, 1912, pp. 35-60, also discusses the various factors
entering into cost.

[335] 6 I.C.C. Rep., 295; 10 _Idem_, 255.

[336] 4 I.C.C. Rep., 611; 9 _Idem_, 382. But compare 23 _Idem_, 663,
fixing the rate on stock cattle at 75 per cent. of that for beef or fat
cattle. How about cost of service here?

[337] 10 _Idem_, 327.

[338] _Cf._ revenue per ton mile by commodities, p. 421, _infra_.

[339] _Cf._ p. 412, _infra_, on the significance of revenue per ton
mile.

[340] 6 I.C.C. Rep., 88; 9 _Idem_, 382; 4 _Idem_, 48. On freight rates
and prices compare Rep. U. S. Industrial Commission, XIX, p. 366, and
chap. X, _infra_.

[341] Hammond, Railway Rate Theories, p. 14 _et seq._

[342] _Ibid._, pp. 27 and 36.

[343] _Ibid._, p. 29.

[344] 14 I.C.C. Rep., 127.

[345] _Freight_, February, 1905, p. 61.

[346] 10 I.C.C. Rep., 281.

[347] 17 I.C.C. Rep., 197. But compare 23 _Idem_, 7, on stock and fat
cattle; and 14 _Idem_, 127, on "big-vein" and "small-vein" coal, as
above.

[348] 20 I.C.C. Rep., 426; 21 _Idem_, 41.

[349] 2 _Idem_, 1.

[350] Evidence before the Interstate Commerce Commission and the
Industrial Commission as to freight rate advances in 1900 proves this
point.

[351] Pp. 108, 118, etc., _supra_.

[352] Sixteenth Annual Report I.C.C., 32; 19 I.C.C. Rep., 244; 21
_Idem_, 349 and 418.

[353] 18 I.C.C. Rep., 459.

[354] _Cf._ Annual Report, I.C.C., 1909, p. 11.

[355] McPherson, Railroad Freight Rates, pp. 117-148, is good on this.

[356] Cotton pools in the South; _cf._ vol. II.

[357] 23 I.C.C. Rep., 151, investigating the transportation of wool
affords a fine example.

[358] 3 I.C.C. Rep., 473.

[359] United States Industrial Commission, XIX, 1901, p. 281.

[360] P. 387, _infra_.

[361] _Cf._ testimony of Wicker before the Cullom Committee in 1886.

[362] 22 I.C.C. Rep., 303.

[363] 7 I.C.C. Rep., 92.

[364] Samuel O. Dunn, _Railway Age Gazette_, September 10, 1909,
p. 463. Cf. 12 I.C.C. Rep., 510; 9 _Idem_, 440; and 23 _Idem_, 504.

[365] The following wide variations as between the different
classifications appear in these excerpts alone, varying from 40,000 to
12,000 lbs. in the Southern Classification, for instance.

  Official Classification--
      Scrap zinc                                36,000 lbs.
      Acetic acid in carboys                    24,000 lbs.

  Western Classification--
      Advertising matter                        24,000 lbs.
      Advertising racks, iron                   30,000 lbs.

  Southern Classification--
      Zinc concentrates                         40,000 lbs.
      Fodder shredders                          12,000 lbs.
      Harvesters                                15,000 lbs.

Search through the entire list would doubtless disclose a far wider
range, with coal or iron at 90,000 lbs. or more, and feathers at the
foot of the list.

[366] 23 I.C.C. Rep., 158.

[367] 11 I.C.C. Rep., 328.

[368] Changes in minimum carloads since 1887 by commodities are fully
described in "Railways in the United States in 1902," I.C.C., 1903,
Part II, p. 17. Their relation to rate increases is evident.

[369] Strombeck, Classification, p. 35 _et seq._; _Railway Age
Gazette_, June 30, 1911, p. 1696.

[370] P. 128, _supra_.

[371] _Railway Age Gazette_, September 24, 1909, p. 553, Samuel O.
Dunn, best treats this topic.

[372] _Cf._ the "two-for-one" rule in the Indianapolis case; 16 I.C.C.
Rep., 254.

[373] 23 I.C.C. Rep., 259; also 23 _Idem_, 226.

[374] 11 I.C.C., 223. _Cf._ also p. 395, _infra_.

[375] Nothing was accomplished, beyond the preparation of a
comprehensive report, under the chairmanship of J. W. Midgley in June,
1890.

[376] _Railway Age Gazette_, May 10, 1907, p. 727; 1909, p. 415.
The whole movement is reflected in the Proceedings of the National
Convention of State Railroad Commissioners year by year.

[377] _Railway Age Gazette_, 1912, pp. 211, 224, 252 and 370.

[378] Lectures by O. M. Rogers, La Salle Extension University, Chicago,
1910. Also Railway Traffic Maps by W. A. Shelton, Chicago, 1913.

[379] P. 12, _supra_.

[380] Well brought out in the Danville case, 8 I.C.C. Rep., 409 and
571; and in the complaint of Wilmington, 9 _Idem_, 48.

[381] Notable recent instances are afforded in the State Rate cases now
pending before the U. S. Supreme Court, and in the Shreveport case, 23
I.C.C. Rep., 31; both discussed in chapter XX.

[382] 16 I.C.C. Rep., 254.

[383] Some are described in the Reports of the U. S. Industrial
Commission, 1900; and the Senate (Elkins) Committee, 1905.

[384] 14 I.C.C. Rep., 294.

[385] "In the Southern Classification plate glass, all sizes, in
carloads, is rated third class; window glass and rough or ribbed
glass, fifth class. In the Western Classification plate glass, outside
measurement not exceeding 100 united inches (that is, length and width
added), is rated fourth class in carloads; window glass, and rough,
rolled, or ribbed glass, fifth class. In the Official Classification
plate glass, outside measurement not exceeding 80 united inches, is
rated fourth class in carloads; window glass and rough and ribbed
glass, fifth class. Thus it appears that in Southern Classification
territory plate glass of ordinary size is rated higher than in Official
or Western Classification territories; and while in the two latter
territories plate glass is rated one class higher than window glass,
or rough or ribbed glass, in Southern Classification territory, plate
glass is rated two classes higher than rough, ribbed, or window glass.
As applied to the transportation from St. Louis territory to Memphis it
results in payment by the consignee at Memphis of rates on plate glass
which are 50 per cent. higher than the rates on window glass."--21
I.C.C. Rep., 113.

[386] 23 I.C.C. Rep., 169.

[387] Acworth, Elements, etc., p. 99; McDermott, Railways, p. 29;
Ripley, Railway Problems, chap. XXV.

[388] 22 I.C.C. Rep., 103, is a fine instance of rectification of
unjust classification rules on vehicles into the South from Toledo,
Ohio.



CHAPTER X

THE TRUNK LINE RATE SYSTEM: A DISTANCE TARIFF

    Conditions prevalent in 1875, 356.--Various elements
        distinguished, 358.--The MacGraham percentage
        plan, 360.--Bearing upon port differentials, 361.--The
        final plan described, 363.--Competition at
        junction points, 368.--Independent transverse
        railways, 370.--Commercial competition, 372.--Limits of the
        plan, 375.--Central Traffic Association rules, 376.


The trunk line freight rate system effectively demonstrates certain
principles in railway economics which are of great importance. The
danger of arbitrary administrative interference without a full
understanding of the intricacies of rate making, and at the same
time the essential soundness of American railway practice in seeking
independently to solve these complex problems by equitable means, are
amply illustrated. The fallacy of certain objections to governmental
control, on the other hand, is revealed with corresponding clearness.
Three principles in particular deserve mention in this connection.
These are: (1) that the element of distance should be a prime factor
in the final adjustment of rates as between competing localities;[389]
(2) that coöperation and agreement between competing carriers are
essential to any comprehensively fair system; and (3) that permanency
and stability of rates are of equal importance with elasticity. That
all three of these results have been voluntarily worked out in practice
by the trunk lines is a tribute at once to the ability and fairness of
their traffic officials. Standards are thus established toward which
the carriers in the West and South should strive, as soon as their
local traffic conditions will permit, in an endeavor to promote good
relations with the shipping and consuming public.

That distance tariffs, modified in part to suit commercial conditions,
are not only theoretically sound, but entirely practicable, this study
aims to prove. The bogey of German rate schedules vanishes into thin
air when it appears that the greatest railway companies in the United
States have for years adopted the same principles in working out their
tariffs. The long and short haul rule is here enforced, not alone as
between various points on the _same_ line, but also as between points
equally distant from a common destination on _different_ roads. Thirty
years ago the trunk lines conceded the principle, for the recognition
of which the shippers of the West and South are now so vociferously
clamoring before Congress and the Federal courts.

This desirable end could never have been attained if the several
competing companies had not been able to act in coöperation. The
erroneous popular opinion that railway competition must be preserved
in the public interest, had it been legally enforced in this territory
a generation ago, would have prevented absolutely any comprehensive
solution of the problem. Until Congress abandons this theory, and
treats railways as essentially monopolistic, thereafter to be protected
and maintained as _beneficent_ monopolies through adequate governmental
supervision, the lesson of trunk line experience will not have been
learned. And, finally, the interesting fact that for almost thirty
years it has not been necessary to change either the main system or, in
many instances, the actual rates charged thereunder, is an offset to
the contention that success in railway operation is to be judged by the
instability of rates, seeking to follow constantly the ups and downs of
commercial conditions. Certain modifications, especially in export and
import traffic, or wherever water rates have to be made or met, are, of
course, inevitable. But it is absurd to reason from this that railway
tariffs in the main need to be continually jostled about at the behest
of the shipping public. Of course, if one railway changes its rates,
all the rest must follow. That is the principal reason why many of our
rate schedules have been as uncertain as the weather. But there is no
reason why, if all parties in competition keep good faith and observe
their tariffs, a schedule of class rates for domestic shipments should
not remain practically constant.

Take the rates on raw cotton from Mississippi river points like
Memphis to New England cities, for example. Was any staple product
ever subject to greater fluctuations in price than raw cotton, varying
as it has in the last few years, from five to fifteen cents a pound?
Yet through it all, good years and bad, whether for the planter or the
manufacturer, the freight rate has stood unchanged at fifty-five cents
per hundredweight. In the same way, within the limits hereafter to be
described, the trunk line rate system has endured for a generation.
Founded upon sound and, consequently, defensible principles, it has
promoted good feeling between railway and shipper. And, if the changes
of classification since 1900 had not been made, one may reasonably
doubt whether the demand for Federal legislation would have been any
more insistent throughout the eastern central states than it now is in
New England.

       *       *       *       *       *

The causes leading to the adoption of a systematic rate scheme by the
trunk lines acting jointly[390] can be understood only in the light of
the conditions existing about 1875. The Baltimore & Ohio Railroad had
entered Chicago in 1874, after which time the most furious rate wars
between the four trunk lines had been in progress. The main dependence
of all these lines was still upon the grain traffic, and all of this
was moving in one direction toward the seaboard. As late as 1882,
seventy-three per cent. of the trunk line tonnage east bound consisted
of such commodities.[391] Moreover,--and this is a point of especial
importance,--the bulk of this grain originated in the territory east
of the Mississippi and south of Chicago. Over four-fifths of the
eastbound traffic came from the states of Illinois, Indiana, Ohio,
Michigan, and Pennsylvania. The great northwest and trans-Mississippi
territory was not yet opened up. Wisconsin and Iowa contributed only
about ten per cent. of the eastbound tonnage, while over two-thirds of
the westbound business did not pass beyond Illinois.[392] Nor was the
traffic concentrated as yet in the larger cities. Mr. Fink makes it
clear that most of the business was gathered up by the trunk lines and
their connections from small towns along the way. The modern problem of
the great city in competition with the small towns was as yet unknown.

The trunk lines had few feeders. Only the main stems to Chicago had
been built. Consequently these central states were served by a host of
little cross lines, built as local enterprises, many of them radiating
from Chicago, Cincinnati, Toledo, or Cleveland at right angles with
the trunk lines, and, for the main part, engaged in an endeavor to
open up their territories to water communication with the East by way
of the lakes and the Erie Canal. Rail rates, nominally at least, were
still high, the rate first-class Chicago to New York, for example,
being about double its present figure; and the conditions of railway
operation were such that water competition was a matter for grave
concern. Every change in the lake situation was at once reflected in
the rail rates, violent dislocations at the opening and closing of
navigation in the spring and fall being of especial importance.

Among these confusing elements in the problem of trunk line rate
adjustment five distinct phases were prominent. In the first place the
four trunk lines were a unit in opposition to the diversion of traffic
to the Great Lakes and the Erie Canal. However much they might bicker
with one another afterward,--apportionment of the rail business being
a distinct feature of the problem,--their interests at the outset were
identical respecting the necessity of holding the business on land.
Water competition by way of the lakes or the Ohio river was a danger
common to them all. The intensity of this pressure may be understood
from the statement that the trunk lines were not even consulted in
making the Chicago-New York rate on which the western lines pro-rated.
They had no voice in it, merely accepting the figure offered them by
their connections into Chicago.[393] The second feature of the problem,
namely, the division of the all-rail traffic among the competing
carriers, is immaterial to the main question before us. Thirdly, it was
essential to the trunk lines to restrict and control the activities of
the subsidiary cross lines and feeders, most of which, as has been
said, were independent. Many of these, aside from having a direct
interest in their longest haul to a terminus on the lakes or the Ohio
river, had been built by local capital, and were administered in the
interests of the lake cities or Cincinnati and Louisville. There was
no unity whatever in their policies, and the most ridiculous wastes of
transportation resulted. Grain was literally meandering toward the East
instead of moving by a direct route.[394] Joint through rates would be
made by the most extraordinary chain of connecting links leading to the
seaboard by very circuitous ways.[395]

A fourth evil, akin to this, consisted of the difficulty of maintaining
through rates, not as among the trunk lines who might be made parties
to a pool, but by reason of cut-throat competition between their
western connections.[396] The agents of these western lines would
indiscriminately cut rates to or from points on their lines, and then
expect their trunk line connections to accept a proportionate shrinkage
of the joint through rate for their part of the haul. The weaker
companies would, of course, be susceptible to such temptations in order
to secure the business. No stable apportionment of this western traffic
among the eastern lines would be possible until they could agree upon
a fair rate for the trunk line haul, and rigidly adhere to it. And,
finally, water competition, causing constant fluctuations in the lake
and Ohio river rates, while directly potent only at waterway points,
was continually putting the through rates from these points out of line
with the local rates from non-competitive inland centres. Or, perhaps,
the Ohio river and lake rates would be out of joint with one another.
The Chicago basis, if applied to Paducah, would make a rate on tobacco
that would send it _via_ New Orleans.[397]

Products would go down the Mississippi after the lakes had been closed
by ice. A considerable amount of corn was certainly moved to New York
by that route.[398] Some device for coordination of the through and
local rates--or, as one might put it, for the distribution of the
localized shock of water rate changes--was imperatively necessary.

An ingenious rate clerk named MacGraham, in the offices of the
Pennsylvania Railroad, proposed a comprehensive scheme for meeting
these difficulties which was first used for westbound rates on
December, 15, 1871. The Chicago-New York rate was to constitute a
basis, upon which all other rates were to be made in percentages,
according to their relative distance from New York.[399] Thus, assuming
Chicago to be 900 odd miles from New York, the rate from a point 600
miles inland would be about sixty-six and two-thirds per cent. of the
Chicago rate, whatever that might be. Whenever the lake rate at Chicago
changed, every other rate throughout trunk line territory would vary
in due proportion. Relativity of charges would thus be preserved.
Moreover, the shortest route, "worked or workable," was to be used
in calculating the rates, the basic distance being about 920 miles
by the Lake Shore from Chicago to Dunkirk, Ohio, and thence by the
Erie to New York. This would give compelling effect to distance as a
factor, and would tend to penalize the roundabout carriage of goods.
More than this, however, it would render the inland territory directly
tributary to New York. From a point, for example, fifty or one hundred
miles south of Chicago, Toledo, or Cleveland, the local rate into
those towns plus the through rate east to New York would always exceed
the rate by a direct route east. For the hypothenuse of a triangle is
clearly always shorter than the sum of the other sides. All shipping
points equidistant from New York would enjoy equal rates, those rates
at any time being determined by the state of water competition. This
was a manifest advantage to the small inland centres, while the rate
on the lake front was not affected. The trunk lines lost something,
perhaps, through lower rates at intermediate points; but the gain
through diversion of traffic from the lake to the rail lines more
than compensated. For conditions were such in the summer of 1875 that
the lake boats were prepared to carry grain for almost nothing. The
railroads were helpless in such cases.[400] The only real sufferers
were the short, independent cross lines and the lake and river cities.
Of these, the former were reduced to a status of mere feeders or
branches of the trunk lines. They were compelled to accede to the
plan, however, by threatened refusal of the trunk lines to turn over
business to them westbound, unless they reciprocated with their grain
shipments eastbound.[401] Many of these lines became bankrupt later,
and were absorbed by the larger companies.[402] And, as for the cities
unfavorably affected, the scheme based upon distance was so obviously
fair that their protests were of no avail.[403]

The great contest between the trunk lines over the granting of
differentials to Philadelphia and Baltimore, as against New York
and Boston, played a not unimportant part in the diplomacy leading
to the acceptance of the MacGraham system. The New York Central,
the Lake Shore, and the Boston & Albany roads, of course eagerly
accepted it, because it promised aid in meeting the lake competition
to which they were peculiarly exposed. The Pennsylvania and the Erie,
lying considerably further from Lake Erie, would also be benefited,
operating as they did in a territory naturally tributary to them, but
exposed to drainage to the lakes by lateral lines. But the Baltimore
& Ohio, ever since its entry into Chicago in 1874, had been a thorn
in the flesh of the others. The territory along its line was so far
from the lakes that it had little to fear from water competition at
intermediate points between Chicago and the seaboard. Would it accept
a plan primarily intended to meet a danger which, while injuring
its powerful rivals, was of less consequence to itself? Fortunately
for the scheme, it was based upon the solid principle that distance
was of preponderating influence in the adjustment of rates. The
entire contention of the Baltimore & Ohio and the Pennsylvania for a
differential rate to Baltimore and Philadelphia below New York rested
upon this same principle. The distance from Chicago to the southern
ports was less. Consequently, they insisted, they were entitled to
offer a lower rate. The MacGraham scale and the port differentials
were thus logically connected. They stood or fell together. The
MacGraham plan materially aided the Baltimore & Ohio in making good
its demands.[404] It was acceptable, therefore, by reason of this
collateral advantage.

Another factor in the situation appealed to the Pennsylvania and the
Baltimore & Ohio. Their lines to tide water were about seventy-five and
one hundred miles shorter, respectively, than the shortest line to New
York.[405] In the division of the joint through rate between a chain of
connecting railway lines this was of great advantage. It always aids
the shorter line if pro-rating is based upon mileage. A feeder one
hundred miles long pro-rating with a trunk line one thousand miles in
length would be entitled to only one-eleventh of the total rate. Were
the trunk line only eight hundred miles long, the neutral road might
claim one-ninth. This seemingly slight difference might mean several
hundred thousand dollars more earnings to the neutral road or feeder,
if it turned over its business to the short line.[406] Any emphasis
upon distance as a general principle strengthened the Baltimore & Ohio
in securing patronage from other roads by this means. The other trunk
lines, through acceptance of the MacGraham scale, conceded the distance
principle, and with it, coincidently, the pro-rating practice.

After three years' experience, the MacGraham scale was readjusted
to conform more closely to the cost of service principle. The plan,
as thus revised, is the one still in force.[407] It recognizes that
railway charges should be proportioned to the length of haul, so far as
actual costs of haulage are concerned; but it first eliminates those
constant elements in cost which do not vary with distance. The original
MacGraham scale made no such distinctions. The expenses at terminals,
such as loading and unloading, are, of course, entirely independent of
the distance covered by the shipment. These, being determined roughly
by experimentation, are first deducted from an assumed Chicago rate.
From the remainder the rate per mile by the shortest route to New York
(920 miles) is then calculated by simple division. This rate per mile
is then applied to the distance to any intermediate point, and the
terminal charge is again added. Thus a rate is found which is reduced
to a percentage of the original Chicago base rate.

                         FOR ILLUSTRATION[408]

                                                               Cents
                                                           per 100 lbs.

  Chicago to New York                                       25
  Less fixed charges on both ends of the line                6
                                                            --
  The basis of rate for computation being the remainder, or 19
  Using short line mileage 920 miles, Chicago to New York,
    would yield a rate per mile                             00.0206
  Short line mileage Indianapolis to New York, 833 miles,
    yields a rate of                                        17.2
  Plus six cents fixed charges, as above, makes             23.2
  The percentage of New York rate being                     93 per cent.
  Which is the present percentage basis Indianapolis to
    New York
  Short line mileage Frankfort, Indiana, to New York is 881
    miles, which would yield at the rate of 00.0206 cents
    per mile                                                18
  Plus terminal charges                                      6
                                                            --
  Which is 96 per cent. of 25 cents                         24

[Illustration: [_Facing page 364_]]

The revised system provides in theory for an absolutely constant rate
per ton mile. It is a rigid mileage tariff in every respect. The
original MacGraham scale had been so in theory, but not in practice.
As amended in conformity with a sound economic principle, it had,
moreover, one important practical advantage over the original scale.
It yielded more revenue at all the intermediate points.[409] Local
rates would be higher as thus calculated than they were originally. It
would be unjust to ascribe undue importance to this motive on the part
of the roads in the adoption of the new system. That the plan yielded
additional revenue, while obviously more just in theory, was naturally
no objection to its acceptance.

The fruits of all this process of adjustment are depicted upon the
accompanying diagram. Viewing it in a large way, and reserving details
for later consideration, we may compare it to a topographical contour
map. The several rate zones are thus analogous to a series of levels or
steps rising from east to west. Our cross section of these along a line
from Pittsburg to Burlington, Iowa, makes this relation plain. Another
cross section at right angles to the first from Louisville, Kentucky,
to Lansing, Michigan, and beyond, shows how these levels are arranged
in a plane from north to south. These steps form a sort of irregular
amphitheatre opening toward the east, with its main axis lying in a
direction slightly south of west toward St. Louis. Or, more correctly,
these rate zones, pursuing our analogy to a topographical contour map,
indicate a broad valley opening toward the east. Along the bottom of
this freight-rate valley lie the great direct trunk lines converging
from Chicago and St. Louis. Throughout the State of Illinois the valley
opens up onto a plateau, somewhat grooved in the middle at Peoria,
where the direct lines from the west cross a neutral field tributary
neither to Chicago nor St. Louis exclusively.

[Illustration: CROSS-SECTION THROUGH LOUISVILLE AND LANSING]

[Illustration: CROSS-SECTION FROM BURLINGTON TO PITTSBURGH] This
general description harmonizes with the apt figure used by that master
mind in railway economics, Albert Fink. Speaking of this situation, he
says, "The trunk lines are nothing but great arteries of commerce, like
rivers, only with this difference: the rivers never run across each
other, the territory from which they draw their supplies is distinct
and well defined." Since his time, by reason of coöperative action for
a generation, the confusing maze of railway lines has now been reduced
to a single comprehensive system. Cross-currents of trade hither and
thither have been united or articulated in such a way as, speaking
in terms of freight charges, to cause the great internal commerce of
the country to flow downhill toward the seaboard in an orderly and
reasonable way. The inequalities incident to commercial competition
have been modified, or, to revert to our original figure, eroded; so
that one may literally speak of the products of the country as flowing,
like rivers, in more or less natural channels over the railway lines
from the great interior basin towards the Atlantic seaboard.

The mathematical precision of the method of computation heretofore
described, while theoretically applicable to a series of parallel roads
in a flat country, free from either water competition, the competition
of cross railway lines, or the competition of towns and cities of
unequal size and importance, obviously requires modification to suit
the actual traffic conditions in this densely populated trunk line
territory. The process of adjustment has been gradual and necessarily
tentative. Every influence brought to bear has been subversive of
systematic arrangement, tending, that is to say, to amend the scheme
out of all semblance to mathematical order. After reading volumes of
the Proceedings of the Joint Rate Committee, filled with petitions of
railways, towns, and individuals for exception to the general rules,
one is surprised to find that, after all, the scheme is so well ordered
as it is. It has been held true only by rigid adherence to the rule
that by the shortest "workable and worked route" no intermediate
place shall be charged more than is charged to any point beyond.
In other words, the long and short haul principle is consistently
observed. Space does not permit a discussion of all of the factors
which have tended to modify the original simple scheme. Three alone
may be considered as illustrative of the rest. These are: (1) the
effect of railway competition at the important junction points; (2) the
influence of the independent cross lines of railway; and (3) commercial
competition between producing or distributing centres.

The effect of railway competition at junction points is revealed at
once, upon inspection of the map, by the general law that the boundary
line of zones lies immediately west of the large cities. Notice the
location of Cleveland; Warren, Pennsylvania; Newark, Ohio; Dayton,
Fort Wayne, Detroit, Port Huron, Cincinnati, Indianapolis, Louisville,
Lansing, Logansport, Terre Haute, Peoria, and Decatur. Columbus,
Toledo, and Evansville, Indiana, are about the only exceptions. In
nearly every case the theoretical zone boundary has been shifted in
such a way that the rate rises just west of the important competitive
point. The reason is obvious. Rates being held down at these points,
and no greater rate being possible at any other point further east,
conditions must be equalized _upwards_, immediately the depressing
influence of competition is removed. Each zone level is of necessity
an average of a theoretic constantly rising scale from east to west.
Places immediately west of an important junction point are raised
somewhat above their theoretical grade as a compensation for those
places on the westerly side of each zone whose rate is held down below
their theoretical level by the exigency of competition at the next
large town. Or, to be specific, Indianapolis may hold down the rate to
ninety-three per cent. of the Chicago rate farther west than otherwise
would be the case. In fact, by reason of its paramount importance as a
railway centre, it has held down the rate so far west that for purposes
of equalization the rate west of it immediately jumps to one hundred
per cent. For, as will be observed, on inspection of the map, the
96-97 per cent. zone is interrupted at this point; the 92-95 per cent.
zone being extended unduly far west and the one hundred per cent. zone
being extended inordinately far east, until the two meet just west of
Indianapolis. Detailed study of the schedules and maps will reveal many
similar instances.

The converse of the proposition that important junction points
lie near the western zone boundaries is found in the fact that,
where competition is absent, the zones sweep much farther east
than mathematically would be prescribed. In other words, wherever
competition is less keen, the percentage rates remain high. Were
competition entirely uniform in its geographical distribution, the
several zones would be parallel, sweeping evenly clear across the
map. Illustration of this circumstance will be found in the extension
of the 87 per cent. zone far to the east, along the Ohio river, in
fact nearly to Parkersburg, West Virginia; or, again, in the 110 per
cent. territory which extends nearly to Louisville. This latter rate
has been recently amended, as will be shown later; but for many years
continued, as here represented, abnormally far to the east. In both
these instances the railway facilities along the river are monopolized
by the Baltimore & Ohio as a trunk line. The only competition is due to
the Cincinnati, Hamilton & Dayton and Norfolk & Western, both of which
work their traffic from New York north. The population and traffic
density being at the same time low, a relatively high level of rates
has resulted. Sometimes, also, it may happen that in these outlying
regions the shortest line "workable and worked" to the seaboard may not
be due east, but may proceed north until a junction with a trunk line
can be effected.[410]

The influence of independent transverse lines of railway has been of
great importance in shifting the zone boundaries from their theoretical
location to conform to practical requirements. Study of the map
permits a second important generalization. Not only does the boundary
of the zones usually lie just west of large cities, the course of the
boundary at the same time frequently follows the location of important
independent transverse railways. The zone boundary, in other words,
lies just west of the cross railway line. For example, the western
boundary of the 100 per cent. Chicago zone, after leaving a point on
the Illinois Central, is defined from north to south by the course of
the Chicago & Eastern Illinois Railroad, and below Terre Haute by the
line of the Terre Haute & Evansville. Similarly, practical exigencies
determined the odd shape of the 110 per cent. zone, formed like a great
distorted boot leg. The western boundary of this 110 per cent. zone
from Peoria south closely follows the Peoria, Decatur & Evansville road
nearly to the Ohio river. Similarly conditioned by railway lines are
the boundaries north and south of Indianapolis, and especially north
and south of Fort Wayne, Indiana. In other cases where the transverse
lines do not cross nearly at right angles with the trunk line, the
zone boundary will follow one railway for some distance, and then
skip across to another railway whose general direction is more nearly
perpendicular to the trunk lines. Thus, from Toledo to Lima, Ohio, the
western boundary of the 76-80 per cent. zone follows the Cincinnati,
Hamilton & Dayton, cutting the Baltimore & Ohio and Pennsylvania trunk
lines at right angles; and then it jumps across to the east until it
strikes the sweep of the Toledo & Ohio Central, which carries it down
almost to Columbus. Similarly, the western boundary of the 66-1/2 per
cent. zone follows the line of the Pittsburg & Western north from
Warren, in order that that line may participate in New York business by
working its line north _via_ Painesville on the Lake Shore.

Why is it apparently necessary that these zone boundaries should
follow along just west of the cross railway lines? The reason may be
made clear by a concrete instance. Originally and until about 1891,
Louisville, Kentucky, instead of having the 100 per cent. Chicago rate,
as at present, enjoyed, on the base of its distance from New York,
about 96 or 97 per cent. of the Chicago rate. In other words, the
96-97 per cent. zone shown on our map as interrupted at Indianapolis,
partly for reasons already mentioned, originally swept across the map
all the way from Grand Rapids to the Ohio river. This territory from
Chicago south is served by the Monon Railway (Chicago, Indianapolis
& Louisville), whose line, not fully indicated on the map, thus lay
partly in 100 per cent., partly in 96 per cent., and partly in 97 per
cent. territory. An important part of the traffic of the Monon, as
well as of the other independent north and south lines, consists of
business coming in from the east at the north and worked south, or
coming in from the east at the south and worked north. Or, in other
words, this line subsisted in part upon indirectly routed tonnage
from New York, let us say, destined for Louisville, but reaching it
by way of Chicago junction points. Freight thus hauled around two
sides of a triangle, instead of by a direct line, as described in
Chapter VIII,[411] constitutes one of the important sources of waste of
transportation energy. The Monon by such tactics is able to participate
in, and to profit by, a much larger volume of through business. That
is to say, its proportion of the entire haul is much greater than
it would be if the business moved by the shortest line. Moreover,
when indirectly routed, the Monon, often securing for its trunk line
connections tonnage for the east which would naturally go to other
competitive trunk lines, is able to exact a higher pro-rating than
even its extended lateral haul would justify on a strictly distance
basis. Such circumstances always greatly enhance the profitableness
of lateral hauls to minor connecting roads. It is obvious that much
of this transverse haulage would be impossible wherever the lateral
railway lines traverse different zones of rates. It might haul traffic
from its 100 per cent. end to connect at its 96 per cent. end with a
trunk line for the east, but not in the opposite direction. The Monon,
always in a position to disturb the rate situation, through connection
with all the competing trunk lines, insisted upon equality of rates all
along its lines. To do this, the 100 per cent. zone had to be extended
east to Indianapolis. Thereafter the Monon could profitably "work its
line in both directions." This illustration will serve to show why
ordinarily the zone boundaries conform as closely as possible to the
course of the lateral roads. The confusion which would be engendered,
were the Peoria, Decatur & Evansville to be partly in the 110 per
cent. and partly in higher percentage territory, while still insisting
upon its right to work its line both ways, can readily be imagined. To
avoid such difficulties, the present modification of strictly distance
percentages had to be adopted.

The third dominant influence, above mentioned, in modifying the
mathematical precision of percentages based alone upon the distance
from New York, has been the commercial competition of traders and
cities one with another. The aim of all rate adjustment should be,
and in fact, so far as possible in American railway practice, is
to equalize conditions, so that the widest possible market shall
result. Producers or traders in each city demand access on even terms
to all territory naturally tributary to them by reason of their
geographical location. Each particular railroad sees to it that its
own patrons and cities are "held" in all parts of these markets, as
against the efforts of competing railways to promote the welfare of
their own constituencies. Consequently, the Proceedings of the Joint
Rate Committee are filled with discussions as to the advisability
of amending general rules here and there to suit local conditions.
Minor changes are continually being effected. Grand Rapids, Michigan,
once in 100 per cent. territory, asked for a 90 per cent. rate, and
in 1891 secured a reduction to 96 per cent.[412] Louisville, once
in 97 per cent. territory, is now a 100 per cent. point. Shifts in
both directions have frequently occurred, as the following table of
percentages shows:[413]--

  -------------------------+---------+--------+----------+-----------
  Basis                    | Detroit | Toledo | Sandusky | Cleveland
  -------------------------+---------+--------+----------+-----------
  April 13, 1876           | 85      |  78    |    71    |   65
  June 23,  1879[414]      | 81.5    |  81.5  |    78    |   73.5
  April 14, 1880           | 75.5[415]| 75.5  |    75.5  |   70
  Present  (1900)          | 78      |  78    |    78    |   71
  -------------------------+---------+--------+----------+-----------

A number of changes were made in 1887 in order to conform to the long
and short haul clause. Flint, Michigan, for example, was reduced from
95 to 92 per cent.; Ashtabula, Ohio, from 71 to 67; while Springfield,
Ohio, was raised from 82 to 83 per cent.[416] Detroit has been most
active in prosecuting its claims for a reduced percentage.[417] But
the Interstate Commerce Commission in 1888 upheld the present status.
A recent minor change is indicative of the forces which must be dealt
with. Evansville, Indiana, on the Ohio river, according to our map, is
a 110 per cent. point. Vincennes, Indiana, lies just north of it in the
108 per cent. triangular zone. Since this plate was made, Evansville
has been reduced to 105 and Vincennes to 103 per cent., respectively.
This is substantially, I am told, on a mileage basis. The reason for
the amendment is that certain important industries are located at these
points. Either to favor them specially or to remove a pre-existing
disability in competition with other towns, this change was insisted
upon by the railways interested in their prosperity. By tentative
processes of adjustment like this the present general relations have
been established.[418] They have been kept constant only by the steady
resistance of the majority of carriers to action which is in the
interest of a few. Judged by results, it would appear that the broad
view has, in the main, prevailed.

The actual situation resulting from the above-named causes, it should
be observed, is not quite as simple as our map makes it appear. Most
of the zones are in fact subdivided into minor gradations. Thus the
closely dotted zone designated "86-90 incl." is constituted of an 87
per cent. area up as far as the railway from Dayton to Indianapolis;
while the rest of it is broken up into little 88, 89, and 90 per
cent. areas, respectively. The same thing occurs elsewhere. Our
map generalizes the results, in an effort to bring out the zone
relationships as fully as is technically possible in a single diagram.
Certain of the zones, however, such as the 60, 66-1/2, 100, and 110 per
cent. territories, are bounded exactly as here represented.

As for direction, the original scale was intended only for eastbound
traffic. Westbound rates were lower and more regular. But the system
worked so well that it was soon extended to cover the westbound
business. Owing to difficulties of routing, in order to transport by
the shortest line into Chicago, these westbound percentages were often
quite different from those in the opposite direction.[419] Detroit, for
instance, for some time prior to 1886, enjoyed a 70 per cent. rate west
bound, while its percentage in the opposite direction was 78.[420] But,
after the passage of the Act to Regulate Commerce in 1887, efforts
were made to harmonize the differences.[421] At the present time the
rates east and west are in most cases the same.

At this point it is essential to understand the limitations within
which this percentage system is confined. It does not necessarily
determine the exact rate to be applied in practice from every little
station in trunk line territory. For, in the first place, it concerns
only the so-called common points; that is to say, points where
competition of two or more carriers is effective. Purely local stations
are charged an "arbitrary" into the nearest common point.[422] But,
inasmuch as throughout this much be-railroaded country most shippers
are less than twenty miles from the next line,[423] and since,
moreover, the arbitrary can never raise the local rate above the
rate to the next common point beyond,[424] the scale is practically
effective everywhere. A more important consideration is the fact that
this scale, even for common points, does not positively fix the rate.
It merely provides a minimum below which rates shall not be reduced,
except by authority of the roads acting jointly. It is a minimum, not a
maximum, schedule in every sense. Its provisions are never promulgated
in the form of tariffs as such. They are rarely known to shippers, but
serve only as a guide to traffic officials. The Interstate Commerce
Commission, in sanctioning the system, has expressly recognized this
fact.[425] Moreover, these percentage rates applied at first to
"classified" tonnage. They were soon, however, extended to include the
great bulk of commodity or special rates which are independently made.
And I am informed by the chairman of the Trunk Line Association that
the MacGraham table was applied to special rates--such as sugar, coffee
and molasses--as early as 1871.

Other exceptions to the applicability of this percentage system
deserve mention, although they are of relative unimportance. Principal
among these is the confusion engendered in Illinois territory
through the entry of the western lines into Chicago. Throughout
their constituencies, by reason of the sparse population, freedom
from competition, inequality of east, and westbound tonnage, and
low-grade freight, western railroad rates per ton mile are very much
higher than on the trunk lines. Moreover, they are naturally desirous
of as long a haul as possible, namely into Chicago. To turn over
their local Illinois traffic to the trunk line feeders exposes them
financially to the same losses as those above mentioned in the case
of lateral independent lines further east. But these western lines,
being stronger, have insisted upon recognition of their claims to a
proportion of the through rate which would at least "pay for their
axle grease."[426] The result is that throughout Illinois, especially
in the north and toward the Mississippi, the distance principle is
considerably distorted, as our map clearly shows. The percentage system
practically excludes freight "from beyond," the rates on that being
determined by other rules.[427]

East of the Central Traffic Association territory shown on our map
the same percentage system is extended to points in New York and
Pennsylvania.[428] Suppose, for example, the rate were desired from
Columbus, Ohio, to Albany, New York, or any other point between Buffalo
and New York City. The rate from Columbus to New York City would
first be determined as a percentage of the Chicago-New York rate,
under the system already described. Then from Columbus to Albany the
rate would be prescribed as a new percentage of this percentage. The
initial western points, however, are not determined individually, but
are comprehended in large groups. Thus the rate from all points in the
72-78 per cent. territory, shown on our map, to Albany, New York, is
96 per cent. of what the rate would be from those points to New York
City. Syracuse has 76 and Utica 87 per cent., respectively, of the
rate from any point in this 72-78 per cent. territory. From points
beyond Chicago, taking, that is to say, more than 100 per cent. of the
New York-Chicago rate, the percentages of the rate to New York City
applying to Albany, Syracuse, and Utica are correspondingly modified to
96, 84, and 91, respectively. Other complications, such as the addition
of arbitraries to Boston and New England points or the subtraction of
differentials to Baltimore and Philadelphia, follow. But, in the main,
conforming always to the long and short haul principle,[429] rates to
all local stations are prescribed within narrow limits by means of a
small number of these fixed points. The system is the same, although
details may vary. Everything interlocks and is harmoniously related on
the distance basis.

Rates from one point to another within the Central Traffic Association
territory shown on our map now alone remain for consideration. These
cannot, of course, be adjusted on a percentage basis, inasmuch as
such traffic may not be east or west bound at all, but may consist
of shipments in any direction. There is no logical reason why they
should interlock with east or westbound through rates when the traffic
is, perhaps, moving locally north and south. Nevertheless, the long
and short haul principle is observed with the same fidelity. A rigid
distance tariff for short hauls, the limits of which are prescribed by
the rates for long hauls under the MacGraham schedule, prevails.[430]
For distances up to 75 miles this conforms closely to the rates
originally prescribed by the Ohio legislature. For greater distances
it is much lower than the Ohio tariff.[431] Thus the Ohio rate for 350
miles is 87.5 cents, while the C. F. A. (Central Freight Association)
scale is only 42 cents. The Ohio scale for 200 miles is 50 cents, the
C. F. A. rate for the same distance is only 33 cents. Thus it appears
that this C. F. A. tariff, applicable to interstate business and beyond
control of any state legislature, has, in reality, been voluntarily
adopted by the interested railroads. The tariff is only a minimum
scale, below which the roads agree not to reduce rates, and above which
the actual rates often rise.[432] Nevertheless, the fact remains that
these rates, according to distance, are so much lower than the Illinois
Railroad Commission's tariff that Chicago and other distributing
centres throughout the State of Illinois claim that it works great
hardship to them. The situation in Illinois is geographically peculiar.
Its great commercial centre is in the extreme northeastern corner,
while, at the same time, the greatest extension of the state is north
and south. These circumstances, coupled with an interstate (C. F. A.)
tariff lower than the Illinois official tariff under which Chicago
merchants must ship out their goods, enable Detroit, Indianapolis,
and Cincinnati to undersell Chicago in its own state. Chicago can be
equalized there only by special or secret rates.[433] Other local
centres, like Quincy, Illinois, joined with Chicago in this complaint
to the Illinois Railroad Commission that their rates were too
high.[434] Think of it! Shippers complaining that a government rate was
too high, and requesting that the railway tariff (C. F. A. schedule)
be adopted in its place! Is that not evidence that reasonable treatment
of its shippers by railway companies is appreciated by the public?
Without undue extension further details of this interesting controversy
cannot be given. It will suffice to state that in December, 1905,
the Illinois Railroad Commission ordered a reduction of its official
schedule by 20 per cent., in an attempt to reduce its rates to conform
more nearly to the C. F. A. railway tariff.

The evils incident upon two conflicting governmental authorities, State
and Federal, each attempting to regulate rates independently, are
clearly indicated in the preceding paragraph. The Interstate Commerce
Commission has been brought flatly up against them in one of its
recent Texas cases.[435] Local and interstate rates must inevitably be
adjusted with reference to one another, so complex are the conditions
of commercial competition. While the plain people remained unsatisfied
that any real Federal regulative power existed, it was inevitable that
the number of arbitrary state tariffs, like those of Illinois and,
more recently, of Missouri, should tend to increase. But now since the
amplified Federal powers under the laws of 1906 and 1910, any clash
between the two must result in limitations placed upon state activity.

FOOTNOTES:

[389] Compare chap. IV, p. 102, _supra_.

[390] The literature on the subject is scanty. Much of the material
has necessarily been gathered in the field by conference with traffic
officials and others. My hearty thanks are due primarily to Paul P.
Rainer, Esq., chief of the Joint Rate Inspection Bureau at Chicago,
for his willingness to impart such explanation of this complicated
matter as the delicate responsibilities of his important post permit.
The map published herewith, while in part prepared from the actual
percentage tables, with his permission and that of several important
trunk line officials concerned, has been checked and corrected by his
official copyright map of January 1, 1899. While the scheme of graphic
representation is entirely different, the facts represented are the
same. I am also especially indebted to H. C. Barlow, Esq., formerly
president of the Terre Haute & Evansville Railroad and now director of
the Chicago Commercial Association, and to J. W. Midgley, Esq., for
many years one of the Trunk Line Commissioners, for assistance in many
ways.

The principal references consulted are included in the following list:

    1874. Windom Committee Report, officially known as Report
        of the Select Committee on Transportation Routes to the
        Seaboard, 43d Congress, 1st Session, Senate Report No. 307,
        vol. I, pp. 24-30; vol. II, pp. 7, 80, 283.

    1879. Hepburn Committee Report, New York State, Special
        Committee on Railroads, 8 vols., pp. 3001-3006, 3102-3111.

    1886. Cullom Committee Report, 49th Congress, 1st Session,
        Senate Report No. 46, vol. II, p. 101.

    1887. Typewritten Record, Opinion, etc., of the Interstate
        Commerce Commission in Detroit Board of Trade _v._ Grand
        Trunk, etc., Railways. Also the Toledo case (1889) and that
        of Pratt Lumber Company (1905), I.C.C. Reports, vol. II, p.
        315; vol. V, p. 166; and vol. X, p. 29.

    1890. Senate Report on the Transportation Interests of the
        United States and Canada, 51st Congress, 1st Session,
        Senate Report No. 847, pp. 497, 611-636.

    1892. Cincinnati Freight Bureau case. Copy of Record before the
        Interstate Commerce Commission, etc., United States Circuit
        Court for Southern District of Ohio, In Equity No. 4748,
        vol. I, pp. 42-53. (Reprint.)

    1900. Report of United States Industrial Commission, vol. IV,
        pp. 556-562.

    1905. Elkins Committee, officially known as Hearings before the
        Committee on Interstate Commerce, United States Senate, 5
        vols., vol. II, p. 1569, and vol. III, p. 2271.

    1905. Record of Proceedings before the Illinois Railroad and
        Warehouse Commission in the Matter of Revision of the
        Schedule of Reasonable Maximum Rates, etc., Springfield,
        especially pp. 31 _et seq._ (Reprint.)

    1876-1905. Proceedings and Circulars, Joint Executive Committee
        and Joint Rate Committee of the Trunk Line, etc.,
        Associations.

[391] Fink, Adjustment of Railroad Transportation Rates, etc., p. 16.

[392] _Ibid._, pp. 19 and 52.

[393] Windom Committee Report, II, p. 7.

[394] Waste of transportation as an economic problem has already been
discussed in chap. IX, _supra_.

[395] This persisted even in 1890. Consult 51st Cong., 1st sess., Sen.
Rep., No. 847, p. 616.

[396] Hepburn Committee, pp. 3006-3010.

[397] Hepburn Committee Report, p. 318.

[398] Windom Committee Report, II, p. 287.

[399] This was adopted officially by the trunk lines April 13, 1876.

[400] Hepburn Committee Report, p. 3112.

[401] Record Proceedings Railroad Commission of Illinois in Revision of
Maximum Freight Rates, 1905, pp. 32 and 88.

[402] 55th Cong. 1st ses., Sen. Doc. No. 39, p. 33. The Hepburn
Committee (p. 3111) describes the local jealousies which prevailed.

[403] Chicago has never become reconciled to it, however, alleging
that it injures her commercially. Compare Windom Committee, 1874, vol.
i, p. 24; 51st Cong., 1st ses., Sen. Rep. No. 847, 1890, p. 611 _et
seq._; Elkins Committee, 1905, pp. 1433, 2538 _et seq._; and Record
Proceedings Illinois Railroad Commission on Revision of Maximum Rates,
1905. _Cf._ p. 378, _infra_. Seaport differentials are discussed in
chap. XI, _infra_.

[404] Hepburn Committee, p. 3104.

[405] Distances are given in the Thurman-Washburne-Cooley Advisory
Commission on Differentials, etc., of 1882.

[406] Hepburn Committee, pp. 3188, 3195. "Taking the Indianapolis &
St. Louis Railroad, for example, running to Indianapolis, where they
can connect with all the trunk lines.... Assume that company had only
100 cars of business per day; if the property went to Baltimore, that
company would receive $800 per day more than if it came to New York,
pro-rating the rates by mileage to both places; now $800 a day, there
being 300 working days in the year, is a difference of $240,000 a year."

[407] The revised table of percentages is reprinted in full in Hepburn
Committee Report, p. 3107 _et seq._

[408] The official rule from Proceedings of the Joint Executive
Committee, June 12 and 13, 1879, is as follows:

"First.--That from all points being less distant from New York than
Chicago new percentages be adopted for making up rates on eastbound
freight upon the following basis: the percentages from points of the
same, or no greater distance than Chicago, to continue as heretofore.

"Second.--That six cents per 100 pounds be first deducted from an
assumed rate of 25 cents per 100 pounds, Chicago to New York, said
deduction to represent the fixed charges at both ends of long or short
hauls.

"Third.--That, after such deduction, the rate per mile, which the
remainder, or 19 cents per 100 pounds, produces from Chicago to New
York, shall be charged per mile from all common points named in the
first section, according to the percentages of distance shown by the
table adopted at Chicago, April 30, 1876, to which result so computed
the 6 cents per 100 pounds of fixed charges first above deducted shall
be again added, and the percentage of the Chicago rate of 25 cents,
produced by such additions, shall thereafter constitute the percentage
of the Chicago rate, which shall be subsequently charged from the
points named in first section.

                            FOR ILLUSTRATION

  Chicago to New York, per 100 lbs.                  25c.
  Less fixed charges,  per 100 lbs.                   6
                                                     --
  Basis of rate for computation                      19

  Columbus, Ohio, as at present 70 per cent. of
    Chicago net rate, will be                        13.3c
  To which add the fixed charges                      6
                                                     ----
  And the new percentage from Columbus will
    hereafter be 77-2/10 per cent. of Chicago,       19.3c
    in lieu of 70 per cent., as at present."

[409] Hepburn Committee, p. 3104. A hypothetical instance will serve
as illustration. Suppose a point with an 80 per cent. rate on the old
schedule. When Chicago paid 25 cents, the rate to this point would be
20 cents. Under the new scheme the intermediate rate would be 80 per
cent. of 19 cents, or 15.2 cents, plus 6 cents terminal charge, making
a total of 21.2 cents. This is 84.8 per cent. of the Chicago rate
instead of 80 per cent. as before. Compare table, p. 373, _infra_.

[410] Thus from Ironton, in the 87 per cent. zone south of Columbus,
Ohio, the distance to Columbus is 127 miles, added to 638 miles from
Columbus to New York makes a total of 765 miles. Multiplying this by
00.0206 makes it 87 per cent. of the Chicago rate.

[411] Page 264, _infra_.

[412] _Cf._ Industrial Commission, IV, p. 556.

[413] Record, Detroit Board of Trade case.

[414] Consult p. 195, _supra_.

[415] Computed apparently by regular rules, but on the basis of only 4
cents terminal charges instead of the usual 6.

[416] Joint Rate Circular, No. 815.

[417] Demanding a 70 per cent. rate on a strict mileage basis, and
also, because the pro-rating basis with Western lines is that figure.

[418] 23 I.C.C. Rep., 684, on wool from Detroit, for example. 13
_Idem_, 300 concerns Evansville rates and those across in Kentucky.

[419] Trunk Line Association Circular No. 523, issued July 26, 1883,
gives tables of these percentages in each direction. Present westbound
percentages are given in _ibid._, No. 751, issued April 3, 1899.

[420] Typewritten record, Detroit Board of Trade case, 1887-88,
Interstate Commerce Commission Office, pp. 244-251.

[421] Under a committee headed by the late J. T. R. McKay, of
Cleveland. The Official Classification and the 75 cent New York-Chicago
rate first-class were then adopted for good.

[422] 12 I.C.C. Rep., 186, on points about New York, for example.

[423] I am told that rivers intervening, to cut off cartage by wagon to
competing lines, have sometimes effectively influenced the charges.

[424] The long and short haul principle has always been given great
weight here. All exceptions to it were removed in good faith by the
carriers when the Act of 1887 was passed. _Cf._ Windom Committee, vol.
I, p. 26; vol. III, pp. 42, 134, and 283.

[425] _G. C. Pratt Lumber Co. v. Chicago, Ind. & Louisville Railway
Co._, decided January 27, 1904.

[426] U. S. Industrial Commission, vol. IV, p. 562.

[427] _Cf._ 8 Int. Com. Rep., 169, on grain rates from Minnesota and
trans-Missouri points; as also 23 I.C.C. Rep., 195.

[428] _Cf._ Joint Committee Information No. 298 of January 13, 1900,
giving all these rules in detail.

[429] _Cf._ Windom Committee, vol. II, pp. 42 and 134.

[430] Known as the C. F. A. scale. Full text is printed in Illinois
Railroad Commission Proceedings in Maximum Freight Rate case, Record,
etc., 1905, p. 43. See also p. 97.

[431] Detailed comparison is made in _ibid._, p. 45. See also p. 17.

[432] Illinois Railroad Commission Proceedings in Maximum Freight Rate
case, Record, etc., 1905, p. 152.

[433] Exhibit A 15, _ibid._, shows this by means of a map. See also
Senate (Elkins) Committee, 1905, vol. III, p. 2271.

[434] The double disability of these smaller places is stated in
_ibid._, p. 7.

[435] Chapter XVIII, _infra_.



CHAPTER XI

SPECIAL RATE PROBLEMS: THE SOUTHERN BASING POINT SYSTEM;
TRANSCONTINENTAL RATES; PORT DIFFERENTIALS, ETC.

    Contrast between the basing point and trunk line
        systems, 380.--Natural causes in southern
        territory, 381.--Economic dependence, 381.--Wide-spread
        water competition, 382.--High level of rates, 382.--The
        basing point system described, 383.--Its economic
        defences, 384.--Early trade centres, 384.--Water
        competition once more, 385.--Three types of
        basing point, 387.--Purely artificial ones
        exemplified, 388.--Different practice among
        railroads, 390.--Attempts at reform, 391.--Western
        _v._ eastern cities, 391.--Effect of recent industrial
        revival, 392.--The Texas group system, 393.--An outcome
        of commercial rivalry, 394.--Local competition of trade
        centres, 395.--Possibly artificial and unstable, 395.--The
        transcontinental rate system, 395.--High level of
        charges, 396.--Water competition, 396.--Carload
        ratings and graded charges, 398.--Competition
        of jobbing centres, 398.--Canadian
        differentials, 400.--"Milling-in-transit" and similar
        practices, 401.--"Floating Cotton," 402.--"Substitution of
        tonnage," 403.--Seaboard differentials, 403.--Historically
        considered, 403.--The latest decision, 403.--Import and
        export rates, 404-409.


The rate system in the southern states contrasts sharply with that
of trunk line territory.[436] Its most unsatisfactory feature is its
complete violation of the distance principle. Public dissatisfaction
was long voiced by a large number of complaints before the Interstate
Commerce Commission in the early days,--a cessation of these complaints
since 1900, however, was the result of the nullification of the law by
judicial interpretation, rather than an indication of any acquiescence
of the public in the scheme. Next to settlement of the problem of
transcontinental rates, a reasonable adjustment of the southern
situation is one of the important tasks confronting the Federal
authorities.

Certain natural features of southern territory are connected with
its peculiar rate system. The first of these is its scattered and
relatively thin settlement. Density of population varies between
one-third and one-fourth of that in the northern states. This greatly
limits the volume of local business. In the second place, the largely
agricultural character of the country, yielding a traffic predominantly
of low grade, has had a great effect. Much attention being devoted to
cotton, there is little local interchange of freight. The business,
moreover, is largely seasonal in character. In the early days, at
least, practically all of the profits of the carriers had to be made
between September and January. This concentration of interest in the
movement of the cotton crop is now rapidly being supplanted by a much
more general movement of traffic; but the rate system in force is an
outgrowth of the conditions prevalent in the early days.

The entire dependence of this territory for manufactured goods upon
the northeastern states, and for foodstuffs upon the West, has had
a profound effect, we have seen, upon its railway development.[437]
The predominant direction of traffic is rendered quite peculiar by
contrast with trunk line territory. In the North, the principal
railroads lie parallel, east and west; in the South, they are radially
distributed outward from Atlanta like the spokes of a wheel. Imagine a
triangle with its apex at this city,--the focus of all transportation
interests in the South,--and with its other two angles lying at New
York and Chicago respectively. The hollow centre of this triangle, as
appears by the accompanying map, is occupied by the Allegheny mountain
chain. The movement of traffic historically along the western side
of this triangle has been overwhelmingly southward; at one time the
disproportion southbound from western territory being as thirteen to
one.[438] Along the eastern side of this triangle,--that is to say
parallel with the Atlantic seaboard,--the preponderance of tonnage,
by bulk and probably by value as well, has been toward the north. In
this direction cotton in the early days, and latterly lumber, have
moved from southern fields and forests to northeastern markets. In
Virginia-Carolina territory, today, about three-fifths of the loaded
mileage is north bound. The uneven distribution of traffic is still
further complicated by the excess of tonnage eastbound in trunk line
territory along the northern side of our triangle, above mentioned.
This general description explains many of the abnormalities in freight
rates throughout this territory. Bulky staples moving one way, while
manufactured goods, high in value but more concentrated in weight, go
the other, greatly complicate the problem of economical operation.

Another omnipresent complication in the southern states is the
widespread existence of water competition. The situation in the South
in this regard is not unlike that of England. Its entire territory
is threaded with a series of more or less navigable watercourses
which penetrate from the seaboard or the Mississippi river, far into
the interior. Here again is a physical peculiarity of the southern
territory, which historically explains, even if it does not fully
justify, as we shall see, certain peculiarities of its freight rate
system.

[Illustration: MAP SHOWING PRINCIPAL RAILROAD SYSTEMS IN THE SOUTHERN
STATES

[Facing page 382]]

The first general characteristic of the southern system is the
relatively high level of freight rates. Bearing in mind that the
distance from New York to Chicago is practically the same as from
New York to Atlanta, the freight rate, first-class, on the trunk lines
was, in 1900, 75 cents per hundredweight as against $1.14 to Atlanta.
Sixth-class rates then stood to one another as 25 cents and 45 cents
respectively, the relatively high ones being in the South. Reference,
for example, to the table on page 349, will bring out this contrast
at the present time in another way. According to this the rates in
the South are not higher than in the West for the same distance. The
disproportionately high charges in the South, however, occur mainly in
the field of local rates. And it is the local, rather than the through,
charges, which cause the present dissatisfaction. The principal
complaint concerning through rates is that they are made up principally
as the sum of locals based upon Ohio or Mississippi gateways.[439]
Whenever such sums of locals have given place to unbroken through
rates, a large measure of satisfaction to shippers has resulted. And
then, finally, it should be observed that certain peculiarities of
the classification system somewhat increase the relatively high grade
of charges throughout this territory,[440] tending to support the
allegation that rates are unreasonably high.

The so-called basing point system is the second fundamental peculiarity
of southern rate adjustment. It has already been discussed in
connection with local discrimination.[441] This basing point system,
although not absolutely confined to the South, has been more highly
developed here than elsewhere. In principle it is simply this: certain
cities are established as basing points,[442] and rates to all other
places in that neighborhood are made by adding to the through
rate into the basing point, the local from that city to the final
destination. Since local rates in the South, based upon slender local
traffic, are always exceedingly high, this appears to confer a very
great advantage in the matter of charges on the cities thus favored.
The way in which this system is opposed to the long and short haul
principle in law has also been discussed in another connection.[443]
On the face of things it certainly appears unjust that goods should be
transported directly through the place to which they are ultimately to
go; and after being hauled to the basing point with a heavy charge for
that haul, should thereafter be brought back again with the addition of
a second high local rate for the service. And yet that very commonly
occurs.

A number of economic defences for the basing point system have been
urged by the carriers at different times. The most substantial one
is that the basing points, historically, were originally important
trade centres and are still intimately related to the business customs
of the South.[444] These trade centres, it is alleged, were not
made by the railroads: they were in existence before the railroads
were constructed. They are an outgrowth of the agricultural system
of the region. In the West a farmer may take a sample of his grain
to the nearest town and sell the whole crop by that sample. No such
transaction is possible with cotton and tobacco. Each shipment must
be sampled, weighed and classified on its own merits. Such grading
cannot take place at local stations. Convenient commercial centres
are, therefore, a necessity, serving for the proper concentration of
products. These trade centres, moreover, arising in connection with the
sale of staple products of the soil, became natural distributing or
jobbing points. The planters naturally buy in the places to which they
resort to sell their crops, often employing the same merchant.[445]
As such natural trading centres, these southern towns are forced to
compete with the older established distributing cities up north. At
this point a second defence of the basing point system arises.[446]
It is urged that a decentralization of jobbing trade in a sparsely
settled or newly developed territory can be effected only by means of
encouragement through peculiarly favorable rates to offset the strength
of the remoter great cities. The plausibility of this defence, however,
is considerably weakened by the fact that under the peculiar southern
classification system, carload ratings are largely absent.[447]
Therefore, as it appears, the local jobber in the South competes under
a disability as compared with New York and Cincinnati which is no
less at the basing point than in the small town. Still a third, and
probably a valid, defense of this violation of the distance principle
by the use of basing points, is the paucity of local business. It is
alleged that in the North the competitive points are so near together,
and the volume of competitive business is so large, that it pays to
reduce the charges at immediate points. In the South, on the other
hand, competitive points are so far apart and, relatively speaking, the
local tonnage is so small, that the adoption of such a policy would be
ruinous.[448]

The most prominent defence of the basing point system brought forward
at all times, and greatly emphasized in proceedings before the
Interstate Commerce Commission, is the widespread existence of water
competition. Carriers allege that in order to secure any portion
of the traffic at many points, low rates must be offered, quite
irrespective of the charges to intermediate inland stations. They
affirm that to lower all rates to this "compelled" competitive level,
would deplete their revenues and lead to bankruptcy. This has been
the main excuse for the persistent violation of the long and short
haul clause by carriers in the southern states down to the present
time. The evidence goes to show, however, that on the lesser streams,
at least, the steamers are so small, their service so irregular, and
the incidental risk of damage, cost of insurance and other expenses
of transhipment are so great, that the railroads practically control
the business.[449] Furthermore, in many places it appears that the
water lines were either owned by the railroads or appeared in league
with them; or else that a division of the business had been effected
by which the little river steamers were accorded a certain proportion
of the low grade freight.[450] Such facts have been established before
the Interstate Commerce Commission, for example, in the so-called
Dawson case concerning the Chattahoochee river; on the Ocmulgee at
Macon in the Griffin and Hawkinsville cases; at Montgomery in the Troy
case; and on the St. Johns river at Palatka, Florida, in the Hampton
case. A competent witness has declared in fact that there is "no more
real water competition at many of these places than in the Rocky
Mountains."[451] Probably the potentiality of competition is somewhat
greater today with improvement of the larger navigable waterways.
It seems to be real at Chattanooga since the construction of the
Mussel Shoals canal; but that it has in late years been effective at
Nashville seems open to question. The practical disappearance of the
Mississippi river traffic also points to the decline in importance of
the great rivers as rate regulators, except in respect of the carriage
of ore, lumber, and coal. Whether the National Waterways movement
will ever succeed in its revival is, it seems to me, open to serious
question.[452]

Analyzing these several grounds of defence, a distinction should be
made at the start between three varieties of basing point. This is not
clearly brought out in the numerous decisions upon rates in southern
territory. In the first group are the old natural trading centres,
usually once blessed with effective competition by water, even if at
the present this is of limited character. Savannah and Montgomery,
Alabama, are of this type. Then, secondly, there are the great railroad
centres like Atlanta and Birmingham. These are modern creations without
water competition of any sort, although the rivalry of railroads
with one another is exceedingly keen. Until recently, moreover, this
competition has been over such widely divergent routes that agreement
has been difficult and consolidation impossible.[453] And, then, in the
third place, there are the basing points which seem to be absolutely
artificial. A number of these are to be found in the southeastern part
of Georgia, such as Cordele, Americus, Albany, etc. In these cases the
only criterion which seems to have been adopted is that the place shall
have attained sufficient importance to enable it to compel some carrier
to give it special privileges in the matter of rates. As was tersely
stated in a leading case--Cordele at that time not having been made a
basing point:[454]

    "Cordele is not treated by defendant roads as a competitive
    point, because it is not a sufficiently large distributing
    point, and it is not such a distributing point because it is
    not treated as a competitive point. Hence it appears that the
    roads seek to excuse their wrong-doing by offering the results
    of the wrong in justification. Judged by its results, this
    system of rate making is at variance with all the equality
    provisions of the act to regulate commerce."

The subsequent experience in this last case is significant. One of the
carriers at Cordele having afterwards discovered the advantage to
itself in making this town a basing point, all the other railroads were
compelled to acquiesce. Such a thing has happened frequently throughout
the South; with the result that many places have been given strongly
preferential rates for no other reason than the arbitrary decision of
some one of the carriers. Even the railroads themselves recognize this
fact. They often deplore the necessity for reducing rates because of
action by competitors at some particular point; but no option remains.
It is with reference to this third class of purely artificial basing
points that the most dissatisfaction among shippers arises.

The awkward and unreasonable situation is well exemplified in a very
recent case,--important, also, because it was the first to be decided
by the Interstate Commerce Commission under its new and enlarged
powers. The location of Ashburn in southeastern Georgia, a county
seat with a population of about 2,200, is shown with references to
surrounding places by the map on opposite page.[455] It lies in the
centre of an irregular quadrilateral, the corners of which are occupied
by Cordele, Albany, Tifton and Fitzgerald. It has no commercial
standing at present, but, being as large at least as Tifton, aspires
to become a distributing centre in its immediate neighborhood. Yet
from every direction its rates are made by a combination upon these
surrounding towns. The disparity is illustrated by the charges from
New York, which are $1.42 per hundredweight, first class, as compared
with $1.17 to all the neighboring places. Examination of the history
of these favored towns shows, however, that they have acquired their
favored status as basing points, neither because they were originally
important trading centres, nor because they enjoyed water competition.
Two of them, actually, are as remote from streams as is Ashburn. The
fact is that the competition of western and eastern dealers with one
another, backed in each case by local railroads having routes or
affiliations either northeast or northwest, has brought about their
establishment as basing points. Neither is Ashburn today more of a
local point than either Tifton or Cordele when they were first granted
lower rates. As one examines further, it appears that this keenness
of trade competition between East and West,--that is to say, from
Baltimore and New York as against Cincinnati and Chicago, etc.,--which
has brought Atlanta into prominence and made it finally the key to
the entire southern rate arch,[456] has in the same manner led to the
special favors granted to one town as against another.

[Illustration]

In this case the Interstate Commerce Commission ordered an
equalization between all five points. It is to be hoped that this
special case may be a point of departure for a general reform in the
immediate future of the entire iniquitous scheme of local favoritism
which has too long been allowed to exist.

The entire artificiality and even at times iniquity of the basing point
system is admitted in the following brief for the railways in the
Alabama Midland case before the Supreme Court of the United States.
"There may be," it is conceded, "a few mere 'railroad junctions' in
the South, which, owing to the ignorance or corruption of certain
railroad officials, have been arbitrarily 'called' competitive points
and which 'receive' certain arbitrary 'concessions' in rates to which
they are not justly entitled. There may be also a few strictly local
stations in the South, which are not even 'railroad junctions,' where
arbitrary and unfair 'concessions' in rates have been made by certain
corrupt railroad officials, to enhance the value of property owned at
such stations by said officials, or by their relatives or friends ...
[but they are] the offspring of ignorance or corruption and should not
be recognized by the courts." This artificiality is also proven by the
difference of practice which exists on the various southern roads.[457]
The worst offender and most defiant opponent of the government from the
inception of Federal regulation, has been the Louisville & Nashville
Railroad. The Southern Railway introduced the long and short haul
principle in the main on its through line to Atlanta long ago. On the
Atlantic Coast Line few violations of the distance principle exist,
and the condition is improving. No basing points whatever exist in
South Carolina; and the state railroad commissions in general are
working for betterment. Neither the Chesapeake & Ohio nor the Norfolk &
Western, operating alike in sparsely settled regions, find it necessary
to violate the distance principle. One of the curses of the scheme,
however, is that irregularity of one carrier may compel its neighbors
to adopt a policy which they recognize as unjust. Only by compulsion
applied to all alike can a just solution be had.

A determined effort was made in 1880 by the carriers themselves to
apply the trunk line rate system, based upon the distance principle,
to the southern states.[458] A thoroughgoing scientific readjustment
was proposed. The situation is significantly described in the following
extract from this report:

    "Your committee entered upon the performance of their duty
    entertaining the sentiment that experience and observation have
    rendered generally potent among those in charge of the revenue
    interest of transportation lines, namely, the necessity for
    more intelligent and defensible methods of making competitive
    freight rates than the following of figures, descending to
    us from tariffs named on arbitrary bases or conditions now
    obsolete, or by the assumption of differences between centres
    of trade now changed or junction points now no longer such,
    or other methods for which there are no reasons capable of
    satisfactory explanation."

Representatives of most of the important lines subscribed to this
plan; but it fell through at the last because of the opposition of
others, selfishly viewing their own particular interests rather than
the general welfare of all. It is clear that while minor improvements
may be introduced, no widespread reform can be effected without the
interposition of Federal authority. It is to be hoped that this
exercise of authority under the larger powers now conferred by Congress
since 1906 may not long be withheld.

A third and essentially different problem respecting southern rates
concerns the discrimination against western cities in favor of those
along the Atlantic seaboard. This has been for years before the
Interstate Commerce Commission in the Cincinnati and Chicago Freight
Bureau cases.[459] The amount of this discrimination appears in
the fact that at the time of the original complaint, the rate from
Cincinnati to Atlanta was ninety-four per cent. of the rate from
New York to the same point; although the distance from Cincinnati
was scarcely more than half of that from New York. It appears as if
this difference were largely the result of keen water competition
by coastwise steamers,--a competition which affects rates for a
considerable distance inland all along the coast as far as New Orleans.
Where such water competition is absent, there seems to be a general
arrangement as between East and West which is standardized by distance.
Atlanta gives the keynote; and all rates from outside southern
territory change with its fluctuations. The disability against western
cities may be expressed, therefore, in another way, by the fact that
New York, although so much farther north than Baltimore,--supposed
theoretically to be kept on a par with Louisville as to rates,--reaches
Atlanta on lower charges than are made to Cincinnati.

Fortunately an attempt at improvement of the southern rate system
will be greatly aided by the wonderful industrial revival which has
been under way during the last decade. The growth of population, and
especially the development of manufactures, may render it possible for
the carriers to endure the hardship which any traffic readjustment
always entails. The growth of manufactures, measuring in a way the
degree to which the South is learning to supply its own needs,
appears in the fact that in 1907 it converted one-fifth of its cotton
production into cloth, and reduced from its own ores one-half of its
consumption of pig iron in its own local factories. Furniture shipments
to the South were once large. At the present time High Point, North
Carolina, is second only to Grand Rapids in this line of manufacture.
Every new mill and mercantile establishment which springs up, is bound
to help to a degree in the transition from a mediaeval scheme of rate
making to a more defensible system.

The Texas "common point" system affords a valuable illustration of
the influence of competitive forces in trade in bringing about an
equalization of transportation charges over a wide area.[460] It also
shows the danger of localization of interest through the exercise of
piecemeal control by state commissions rather than the enforcement of
broad-gauge regulation by the Federal government. The settlement of
the great area of Texas naturally first took place by extension inland
from the Gulf coast. All supplies came by sea from the north. Freight
schedules were scaled from the seaboard according to distance, more or
less, in competition with stage and wagon. Gradually, however, with
the growth of St. Louis as a rival centre of distribution, railroads
serving that city penetrated directly from the northeast. The St.
Louis jobbers were at once brought into keen rivalry with merchants
in North Atlantic states, served by coastwise steamship lines. This
competition beginning at the points of contact of the two different
sets of railroads, gradually extended all over the state. St. Louis
lines, acting for local jobbers whose goods came from New York, might
not charge more at any point in the aggregate than the total rate from
the same initial city which applied by way of the Gulf steamers. Nor
could the railroads in from the Gulf ask more for both steamer and
rail carriage than the entire double charge from New York around by
way of St. Louis. The natural stronghold of the Gulf lines was in the
centre and the south; northern Texas was more naturally tributary to
St. Louis; but gradually a compromise was effected whereby equality of
rates was accorded either from New York or St. Louis to all stations
throughout the state. Thus arose the so-called Texas Common Point
Territory, to all parts of which Kansas City, Chicago, and finally all
other distant cities were admitted on even terms.

Another feature of the Texas rate adjustment is suggestive.

A vast territory, uniform in products and needs, might either be
served by a few great distributing centres or by a larger number
of smaller ones, each forming the natural focus of trade within a
given district. Believing the latter arrangement to be better suited
to local conditions, the Texas Railway Commission has arbitrarily
prescribed such intrastate tariffs as to foster the development of
a number of such jobbing points or mercantile centres. Local rates,
more or less proportioned according to distance, are graded up to
a maximum, all based principally upon the needs of the principal
city, Houston, as served by its seaport, Galveston. The significant
feature of these Texas local rates, however, is the fact that beyond a
fixed maximum,--say 245 miles on classified tonnage, or 160 miles on
cotton,--no further increase of rate occurs with extension of the haul.
That is to say, beyond a certain radius fixed by the maximum rate,
distributing centres are placed upon an entire parity with one another.
Fort Worth, for example, within a distance of about two hundred miles,
naturally has an advantage over all other competing centres, more
distantly located; but outside of this zone, naturally tributary to
it as a provincial trade centre, all others such as Dallas, Waco,
or San Antonio enjoy equal opportunity. In only one respect is the
distance principle violated: namely, in the preferential rates from
the north to Houston and Galveston as compared with the higher charges
to intermediate Texas points. These primary centres are encouraged by
standing in a class by themselves.

This theoretically admirable Texas system is, however, unstable in
several regards. It is artificial in that it is primarily adjusted
to the needs of the state, without reference to the rights of other
places lying beyond its borders.[461] The railroads naturally desire to
contract the common point territory; the forces of trade rivalry seek
to enlarge it. The growth of middle western cities and manufactures,
supplying Texas from their own domestic plants rather than merely
redistributing goods manufactured in the East, also tends to modify
the scheme. Whether the common point system, therefore, can long
withstand the force of these disintegrating influences remains to be
seen. The conditions are not compact and homogeneous as they are in New
England, which enjoys a similar flat rate system. And it may well be
that ambitious cities along the northwestern border of the state, like
Fort Worth, may finally succeed in forcing concessions in rates from
the Middle West on the ground of their relative nearness as compared
with competitors further south. On the other hand, distributing centres
farthest away from the main sources of supply, like San Antonio, would
naturally resist any infraction of the rule of parity. And then, again,
it is becoming apparent that the decentralization of distribution
through a number of second-rate jobbing towns rather than from one
preëminent centre, is hindering the growth of a metropolis, able to
compete on even terms in high grade products with the older centres of
the East. Few dealers in Texas cities are able to purchase dry goods or
boots and shoes in carload lots, that is to say, on the lowest terms as
concerns freight rates; and the combination of shipments of different
goods to make up a miscellaneous carload rate, thus overcoming this
disadvantage, is open to serious objection.[462] All told, therefore,
the experience of Texas is well worth attentive consideration, as a
study in the intimate relationship between trade and transportation.
The sharpness of contrast between such a common point scheme and the
basing point system of the other southern states, brings the relative
advantages and defects of each into strong relief.

       *       *       *       *       *

Transcontinental freight rates have been brought into prominence of
late in direct connection with the wonderful growth of population
and trade on the Pacific slope.[463] Our territorial possessions in
the Pacific and the development of Oriental trade, together with the
general interest in the Panama Canal since 1900, have all conspired to
direct attention to this complicated problem. The first point to notice
is the relatively high level of rates, averaging very much more per
mile than anywhere else in the United States. The following table of
rates in 1905 is significant:

  ------+---------------------------------------+------------------
  Miles |                                       |      Class
  ------+---------------------------------------+---------+--------
        |              From                     |    1    |    5
  ------+---------------------------------------+---------+--------
   912  | Chicago to New York                   |  $0.75  |  $0.30
   912  | Chicago to New Orleans                |   1.10  |   0.47
  2328  | Chicago to San Francisco              |   3.00  |   1.65
  ------+---------------------------------------+---------+--------

These distance tariffs, however, as already explained in our chapter
on Classification, need to be supplemented by additional details in
order to bring into relief the relative amount of the charge. So far
as these figures go, it will be observed that for a distance about two
and one-half times as great as from Chicago to New York or the Gulf of
Mexico, the rates to San Francisco are very much higher in proportion.

The unrest among shippers in far western territory is not due to
the relatively high tariffs in force. It arises primarily from the
nullification of the distance principle in rates. And, in the second
place, it hinges upon the relation between carload ratings and the
development of local jobbing business. The primary factor in the
making of rates to the coast has always been the existence of water
competition, either by way of Cape Horn or the Isthmus of Panama.[464]
The facilities for cheap transportation over these routes have
compelled the all-rail lines to make low through rates which would
enable them to secure a portion of the business. Inasmuch, also, as
most of the competition of the steamships over these very long routes
involves shipments in large quantity, competition with the railroads
has mainly been felt in making rates by the carload. The result has
been the existence for many years of a special transcontinental tariff,
more or less uniformly adopted by all the roads, which consists in the
main of commodity rates for carload shipments, the scale of these rates
being sufficiently low to meet steamship competition as above described.

This simple situation has been complicated by the fact that all of the
transcontinental lines, except the Southern Pacific with its eastern
terminus at New Orleans, have had a particular interest in building up
both manufacturing and jobbing business at their eastern terminals at
Chicago or Missouri river points. For such a policy enabled them to
secure the entire charge for the transportation of commodities to the
Pacific coast, without the necessity of a pro-rating division, as when
goods are hauled from the Atlantic seaboard cities. The situation then
resolved itself practically into a competition of markets. Chicago, St.
Louis, and St. Paul were pitted against New York, Philadelphia, and
other Atlantic ports in rivalry for the trade of the Pacific coast. In
order to benefit the cities in which they had a peculiar interest, the
all-rail lines, therefore, gradually introduced what is known as the
system of "postage-stamp rates."[465] That is to say, they gradually
extended to one city after another east of the Mississippi river, the
same rates to the Pacific coast as were enjoyed by the seaboard cities.
As a consequence, for some years every city east of the Mississippi
has been able to ship goods to San Francisco at the same rate which is
paid from Boston and New York, which may be more than a thousand miles
farther away.

This system is justified in theory, even for rates from Chicago and
St. Louis, as due to water competition; and it has been said that
commodities are sometimes shipped from as far inland as this to the
Atlantic seaboard, and thence to San Francisco by water. The latest
phase of the controversy reveals the weakness of this argument. The
inland cities, such as Chicago and St. Louis, having been accorded the
same rate to San Francisco as New York and Philadelphia, demand lower
rates than the Atlantic cities in proportion to their relative nearness
to San Francisco. In other words, they demand that the rates, instead
of being made upon the "postage-stamp basis"--absolutely the same from
all cities, however remote--shall be graded. This would give Chicago,
St. Louis, and St. Paul an advantage in laying down manufactures or
in distributing products secondarily, in competition with the older
centres at the East. To this policy the jobbing interests of the
Pacific coast strenuously object. From their point of view, any grading
of rates will enable the western cities to compete with them directly
in local distributive business. They do not object to the low rates
from the eastern seaboard, nor would it avail to do so because the
natural conditions of water competition are beyond control. Moreover,
the low rates from Atlantic points are all, as above said, on carload
lots, and such low carload rates operate distinctly to the advantage
of the Pacific coast jobber, enabling him to obtain goods in wholesale
lots, and then to break bulk in order to distribute them up and down
the coast.

The intimate relationship between the carload question and the grading
of rates to interior centres, is plain from the foregoing paragraph.
Viewed by itself alone, the carload question is not dissimilar to
that presented in the southern states. Rivalry between jobbers in the
East and provincial middlemen in a little developed territory is in
evidence in either case. The St. Louis Business Men's League case best
exemplifies this issue.[466]

Trade interests in this interior city wished to abolish all
distinction between carload and less-than-carload lots, for the patent
purpose of enabling them to sell direct throughout the Pacific coast
territory in competition with San Francisco jobbers. The latter, on
the other hand, demanded that all less-than-carload ratings should be
abolished on transcontinental shipments; so that they might purchase
their goods by the carload and resell them in parcels. The Commission,
after fully weighing the evidence, decided that, so far as carload
differentials were concerned, the existing scheme in 1902 was not
abnormal as compared with other portions of the country. On the other
aspects of the matter, such as the relativity of rates to Rocky
mountain and Pacific terminal points, no ruling was made. But the
dissenting opinion upon this point is significant, as we shall see, in
that it put forth the suggestion of a scheme of rates graded according
to distance,--a plan ten years later to be enforced by the Commission
under its amplified powers at law.

The welfare of the entire Rocky mountain belt of population, and
particularly its commercial centres, constitutes a second phase of
the problem of transcontinental rates.[467] The whole chain of cities
from Spokane on the north to the Mexican border has been long and
vitally interested in this matter. Rates to these cities, elsewhere
described,[468] as well as from these cities out in either direction,
are very much higher than the rates for longer distances through
them and beyond. Thus, for instance, in the case of Pueblo, it has
been shown that bar iron was hauled 2,400 miles from Chicago to San
Francisco, for fifty cents per one hundred pounds, and rails were
hauled the same distance for sixty cents; while for the haul from
Pueblo, Colorado, to San Francisco, only 1,500 miles, the rate on both
commodities was $1.60. Cotton piece goods were shipped from Boston to
Omaha for fifty-two cents per one hundred pounds, with the added rate
on to Denver of $1.25, giving an aggregate of $1.77. In face of this,
the rate through Denver to California is only one dollar. The railways'
defence for this situation was that the low through rates were
compelled by water competition. But it is certainly difficult on this
ground to justify lower rates to Missouri river points than to Denver
or Salt Lake City. In other words, as urged in our chapter on local
discrimination,[469] having once recognized the principle of blanket
rates as far west as Kansas City, there seemed to be no reason why the
limit should not be pushed further west. All of these allied cases,
however, were left unsettled for years, owing to the lack of power on
the part of the Interstate Commerce Commission to enforce its decisions
under the law as then interpreted. With the new legislation since 1906,
as will be shown,[470] a permanent and just solution of the matter is
promised at last.

The relations between the Canadian railways and the transcontinental
lines in the United States were for many years unsatisfactory; and were
oftentimes a source of serious disturbance in the matter of rates. The
Canadian Pacific claimed, and was in fact accorded for some years, a
differential or a lower rate, in order to offset its disability in the
matter of distance, extra-territoriality, etc. Thus, for instance, in
1888 the Canadian Pacific was allowed to quote rates thirty cents per
one hundred pounds below those by the standard lines. The rates were
afterwards increased on first-class traffic. The other roads refused,
after a time, to continue differentials at this figure, and after
a year the differential was reduced to twenty-eight cents from the
Atlantic seaboard. The question was bitterly contested after that until
1892, when all agreements were abandoned.

Since that time the Canadian Pacific has acted independently, taking,
as a rule, rates about ten per cent. less than its competitors in
American territory. The whole question was submitted to arbitration
in 1898, and by a divided opinion two out of three of the arbitrators
decided that the Canadian Pacific Railway was not, nor should it
be, entitled to a differential under the rates made by the United
States lines.[471] The intricacy of the question is indicated by the
non-concurrence in this conclusion of so well recognized an authority
as J. W. Midgley. The railroads concerned having all agreed to
acquiesce in this decision, the situation has been far more harmonious
in this respect than for many years previous.

       *       *       *       *       *

A difficulty often arises in connection with the interruption of
a shipment of goods in order to subject it to some simple process
of manufacture. Shall the entire journey from producer to consumer
be considered as a unit in determination of the rate; or shall the
two parts, before and after the change of form by manufacture, be
considered as separate and distinct in this regard? This problem arises
in connection with the so-called "milling-in-transit" system for
grain.[472] Logs likewise may be stopped at some convenient point en
route for cutting into lumber.[473] Cattle or hogs must sometimes be
stopped on the way to market in order to fatten or otherwise prepare
them for sale;[474] structural iron may be halted for the purpose of
fitting, shearing, or punching;[475] transit privileges on wool or
concentration points for other commodities may be involved;[476] or
other goods may be substituted at an intermediate point.[477] And then,
finally, there are the so-called "floating cotton" cases.[478] The
principle at bottom is practically the same in all of these sets of
cases. It may be worth while briefly to consider two of them.

The "milling in transit" system is simply that of according to grain
which is unloaded and milled at an intermediate point, the low through
rate from the point of origin to that of consumption. Thus, for
instance, wheat grown in North Dakota may be unloaded and ground into
flour at Minneapolis and thence shipped to New York at the through
rate from its point of origin to New York. Oftentimes a very small
charge, as, for instance, one cent per one hundred pounds, is made for
the privilege. This system prevails throughout the southern states
also. Grain is brought, for instance, from Kansas City to Nashville or
Birmingham, milled there, and shipped farther south for consumption.
The rate charged is based upon the entire haul from Kansas City to
the local point where the flour is consumed. Obviously this system
stimulates very greatly the development of the milling industry at
intermediate points. It is opposed correspondingly by the large cities
which otherwise enjoy special privileges in the matter of low rates.

Precisely the same principle is involved in what are known as "floating
cotton" rates. In this case the system has developed of permitting
cotton to be unloaded in transit and compressed at an intermediate
point, it being thereafter reshipped to the point of destination at a
through rate from its point of origin. Thus, for example, cotton may be
hauled twenty to thirty miles to one of the larger towns. There it is
unloaded, sorted and compressed, reloaded, and sent on as if it had not
been interfered with at all. Obviously one rate for the entire shipment
is much less than the local rate into the town--which is always very
high--plus a second rate from that town on to destination. The system
in respect to cotton has developed even further than that of milling
in transit of grain; for in the latter case the grain must be unloaded
at some point on the line to destination; whereas in the case of
cotton it may, under rulings of the Interstate Commerce Commission,
be actually hauled _away_ from its ultimate destination a number of
miles and then reshipped back over the same line though at a lower rate
than it could otherwise have enjoyed. Thus, in a leading case decided
in 1899 it was held by the Interstate Commerce Commission that cotton
could be hauled from Gattman, Mississippi, forty-one miles northwest to
Tupelo, compressed there, and then hauled back again through Gattman
and Birmingham to New Orleans.

Important centres, such as Memphis, which formerly enjoyed almost a
monopoly of the compressing business, have strenuously opposed the
development of this system. On the other hand, it offers a distinct
advantage to the grower, because in place of selling the cotton
through cotton factors at Memphis or other centres, it may be sorted
and compressed at local stations. By this means much expense in the
matter of drayage, handling and commissions is saved. This system is
particularly advantageous because it tends to break up the pernicious
basing point system, which tends to centralize all business at a few
important points in the southern states. Almost a complete revolution
in the matter of handling cotton has been effected during the last
few years by the growth of this practice. Not only has the floating
cotton system developed further than that of milling in transit by
according the right of shipping even backward, away from the ultimate
destination; it has also permitted of liberality in the handling of the
product itself. It has been held that it is not even necessary for the
same cotton to be reshipped from the point of compression. A carload
started from the initial point for Boston, for example, may never
reach there, other cotton being substituted for it. The destination
of the car may be, and frequently is, changed. A few dozen grades
of cotton being on the market, the original shipment into the point
of compression may be entirely resorted and distributed to a dozen
different points. Even the ownership of the cotton may change while it
is in transit. Nevertheless, the system has been held as valid under
the law, and its beneficial effects during the last few years have
been observable, especially in the southern states. Of late the danger
lurking in these systems of gross personal favoritism, have led to
their careful examination in a number of cases. What the final policy
regarding them is to be, cannot at this writing be affirmed.[479]

       *       *       *       *       *

A problem of considerable difficulty, involving the relative shares
of the various seaports in American export business, has occupied the
attention of experts for more than a generation; and at this present
writing, although before the Interstate Commerce Commission for the
third time, seems to be almost as far from a satisfactory solution as
ever.[480] It originated at the time of the rate wars in 1876. The
first agreement between all the trunk lines concerning it was entered
into in the following year. By this an attempt was made to equalize
the aggregate cost of ocean and rail transportation between competing
points in the West and all foreign and domestic points reached through
Baltimore, Philadelphia, New York, and Boston. Under this agreement,
Baltimore was allowed a rate of three cents below the rate from Chicago
to New York; Philadelphia enjoyed a concession of two cents; while
Boston had its rate fixed at a certain percentage of the Chicago-New
York figure. There was considerable dissatisfaction expressed at
various times with these differentials, and the whole matter was
submitted to arbitration in 1882. The commercial interests of New York,
as well as of the railroads centering in that city, have complained
bitterly that these differences, once adjusted upon a very much higher
scale of rates than at present, have become increasingly burdensome
now that the Chicago-New York rate is perhaps not more than a third
or a quarter of what it formerly was, while the differential has
remained at a fixed figure. The recent decline of the export commerce
of New York is, in fact, ascribed in a large measure to the operation
of these differentials; and a leading case before the Interstate
Commerce Commission, instituted by the Produce Exchange of New York,
endeavored to secure their abolition. The Commission held, however,
that the differentials--recognized by the Joint Traffic Association
of 1896--were legitimately based upon competitive relations of the
carriers; and that consequently no unlawful preference or advantage had
been accorded to the cities competing with New York for export business.

The result of pressure for a larger division of export business,
particularly from Boston, led, in 1899, to a reduction by one-half of
the differentials. The matter was finally submitted for arbitration
to the Interstate Commerce Commission, which very fully examined
the question and rendered a decision in 1905.[481] By this decision
rates _via_ Philadelphia on traffic for export were to be one cent
less than by way of New York, while to Baltimore they were to be two
cents less. This arrangement still left Boston subject to its former
substantial disability. It was contended that the original purpose
of the differentials, namely, equilibration of rates from western
centres of production through the various ports to Liverpool, had been
practically nullified. For a time the phenomenal development of the
Gulf exports diverted attention, forcing all the Atlantic seaports to
make common cause against their southern rivals.[482] But the passing
of this danger once more revived interest in the struggle between the
Atlantic cities. Opportunity for the collection of full data under
the strengthened Federal law in 1906, made it possible to reopen the
case in 1912 before the Interstate Commerce Commission. But, in the
meantime, both in 1909 and 1911, after an interval of twenty years,
trunk line rate wars threatened to break out for the protection of
Boston against its rivals. The latest decision by the Commission,
just handed down,[483] still fails to satisfy Boston. No differential
rate on export grain on the ground of distance as against New York is
conceded; but those already in effect at Philadelphia and Baltimore
are sanctioned. What the effect will be, remains for the future to
determine.

       *       *       *       *       *

The principle involved in the so-called import and export cases[484] is
that of the reasonableness of charging lower rates on goods originally
shipped from or destined to domestic points, than are charged for
similar goods, over the same lines and for the same distances, when
brought from or destined to foreign countries. Thus, for instance, in
the case of cotton cloth shipped by way of Pacific ports to the Orient,
the practice is not uncommon of charging a less rate to San Francisco
for the transportation of goods ultimately destined for export, than is
charged on similar goods which are to be unloaded for consumption at
San Francisco or other California points. Or, reversing the case, this
question touches the reasonableness of transporting goods from New York
to Chicago at a lower rate, if they have been brought in from Europe,
than is charged for similar service in the case of goods that have
originated at or near New York. Cases of this description have become
increasingly frequent during the last twenty years. The first and most
important one, upon which both the Interstate Commerce Commission and
the United States Supreme Court have passed, originated in proceedings
before the Interstate Commerce Commission, brought by the New York
Board of Trade of Transportation against the Pennsylvania and other
railroad companies. The case practically raised the general question
whether, in the carriage of goods from American seaports, carriers
subject to the act could lawfully charge less for the transportation of
imported than of domestic traffic of like kind to the same destination.
The Commission, after careful examination, held that such differences
in rates constituted discrimination as against the domestic shipper.
According to its view, the circumstances and conditions pertaining to
the carriage of freight from a foreign port to the United States could
not be considered as creating the dissimilarity of conditions which
alone would justify a different rate for like service in the two cases.
The Commission held that:

    "One paramount purpose of the act to regulate commerce,
    manifest in all its conditions, is to give to all dealers and
    shippers the same rates for similar services rendered by the
    carrier in transporting similar freight over its line. Now, it
    is apparent from the evidence in this case that many American
    manufacturers, dealers, and localities, in almost every line
    of manufacture and business, are the competitors of foreign
    manufacturers, dealers, and localities for supplying the
    wants of American consumers at interior places in the United
    States, and that under domestic bills of lading they seek to
    require from American carriers like service as their foreign
    competitors.... The act to regulate commerce secures them this
    right. To deprive them of it by any course of transportation
    business or device is to violate the statute."

The Commission thereupon ordered the carriers to cease and desist
from making such discrimination. This order, while obeyed by a number
of carriers, was disregarded by the Texas and Pacific Railway, which
operated an import line from New Orleans to San Francisco. Upon
application by the Commission this case was carried to the Supreme
Court of the United States for final adjudication. The Supreme
Court decided that the interpretation of the law by the Commission
was defective, although three members of the court, including the
Chief Justice, dissented from this opinion. As an illustration of
the discrimination which existed in this case it appeared that the
domestic rate on books, buttons, carpets, etc., from New Orleans to San
Francisco was $2.88 per one hundred pounds, while the total through
charge on the same articles from Liverpool to San Francisco was only
$1.07. The Supreme Court distinctly refrained from an opinion as to the
reasonableness of these rates, and contented itself with passing upon
the propriety of any difference in rates whatever. It held that the
contention of the railroads was sound, namely, that all circumstances
and conditions, whether within the United States or having regard for
ocean rates and foreign competitive conditions, must be considered. In
other words, they recognized the validity of the claim of the railroads
that this import traffic must be taken at an extremely low rate if at
all, since otherwise the goods would go by water around Cape Horn,
or by another route. On the basis of such reasoning it would appear
that any contribution from low import rates to the fixed charges of
the railroad would enable that road to transport its domestic traffic
at a lower rate than it otherwise might. What, however, the majority
of the court did not add, although it was developed by the dissenting
justices, was the fact that these conditions might exclude domestic
purchasers entirely from certain markets, giving them over to importers
who could control the market by reason of the low rates accorded. Since
this decision in 1896 the railroads have still further developed this
system of discrimination. The only safeguard for the domestic producer
must lie, obviously, in some decision by a competent tribunal as to
the amount of such differences which may reasonably exist. The Supreme
Court has upheld their validity as a system, but it still remains for
the amount of such difference which may be deemed reasonable, to be
determined.

Identical in principle with the above described case, although
presenting reversed conditions, are the so-called export rate cases.
These have to do mainly with the rates charged on products for domestic
consumption as against like products for export. As an illustration
of the extent of such differences, it was clearly shown before the
Industrial Commission that at times the freight rate on wheat from
Kansas City to Galveston was twenty-seven cents per one hundred pounds
if for domestic consumption, while the proportion of an export rate
for a similar service was ten cents.[485] The rate on wheat from the
Mississippi river to New York for domestic consumption was at times
twenty or twenty-one cents per one hundred pounds, while for the same
service when the goods were to be exported, the rate would be thirteen
cents per one hundred pounds. This system of stimulating foreign
business by discriminatingly low rates seems to have attained large
proportions only since 1897. The Interstate Commerce Commission took
cognizance of the system in a decision rendered in 1899.[486] It was
enabled to do so by virtue of the Import Rate decision above cited,
whereby the United States Supreme Court authorized it to consider not
only circumstances and conditions within the United States, but also
those relating to ocean transport and foreign competition.

The railroads justify their action on the ground that only by making
such concessions in export rates could they lay down grain in foreign
markets in competition with other parts of the world. On the other
hand, it was not made clear why such competition from foreign markets
had become any more acute in the last few years than prior to that
time. There appears to be much force in the argument of many shippers,
and also of some railroad men, that this anomalous condition of rates
was due, not so much to the keenness of foreign competition, as to the
rivalry among the American carriers themselves. In other words, it
was said that the competition between the Gulf ports and the Atlantic
ports was responsible for the abnormally low rates on export business.
In line with this argument would seem to be the fact that it is the
rates upon wheat and not upon flour for export, which have decreased
more than in proportion to the decrease upon similar commodities for
domestic consumption. The passing of the acutest phase of competition
from the Gulf ports since 1906, has rendered these questions of lesser
interest of late years. They may at any time be revived, but seem
unlikely to regain the importance which they formerly assumed.

FOOTNOTES:

[436] Among the best references on the subject are the following:
McPherson, Railway Freight Rates, pp. 85-92, especially on the
Virginia-Carolina cities; Rep. U. S. Internal Commerce, 1876, App., pp.
1-20; U. S. Senate (Elkins) Committee Hearings, 1905, Digest, App.,
III. The principal I.C.C. cases are as follows: 1891. Social Circle;
4 I.C.C. Rep., 744.--1892. Georgia R. R. Com.; 5 _Idem_, 324.--1893.
Troy, Ala.; 4 Int. Com. Rep., 348. In Railway Problems.--1894.
Summerville, Ga.; 4 _Idem_, 521.--1894. Cordele, Ala.; 6 I.C.C.
Rep., 343.--1895. Tifton, Ga.; 6 Int. Com. Rep., 343.--1897. Lagrange,
La.; 7 _Idem_, 431.--1897. Griffin, Ga.; 7 _Idem_, 224.--1899. Dawson,
Ga.; 8 _Idem_, 142. In Railway Problems.--1899. Aberdeen, S. C.; 10
I.C.C. Rep., 289.--1899. Wilmington, S. C.; 9 _Idem_, 118.--1900.
Piedmont; 6 Int. Com. Rep., 588.--1900. Hampton, Fla.; 8
_Idem_, 503.--1900. Danville, Va.; 8 _Idem_, 409. In Railway Problems.

[437] Chapter I affords a historical review of railway development in
the United States.

[438] Rep. Internal Commerce, 1876, App., p. 28; Senate (Elkins)
Committee, 1905, Digest, App. III, p. 71.

[439] _Cf._ the Commerce Court case; February session, 1912, No. 40.
Also _cf._ p. 251, _supra_.

[440] Page 311, _supra_.

[441] Pp. 239-252, _supra_.

[442] A list of these on the Louisville and Nashville R. R. is given
in U. S. Senate (Elkins) Committee, 1905, Digest, App. III, pp. 84-93.
There is a distinction between a basing and a common point. The latter
is a competitive junction, to which rates are made on combination of
locals. The basing point enjoys a still further advantage in that it
gets even lower than the combination rates.

[443] Page 474, _infra_.

[444] Senate (Elkins) Committee Hearings, Digest, App. III, pp. 73 and
78.

[445] _Cf._ chap. IV, p. 125, _supra_. Also I.C.C. Opinion, No. 861,
1906.

[446] H. R. Meyer's, Government Regulation of Railroad Rates, pp. 196
and 292-303.

[447] Page 310, chap. IX, _supra_.

[448] Senate (Elkins) Committee, 1905, p. 65: 80 per cent. of net
earnings on the Louisville & Nashville in 1886 were from local business.

[449] _Cf._ pp. 386, 591, 612 and 642, _infra_, for example.

[450] 24 I.C.C. Rep., 228, for Bowling Green, Ky., clearly establishes
such a community of interest between rail and water lines.

[451] Senate Interstate Commerce Committee, Hearings, 1897. Twelfth
Annual Rep. I.C.C., p. 59, well describes the situation.

[452] Compare chap. XX, p. 638, _infra_. Other references on internal
waterways are as follows: 1905. Senate (Elkins) Committee, Digest, App.
IV.--1908. Report Inland Waterways Commission, 2 vols.--1910. Reports
U. S. National Waterways Commission, especially Document 11. Traffic
History of the Mississippi river. _Cf._ also, _Railway Age Gazette_,
June 2 and 30, 1911 and Jan. 12, 1912: Bulletin 21, Bureau of Railway
Economics; and the Bulletins of the U. S. Census.

[453] Compare vol. II, on railroad consolidation in this territory,
since 1900.

[454] 6 I.C.C. Rep., 343.

[455] 23 I.C.C. Rep., 140.

[456] _Cf._ p. 248, _supra_.

[457] Senate (Elkins) Committee, 1905, Digest, App., III p. 93; gives a
list of new basing points created since 1887.

[458] Southern Railway and Steamship Association Proceedings; Meeting
of Aug. 12, 1880.

[459] Fully discussed at pp. 248 _supra_ and 588 _infra_.

[460] McPherson, Railroad Freight Rates, p. 92, is best on this. _Cf._
pp. 127 and 243, _supra_.

[461] _Cf._ chap. XX on the conflict of state and Federal powers.

[462] _Cf._ chap. IX on carload rates as a problem in classification.

[463] This problem is discussed as a form of local discrimination at
p. 245, chap. VII, _supra_, and as a long and short haul question at
p. 610, chap. XIX, _infra_. The voluminous record in the pending Union
Pacific-Southern Pacific Merger case before the U. S. Supreme Court,
No. 820, October term, 1911, is a primary source of material. It is
outlined and examined in detail in our Railway Problems, rev. ed.,
chap. XXII.

[464] Best described in 19 I.C.C. Rep., p. 245; and 21 _Idem_, pp.
345-354, 416-421.

[465] Historically discussed in 9 Int. Com. Rep., p. 318 and 19 I.C.C.
Rep., p. 238 with map; both reprinted in our Railway Problems; and 21
_Idem_, pp. 352 and 418.

[466] 9 Int. Com. Rep., p. 318; reprinted in our Railway Problems,
chap. XVII.

[467] 19 I.C.C. Rep., p. 238 with map, reprinted in our Railway
Problems, voicing the complaint of the Nevada Railroad Commission, is
thoroughly typical. The leading Kindel cases are in 8 I.C.C. Rep., p.
608; 9 _Idem_, p. 606 and 11 _Idem_, p. 495 (with a highly suggestive
map); the San Bernardino cases are in 4 _Idem_, p. 104; and 9 _Idem_,
p. 42; and for Salt Lake City, 19 _Idem_, p. 218. _Cf._ also University
of Colorado, Economic Studies, Dec. 1909.

[468] Page 610 _infra_.

[469] Page 342, _supra_.

[470] Chapter XIX, _infra_.

[471] Board of Arbitration on Question of Canadian Pacific
Differentials Proceedings and Decision, Oct. 12, 1898.

[472] Typical cases 8 Int. Com. Rep., p. 47; and 10 I.C.C. Rep., p. 675.

[473] The Central Yellow Pine case, No. 681, 1903; and Op. 705, 1906.
Also in 1912, 22 I.C.C. Rep., p. 239.

[474] Best described by Bowes, Senate (Elkins) Committee, 1905, p. 2851.

[475] 14 I.C.C. Rep., 11.

[476] 23 I.C.C. Rep., 169 and 438.

[477] 18 _Idem_, p. 280; _cf._ p. 209, _supra_.

[478] 8 Int. Com. Rep., p. 121, is typical of a large number.

[479] 23 I.C.C. Rep., p. 448: U. S. Commerce Court, April session,
1912, No. 47. Ann. Rep., I.C.C., 1896, p. 78. Extensive investigations
concluded July 6, 1912.

[480] The literature upon this subject, aside from the decisions
specifically noted below, is voluminous. The Senate (Elkins) Committee,
1905, vol. V, devotes much attention to it as a constitutional
difficulty in the way of amendment of the law. The admirable catalogue
prepared by the Bureau of Railway Economics, 1912, at p. 126, well
covers the field. _Cf._ chap. X, p. 361, _supra_.

[481] 11 Int. Com. Rep., 13.

[482] Page 31 with diagram, _supra_.

[483] 24 I.C.C. Rep., p. 55.

[484] The leading references are as follows: 4 I.C.C. Rep., p. 450; 10
_Idem_, p. 55; 13 _Idem_, p. 87; Rep. to the Senate by I.C.C., Feb.
28, 1903; Senate (Elkins) Committee, 1905, Digest, App. V. The leading
export rate case, 8 I.C.C. Rep., p. 214, is reprinted in our Railway
Problems. Johnson and Huebner, Railroad Traffic and Rates, vol. I, pp.
492-518. In this instance I have reproduced a portion of my report
prepared for the U. S. Industrial Commission in 1900.

[485] _Cf._ Ann. Rep., I.C.C., 1899, p. 22.

[486] 8 Int. Com. Rep., p. 214; reprinted in our Railway Problems,
chap. XVIII.



CHAPTER XII

THE MOVEMENT OF RATES SINCE 1870; RATE WARS

    Contrast before and after 1900, 411.--Revenue per
        ton mile data, 412.--Their advantages and
        defects, 414.--Nature of the traffic, 416.--Low-grade
        traffic increasing, 416.--Growing diversification of
        tonnage, 418.--Present conditions illustrated, 419.---
        Length of the haul, 421.--The proportion of local
        and through business, 422.--Effect of volume of
        traffic, 424.--Proper use of revenue per ton mile, 425.---
        Index of actual rates, 426.--Its advantages and
        defects, 427.--Difficulty of following rate changes since
        1900, 427.--Passenger fares, 429.--Freight rates and price
        movements, 430.

    Improvement in observance of tariffs, 431.--Conditions
        in the eighties, 432.--The depression of
        1893-1897, 433.--Resumption of prosperity in
        1898, 436.--The rate wars of 1903-1906, 438.--Threatened
        disturbances in 1909-1911, 439.


The course of freight rates in the United States during the last
generation divides naturally into two periods, before and after 1900,
respectively.[487] Prior to that date an almost uninterrupted decline
took place, which has been followed by a strongly marked upward
tendency during the last decade. In respect of freight rates this
movement is commonly judged in either of two ways; by comparison of
actual rates charged for specified service between given points through
a series of years; or, secondly, by means of what is called the revenue
per ton mile. Considering first the use of this latter index, the
course of events is shown by means of the diagram opposite the next
page, covering the period between 1867 and 1910. But before conclusions
may safely be drawn from this showing, it is imperative that the true
significance of revenue per ton mile statistics should be set forth.
For a generation, and particularly in connection with the Roosevelt
legislation in 1906, volumes of written and oral evidence upon moot
questions were based upon such figures. Specious and misleading
reasoning upon a public question was perhaps never more common in the
course of our history.[488] It is most important to understand clearly
the real significance of this common statistical unit. We shall then,
only, be in position to interpret the diagram properly.

The revenue per ton mile for a given road, or for the railway system of
the United States, is computed by dividing the total freight revenue
for that service, whatever it may be, by the number representing the
amount of freight in tons hauled one mile. Thus, for example, if the
total freight revenue of a system of roads be $900,000,000, this
having been received as compensation for hauling an equivalent of
90,000,000,000 tons of freight one mile, the compensation actually
received for each ton hauled one mile is obviously one cent. All that
is necessary in order to compute the average revenue per ton mile,
then, is to know the total freight revenue and the amount of ton
mileage service. Computed in this way the average revenue per ton per
mile for the railways of the United States in 1867 was 1.92 cents.
From this level a decline took place in 1890 to 0.941 cents--that is
to say, the average amount received for each ton of freight hauled
one mile had declined about one half. Since about 1897 there has been
no considerable change, the corresponding figure for 1911 being 0.757
cents. In other words, at the present time the carriers of the United
States receive about three-fourths of a cent for each ton-mile service.
From a revenue point of view this unit may seem insignificant in
amount; but it should be borne in mind, of course, that it is applied
to an immense volume of traffic. Even the slight increase between 1900
and the present time, if applied to the volume of traffic now existing,
would make a difference in freight revenue for the entire railway
system of the United States of approximately $61,000,000.

[Illustration: MOVEMENT OF FREIGHT RATES 1867-1970]

Measurement of the course of freight rates by means of revenue per
ton mile possesses one great advantage. It measures the _actual_
return received by the railway without regard to the published tariff,
showing accurately, therefore, the degree to which any departures
from the published rates take place. For this reason the foregoing
diagram probably under-indicates the extent, relatively, of the decline
before 1900. For it is indubitable that the published rates have been
very much more nearly observed with the passage of time during this
decade.[489] On the other hand, revenue per ton mile, as thus used
for general purposes, is open to a number of very serious objections.
Obviously, like any statistical average it fails to represent the
actual payment for any given service. But its disadvantages are more
deeply seated than this. Entirely irrespective of any change in the
level of rates, revenue per ton mile is affected fundamentally by three
distinct sets of conditions. It varies according to the nature of the
traffic, whether high grade or low; it is affected by the length of the
haul and the proportion of local as distinct from through business; and
it is modified profoundly according to the volume of traffic handled.

Before proceeding to the consideration of the above mentioned factors,
attention may be directed to the following table, which gives the
extreme range of ton-mile revenue for a number of different railways
arranged in groups according to the nature of their business.

Each group is graded, moreover, within itself according to the
revenue per ton mile. From this showing it appears that for 1910
the range above and below the average for the United States is
considerable--being upwards of three times as great for the New Haven
system as for the Chesapeake & Ohio, which comes at the foot of the
list. It will now be in order to explain the reasons for these wide
variations, which are by no means, as is customarily assumed in public
discussion, conditioned even primarily by the level or reasonableness
of the freight rates charged. Until these attendant circumstances are
fully understood, any conclusions as to relative freight rates for a
given service based upon revenue per ton mile, are entirely misleading.

                                 Revenue per              Av. haul
                                  ton mile.    Freight    per ton.
     1910                         (_Cents_)    density.   (_Miles_)

  New England--
    New York, New Haven & Hartford  1.417    1,057,000      93.4
    Boston & Maine                  1.08     1,046,000     102.8

  Southern--
    Atlantic Coast Line             1.273      365,000     145
    Southern R.R.                    .957         ..        ..
    Louisville & Nashville           .751    1,124,000     170
    Illinois Central                 .589    1,445,000     238

  Western and Transcontinental--
    Denver & Rio Grande             1.279      532,000     104
    Southern Pacific                1.232      745,000     256
    Union Pacific                   1.011    1,091,000     364
    Northern Pacific                 .900      940,000     297
    Great Northern                   .822      814,700     244.1

  Granger--
    Chicago & North Western          .891      729,000     141
    Chicago, Milwaukee & St. Paul    .843      709,000     173
  =United States, all roads=         .753    1,071,000     146

  Trunk Lines--
    Erie                             .626    2,808,000     146
    New York Central & Hudson River  .625    2,548,000     195
    Pennsylvania Railroad            .580    5,139,000     168
    Baltimore & Ohio                 .577    2,711,000     191
    Lake Shore & Michigan Southern   .515    3,911,000     171

  Coal and Ore--
    Philadelphia & Reading           .765    4,506,000      97
    Lehigh Valley                    .646    3,288,000     174
    Hocking Valley                   .458    4,014,000     125
    Bessemer & Lake Erie             .453    8,051,000     118
    Norfolk & Western                .447    3,456,000     264
    Chesapeake & Ohio                .407    3,161,000     267

The nature of the traffic handled by a carrier is the most important
consideration to be kept in mind in interpreting revenue per ton mile
data. This is most clearly shown by comparison in the table between the
group of coal and ore roads and the New England systems. The revenue
per unit of service on a road whose traffic is largely of low grade
most necessarily be low. Probably the lowest average ever reported
in the United States was for the Chesapeake & Ohio in 1899--the low
point in the general movement of freight rates--when its ton-mile
revenue touched O.362 cents. Whenever the business of a carrier
consists largely of coal, grain, lumber or other low-grade commodities
on which the freight charges must necessarily be exceedingly low in
order that the freight shall move at all, the revenue per ton mile
must consequently stand at a low figure. Bald comparison of any such
revenue with a corresponding figure for high-grade roads is obviously
misleading and fallacious. It does not mean that the latter necessarily
charges more for the same service; but its higher revenue per ton of
freight moved one mile may be, and very likely is, merely due to the
fact that much of its tonnage is capable of bearing higher charges.
From this circumstance it also follows that comparisons from year to
year either for single roads or for the entire railway net, must be
made in the light of variations in the proportion of high and low grade
tonnage. The trend seems to have been steadily downward in this regard
year by year. A steady increase, relatively, in the volume of low-grade
traffic has long been under way.[490]

The development of the last twenty years in the United States has
certainly been in favor of a great increase in low-grade traffic.
This is shown by the following table, giving the per cent. of tonnage
in various classes upon the trunk lines from New York to and beyond
Chicago.

         PER CENT. OF TONNAGE IN EACH CLASS OF FREIGHT ON TRUNK
                         LINES, WESTBOUND[491]

  Class    1878  1880  1885  1890  1892

    1      30.4  26.4  24.8  21.0  19.9
    2       6.9   6.7   7.1   6.4   5.4
    3       4.8   4.4   4.2  12.3  11.3
    4      57.9  50.1  29.3  12.7  10.4
    5       0.0  10.6  34.6  10.0   9.6
    6       0.0   0.0   0.0  37.6  43.4
  Special   0.0   1.8   0.0   ..    ..
          ----- ----- ----- ----- -----
          100.0 100.0 100.0 100.0 100.0

From this it appears that "sixty per cent. of the tonnage is now
(1893) carried in fourth, fifth and sixth classes.... Prior to 1886
no considerable number of articles were permanently assigned to the
fifth and sixth classes; they embraced usually a few commodities which
had been assigned a special rate." Further consideration of this table
shows that first-class freight, forming thirty per cent. of the tonnage
in 1878, declined to less than twenty per cent. in 1892; while at the
same time sixth-class freight ran up from nothing to 43.4 per cent.
in 1892. Fourth-class freight declined during the same period from
57.9 to 10.4 per cent. These figures simply mean that a great deal of
traffic is now carried upon American railways for long distances which
a generation ago it was believed could not be profitably moved at all.
The utility of the railway service, once supposedly confined entirely
to freight of the higher classes, has been gradually extended until
today there is no commodity too cheap to be handled with the improved
facilities. This vast increase in the amount of low-grade traffic is
undoubtedly responsible to some degree for the apparent decline of
freight rates so often instanced. Fortunately upon this point we have
the specific testimony of traffic managers of long experience. On
the other hand, in justice to the railways it must be admitted that
the proportion of local business at high rates, which would tend to
increase the average revenue per ton mile, has steadily increased
with the growth of the country; and, moreover, as has already been
shown, in times of exceptional prosperity the movement of high-grade
freight has increased in more than its due proportion.[492] Nor are
these facts adduced in criticism of American railway policy. They are
simply intended to draw attention to the fact that, while changes of
freight rates have undoubtedly been considerable, they have not been
as great as is oftentimes plausibly stated. As for comparisons with
foreign countries, they are practically invalidated by the difference
in local conditions, as, for instance, in England where local delivery
is involved. In the United States such service is charged in addition,
either as drayage or express.

The increased diversification in the freight tonnage of American
railways, always in the direction of a larger proportion of traffic
from general business rather than from the movement of staple
commodities, is also of great fiscal significance. It means not only
more business, but better and more permanent traffic. The difference,
moreover, between the charge which high-grade freight, such as
merchandise, will bear by comparison with the highest rate upon grain
or coal, is much greater than any difference in the cost of service.
The profit, therefore, attendant upon the movement of traffic other
than low-grade commodities is strikingly great; although, of course,
profitableness is a question of relativity between operating cost and
revenue. Heavy train loads of coal at 4 mills per ton mile may be
better business than merchandise in light carloads at a rate five times
as high. At all events the tendency toward higher grade tonnage has
been notable, especially since 1900. Many western roads and even the
trunk lines, formerly dependent in a great measure upon the movement
of crops, are now affected only indirectly in this regard, by reason
of their influence upon general business. The growing diversification
of traffic because of its financial importance merits more concrete
illustration.

The Lake Shore & Michigan Southern, during the calendar year 1900,
increased its freight traffic by 1,760,000 tons. Of this only 194,000
tons were specified as products of agriculture and animals, while
products of the forests actually declined by 84,000 tons. In other
words, nearly all of this phenomenal increase in business in 1900
was due to the movement of manufactures, minerals and merchandise.
A comparison made for the last three decades makes this point still
more clear. Since 1880 there has been very little increase in
agricultural tonnage upon this trunk line, with an actual decrease in
the movement of grain. This, perhaps, may be in part explained by the
great development of grain traffic upon the lakes, which, of course,
absorbs much business formerly carried by this road. In other words,
farm products and provisions transported by the Lake Shore rose from
3,465,000 tons in 1880 to only 3,843,000 tons in 1900. The movement
of petroleum and lumber actually decreased, owing to the construction
of pipe lines and the clearing of the forests. On the other hand,
manufactures and merchandise increased threefold in volume, rising from
3,754,000 tons in 1880 to 14,932,000 tons in 1900. Whereas agricultural
products in 1880 formed over forty per cent. of the traffic upon the
Lake Shore, they constituted in 1900 less than twenty per cent. Much
the same tendency is manifested by other routes. Thus for the fiscal
year 1901, the Chesapeake & Ohio reported substantial decreases in the
actual tonnage of flour, grain, sand, stone, iron, etc.; but a largely
augmented movement of general merchandise of the higher classes. Many
of the soft-coal roads, such as the Cleveland, Lorain & Wheeling,
which used to carry nearly two-thirds of their tonnage in the form of
coal, now carry less than forty per cent. A feature of importance in
the great prosperity of the anthracite coal roads has been a steady
increase in the volume of their general traffic as distinct from
coal tonnage. All over the country, in short, the steady growth of
population and the decline in the proportion of grain for export is
reducing, relatively, the importance of low-grade tonnage, supplanting
it by a movement of supplies and merchandise in the contrary direction.

The classification of tonnage for the United States, as a whole and by
main divisions, is shown by the following excerpt from _Statistics of
Railroads for 1909_:

                        Freight Traffic Movement

  -------------------+------------------+------------------
                     | United States    |   Trunk Line
                     |                  |   Territory
  Class of           +-----------+------+-----------+------
  commodity          | Tonnage   | Per  |  Tonnage  | Per
                     | _Tons_    | Cent |  _Tons_   | Cent
  -------------------+-----------+------+-----------+------
  Products of        |           |      |           |
  agriculture        | 73,600,000|  8.92| 19,000,000|  4.65
  Products of        |           |      |           |
  animals            | 20,600,000|  2.49|  7,600,000|  1.86
  Products of        |           |      |           |
  mines              |459,500,000| 55.60|256,200,000| 62.71
  Products of        |           |      |           |
  forests            | 97,100,000| 11.75| 21,500,000|  5.28
  Manufactures       |108,600,000| 13.15| 70,000,000| 17.15
  Merchandise        | 33,900,000|  4.11| 13,500,000|  3.31
  Miscellaneous      | 32,800,000|  3.98| 20,500,000|  5.04
  -------------------+-----------+------+-----------+------
  Grand total        |826,400,000|100.00|408,600,000|100.00
  -------------------+-----------+------+-----------+------

  -------------------+-----------+------+------------------
                     |     Southern     |    Western
                     |     Territory    |    Territory
  Class of           +-----------+------+-----------+------
  commodity          |  Tonnage  | Per  |  Tonnage  | Per
                     |  _Tons_   | Cent |  _Tons_   | Cent
  -------------------+-----------+------+-----------+------
  Products of        |           |      |           |
  agriculture        |  9,500,000|  7.92| 45,100,000| 15.18
  Products of        |           |      |           |
  animals            |  1,000,000|   .83| 11,900,000|  4.03
  Products of        |           |      |           |
  mines              | 63,000,000| 52.20|140,200,000| 47.22
  Products of        |           |      |           |
  forests            | 25,300,000| 20.95| 50,200,000| 16.92
  Manufactures       | 13,300,000| 11.09| 25,100,000|  8.48
  Merchandise        |  4,800,000|  3.98| 15,600,000|  5.26
  Miscellaneous      |  3,600,000|  3.03|  8,600,000|  2.19
  -------------------+-----------+------+-----------+------
  Grand total        |120,700,000|100.00|297,000,000|100.00
  -------------------+-----------+------+-----------+------

Conclusions from these figures are well worth noting. The importance,
measured by traffic rather than revenue, of low-grade freight classed
as products of mines, is notable. This forms more than half the
aggregate tonnage for the United States, and has appreciably increased
within the last ten years. In 1910 it constituted almost two-thirds
of the business in trunk line territory and almost one-half in the
West. Products of agriculture, on the other hand, even in western
territory, amount to less than one-fifth of the total tonnage. These
facts indicate clearly the diverse conditions under which railways
operate in different parts of the country. The next table,[493]
besides incidentally throwing more light upon the relative tonnage of
staple commodities, will suffice to establish our main point--namely,
that the nature of the traffic vitally affects all ton mile revenue
statistics. It entirely, in fact, overshadows mere changes in the
general level of freight rates. Any argument concerning the movement
of such charges, which fails to correct fully for this factor, may be
dismissed at once as valueless.

      Summary of Selected Commodities for the Year Ending June 30,
                               1910[494]

                                                            Average
                                                            receipts per
                                Ton-mileage   Revenue       ton per mile
                  Freight       of freight    from freight  from freight
                  carried in    carried in    carried in    carried in
  Commodity       carload lots  carload lots  carload lots  carload lots
                     _Tons_      _Ton miles_                   _Cents_

  Grain             31,947,009   7,067,690,568  $44,553,330    0.630
  Hay                5,856,185     954,623,830    9,731,590    1.019
  Cotton             3,400,316     689,594,719   12,573,674    1.823
  Live stock        10,754,108   2,449,310,036   29,802,514    1.217
  Dressed meats      2,407,454     724,239,606    6,548,955     .904
  Anthracite coal   28,202,577   5,104,428,347   30,083,630     .589
  Bituminous coal  192,479,389  22,228,778,428  110,139,107     .495
  Lumber            68,482,732  11,891,569,514   87,225,470     .734

A second consideration in the interpretation of ton mile data, of
equal importance with the nature of the traffic, is the length of the
haul and the proportion of local as distinct from through business.
This necessarily follows from the nature of a distance tariff. Only
on condition that the rate augmented in direct proportion to the
increase of distance, would the revenue per ton mile remain constant.
The diagram at page 108 is instructive in this connection. The
charges--denoted by the height of the curve at any given point--tend
to grow much less rapidly than distance. In other words, the rate
curve approaches a parabolic form, until after a certain point it
becomes practically a flat rate, independent of distance. This fact of
necessity causes ton-mile revenue to decrease steadily with the length
of the haul. For ton-mile revenue is but the ratio of the abscissa to
the ordinate of the curve at any given point; the former being the rate
charged, the latter the distance.

In practice, therefore, the longer the haul in general, the lower is
the revenue per ton mile.[495] This is clearly shown by comparison of
the two items for given roads, otherwise similarly circumstanced, in
the table already discussed on page 415.

Closely akin to the length of haul in affecting ton-mile revenue,
is the proportion of local traffic. This also is in practice vital.
Obviously it costs much more to handle local business, the terminal
expenses being far greater in proportion. And at the same time a larger
proportion of the freight moves in small lots locally. This difference
between revenue per ton mile for local business and through traffic
is very great. On the Louisville & Nashville, for example, in 1886,
it was 1.48 cents for the former, as against .99 cents for through
business.[496] The Illinois Central in 1900 reported an average revenue
per ton mile on through freight of 0.48 cents, while for local freight
the corresponding figure was 1.17 cents, the average of both being
0.56 cents. It is apparent, therefore, that any accurate determination
of the level of charges in general must take account of such facts as
these.

Any carrier like the Southern Pacific, the Chesapeake & Ohio or the
Erie, with relatively little local traffic and a business dependent
largely upon the long haul, will conduct transportation for a
materially lower figure than roads in a densely settled territory.
This consideration was recently illustrated in Massachusetts
experience.[497] The Fitchburg Railroad, devoted to long distance,
low-grade business by the Hoosac tunnel route, was consolidated with
the Boston & Maine in 1900. Its revenue per ton mile was formerly .818
cents based upon such traffic. When it was merged with the Boston &
Maine,--considerably blessed as it is with local traffic,--the latter's
ton-mile revenue fell from 1.44 cents in 1900 to 1.158 cents in the
following year. There had been no change whatever in freight rates.

A word may be interposed in this connection as to the peculiar movement
of local as distinguished from through rates through a series of years.
Local charges have decreased relatively little, probably because of the
absence of competition in such cases. They have, moreover, decreased
very unevenly in different parts of the country. Apparently one of
the first and most beneficent results of the enactment of the Act to
Regulate Commerce in 1887, was a reduction of local rates in various
parts of the country, in order to bring the rate adjustment into
conformity with the long and short haul clause. This was peculiarly
the case in the northeastern or trunk line territory. It does not seem
to have occurred in the southern states, where the long and short
haul principle has never been accepted in its entirety. The most
comprehensive report upon the subject concludes that local rates have
in various parts of the country, during the last quarter century,
been reduced from ten to fifty per cent.[498] Returns from various
railway commissions interrogated by the Industrial Commission in 1900
upon the subject showed highly variable results. From Mississippi it
appeared that "local freight rates in this state have been materially
lowered in the last four years, especially in the lettered classes";
while in the adjoining state of Alabama "local rates on freight have
decreased very little in the last five or six years, and have not
decreased in proportion to the decrease made in interstate rates." In
New England, comparison of actual freight rates did not indicate any
very considerable reduction, the absence of competition in this section
being, perhaps, in part responsible for this result. A comparison of
published freight rates in southern territory, without making allowance
for departures from such tariffs, apparently showed a very much smaller
reduction than in other parts of the country. It is also apparently
true that the reduction of cotton rates in this section, while
considerable, had been much less rapid than that of the rates upon
grain from Chicago to the seaboard in either direction. A few instances
of an actual rise of local charges since 1900 may be cited.[499]
But the fact that competition has been substantially eliminated in
consequence of widespread consolidation since 1900, has rendered the
movement of local and through freight rates more nearly alike all over
the country than they were prior to that time.

The third consideration which must always be kept in mind in the
interpretation of revenue per ton mile is the volume of the traffic
handled. Any comparison of freight rates which is not made in the light
of increase in the business transacted, is bound to be misleading.
A reduction of cost of operation per unit, attending a growth in
volume, has already been fully described in connection with the theory
of rates. And it is but natural that a reduction in the rate should
follow any lessening of cost. Moreover, a large volume of business
usually implies a relatively greater amount of low-grade tonnage. In
order to bring out this relationship the second column in the table on
page 415 has been added. This permits a correlation between freight
density--that is to say, ton miles per mile of line and revenue per
unit of service. It will be noted that, in general, the revenue unit
falls as the volume of traffic, measured by freight density, rises.
This is strikingly shown by comparison of the groups of western and
transcontinental roads with those concerned mainly with the carriage
of coal and ore. The soft coal Hocking Valley road with its enormous
density and very low revenue per ton mile, affords an excellent
example. It is indubitable that the trunk lines and the coal roads are
able to transact business for relatively low rates, not only because
their tonnage is of low grade, long haul or both; but also because
of its immense concentration per mile of line, permitting all of the
economies incident to large-scale operation. In this connection,
however, it should be noted as a general principle, that oftentimes it
is not the mere increase in the traffic of a particular sort which is
significant; but rather the growth in the total volume of business of
all kinds.[500]

The foregoing criticism of the use of revenue per ton mile as a means
of showing the course of freight rates in general has been mainly
destructive. This figure, nevertheless, will in many cases be found
highly serviceable in the examination of particular rates. It may
properly be used to determine whether a given commodity is contributing
its due proportion to the general budget of the carrier. Revenue per
ton mile can, of course, be computed for each particular service;
inasmuch as both the income and the volume of that service are matters
of independent record. The table on page 421 brings out this point.
Or take a division of the Illinois Central for 1900. Its revenue per
ton mile was 0.136 cents on wheat, 0.79 cents on flour, 4.267 cents on
sugar-cane, 0.309 cents on soft coal, 1.148 cents on stone and sand,
2.238 cents on furniture, 3.165 cents on merchandise. On this basis
one may properly inquire as to whether under all the circumstances
wheat, coal or merchandise are doing their part, in the light of the
particular expenses attached to their carriage, in maintaining the
general burden of indivisible costs. When copper yields a revenue per
ton mile of only 0.285 cents, the rate being only 1.6 per cent. of
its market value, while on wheat for the same haul the corresponding
unit of return is 0.4 cents per ton mile--equal to one-fifth of its
worth--there is evidently a maladjustment favoring one commodity over
another.[501] In a number of recent cases questions of this sort
have been rather satisfactorily answered by resort to this unit of
measurement.[502]

The curve of revenue per ton mile, as shown by diagram at the head
of this chapter, certainly gives no indication of the considerable
increase of freight rates which has ensued since 1900. This follows
from the fact that in at least two of the three respects, above
mentioned, the trend of events, independent of any change in the level
of freight rates, has operated to greatly dilute the revenue per ton
mile. The growth of low-grade traffic and the immense augmentation in
tonnage have both conspired to render this unit entirely useless for
purposes of comparison year by year. The average length of haul alone
seems to have remained much the same during the decade. Although the
curve does not show it, there has been a notable upward movement all
along the line, responsible, as we shall see, for much of the new
Federal legislation. How may we, then, estimate the amount of these
increases? Under such circumstances, it is necessary to turn to the
movement of actual rates.[503] The course of these down to 1900 is best
shown upon the same diagram above mentioned by means of the dotted
curve, entitled Actual Rate Index, the scale for which is given at the
right. This rate index is simply the average of the actual published
rates for a number of specific commodities between certain given
points. It differs in principle from the ton mileage revenue curve, in
that it concerns merely the _published_ rates, taking no account of
rebates or departures from those rates in actual practice. A comparison
of its course with that of the ton mileage curve shows a more abrupt
decline from about 1878 to 1886, since which year the course of both
lines is about parallel. Its irregularity is also significant as
illustrating the violent fluctuations to which the published rates were
subjected jected prior to 1887. Judged by this curve, the situation
has been more settled since the enactment of the Act to Regulate
Commerce in 1887.

Were data at hand for a continuation of this line to 1910 it would
undoubtedly afford a fairly reliable measure, in general, of the
substantial increase of rates which has taken place during the decade.
The main objection to it would be that it did not weight the average
according to the volume of the business carried for each of the
thirty-seven concrete rates chosen.[504]

Tracing the rise of actual rates since 1900 is rendered peculiarly
difficult, also, by reason of the fact that few of the changes took
the form of an outright advance in charges. The end in view was
more often accomplished surreptitiously. The substantial increases
in 1900[505] which inaugurated the upward movement were mainly
accomplished by changes of classification. Modification of the carload
ratings brought about the same result. A notable instance appeared
in the complaint of the dairy men in Wisconsin in 1909. An annual
shipment of 38,000,000 lbs. of cheese to Chicago before 1899 moved
at twenty cents per one hundred pounds, irrespective of the size of
the consignment. Ten years later the rate had become twenty-eight
cents for less-than-carload lots, and twenty-two and one-half cents
for wholesale shipments. The relative disability of the small shipper
under the new circumstances is as significant as the rise of rate for
all.[506] The increase of charges might be brought about in another way
without actually advancing rates by a withdrawal of commodity ratings,
thereby subjecting the shipper to the higher scale of classified
commodities. And, finally, a practical elimination of the rebate and
the cessation of general rate wars has usually resulted in a very
substantial increase in the revenue of the carriers as well as in
the scale of charges imposed upon most shippers. Evidence upon this
point is officially given in connection with the rate increases of
1903.[507] It thus appears that to follow step by step the movement of
actual rates is an extremely complicated matter. Every factor entering
into the determination of the charge must be considered; the distance
tariff, the classification, minimum carload rules and a host of other
specifications which enter into the final result. For our purposes it
must suffice that the fact of a substantial rise of charges since the
turning point in 1900 is beyond question.[508] On the other hand, it
is indubitable that such increases as have occurred, arousing vehement
protest among shippers, have been more widely advertised than changes
in the opposite direction. Substantial reductions, especially on
low-grade staples, have sometimes occurred. One is almost at a loss to
strike a fair balance between the two, in the absence of dependable
data.

The movement of passenger fares has been quite different from that
of freight rates.[509] No marked decline during the last quarter of
the nineteenth century took place. Growth in the volume of traffic
was not accomplished by a reduction of charges. This is in consonance
with the experience of foreign countries. Passenger business, while
steadily growing, has increased less rapidly than freight tonnage.
Generally, in other words, as measured by volume, freight business has
become relatively more important with the progress of time. Fiscally
the same thing is true. Only in New England does the revenue from this
service approximate one-half of the total net earnings. The nature of
railway competition explains why passenger fares have not decreased
as rapidly as freight rates. Persons must necessarily be more or less
directly transported from one point to another; while experience shows
that competition in freight traffic may be exceedingly circuitous in
route, goods even going hundreds of miles out of the direct line for
transportation by water. This narrowing of the sphere of competition
in the case of passengers has consequently operated to lessen the
rate of decline. Another point to be considered in this connection
is that no such increasing economies in the handling of passengers
are possible as in the case of freight. Instead of decreasing the
proportion of dead weight, which for passengers amounts to upward
of ninety per cent., by any of the economies recently applied to
freight traffic, it appears rather that the proportion of dead weight
of equipment per passenger is increasing, owing to the necessity of
providing more sumptuous accommodations. Bearing in mind all these
facts, it appears not unreasonable that the progressive decline of
passenger fares has continually lagged behind the decrease of freight
rates. But the natural lethargy in the movement of passenger fares was
rudely interrupted in 1908 in connection with the wave of legislation
accompanying the Roosevelt campaign which culminated in the Mann-Elkins
law. A widespread demand for lower passenger fares found expression
in the passage by twenty-two states within five years of maximum fare
laws. Eleven legislatures fixed the charge at two cents per mile, the
others establishing it at less than three cents. Many appeals to the
courts in connection with these statutes took place on the ground of
confiscation, and sharp conflicts of authority between Federal and
state governments arose.[510] Whether passenger rates would ever have
declined without such exercise of authority is open to question, but
the disturbance of established conditions at this time was extreme.

One further question with relation to the movement of rates merits
consideration. In how far has the rise since 1900 been commensurate
with the general upward movement of prices of other commodities than
transportation--the particular commodity produced by railways? The
evidence tends to show that prices in general have moved upward during
the last ten years by approximately one-fourth, and it may be even
one-third.[511] Have railway charges in general surpassed this rate or
not?

Some activity of railway experts has been devoted of late to the
elucidation of this question.[512] But, after all, is this inquiry
of basic importance as bearing upon the general reasonableness of
railway rates? Here, as so often elsewhere in the discussion of
these questions, the need is for the analysis of such problems with
reference to particular services and not in connection with matters
in general.[513] It is conceivable that railway rates might and
properly ought to increase under certain circumstances much more than
in proportion to the general change in freight rates; or that, on
the other hand, they might fairly be compelled to lag behind. This
introduces the larger question of reasonable rates in general which
must remain for discussion in our second volume.

       *       *       *       *       *

The general level of rates affects the ultimate consumer more than the
shipper. Steadiness of rates, on the other hand, is vital to a healthy
state of trade. It is important to examine the evidence from this point
of view. The history of railroad rates shows a steady improvement
in the direction of more general observance of published tariffs.
Periods of abject demoralization incidental to the most furious rate
wars, have alternated with periods of peace, characterized by more or
less faithful observance of agreed rates. Viewed in a large way the
intervals of disturbance have become less frequent and less intense
with the passage of time. Present conditions are more satisfactory than
any which have prevailed since 1850.

Rate wars are almost as old as railroading and are coincident with
the appearance of competition. Among the earliest of note were the
struggles between the Erie and the New York Central as soon as the
former road was constructed to Dunkirk, Ohio, on the Great Lakes.
But the most notorious rate wars were those which prevailed between
the trunk lines in respect of the carriage of grain to the seaboard.
These wars began with the entrance of the trunk lines into Chicago in
1869.[514] The Baltimore and Ohio from the outset was the disturbing
factor. Having no entry into New York except over the lines of the
Pennsylvania Railroad, the refusal of the latter in 1874 to give
proper facilities led to immediate retaliation by rate cutting on
the Baltimore and Ohio. The details of these wars and their economic
significance have become classics in our American industrial history.
Suffice it to say that for intensity and persistence these contests
which lasted for ten years after 1884, have been unequalled in our
history since that time. A brief period of calm ensued after 1876.
But soon the struggle broke out again in 1881, intensified by the
construction of new parallel trunk lines like the West Shore and the
Nickel Plate. These latter rate disturbances lasted for about three
years.

The passage of the Act to Regulate Commerce in 1887 greatly improved
the rate situation for a time;[515] but harmonious relations were
rudely shaken by a bitter rate war in 1888 between the Grand Trunk
Railway and the American Lines with reference to the rates upon dressed
beef. Trouble over this traffic had occurred as far back as 1879,
when the rate from Chicago to New York had been cut from one dollar
to forty-five cents. In 1888, however, the rate on dressed beef for
weeks was as low as six cents per hundred pounds. The Grand Trunk which
had carried almost half of this business in 1887, had its proportion
reduced to twenty-eight per cent. in the following year. At this time
also extensive rate wars prevailed in the far western territory. The
failure of the Atchison Road brought to light accumulated rebates
for the four years prior to 1894 to the amount of $3,700,000. The
prosperity of the early nineties led to a considerable improvement
in rate observances. The only exception was the persistence of
trouble from the Canadian carriers. The Soo line across the Straits
of Mackinac, opening a short route from St. Paul and Minneapolis to
the seaboard, was acquired by the Canadian Pacific Railroad in 1890.
Combined lake-and-rail grain rates were sadly disturbed and the
controversy over so-called ex-Lake grain between the lines from Buffalo
to New York, which afterward cropped out in 1900, took its beginning.
These Canadian Pacific rate wars were severe while they lasted. In
1892, for instance, the rate on boots and shoes from Boston to St.
Paul dropped from one dollar and fifteen cents per hundredweight to
forty-five cents.

The panic and subsequent depression of 1893 caused serious and
widespread rate wars all over the country. Grain rates from Chicago to
New York were openly reduced from twenty-five to fifteen cents. Two
peculiarities of this rate war deserve mention. In the first place,
every concession was publicly made,--that is to say, the cut rates
were filed with the Interstate Commerce Commission; and, consequently,
owing to the percentage-basis system to intermediate points, the rate
war on Chicago-New York business automatically induced a rate war to
every intermediate point in Central Traffic Association territory.
Transcontinental rates were also badly upset at the same time. This
was due not only to the prevalent hard times, but to complications
arising from the independence of the Panama Railway. This line had been
controlled since 1871 by the Union Pacific Railroad. The arrangement
under which the Pacific Mail Steamship Company was also controlled came
to an end in 1893, when the field was again opened to competition.
The merchants of San Francisco established an independent line of
steamships and for two years the most bitter and reckless rate war
prevailed. During this conflict freight was carried from New York to
San Francisco as low as thirty cents per hundredweight.[516] Matters
were finally settled in 1898; but in the meantime the Union Pacific
Railroad had gone into bankruptcy.

Entire demoralization in freight rates throughout the southern states
occurred in 1894. Every carrier in this section was involved. Rates
were cut for two months by as much as two-thirds. The first-class
rate from New York to Atlanta dropped from $1.14 to forty cents per
hundred pounds. The years 1894-1895 for the country as a whole were
exceedingly unfortunate. Better conditions then supervened except for
a rate war on grain at Missouri river points, so important that it
was made the subject of special investigation.[517] The Chicago Great
Western Railroad through the agency of a corporation known as the
Iowa Development Company actually purchased on its own account large
amounts of grain in order to secure its carriage. Grain was carried
from Kansas City to Chicago under the system of rebating known as
"protecting the through rate" for as low as two cents, when the open
published rate was seventeen cents per hundredweight. Conditions then
bettered somewhat largely through the activities of the Joint Traffic
and Trans-Missouri Freight Associations. The prospect of legalization
of pooling by Congress was bright. Rates seem to have been observed
with more than usual faithfulness throughout the country, the only
exception being another brief conflict in the southern states. But the
Trans-Missouri decision by the United States Supreme Court in 1897,
declaring these traffic associations illegal, once more precipitated
most unsatisfactory conditions. And these were accentuated by the
budding prosperity of the following year.

With the return of activity in business and agriculture in 1898
a frenzy for participation in the rapidly expanding traffic once
more brought about extreme disorganization. The Interstate Commerce
Commission reported that "a large part of the business at the present
time is transacted upon illegal rates ... in certain quarters the
observance of the published rate is the exception." The commissioner
of the St. Louis Traffic Bureau testified before the United States
Industrial Commission that "there were fewer rates maintained in 1898
than at any other time within my knowledge of the railroad business,
and I have been in the railroad business for twenty-eight years." At
this point the Interstate Commerce Commission intervened by the proffer
of its good offices. Conferences with the heads of the principal
railroads were held. A decided change in the attitude of the Commission
toward the carriers became evident. It wisely sought to arouse the
railroads themselves to the enormity of the existing evils, being
absolutely unable itself under the law either to prevent or correct
the existing abuses. The result fully justified all expectations. The
following year witnessed an almost complete restoration of published
rates, although business continued to expand in volume. Naturally there
was ample for all the railroads to handle. This condition lasted for
some time. But during 1900 rate cutting again developed upon a large
scale in westbound business. The great increase of eastbound shipments
and the demand for return lading at any price was undoubtedly the
cause. This condition lasted for some months.

Rate cutting between the trunk lines again broke out in the spring of
1901, grain being hauled as low as eleven cents per hundred pounds
from Chicago to New York. Competition between the Lake line railroads
seems to have been the cause. The problem of adjusting ex-Lake grain
rates dates from this period. The community-of-interest plan of trunk
line control was ineffective to prevent disturbance. In the same
year a passenger rate war from the Missouri river to California was
also threatened. The United States Industrial Commission sent out
a number of inquiries concerning conditions in the summer of 1901.
This indicated a firm and stable rate condition in the East but some
disturbance on lines between Chicago and the Ohio river points. Trouble
soon broke out, however. The Atchison road suspecting its competitors
of bad faith, cut its rates first-class from Chicago to the Missouri
river from eighty cents to fifty cents per hundredweight. Agreements
were repeatedly made and almost immediately violated, some of the
strongest lines being the worst offenders. During the fall of that year
export rates on flour and grain were badly slashed. The traffic manager
of the New York Central lines testified that grain rates for export
were not maintained for a number of months.

Apparently the general situation in 1900 was more satisfactory than at
any previous time in the history of railroading in the United States.
With few exceptions the published rates were observed. This commendable
situation seems to have been due to several causes. Primarily an
adequate appreciation by the railroads themselves of the losses of
revenue to which they had voluntarily subjected themselves prevailed.
An enormous volume of traffic incident to general prosperity, also,
almost overtaxed the facilities of the carriers. And, in the third
place, the spread of consolidation and the community-of-interest idea
undoubtedly contributed to the same end. The determined attitude
taken by important roads, notably the Southern Railway, contributed
to the maintenance of rates. Even in the Far West and Northwest, rate
conditions seemed to be in better shape than at almost any previous
time. But it was too good to last; trouble soon broke out again. Grain
rates from Kansas to Chicago during the summer dropped from nineteen
cents to seven cents. Rates on packing-house products became utterly
demoralized. So bad did conditions become that in March of 1902 the
Interstate Commerce Commission intervened, seeking injunctions in the
Federal courts against any departure from the published tariffs. This
immediately bettered conditions; and in February of 1903 the passage
of the Elkins law, as we shall see, contributed still further to this
end. The enactment of this statute, passed at the solicitation of the
carriers themselves and imposing much severer penalties upon departure
from published rates, brought about conditions during the spring
of 1903 unsurpassed for stability. The only exception was a minor
disturbance concerning the carriage of ex-Lake grain from Buffalo to
New York. Tariffs seem to have been faithfully maintained throughout
the country with one exception, that is to say, concerning traffic to
and from Missouri river points.

Since the passage of the Elkins Amendments in 1903, the phenomenal
development of export trade through the Gulf Ports, principally New
Orleans and Galveston,[518] has been mainly responsible for recurring
and often ferocious rate wars, particularly during the years 1903-1906.
These rate wars were usually precipitated in the first instance by
struggles between the Gulf railroads and the trunk lines for the
carriage of export corn. In 1904, for example, after a long period
during which little surplus corn was available for export from Iowa,
Kansas and Nebraska, much of it being locally consumed for stock
feeding, a large surplus was left over. Rates were promptly cut during
1905 by both sets of lines. Thus the rate on export corn from Omaha
to New Orleans was reduced from eighteen to eleven cents per hundred
pounds. This cut was promptly met by a reduction of rates from Missouri
river points to Chicago from twenty-four to thirteen cents. The rate
from Omaha to New York dropped to the extraordinarily low figure
of thirteen cents per hundred pounds. The Burlington and Missouri
Pacific Railroads were particularly active in this contest; together
securing over eighty per cent. of the corn traffic, although five other
important roads were operating in this territory. All through the
winter and spring of 1905 the struggle went on unabated. The Gulf ports
during this period increased their exports of corn two and one-half
times over. The struggle was not alone confined to the carriage of
grain; although export flour being manufactured so far north, seems to
have been immune from disturbance. The trouble extended over into the
field of packing-house products for export. It was long thought that
this could not be shipped over the roundabout southern route, but its
practicability was demonstrated at this time. The demand of the Gulf
roads for a ten per cent. differential rate in their favor as an offset
for the greater time requisite for transit, not being accorded, rates
were again cut by one-third, sometimes being as low as twenty cents per
hundred pounds.

The rate wars of 1905 in the carriage of export traffic immediately
spread into the field of imports. Competition for transcontinental
and far western business has always been keen by the Gulf routes. The
notable Import Rate case already discussed, offers a good illustration
of this fact. The great volume of tonnage moving outward through
Galveston and New Orleans necessitated a correspondingly heavy
northern and northwestern movement of empty cars. Hence the railroads
leading from the Gulf ports, actively bid both against one another
and in connection with the steamship lines against the trunk lines.
Competition was particularly keen for the carriage of the large volume
of sugar to the Middle West, particularly Missouri river points like
St. Louis and Omaha. Carriers from every point of the compass were
interested in this traffic. The trunk lines brought refined sugar from
the seaboard cities where the West Indian product is concentrated. The
Gulf lines brought the Louisiana product, partly as a back-load against
exported grain. And the transcontinental lines brought the Hawaiian
sugar, also as a back-load against a predominance of westbound tonnage.
All hands thus directly took part.[519] For three years this sugar war
persisted despite all attempts at harmony. Rates were constantly cut
by fifty per cent., always of course to the profit of the large sugar
refiners. Coffee, also constituting an important part of our import
trade, and of course particularly adapted to entry through the Gulf
ports, was carried at ruinous rates. Thus on green coffee during 1905,
the rate from New Orleans to St. Paul was cut from forty to fifteen
cents per hundred pounds, while coincidently the rate on sugar dropped
from thirty-two to ten cents. The struggle for import business extended
finally to all imports of merchandise from Europe. The Illinois
Central, for example, actively bid for the imported plate glass
business about this time. At a meeting of parties concerned in 1905,
the fact developed that every one of the important lines had entered
into contracts for the carriage of this traffic at rates approximately
one-half those normally prevalent. The trunk lines of course had to
meet this competition or lose the business. The Pennsylvania Railroad
cut the rate on crockery from forty to eighteen cents; on imported
seeds the rate dropped from fifty to twenty cents and on toys from
seventy-five to twenty-five cents per hundred pounds. These rate wars
it will be observed differed neither in extent nor degree from those
of a generation earlier. One cannot avoid the conclusion that the
utter demoralization of rates was ended only by the intervention of
the Federal government; first by the sturdy and determined application
of the Elkins Law under President Roosevelt's personal direction, and
later by extension of the principle of supervision and regulation by
the Hepburn Act of 1906.

The principal breach since the sugar wars was a rather persistent and
locally interesting disturbance of westbound import rates, precipitated
in the spring of 1909 by the Boston & Maine Railroad. Its object was
to overcome the disability against the port of Boston in the matter
of imports, due to the differentials allowed at Philadelphia and
Baltimore.[520] This led to a general trunk line upset lasting about
four months, in the course of which rates from Boston to Chicago were
reduced from sixty-nine to fifty-eight cents. This obviously left
little profit in the business. Yet it was a mild concession as compared
with the struggles of earlier years. Two years later, in June, 1911,
trouble threatened to break out again. This time it was the Delaware
& Hudson and Erie roads which filed reduced rates to the interior. But
the solidarity of feeling between the trunk lines was such that an open
breach was prevented at the last moment. The prompt intervention of
the Federal authorities was a noticeable feature on this occasion. It
may somewhat safely be predicated that further serious disturbance in
future is unlikely to occur.

FOOTNOTES:

[487] U. S. Industrial Commission, XIX, 1901, pp. 272-290; _Annals of
the American Academy of Political Science_, 1898, pp. 324-352.

[488] Revenue per ton mile in index to the Senate (Elkins) Committee
Hearings, 1905, vol. IV.

[489] Compare conclusions as to rebating in 1900; U. S. Industrial
Commission, XIX, p. 285. When, as in 1887, a general departure of 50
per cent. from published rates characterized transcontinental traffic,
the difference between the theoretical and actual revenue, as measured
by the published rates, is very great. 21 I.C.C. Rep., 349.

[490] The movement of average trainloads in connection with ton-mile
revenue bears upon this point. Thus in 1905, the increased trainload,
accompanied by a lower ton-mile revenue, points specifically to an
increase in low-grade traffic.

[491] Senate Finance Committee Report on Prices, 1893, Part I, p. 437.

[492] The effect of periods of depression, such as 1903 and 1908, upon
the proportion of low-grade tonnage is a moot point.

[493] _U. S. Statistics of Railways_, 1910, p. 64.

[494] Mileage of roads represented on June 30, 1910--130,395.46 miles.

[495] _Cf._ Ripley Railway Problems, p. 509. _Cf._ also p. 103, _supra_.

[496] Senate (Elkins) Committee, Digest, App. III, p. 63, brings out
the high proportion of local business in the South. On the L. &. N. 80
per cent. is thus classed.

[497] Mass. Commission on Commerce and Industry, 1908, p. 117.

[498] McCain, in Senate Finance Committee Report on Prices, 1893.

[499] I.C.C., Annual Rep., 1903, p. 150.

[500] Emphasized in the case of wool rates. 23 I.C.C. Rep., 151.

[501] Samuel O. Dunn, _The American Transportation Question_, p. 65.

[502] 22 I.C.C. Rep., 617; 11 _Idem_, 296; 13 _Idem_, 418; 23 _Idem_,
7; 9 _Idem_, 382, etc.

[503] J. R. Commons, _Bulletin, Bureau of Economic Research_, No. 1,
July, 1900; unfortunately not continued to date.

The best data giving actual rates and classifications is the _Forty
Year Review_, etc., published by the Interstate Commerce Commission,
as "Railways in 1902," part II, 1903; continued in Senate (Elkins)
Committee, Digest, App. II, 1905; and 58 Cong., 2nd sess., Senate Doc.
No. 257, savagely attacked in Bull. II, Chicago Bureau of Railway News
and Statistics, 1904. The largest collection of material is in the
Senate (Aldrich) Committee Report on Prices, 1890, I. pp. 397-658,
covering the period 1852-1890. Also Bulletin 15, Misc. Series, Div. of
Statistics, U. S. Dept. of Agriculture, 1898, pp. 1-80.

[504] The continuation of Commons' index number of freight rates
to date, seemed inadvisable on account of the changes in traffic
conditions which have taken place. Originally well selected, the
thirty-seven rates chosen in 1900 are not now representative. There
are, for instance, no transcontinental quotations at all; none from
the southern states, such as on raw cotton; none for the great staples
elsewhere moving under commodity ratings, such as iron ore, chemical
fertilizers, lumber, citrus fruit, etc. Moreover, twelve of the
thirty-seven items chosen by Commons were rates on petroleum which now
moves in bulk in pipe lines except locally. Several of the quotations
for coal, and for all the other carload rates, as a matter of fact,
have been so affected by changes in carload minimum rules, that the
mere rate by itself has little significance.

Rejecting Commons' particular index number by reason of its inherent
defects does not, however, lessen the desirability of choosing some
other combination of rates which may be used as a standard for
measurement of rate changes year by year. Yet the selection of such an
index number is open to all the difficulties attaching to a similar
index number of prices. Is the object, for example, an academic
determination of rate changes _per se_; or is it intended to ascertain
the financial burden of such charges upon the community? In the
former case the volume of traffic affected would not be an important
consideration. Local rates on indigo or millinery would be given the
same weight as similar changes in the rate on wheat between Chicago and
the Atlantic seaboard. The latter mode of approaching the question, on
the other hand, would correspond to an index number of prices, weighted
according to the volume of consumption. A doubled freight rate on
hard coal to Perth Amboy would outweigh an equal change in the charge
on castile soap in exact proportion to its commercial importance as
measured by the total tonnage transported. Many such details would
call for careful consideration before the final adoption of the rate
items chosen to constitute the index number; but the Interstate
Commerce Commission might well consider the initiation of such a
statistical project, endeavoring to do for railroad rates what the
Federal Commissioner of Labor performs so satisfactorily in officially
recording current changes in the price of commodities. Such a record
of railroad rates extending over a series of years, supplemented by
data for ton mileage revenue, would be invaluable in the determination
of the reasonableness of rate advances in future; even as the rate
increases of 1910 clearly pointed to the need of a similar standard for
purposes of comparison from year to year in the past.

[505] U.S. Industrial Commission, XIX, pp. 281-291; 58th Cong., 2nd
sess., Sen. Doc. 257.

[506] 16 I.C.C. Rep., 85. For other instances compare 12 I.C.C. Rep.,
149, and 23 I.C.C. Rep., 158.

[507] 9 I.C.C. Rep., 382.

[508] For further examples supplementing our concrete instances
above, the following citations are significant; For cattle, 11 I.C.C.
Rep., 238, 296 and 381; 13 I.C.C. Rep., 418; 23 I.C.C. Rep., 7; for
soft coal, 22 I.C.C. Rep., 617; for hay, 9 I.C.C. Rep., 246; for
transcontinental rates in general, _U. S. v. Union Pacific Railroad_,
etc., Supreme Court, 820. October Term, 1911, p. 558. The record, so
far as the general advances of 1910 are concerned, will be considered
in connection with the legislation of that date, in chapter XVIII.

[509] _Annals of the American Academy of Political Science_, 1898, pp.
324-352.

[510] Discussed in chap. XX.

[511] _Quarterly Journal of Economics_, 1907, p. 618.

[512] Calculations of C. C. McCain on the Diminished Ratio of Railway
Rates to Wholesale Commodity Prices, in connection with the increases
in 1910.

[513] Well expressed in a recent soft coal case; 22 I.C.C. Rep., 617.

[514] Further details in our historical summary in chap. I.

[515] The main sources of the following chronicle have been the files
of Annual Reports of the Interstate Commerce Commission and of the
_Railway Age_ and _Age-Gazette_.

[516] A carload of bamboo steamer chairs across the continent for $9.40
is a cut to the bone indeed. 21 I.C.C. Rep., 349.

[517] 54th Cong., 2nd sess., Sen. Doc. 115, is as fine a picture of
utter rate demoralization as can be found.

[518] Shown by diagram at p. 32, _supra_.

[519] Senate (Elkins) Committee, 1905, pp. 2730 and 2874.

[520] _Cf._ p. 405, _supra_.



CHAPTER XIII

THE ACT TO REGULATE COMMERCE OF 1887[521]

    Its general significance, 441.--Economic causes, 442.--Growth
        of interstate traffic, 442.--Earlier Federal
        laws, 443.--Not lower rates, but end of discriminations
        sought, 443.--Rebates and favoritism, 445.--Monopoly
        by means of pooling distrusted, 446.--Speculation
        and fraud, 447.--Local discrimination, 448.--General
        unsettlement from rapid growth, 449.--Congressional history
        of the law, 450.--Its constitutionality, 451.--Summary
        of its provisions, 452.--Its tentative
        character, 453.--Radical departure as to rebating, 454.


Due appreciation of the significance of the great body of Federal
legislation concerning railroads which has accumulated during the
last quarter century in the United States, depends upon a clear
understanding of the economic events of the period. Great laws are not
the figments of men's minds, conjured up in a day. They are a response
to the needs of the time. Their true causes are thus immeasurably
complex. Nor does a wholesale public demand for legislation arise
overnight. From small beginnings the pressure steadily grows,
oftentimes for years; until, perhaps through a conjuncture of
particularly aggravating events, matters are at last brought suddenly
to a head. Yet while this culmination of industrial or social pressure
may finally result in legislation under some particularly strong
political leadership, to assign such personal influence as even the
remote cause of legislation, is to belie all the facts and experience
of history. No clearer illustration of the close relationship between
economic causes and statutory results could perhaps be found, than in
the field of our Federal legislation concerning common carriers. It
forms one of the most important chapters in our industrial history.

Several of the economic causes of the Act to Regulate Commerce of
1887, are deep-rooted in the preceding decade. A few even run back
to Civil War times. Foremost among these was the rapid expansion of
the railway net; and particularly, as outlined in our introductory
historical chapter, its phenomenal growth during the eighties. More
new mileage was laid down in the year of the Act itself than at any
other time in our entire history within a single twelvemonth. Of equal
significance, however, was the far more than commensurate development
of long distance, that is to say, interstate business. The through
carriage of livestock and grain to the seaboard for export attained
immense importance; and the settlement of the Middle West called for
a corresponding westward movement of manufactured goods. The Windom
Committee of 1874 on "Transportation Routes to the Seaboard"[522] bears
eloquent testimony to the growing importance of this through traffic
as a factor in legislative activity. According to the Cullom Committee
Report twelve years later,[523] approximately three-fourths of the
railway traffic of the country was already at that time interstate in
character. On the trunk lines, excepting the Pennsylvania Railroad
which still relied more largely on Pittsburg-Philadelphia tonnage, more
nearly nine-tenths of the traffic consisted of through, as distinct
from local, business. Obviously, this pointed to the assumption of
authority by the Federal government, if any were to be exercised;
inasmuch as the separate states, as will shortly appear, were held by
the Supreme Court of the United States in 1886 to be powerless to deal
with interstate commerce.

The growing disposition of Congress to assume control over interstate
business had already been evinced in the passage of two Federal
statutes. One in 1872 had dealt with abuses in the carriage of
livestock. And another, even earlier, had sought to remove obstacles
set up by local jealousy and monopoly to the through carriage of
goods. Some railway charters actually prohibited railroads from making
connections with other lines; or from allowing cars to leave their
own rails. The Erie, for example, was thus hampered; lest the trade
of southern New York be diverted to rival seaports. But the military
necessity of through transport of troops, and the impediments to speedy
and cheap carriage of mails and goods through delays at junction
points, impelled Congress to authorize, though not as yet to compel,
the formation of through routes and the issue of through bills of
lading by the Act of 1866. The immediate response to this permissive
legislation was the rise of the private car lines, elsewhere described,
in connection with personal discrimination and also in the general
historical review.[524]

No widespread demand for a general reduction of railroad rates seems
to have existed in 1887. In this regard the situation is strikingly in
contrast with that which prevailed during the protracted hard times
succeeding the panic of 1873. Acute industrial depression during that
period had aroused deep public feeling against the "extortions of
soulless railway corporations." It was but natural that all the farmers
in the newly settled states should actively participate in the Granger
movement. The popular war cry in this agitation was lower freight
rates. This demand is voiced in the President's message of 1872,
calling for "more certain and cheaper transportation, of the rapidly
increasing western and southern products, to the Atlantic seaboard."
The proposals of the Senate to attain these objects are contained in
the above-mentioned Windom Committee Report of 1874. Competition is to
be stimulated by the development of waterways and new trunk lines. A
bureau of commerce is proposed. The long and short haul principle in
rate making is to be enforced. Stock-watering is to be prohibited; and
publicity of rates to be brought about. On the whole, reduced charges
are to be secured rather by means of natural competition among carriers
than through legislation. But the keynote of the Windom Report of 1874
is cheaper carriage of goods,--a general reduction of rates all along
the line.

Many things happened during the next twelve years to modify this
demand. By 1886, according to the Cullom Committee, "the paramount
evil chargeable against the operation of the transportation systems of
the United States, as now conducted, is unjust discrimination between
persons, places, commodities, or particular descriptions of traffic."
Purely economic events had brought about this change of opinion.
The rate wars of the seventies; a revival of general prosperity in
1879; and great mechanical improvements and economies in operation,
had brought about the desired decline of freight rates.[525] For the
time the bogey of extortionate charges was laid at rest. The Act of
1887, elaborate as it was in form, seems not to have been intended to
deal with rates in any general way. It was in the main aimed at the
prevention of specific abuses. "The practice of discrimination in one
form or another is the principal cause of complaint." Consequently, the
long succession of bills introduced in the House of Representatives
year after year for more than a decade by Judge Reagan of Texas and
others, made no attempt to provide administrative machinery by which
to fix rates in general; but sought merely to prohibit these specific
abuses by statute.[526] The proposition for a permanent commission
to deal with rates in a more comprehensive way, seems, as we shall
see, to have emanated from the Senate at a later time. But this more
statesman-like proposition from the upper chamber was essentially
different from the response in the House of Representatives to popular
feeling against discriminatory practices, which slowly gathered force
during more than a decade of agitation and debate.

What now were some of the specific "discriminations" which these
various bills in Congress aimed to prevent? And why did the
movement come to a head in 1887? The evidence is conclusive that
personal favoritism as between rival shippers took first place. The
indiscriminate and cut-throat competition of the carriers, particularly
in connection with the trunk line rate wars, offered a golden
opportunity to those in search of secret and preferential rates.[527]
The chief offender, of course, was the Standard Oil Company under the
direction of John D. Rockefeller. The Cassatt revelations in 1877 as
to exclusive contracts with the great trunk lines for the carriage
of oil, greatly stirred public opinion. Congressional attention had
been directed to the subject some years before by complaints from the
Pennsylvania field. But the abortive results of the investigation of
1875 demonstrated nothing beyond the shameful impudence of the chief
offenders. According to the New York (Hepburn) Committee investigation
in 1879, few shippers had ever seen printed tariffs. The Assistant
General Freight Agent of the New York Central testified that one-half
the business out of New York, and nine-tenths out of Syracuse went on
special rates. At this time there was also unrest in the anthracite
coal trade. Moreover, the activity of the "eveners" in the cattle
business in 1875-1879[528] had laid the foundation for still other
monopolies built up by means of rebates. But the constant irritant
in the public eye was the Standard Oil Company.[529] The Lake Shore
case, fought through every Ohio court and then on appeal up to the
Supreme Court of the United States in 1886, widely advertised the
discriminatory practices of the railroads. But the most spectacular
disclosures of all took place in 1885-1888 in the George Rice cases in
Ohio. The Cullom Committee in recommending publicity of rates as its
primary remedy for the evils of the time, specifically cites "this most
impudent and outrageous" proceeding.[530] In the protracted struggle
in conference committee upon the provisions of the act, elimination of
rebates was the only subject upon which both House and Senate conferees
were in thorough accord from the start. Whatever the commercial crimes
chargeable to the founder of the Standard Oil Company, he should, at
least, be credited with the performance of a great public service in
finally crystallising public opinion in 1887 in favor of railroad
legislation for the prevention of rebating.

Distrust of monopoly has always loomed up large in the public eye.
The dread of it is voiced in every public document of the time. The
Windom Committee in 1874, as we have seen, looked to the stimulation
of railway competition as its chief remedy against high rates. Five
years later, the Hepburn Committee in New York vehemently denounced
railroad monopoly as an evil to be sternly repressed. But, in the
meantime, the carriers, almost prostrated by the excesses of their rate
wars, were slowly learning how to coöperate for the maintenance of more
stable charges. Railroad pools and traffic agreements, first essayed
about 1875, were gradually elaborated; until by 1886 nearly all parts
of the country were covered by them.[531] From small beginnings in
1877, the Trunk Line Association under Albert Fink was in its heyday
of activity. The Southern Railway Association was restoring order out
of chaos, south of the Ohio river. By 1886 all competitive traffic
north and west of Chicago was pooled. This was especially true of
the highly competitive business between the Missouri and Mississippi
rivers. Even in remoter regions, such agreements threatened to
deprive the public of the benefits of rival railroad construction.
In Colorado and New Mexico public sentiment was deeply aroused over
the tripartite division of territory between the carriers then in the
field.[532] The helplessness of independent railroads was made evident
in connection with the attempt of the (now) Colorado & Southern road
to gain a foothold. Its suits in both state and Federal courts, and
the attempted remedial legislation by Colorado in 1885, disclosed the
great power of monopoly over the public welfare in that region. In
Texas, the Gould-Huntington apportionment of the field between the two
systems in 1881,[533] was doubtless perceived as to its results, even
if its precise terms were secret. The Texas Traffic Association, also,
organized in 1875, embraced all the lines in that vicinity. May it not
well be that the final inclusion in the Act of 1887 of the prohibition
of pooling, upon direct insistence of the Texas representative in
Congress against the protest of the Senate, had some connection with
these events? It seems clear that the marked interest of the railways
in eliminating competition all over the country at this critical time,
carried great weight with Congress in shaping the law.

The years since the Civil War had witnessed an ever increasing
volume of speculation and fraud in railway affairs, which reached
its climax in the frenzied construction period of the eighties.[534]
Jay Gould, "Jim" Fisk and their successors who contributed to the
"railway panic" of 1884, had done their work well in arousing public
hostility to the railroads. The Hepburn Committee Report in New York
is symptomatic of the state of feeling in its vehement denunciation
of these practices.[535] The Windom Committee, five years earlier,
had officially registered its opinion that of all the abuses of the
time, "none have contributed so much to the general discontent and
indignation as the increase of railway capital by _stock watering_ and
_capitalization of surplus earnings_. The murmurs of discontent have
swollen into a storm of popular indignation. Your committee believe
the evil to be of such magnitude as to justify and require for its
prevention the coöperation of both Congress and the States."[536]
Nor is the Cullom Committee less emphatic in 1886; although its
condemnation is shifted from the trunk lines, particularly the New
York Central and the Erie, to the newly constructed "unnecessary
roads." "This practice (of stock watering) has unquestionably done
more to create and keep alive a popular feeling of hostility against
the railroads of the United States than any other one cause."[537] All
were agreed that the remedy must be applied by the states, from which
the companies derived their charters. But a powerful impulse toward
publicity of accounts and operating details as well as of rates, to
be enforced by the hand of the Federal government, was unquestionably
imparted by the financial scandals of the time. It was hoped that
fraudulent construction concerns, subsidiary companies for "milking"
the main corporation, unnecessary paralleling of existing lines for
purposes of blackmail, speculative bankruptcies and all similar
practices of the period might be restrained in part by letting in the
light of day upon their affairs.

Then again, there were the discriminations in rates, so vehemently
denounced, against the small towns and local business, in favor of
the large cities mainly interested in long distance traffic. Such
jealousies and rivalries of course antedate the railroad. They are
almost as old as trade. And yet the course of affairs since the panic
of 1873, had lent peculiar force to them by the middle of the eighties.
It had been a period of ruinous railroad competition all over the
land, but especially in trunk line territory. Through rates had fallen
tremendously; without any corresponding change in local charges.[538]
The great western cities and the remote farmers were the immediate
beneficiaries, of course. But there were the older communities of
the East to be reckoned with,[539]--the farmers of New England and
Middle New York and the secondary cities which had once been terminal
points but were now become way stations. In the South, new towns were
springing up, anxious to divide distributive trade with the older
cotton concentration points. Nashville, soon to take first place in a
celebrated case, was being built up by a favoring railway; and Atlanta,
a purely railroad town, was in rapid growth at the expense of older
rivals. The separate states had long sought to deal with this ancient
evil of local discrimination in rates by means of long and short haul
clauses; but to little effect. What wonder that the Cullom Committee in
1886, heads its long list of "complaints against the railroad system of
the United States" by two forms of this alleged evil!

In brief, the contemporary evidence all goes to show that,--quite aside
from evil intent,--the railroad business of the United States in the
middle of the eighties, was in a highly disorganized state. Phenomenal
economic development since the resumption of specie payments in 1879,
had perhaps outstripped the capacity of managements to scientifically
order their affairs. Collateral evidence as to this is the
extraordinary wastefulness, of operation which prevailed. Competition
had run mad. All of the tricks and vagaries of roundabout routing of
freight found place.[540] To keep pace with mere operating demands
was a heavy enough task,--to say nothing of constructing well-ordered
tariffs, keeping straight accounts, and providing adequate funds for
growth. And out of this unsettled condition of affairs there had sprung
the usual mushroom crop of speculation, fraud and corruption which is
bound to flourish at such times.

And then, finally, in seeking to understand the economic situation
in 1887, the intolerable arrogance of great railway managers must be
kept in mind. Honorable exceptions there must have been, to be sure.
But the "Public be damned" attitude of the old Commodore Vanderbilt
was evidently a general, although perhaps a somewhat exaggerated one.
It is certain that there was no well-defined sense of responsibility
to the public. All attempts at investigation or reform were treated
as "interference with private business." The rising tide of popular
feeling was increased by evidence of corrupt political practices,
as well as of mere crude contempt for the rights of patrons. Read
the congressional debates upon the Camden and Amboy monopoly in New
Jersey; the special laws "jammed" through the state legislature by the
New York Central Railroad;[541] and the revelations as to corruption
in the Credit Mobilier and other proceedings in Congress.[542] Such
things added fuel to the flames in the East, kindled and kept alive in
the West by the Granger movement. The time for an attempt to curb the
second great manifestation of corporate power in the United States was
indeed at hand. The only question was as to the form which it should
assume.

       *       *       *       *       *

The congressional history of the Act of 1887 extends over a period
of nearly fifteen years. The first general bill to pass the House of
Representatives in 1874, had for its object a reduction of rates; but
the movement for the elimination of discriminatory practices did not
begin until two years later. Then in 1877, came the first of the long
series of bills which finally led up to the statute in its final form,
prepared by Representative Reagan of Texas. But it was not until 1884
that the Senate, ever tardy in its response to public sentiment, began
to take the matter seriously. Its earlier interest in reduced rates
had dissipated, ten years before, with the Windom Committee Report.
Now, however, under the leadership of the Senator from Illinois, the
Cullom Committee brought in a bill, the distinctive feature of which
was provision for a permanent administrative commission. The various
House bills, in their distrust of executive appointments and authority,
had favored leaving the elimination of abuses, once clearly defined
by law, to the Federal courts. A legislative deadlock between the two
chambers resulted upon this point; as well as concerning the status of
pooling. For the House sought to prohibit all traffic agreements; while
the Senate would permit them under proper administrative supervision.

At this critical juncture the Supreme Court decision in the Wabash, St.
Louis, and Pacific Railway case[543] was handed down. It specifically
denied to the individual states, power to regulate the ever-increasing
volume of interstate traffic. This decision put the match to the long
train of influences making for action. The Senate and House bills were
therefore taken up in conference committee, with the usual outcome of
give and take. The Senate gained its point of administrative, rather
than judicial, control. A commission was provided; but the courts were
accorded power to entertain appeals. On the other hand, the House
conferees insisted upon the prohibition of pooling and a more stringent
long and short haul clause. All were agreed in respect to the publicity
features. The series of votes at different times with steadily growing
majorities, leading up finally to the passage of this compromise
statute by both houses, is significant of the progress of public
opinion upon the matter.

                      _House of Representatives_  _Senate_

  1874  Passed                121 to 116             --
  1877    "                   139 to 104             --
  1884    "                   161 to  75          43 to 12
  1886    "                   192 to  41          47 to  4
  1887    "                   219 to  41          37 to 12

The constitutionality of the Act to Regulate Commerce of 1887 need not
long concern us.[544] Everything depended upon the interpretation of
the clause in the Constitution conferring upon Congress power over
commerce with foreign nations and among the states. A generation
earlier the regulation of railroads by Federal statute might not have
been sanctioned. But Lincoln and Grant had dealt a death blow to the
old states' rights idea. And the positive legislation after the Civil
War prior to this time, had already denoted a much more progressive
and liberal point of view. The far-reaching decisions of the Supreme
Court following _Munn v. Illinois_ in 1876 had clearly upheld the
power of the several states to regulate commerce. The situation called
only for definition of the dividing line between state and Federal
authority. This was accorded in the Wabash case, which, as has already
been stated, terminated the congressional deadlock, and brought about
an agreement upon the terms of the law. Nor is it without significance,
in the light of subsequent events, that the Wabash case was an appeal
by a common carrier to Federal authority for protection against a state
statute.

A brief summary of the main provisions of the Act to Regulate Commerce,
at this point, will be convenient for future reference.

    Section 1. It applies to freight and passengers by land; or by
    land and water in cases of continuous or through shipment, even
    to foreign countries. All charges shall be reasonable and just;
    and every unjust and unreasonable charge is prohibited.

    Section 2. Rebates and personal discrimination of every sort
    forbidden.

    Section 3. Local discrimination forbidden; equal facilities for
    interchange of traffic with connecting lines prescribed.

    Section 4. Long and short haul clause: "That it shall be
    unlawful for any common carrier subject to the provisions of
    this act, to charge or receive any greater compensation in the
    aggregate for the transportation of passengers or of like kind
    of property, under substantially similar circumstances and
    conditions, for a shorter than for a longer distance over the
    same line, in the same direction, the shorter being included
    within the longer distance; but this shall not be construed as
    authorizing any common carrier within the terms of this act to
    charge and receive as great compensation for a shorter as for a
    longer distance: _Provided_, _however_, That upon application
    to the Commission appointed under the provisions of this act,
    such common carrier may, in special cases, after investigation
    by the Commission, be authorized to charge less for longer than
    for shorter distances for the transportation of passengers or
    property; and the Commission may from time to time prescribe
    the extent to which such designated common carrier may be
    relieved from the operation of this section of this act."

    Section 5. All pooling and traffic agreements prohibited.

    Section 6. All rates and fares to be printed and posted
    for public inspection at all stations; and filed with the
    Commission at Washington. No advance in rates except after ten
    days notice. All charges, other than as published, forbidden.

    Section 9. Procedure by complaint before the Commission or
    Federal courts. Power to compel testimony and production of
    papers.

    Section 10. Penalty of $5000 for each offence in violation.
    (Amended in 1889, adding imprisonment.)

    Section 11. Interstate Commerce Commission of five members
    established; by Presidential appointment; term six years.

    Section 12. Powers of Commission to inquire, with right to
    obtain full information necessary to exercise of its authority.
    Power over witnesses and production of papers, to be sustained
    by U. S. Circuit Courts.

    Sections 13-14. Procedure before Commission by complaint.
    Parties competent to appear. Decisions to include findings of
    fact upon which based, for courts on appeal.

    Section 15. Duty of Commission to notify carriers to "cease and
    desist" from violation, or to make reparation for injury done.

    Section 16. To enforce obedience, procedure by petition of
    Commission in Federal courts, which may issue writs.

    Section 20. Annual detailed reports from carriers as to
    finance, operation, rates or regulations in prescribed forms as
    desired by the Commission.

Such is the substance of the statute which marks the real, beginning
of subjection of the railroads to control by the Federal government.
It was avowedly tentative in character. It was a compromise, entirely
satisfactory to no one. Many of its provisions were not new.
Administrative commissions had already been in existence some time in
several of the states. Pooling had also commonly been condemned. The
long and short haul clause in the statute constitutes no innovation.
It was based specifically upon a number of state laws, more or less
similar to it in tenor.[545] In Vermont, for example, since 1850; in
Virginia, since 1867; and in Massachusetts, since 1874, long and short
haul clauses had been in force. Some seventeen states, prior to the
enactment of the Interstate Commerce Act in 1887, had conceded the
wisdom of such an adjustment between local and long hauls. Nor were
such statutes disregarded, as a rule. Thus, in Massachusetts they were
enforced to the extreme degree of prohibiting any concession in rates
at Provincetown, on the point of Cape Cod, one hundred and twenty miles
from Boston by land, while only thirty-six miles in a direct line
by water, below the rates at any of the intermediate points on the
roundabout rail line along the Cape. The debates in Congress at the
time this section of the Act was under discussion show that the bill
as finally passed was a compromise between an absolutely inflexible
prohibition, in the House, and a more elastic measure, providing for
exceptions, in the Senate.

In one respect the law of 1887 marks a profound revolution in both
commercial theory and practice. Its provisions concerning equality
of rates to all classes of shippers denote a great moral uplift in
the business standards of the country. Prior to this time the English
common law, while requiring reasonableness of charges by common
carriers, by no means insured that such charges should be stable and
uniform. This flowed perhaps from the circumstance that rebating was an
essentially American abuse. Neither in England, nor on the continent
for that matter, had business rivals ever made such use of the services
of carriers to suppress fair competition in trade. With us, on the
other hand, in the early free-and-easy days, entire freedom of contract
between shipper and carrier had been the rule. Published tariffs were
only the starting point for "higgle" and "dicker." It was not bad form
for a shipper to "go shopping" freely among the freight agents of
competing lines. The location of new enterprises, new opportunities for
the expansion of old ones, were all more or less conditioned by the
special favors which were so readily obtainable on demand. Nor was the
accompaniment of secrecy necessarily due to fear of moral condemnation
by the community. Secrecy was an economic essential of the device, as
has elsewhere been shown.[546] By this new statute all was suddenly
changed. Rebating was made a crime, punishable as such. Is it any
wonder that, almost from the outset and for nearly fifteen years, this
part of the law was the storm centre of litigation; and that in respect
of rebating, the need of supplementary legislation should first become
apparent?

FOOTNOTES:

[521] The following references are best:--1866. Hudson, J. F. The
Railways and the Republic.--1877. Seligman, E. R. A. _Political
Science Quarterly_, II, pp. 223-264 and 369-413.--1887. Nimmo, J.
Legislative history in _The Railway News_, currently reported.--1887.
Painter, U. H. Compilation from the Congressional Record. Privately
published.--1888-1889. Hadley, A. T. _Quarterly Journal of Economics_,
II, pp. 162-187; III, pp. 170-187. In addition, the general works of
Hadley, Charles Francis Adams and Haney; and the extensive list of
magazine articles in the Bibliography on Railways of the Library of
Congress, 1907.

[522] 43d Congress, 1st session, Senate Report No. 307, 2 pts.

[523] 49th Congress, 1st session, Senate Report No. 46, 2 pts: pt. 1,
pp. 16 and 137-166.

[524] Pp. 140 and 192.

[525] In detail at pp. 22 and 411, _supra_.

[526] _Cf._ Haney, vol. II, p. 309.

[527] _Cf._ pp. 22, and 431, _supra_.

[528] Select Senate Committee on Transportation of Meat Products, 1889,
p. 2, etc.

[529] _Cf._ the chapter from Miss Tarbell's History of the Standard Oil
Company, reprinted in our Railway Problems. Hudson, pp. 55-106, well
summarizes the Hepburn Committee testimony.

[530] _Op. cit._; vol. I, p. 199.

[531] Pooling is discussed in detail in volume II.

[532] University of Colorado Studies, V, 1908, pp. 137-148.

[533] Bulletin, University of Texas, No. 119, 1909, p. 73.

[534] Details in chapter I and in the discussion of speculation in
volume II.

[535] Hudson, _op. cit._, pp. 251-286, uses much of this testimony.

[536] Pp. 72 _et seq._

[537] Pp. 51 _et seq._

[538] Pages 22, 422, _supra_, and 456, _infra_.

[539] _Cf._ Hudson, _op. cit._, pp. 41-46.

[540] _Cf._ chap. VIII.

[541] Chapters of Erie reprinted in part in our Railway Problems.

[542] _Cf._ Haney, Congressional History of Railways, vol. II, p.
256. The Credit Mobilier is also described by reprint in our Railway
Problems.

[543] 118 U. S. 557.

[544] _Cf._ Cullom Committee, 1, pp. 28-40; and the summary of
Congressional debates by Haney, _op. cit._, vol. II, p. 231 _et seq._

[545] 21 I.C.C. Rep., 340.

[546] Chapter XX.



CHAPTER XIV

1887-1905. EMASCULATION OF THE LAW

    Favorable reception, 456.--First resistance from unwilling
        witnesses concerning rebates, 457.--Counselman and
        Brown cases, 458.--The Brimson case, 459.--Relation
        to Federal Courts unsatisfactory, 460.--Interminable
        delay, 461.--Original evidence rejected, 461.--The
        Commission's court record examined, 462.--Rate orders at
        first obeyed, 467.--The Social Circle case, 468.--Final
        breakdown in Maximum (Cincinnati) Freight Rate
        case, 469.--Other functions remaining, 472.--The long
        and short haul clause interpreted, 474.--The Louisville
        and Nashville case, 474.--The "independent line"
        decision, 476.--The Social Circle case again, 478.--"Rare
        and peculiar cases," 479.--The Alabama Midland (Troy)
        decision, 481.--Attempted rejuvenation of the long and
        short haul clause, 483.--The Savannah Naval Stores
        case, 484.--The dwindling record of complaints, 485.


The first response to the new Federal law by the railroads was entirely
favorable.[547] They sought to obey its mandates both in letter and
spirit. The Commission reports in 1888 that the railroads "conformed
promptly" to their orders; although in the South and West they were
"moving more slowly." On the other hand, the new Commission under the
leadership of Judge Cooley, an able jurist trusted by all parties
concerned, was equally conciliatory in spirit. Many desirable changes
were brought about in railway practice. Attempts were made to remodel
tariffs all over the country, particularly in the East, to conform to
the long and short haul clause.[548]

The immediate effect of acquiescence in Section 4 was to compel, in
many parts of the country, a reduction of the local rates in order
to reduce them below the rates charged to terminal and competitive
points. Thus, for example, throughout trunk line territory, they
were almost uniformly adjusted to meet this requirement. Even in the
southern states, where in some quarters the most persistent opposition
to the law has from the first existed, there was a patent disposition
shown to recognize the justice of such legislation. The Southern
Railroad modified its tariff all along the line as far as Atlanta,
although it claimed inability to make changes beyond that point. For
nearly three years, in fact, the carriers conformed in an increasing
degree to this requirement of the law.[549] A sincere effort toward
uniform classification of freight, with substantial results in the
direction of simplification of schedules, extended over several
years. Many pools were disbanded; all were reorganized in conformity
with the statute. And in the matter of uniformity and publicity of
statistical returns, friendly coöperation between the railroads and the
Commission, brought about great improvements in accounting practice.
No considerable popular interest in the new commercial tribunal, to
be sure, is indicated by the volume of its business. After five years
experience, only thirty-nine formal complaints were filed in 1892. But
this may have been due in part to the natural hesitancy of shippers
to antagonizing the roads by coming out into the open with their
grievances. Or, perhaps, it was merely because the people at large were
as yet quite unfamiliar with the law and with the ease of procedure
under it.

The earliest intimation of determined resistance by the carriers came
in connection with prosecutions for rebating in 1890. This abuse was
still widely prevalent. The Commission complained in that year of the
"general disregard" of the law against personal discrimination; and
set out to prosecute with vigor. But witnesses called upon to testify
before grand juries as to such practices, proved recalcitrant.[550]
Corporations could be made amenable to the law only through the
instrumentality of persons in their employ. And guilt in such matters
could be detected only by the testimony of those who had directly
witnessed, or participated in, the unlawful acts themselves. As one
writer has put it, "Rebate contracts are not usually negotiated before
large audiences nor are rebate payments commonly made upon street
corners. An essential element in these practices, quite aside from
their legality, is the secrecy with which they are conducted." It soon
became apparent that unless this mantle of secrecy could be stripped
off in preliminary proceedings, not even indictments could be had,--to
say nothing of the proof needed for subsequent conviction.

The first ground for contesting the right of the government to
extort testimony from unwilling witnesses arose, oddly enough, from
an amendment of the law intended to increase its effectiveness.
Originally punishable only by heavy fine, on recommendation of the
Commission, Congress added in 1889 an amendment whereby departure from
the published rate was made punishable also by imprisonment. By this
change criminal, as well as civil, procedure was thus brought into
play. The amendment, moreover, extended the punishment to shippers; the
railroad official who gave rebates having alone been liable hitherto.
An unexpected result speedily followed. In 1890 one Counselman, a
shipper, questioned concerning his enjoyment of less than the open rate
upon grain, declined to answer, taking refuge under the Fifth Amendment
to the Constitution of the United States. This declared that "no
person ... shall be compelled in any criminal case to be a witness
against himself." The witness persisted in his refusal to testify
even before a district judge: and the case went on appeal through the
Circuit Court which decided in favor of the Commission, up to the
Supreme Court of the United States. This tribunal in 1892 held that
the Revised Statutes of the United States which for twenty-five years
had been held to protect the constitutional rights of witnesses when
called upon to give testimony, against criminal proceedings based upon
such evidence, did not in fact adequately afford such protection.
Counselman was ordered discharged from the custody of the United
States Marshal. It was held, furthermore, "that a statutory enactment
to be valid, must afford absolute immunity for the offence to which
the question relates."[551] Congress promptly passed a law to this
effect in the following year. The matter did not, however, rest here.
The validity of this later statute had now to be upheld. And, with
discouraging defeat in 1894 in an Illinois Circuit Court, the issue had
to be raised again a year later elsewhere, to be then carried on appeal
a second time to the Supreme Court. This took place in the so-called
Brown case.[552] The final outcome in 1896 was a complete denial of the
right of witnesses to withhold material testimony. But it required six
years of litigation to bring about the desired result.

During the pendency of the proceedings above described, a second line
of resistance to the government developed. Not the merely negative
personal right of witnesses to withhold testimony, but the positive
legal authority of the Commission to exact it, was called in question.
This struck at the very roots of all procedure. For it challenged the
validity of the Act itself. In how far might an administrative body,
independently, have power, hitherto resident alone in the courts and
Congress, to compel the attendance and testimony of witnesses as well
as the production of papers? Section 12 of the Act was evidently
intended to confer such powers as were possessed and might be delegated
by the Congress. But then there was the Constitution again to be
considered! Certain witnesses declined to produce books and answer
questions in 1892. One Brimson was selected for a test case. The first
decision by the Circuit Court held these sections of the statute to be
unconstitutional on the ground that "Congress cannot make the judicial
department the mere adjunct or instrument of the other departments."
But the Supreme Court of the United States in 1894 reversed this
judgment; and, unreservedly, although by a bare majority opinion,
affirmed the constitutionality of the procedure under the Act.[553]
This Brimson opinion, together with the Brown decision two years
later, were confidently believed to have so strengthened the arm of
the government that rebating might at last be eliminated. But, as will
shortly appear, an entirely new law was yet needed to eradicate the
evil. For the moment, however, the right of Congress to legislate and
of the Commission to act, had been upheld.

       *       *       *       *       *

The relation of the Interstate Commerce Commission as an administrative
body to the Federal courts under the provisions of the Act of 1887,
proved unsatisfactory from the first. In order to understand the
situation, it may be well to review the ordinary procedure. Formal
complaint having been filed, the Commission heard the case and
promulgated its decision in the form of an order to the carriers. If
they chose to comply with it, well and good. Otherwise, the Commission
must apply to a Federal court for the issuance of a judicial writ to
compel obedience to the order. Thereupon the court proceeded to review
the case; and upon the findings to issue an order of its own. From this
order, however, appeal might be taken even up to the Supreme Court.
Then, and then only, did the original mandate of the Commission have
the force of law. Practically, two results followed, as shown by the
experience of the succeeding years. There was intolerable delay in
the redress of grievances; and, in the second place, all definitive
proceedings were postponed until the case had gone on appeal to the
courts. In other words the Commission instead of being a coördinate
body with the courts, was reduced to an entirely subordinate position.
Its function became merely to institute proceedings, and thereafter
to appear as a complainant before other tribunals competent alone
to decide the case. Intolerable delay in procedure was the constant
complaint of shippers. Years elapsed before final judgments were
rendered. The average duration of cases appealed was not less than four
years. Sometimes they extended over twice that period. Often, as in
the Charleston, S. C., case in 1898, several years elapsed before the
Commission itself rendered a decision. Knotty cases were sidetracked.

But the main source of delay was in the carriage of cases on appeal up
to the Supreme Court of the United States. They had to await their turn
in regular order, being given no priority on the crowded dockets. The
Social Circle and Import Rate cases, soon to be discussed, consumed
five years in litigation, even after the Commission had rendered its
opinion. The Florida Fruit Exchange case involving rates on oranges,
originally decided by the Commission in 1891, was for six years
thereafter before the Federal Courts. The Georgia Railroad Commission
cases were not settled for nine years. Nor did the tedious process end
here. After the judicial review, which usually covered the law points,
the entire question had to be remanded to the Commission for a new
order in conformity with the findings of the court. After nine years
of litigation in the Chattanooga case, back it went to the Commission
to be re-tried after consideration of other commercial factors. First
decided in 1892, it was reopened in 1904.[554] Is it any wonder that
the number of formal proceedings instituted on complaint of shippers
steadily dwindled year by year? In 1901 only nineteen petitions were
filed. Business of this sort was almost at a standstill.

A second unsatisfactory feature of the relations of the Commission to
the courts, lay in the refusal of the latter to accept the evidence
taken before the Commission in the original proceedings as final.
Trouble began in 1888 on the first appeal, known as the Kentucky
and Indiana Bridge case.[555] The court treated it as an original
proceeding, even as to questions of fact; and proceeded to consider
it _de novo_. This of course involved a duplication of all expenses;
which, in causes sufficiently important to appeal, were very heavy. Ten
volumes of typewritten testimony, each as large as the Congressional
Record, were taken, for instance, in the San Bernardino case.[556]
Both shipper and railroad, therefore, commonly came to regard the
proceedings before the Commission as merely a necessary formality to
be observed prior to the conclusive adjudication of the matter by the
courts. This placed the Commission in a most awkward predicament. It
was compelled by law to render a decision upon an entirely imperfect
presentation of facts. And this decision was thereafter liable to
be reviewed upon the basis of entirely new testimony. Thus in the
leading Alabama Midland case, involving the reasonableness of rates
to Troy, Alabama, as compared with adjacent towns, much depended upon
the existence of effective competition with the railroads from boat
lines on the rivers at other places.[557] Before the Commission the
evidence adduced by the carriers dwelt upon the navigability of the
Chattahoochee river as compelling lower rates at Columbus and Eufaula
than at Troy, an inland town. Yet, when the case was really opened up
in appeal proceedings, it appeared that this magnificent waterway was
really dry about half the year; that the channel was never deeper than
three feet; and that boats were at all times of the year "embarrassed
by the overhanging trees." How could the Commission be expected to
pass upon vital questions wisely under such circumstances? Whether
wilfully done or not,--and evidence is not lacking of a deliberate
policy adopted in some cases,--the inevitable effect was to bring
the Commission and the law itself into discredit. So accentuated did
this evil become, that in the Social Circle case the Supreme Court
distinctly discountenanced the practice, declaring it to be the
intention of the law that all material facts should be disclosed in
the original proceedings.[558] But it was not until 1906 that the mode
of procedure on appeal was by statute clearly defined. In the meantime
public interest in the work of the Commission was bound to wane.

In this connection it may not be out of place to refer to the
persistent use made of the record of the Commission in court
proceedings under these adverse circumstances, as a plausible argument
by the railroads in later years against any augmentation of its powers.
One brief, for example, recites that "since 1887, forty-three suits
have been instituted to enforce final orders of the Commission as to
rates. The net result of the action of the courts shows two affirmances
and thirty reversals." It continues later, "as over ninety per cent. of
the Commission's orders as to rates which have gone before the courts
have been overruled, it is impossible to foretell what havoc would
follow from the exercise of such powers." This statement is entirely
true, but it is not the entire truth. We may profitably consider
the cases of sufficient importance to have been passed upon by the
Supreme Court of the United States. Between 1887 and 1905, sixteen
such decisions were rendered on cases appealed for enforcement by the
Interstate Commerce Commission. Fifteen of these were decided in favor
of the carriers, while only one sustained in part the contention of the
Commission. At first sight, this record certainly appears to warrant
the condemnation of the Commission. A body so persistently on the wrong
side of great questions as this record indicates, would surely invite
distrust. There were two answers to this contention, however, which
merit consideration before a final judgment can be rendered. One of
these was the irregularity of procedure, above described. The other
was that these court cases had nearly all involved, not so much the
administrative application of the law to economic abuses, as the purely
judicial interpretation of the law itself.

Only by means of concrete cases decided by the Commission as an
administrative body, could the scope and meaning of the original law
be determined. This was a most difficult task hinging upon the utmost
legal technicalities and refinements. Even the most learned judges
failed to agree among themselves. Thus in eight of the sixteen cases
above mentioned, the decisions in the lower Federal courts failed of
agreement with the final decree of the Supreme Court. In the Cartage
case,--involving the legality of a railway giving one shipper free
cartage of goods to a railway station as an inducement to ship over its
line, while withholding the privilege from another,--the Commission
was sustained in the Circuit Court and reversed in the two higher
tribunals. In other instances, like the Social Circle case,--turning
upon the discrimination in freight rates against small towns in favor
of large competitive centres,--the first court ruled adversely, while
the Circuit Court of Appeals and the Supreme Court sustained the
Commission in part. Or yet again, as in the Chattanooga case,--wherein
this city complained against a higher freight rate from New York than
the rival city of Nashville enjoyed, although the goods for Nashville
passed through Chattanooga and were hauled one hundred and fifty-one
miles further,--both lower tribunals sustained the Commission only to
be finally overruled by the Supreme Court. The fact that in only eight
of these most important cases the courts could agree among themselves
indicates the nicety of the legal issues comprehended. All parties
were in fact working much in the dark, both as to the intention of the
original law and as to the possible effects of its interpretation. The
charge of incompetence, if it held good for the Commission, applied
equally well to a large number of the most learned judges in the
Federal courts.

Another indication of the extreme delicacy of the legal issues
involved, is found in the lack of unanimity even among the justices of
the Supreme Court itself. In nine of the sixteen Supreme Court cases
the final decision was not rendered without dissent. As the lower
courts were divided among themselves, so the justices of the Supreme
Court were apparently somewhat at sea. The minority, to be sure, was
small, in most cases being due to the failure of Justice Harlan to
concur. But in the far-reaching Import Rates case,[559] the court was
more evenly divided. The issue raised, concerned the legality of lower
through rates on imports from Liverpool to San Francisco _via_ New
Orleans, than were granted on domestic shipments from New Orleans to
the same destination. Thus the rate on books, buttons, and hosiery,
from Liverpool to San Francisco through New Orleans was $1.07 per
hundred pounds. At the same time the domestic shipper was compelled
to pay $2.88, or two and one-half times as much, for a haul from
New Orleans to San Francisco alone. In another important instance,
tin plate was carried from Liverpool by steamer and rail through
Philadelphia to Chicago for twenty-four cents per hundred pounds. For
the American merchant in Philadelphia the rate to the same market was
twenty-six cents. For the inland haul alone the Pennsylvania Railroad
was receiving sixteen cents on the foreign goods, while coincidently
charging American merchants ten cents more for the same service.
Discrimination against the American merchant in favor of foreign
competition, not infrequently more than sufficient to overbalance any
supposed protection afforded by the tariff, has been repeatedly proved
in such cases as this. The duty on imported cement was eight cents per
hundredweight. In one instance, this duty with the total freight rate
added amounted to only eighteen cents, as against a rate of twenty
cents for the domestic producer from New York to the same point. There
were reasons for this grievous discrimination against the domestic
shipper, mainly concerned with the vagaries of ocean freight rates.
Steamers must have ballast for the return trip to equalize out-going
shipments of grain and other exports, and they will carry heavy
commodities, such as salt, cement, crockery, and glass, at extremely
low rates. Nevertheless, such imported commodities can be sold to
advantage in competition with domestic goods only when the railways
will contribute equally low rates to complete the shipment.

The Interstate Commerce Commission in these Import Rate cases
originally held that such discriminations were unlawful. Two
appellate courts, in turn, sustained this view. Finally, however,
the Supreme Court decided, with three members, including the Chief
Justice, dissenting, that the Interstate Commerce Law as phrased
did not expressly prohibit the practice. Everything turned upon the
interpretation of certain clauses in the law. No question was ever
raised as to the economic issues involved, nor was it competent to
these tribunals to pass upon such issues. The question was simply and
solely this: When the Act to Regulate Commerce forbade inequality or
discrimination between shippers, did it contemplate competition between
shipments originating within the country and others from foreign ports?
Was the Interstate Commerce Commission, in other words, empowered,
in interpreting this act, to consider circumstances and conditions
_without_ as well as _within_ the boundaries of the United States?
If it was entitled to consider solely domestic conditions, it was
certainly right and economically sound in forbidding such practices;
if, on the other hand, it was required to take account of commercial
conditions the world over, irrespective of the effect upon the domestic
producer and internal trade, its decision should have been favorable
to the railroads. To appreciate fully the extreme nicety of the legal
points involved and the delicacy of the economic interests at issue,
one must needs read the extended opinions both of the majority of the
Supreme Court and of the three dissenting justices, including Chief
Justice Fuller. But to interpret the reversal of the original decision
of the Interstate Commerce Commission by this tribunal as in the
slightest degree involving incompetence or judicial unfairness is a
misrepresentation of all the facts involved. As in the preceding cases
touching the interpretation of the long and short haul clause, it may
fairly be said that the consensus of opinion among business men, and
certainly among the professional economists of the country, was on the
side of the Commission in condemning such practices. As to the law,
that was decided otherwise by a narrow majority.

The final breakdown of the law of 1887 came, however, not from mere
defects in procedure, but from the adverse construction placed by the
Supreme Court of the United States upon its fundamental clauses, viz.,
those concerning the exercise of rate-making power by the Commission.
Whether or not it was the intention of Congress to delegate such power,
seems not to have been considered for some years. At all events,
within two months after the law was passed the Commission certainly
interpreted the law as giving it, not only power to investigate but to
prescribe remedies for what it conceived to be unreasonable charges.
The right to exercise general rate-making power in first instance was
distinctly disclaimed.[560] But the right to prescribe a modification
of existing rates on complaint was repeatedly affirmed, without
question either by the carriers or the Federal courts.[561] The first
order of the commission in _Evans vs. The Oregon Navigation Company_
directed a reduction of the rate on wheat from Walla Walla, Washington,
to Portland, Ore., from thirty to twenty-three and one-half cents.
It was promptly complied with. Then came the Farmington-Red Wing,
Minn., wheat case, touching not absolute but relative rates between
two competing places. The order that the charge to one town should not
exceed that to the other by more than one-third was likewise obeyed.
Even freight classification, not specifically mentioned in the Act, was
supposed to be fully subject to the Commission's control.

In the Reynolds case, railroad ties and lumber were ordered to be
grouped together, without contest. The activity of the Commission at
this time in promoting uniform classification elsewhere discussed,[562]
was evidently based upon a similar belief in its legal competency to
act. For nearly a decade attention seems to have been so concentrated
upon matters of judicial procedure, that this more fundamental
proposition was neglected. Moreover, all this time was needed to secure
a final pronouncement from the Supreme Court, which was alone competent
to settle it as a matter of law.

It was not, then, until almost ten years after the institution of the
Commission, in fact, that its rate-making power was denied. The first
shadow of doubt seems to have been expressed in the decision of the
Supreme Court in the so-called Social Circle case.[563] This involved
the reasonableness of rates from Cincinnati to the town of Social
Circle, Georgia, as related to the rates to Atlanta and Augusta on
either side. Disregarding other phases of the case which concerned
the interpretation of the long and short haul clause, the Commission
had, when the case was first decided in 1891, ordered a reduction
of the rate from Cincinnati to Atlanta from $1.09 to $1 per hundred
pounds. This case was carried to the Supreme Court, where decision
was finally rendered in 1896. Purely as an _obiter dictum_ the court
discussed briefly the interpretation of the original act in respect to
rate-making power. It expressed a reasonable doubt in the premises,
even going further and confessing inability to find any provision
of the act "that expressly or by necessary implication confers such
powers." It does not seem clear whether by this statement the court
had reference to the arbitrary prescription of rates in first instance
to the carriers, or merely to action of the Commission in prescribing
rates after complaint, in order to redress grievances.

Several decisions of circuit courts during 1896 reënforced the judicial
doubt as to the validity of the rate-making power of the Commission.
Thus, for example, in the case of Coxe Brothers,[564] involving rates
upon anthracite coal, which, by the way, had been pending since 1891,
the Circuit Court of Appeals expressly declined to enforce an order
of the Commission, stating that it "is not clothed with the power to
fix rates which it undertook to exercise in this case." The court's
reasoning in the Social Circle case was followed and expressly cited.
During the same year, 1896, other cases, such as that of the Truck
Farmers' Association, were decided in the same spirit. The final
adjudication of this point, however, was reserved for the decision
in the so-called Cincinnati Freight Bureau case. This had its origin
in an application from the Commission to enforce an order issued in
1894 against the Cincinnati, New Orleans and Texas Pacific Railroad
Company.[565] The case involved the adjustment of rates from eastern
and western centres, respectively, into the southern states; and the
Commission had decided that a reduction of the rates from the western
cities was reasonable and necessary. This leading case, also known as
the Maximum Freight Rate decision of 1897, is characterized by the
Commission itself as perhaps "the most important since the enactment of
the Act to Regulate Commerce." It merits consideration in some detail.

The reasoning in the Maximum Freight Rate case[566] cannot be better
put than by the following excerpts from the opinion of the Supreme
Court.

    "It is one thing to inquire whether the rates which have been
    charged and collected are reasonable,--that is a judicial act;
    but an entirely different thing to prescribe rates which shall
    be charged in the future,--that is a legislative act.

       *       *       *       *       *

    "We have, therefore, these considerations presented: First.
    The power to prescribe a tariff of rates for carriage by a
    common carrier is a legislative, and not an administrative or
    judicial, function, and, having respect to the large amount of
    property invested in railroads, the various companies engaged
    therein, the thousands of miles of road, and the millions of
    tons of freight carried, the varying and diverse conditions
    attaching to such carriage, is a power of supreme delicacy
    and importance. Second. That Congress has transferred such
    a power to any administrative body is not to be presumed or
    implied from any doubtful and uncertain language. The words
    and phrases efficacious to make such a delegation of power
    are well understood, and have been frequently used, and, if
    Congress has intended to grant such a power to the Interstate
    Commerce Commission, it cannot be doubted that it would have
    used language open to no misconstruction, but clear and direct.
    Third. Incorporating into a statute the common-law obligation
    resting upon the carrier to make all its charges reasonable
    and just, and directing the commission to execute and enforce
    the provisions of the act, does not by implication carry to
    the commission, or invest it with the power to exercise, the
    legislative function of prescribing rates which shall control
    in the future. Fourth. Beyond the inference which irresistibly
    follows from the omission to grant in express terms to the
    commission this power of fixing rates is the clear language of
    section 6, recognizing the right of the carrier to establish
    rates, to increase or reduce them, and prescribing the
    conditions upon which such increase or reduction may be made,
    and requiring, as the only conditions of its action--First,
    publication; and, Second, the filing of the tariff with the
    commission. The grant to the commission of the power to
    prescribe the form of the schedules, and to direct the place
    and manner of publication of joint rates, thus specifying the
    scope and limit of its functions in this respect, strengthens
    the conclusion that the power to prescribe rates or fix any
    tariff for the future is not among the powers granted to the
    commission.

    "These considerations convince us that under the interstate
    commerce act the commission has no power to prescribe the
    tariff of rates which shall control in the future, and
    therefore cannot invoke a judgment in mandamus from the courts
    to enforce any such tariff by it prescribed."

The immediate effect of this decision was to put an end to any
enforcement of decisions relative to rates by the Commission. The
carriers immediately refused to obey any orders which the Commission
issued for the redress of grievances. This policy was manifested with
increasing clearness during the five years subsequent to the decision.
It became more and more certain that the denial of the right, not
only to pass upon the reasonableness of a particular rate, but to
prescribe what rate should supersede it, meant the abolition of all
control whatever over the scale of charges. The entire inadequacy of
making rate regulation dependent upon the mere determination of rates
as applied _in the past_, without reference to the rates which should
prevail _in the future_, was apparent on all sides. More than this,
all remedy for the parties who had borne the burden of an unreasonable
rate would seem to have been removed. This was clearly described in
the report of the Commission for 1897. It was illustrated by the rates
upon oranges. In 1890 there had been a sudden advance on rates from
Florida to New York from thirty to forty cents. The Commission after
investigation ordered that the rate be reduced to thirty-five cents.
As a matter of fact, how could this action redress grievances of those
who had already paid forty cents per box? It was difficult in the first
place to discover who bore the burden of the unreasonable charge; and
in the second place it was certain that some of those who suffered
could not legally sue in court. The actual shipper who alone could sue
for repayment of unreasonable charges was a middleman who recouped
himself in any event, either from the grower, the consumer, or both.
He lost nothing by reason of the unreasonable rate. As a matter of
fact, not any single individual but the locality, had been mulcted by
five cents per hundred pounds, supposing that a rate of forty cents
were unreasonable. Experience showed that almost no shippers or other
parties injured, actually attempted to secure the restitution of moneys
already paid for unreasonable charges. In only five out of 225 cases
down to 1897 was a refund actually sought; and in those cases $100 was
the maximum sought to be recovered. As a matter of fact the damage
inflicted by the existence of such an unreasonable rate could not be
measured by hundreds or perhaps by hundreds of thousands of dollars.
The bearing of this citation is to show that any effectual protection
to the shipper must proceed from adjudication of the reasonableness
of rates _before_, and not _after_, they have been paid; that is
to say, in advance of their exaction by the carrier. Power to pass
upon the reasonableness of such rates prior to their enforcement, as
a consequence, constitutes practically the only safeguard which the
shipping public may enjoy. It will be observed that in this discussion
reference is made simply and solely to that class of cases where
complaint is made against the unreasonableness of a rate _per se_ as
applied to all shippers alike, entirely distinct from the exercise of
powers by the Commission in respect of unreasonable discrimination as
between two or more persons or places. That other question of relative
rates was to come up in another connection.

Despite this denial by the Maximum Freight Rate decision of power
to prescribe future rates, in substitution for others held to be
unreasonable, there were still certain things which the Commission
might do in the matter of rate determination. The only question was
as to whether they afforded an adequate remedy for the redress of
grievances. Were they really worth while? Complaint as to a rate,
once paid, might still be made. The Commission might still hold it
unreasonable; and even pass upon the degree of its unreasonableness.
And the complainant shipper might then institute proceedings for
repayment of the excessive charges under that particular rate. But
the difference between this range of powers and those which had been
claimed by the Commission for ten years was simply this: That under the
original interpretation of the law the Commission had not only decided
whether rates were wrong; it had also prescribed a remedy by issuing
an order as to what rates were right, believing that these would be
enforced by the courts. Not even the power to prescribe maximum rates
remained to the Commission after this interpretation. The only action
open to it would be to declare one rate after another unreasonable
until the carriers had been brought to terms. Its inadequacy as a
practical remedy was the main factor in bringing about the passage of
the new law of 1906.

It must not be assumed that the Supreme Court in the Maximum Freight
Rate decision intended to render the Commission an entirely superfluous
body. But its functions, as set forth in the following quotation from
the opinion, proclaimed the adoption of an entirely different policy
concerning public control of rates from the one hitherto pursued.
Whether it was adequate for the purpose in view will appear, as has
just been observed, from the subsequent course of events.

    "But has the commission no functions to perform in respect to
    the matter of rates, no power to make any inquiry in respect
    thereto? Unquestionably it has, and most important duties
    in respect to this matter. It is charged with the general
    duty of inquiring as to the management of the business of
    railroad companies, and to keep itself informed as to the
    manner in which the same is conducted, and has the right to
    compel complete and full information as to the manner in which
    such carriers are transacting their business. And, with this
    knowledge, it is charged with the duty of seeing that there is
    no violation of the long and short haul clause; that there is
    no discrimination between individual shippers, and that nothing
    is done, by rebate or any other device, to give preference to
    one as against another; that no undue preferences are given to
    one place or places or individual or class of individuals, but
    that in all things that equality of right, which is the great
    purpose of the interstate commerce act, shall be secured to
    all shippers. It must also see that that publicity which is
    required by section 6 is observed by the railroad companies.
    Holding the railroad companies to strict compliance with all
    these statutory provisions, and enforcing obedience to all
    these provisions, tends ... to both reasonableness and equality
    of rate, as contemplated by the interstate commerce act."

The nadir of government regulation for the time being was reached in
November, 1897,--six months after the Maximum Freight Rate decision.
A second opinion from the Supreme Court of the United States in the
Alabama Midland (Troy) case, with one blow practically nullified the
long and short haul clause.[567] The first opinion had put an end
to control over the reasonableness of rates in and of themselves.
This second one denied the right to establish their reasonableness
_relatively_ as between competing places or markets. In order fully
to appreciate the significance of this decision it will be necessary
to review cursorily the tedious litigation which led up to this
result,--the entire emasculation of the Fourth section. The final
outcome may be best described by Justice Harlan in his dissenting
opinion in this leading case:

    "Taken in connection with other decisions defining the powers
    of the Interstate Commerce Commission, the present decision, it
    seems to me, goes far to make that commission a useless body
    for all practical purposes, and to defeat many of the important
    objects designed to be accomplished by the various enactments
    of Congress relating to interstate commerce. The Commission
    was established to protect the public against the improper
    practices of transportation companies engaged in commerce among
    the several States. It has been left, it is true, with power
    to make reports, and to issue protests. But it has been shorn,
    by judicial interpretation, of authority to do anything of an
    effective character."

The interpretation of the long and short haul clause[568] as applied
to concrete cases by the Interstate Commerce Commission, was first
enunciated in the decision known as the Louisville & Nashville
case.[569] Immediately after the enactment of the law, a multitude
of petitions were received from carriers all over the country
praying that they be exempted from the operation of this clause,
which prohibited a greater charge for a lesser haul than for one
over the same line between points more distant. The policy outlined
in the Louisville & Nashville case, delivered by Judge Cooley, has
practically remained unchanged to the present time. This railroad
company operating a line parallel to the Mississippi, as well as
intersected at various points by its tributary rivers, claimed that
the existence of water competition compelled a rate to all competitive
points, lower than rates which could be made to local and intermediate
stations. It alleged that an adjustment of its local rates to the
low level necessitated at competitive points, would prove disastrous
from the point of view of revenue. The point at issue was as to the
interpretation of the phrase "under substantially similar circumstances
and conditions"; which, in the words of the Act, was necessary in order
that the prohibition of the lesser charge for the longer haul should
become operative. Without entering into the details of this decision,
in the course of which the nature of railroad competition and of rate
making were fully discussed, as well as the legislative history of this
clause of the Act, it will suffice to note the conclusions. These were;
firstly, that the prohibition against a greater charge for a shorter
than for a longer distance over the same line in the same direction,
the shorter being included within the longer distance, was limited to
cases in which the circumstances and conditions were substantially
similar; secondly, that carriers might judge in the first instance as
to the similarity or dissimilarity of circumstances; but, thirdly, that
this judgment was not final but was subject to review by the Commission
and the courts. Perhaps the most important point, however, was the
determination of the conditions which constituted such dissimilar
circumstances and conditions as entitled the carrier to charge less
for the longer than for the shorter haul. These conditions were the
existence of water competition; the existence of other railroads not
subject to the statute; and "rare and peculiar" cases of competition
between railroads which were subject to the law. The Commission also
held as a guiding principle in the interpretation of this clause that
no distinction would be recognized between local traffic and so-called
through business; and also that the expense to the carrier involved
would not be recognized as a factor unless it happened to come under
the case already cited as "rare and peculiar." Furthermore, the desire
to encourage manufactures or to build up business or trade centres, was
not recognized as a competent reason for claiming exemption from the
prohibition in the Act.

The leading decision of the Interstate Commerce Commission, above
mentioned, was rendered in 1887. It was not until October of 1892 that
the first serious interference arose through judicial interpretation
in the United States Courts. The first was the so-called "separate and
independent line" decision.[570] This case arose respecting a suit for
the repayment of $225 as overcharges on corn shipped by one Osborne
from Scranton, Iowa, to Chicago. It was claimed that the charges
were unjust and unreasonable, inasmuch as they were in excess of
rates charged from Blair, Nebraska, a point more remote from Chicago.
The United States Circuit Court of Appeals at St. Paul reversed the
decision of the lower court, holding that the lesser rate from Blair
with which the Scranton rate had been compared, was not a rate to
Chicago, but part of an agreed through rate to New York and other
eastern points. Under this interpretation, the aggregate charge for the
longer distance from Blair to New York was not less than the charge
for the shorter distance from Scranton to Chicago. To this point the
decision was in conformity with the previous interpretation by the
courts and the Commission; which had uniformly held that a portion of
a joint through rate cannot be compared with local or individual rates
in the determination of what constitutes the rate for the shorter or
the longer haul. This decision went further, however, and therein
profoundly affected the subsequent interpretation of the law. It
proceeded to define the word "line" as used in the Act, by holding
that the joint line formed by two roads is wholly independent of the
two lines represented by the several roads taken separately and apart.
Interpreted in this way, the decision held furthermore that the total
joint rate over two roads, not being over the "same line," might for
anything in the fourth section of the Act, not only be as low but even
lower than the local rate of either. The effect of this decision was
obviously to permit a railroad to engage in traffic agreements for
through carriage of freight; and by so doing, legally to become a line
separate and independent from the same physical property when engaged
in the transportation of freight over its own line. Moreover, by every
contract for through carriage of freight with different carriers,
the road became a separate and independent line in the eyes of the
law. As many lines could exist over one set of rails as there were
traffic agreements for through haulage of freight between its terminal
points.[571]

The apprehension of the Interstate Commerce Commission that this
interpretation of the word line might render the Fourth section of
the Act inoperative, was realized in the following year. Several
decisions not only adopted the _obiter dictum_ of the Osborne case,
above described, but proceeded to expand upon it. Thus, for example,
in the Georgia Federal Court, a case arose involving rates from the
North to Atlanta as compared with the higher rates to intermediate
points. The court held that traffic from Cincinnati to Augusta or
Atlanta was carried over a different line than that which was used for
transportation to points intermediate between Atlanta and Augusta;
inasmuch as the several carriers agreeing upon the joint rate as far as
Atlanta from the North, were different.

Moreover it held that the road from Atlanta to Augusta being wholly
within the state of Georgia, might by making a local rate from Atlanta
which was added to the through rate into Atlanta, constitute itself
merely a state road, and therefore be exempted from the prohibition of
the Act. Thus it appeared, to quote from the report of the Commission
for 1893, "that in addition to the embarrassments proposed by the
original 'line' decision, the very jurisdiction of the law itself is
invaded by the extension of the line theory indulged in by the Georgia
Federal court."

The interpretation put upon the Fourth section of the Act by the
decision above cited, remained in force and largely nullified
application of the Act itself until 1896. The next important
interpretation came, in the decision by the Supreme Court of the United
States in the so-called "Social Circle" case.[572] This decision fully
discussed the interpretation placed upon the word "line" in the Act.
The rates involved were those on buggies from Cincinnati, Ohio, to
Social Circle, a local station between Augusta and Atlanta, Georgia.
Following the practice of the carriers for some years, the Georgia
Railroad Com