THE REAL BASIS OF RATES.
The Managers of English railways have not assumed that they could
fix rates on a “Scientific” or “Natural” basis. But they have
endeavoured, after consulting merchants, manufacturers and traders,
to fix such rates as were required to develop the largest amount
of trade; and it is submitted that they have been carrying out
principles which will, on the whole, bear the closest examination.
They probably have made mistakes, and in some cases entered into
undue competition with each other, or fostered it too much between
producers or ports. But the principles upon which they have
acted are sound; and the instances in which they have erred are
exceptional. It has been the aim of railway companies to make rates
conform to the requirements of trade, or, according to a popular
expression, to charge what the traffic will bear.[30] It is easy
to misrepresent this principle. The commonest misrepresentation
is to assume that it means charging what the traffic will _not_
bear. Rightly understood, this, it is contended, is the only fair
working principle; the only scientific rule, if that phrase has
any clear meaning. It is only another way of saying that rates
should be so fixed as to enable a manufacturer or a trader and
the railway company to obtain a reasonable profit, and that rates
should ultimately be determined by the law of supply and demand. The
value of conveyance, like the value of any other service, is not
necessarily what it costs, but what it is worth to him who wishes
his goods carried. On supply and demand, the available means of
transport and the demand for it depends what it is worth while to
give for carrying an article from A to B. Obviously the demand will
be affected by the nature of the merchandise. If it be of a costly
nature, such as manufactured articles, producers of it or dealers
in it can afford to pay a higher rate than if it were of low value;
a rate of 3d. a ton per mile, which might be prohibitive of the
carriage of sand or lime, would add to the value of silk or velvet
only an insignificant percentage.[31]
[30] In the Report made by M. Richard Waddington in the name of
the Commission of the Third System of Railway Tariffs, special
or differential rates are thus referred to. “These Tariffs are
established in compliance with a trade demand which varies, as
one can easily understand, according to the locality and district
concerned. Like intelligent merchants the administrators of the
railway companies have based their rate of charges on the law of
_Supply and Demand_....” The celebrated expression of M. Solacroup,
director of the _Orleans Company_, sums up the considerations which
led to the compilation of special tariffs. “_In the matter of
Transport Tariffs there is only one rational rule, viz., to ask of
merchandise all it can pay; any other principle is no principle._”
[31] It may be objected that under such a system companies might
extort exorbitant sums from traders who must send their goods. But
(1) the figures and returns referred to later on show that in fact
the companies have not made such charges, but have benefited every
industry as well as themselves; (2) the statutory maxima cannot
be exceeded; (3) at many points there is effective sea and canal
competition; (4) the result of increasing the rates to a height
which prevents the producer from earning a fair profit must, in
the long run, be to diminish the traffic of the railway; (5) there
is always a liability when, high rates exist that Parliament will
sanction a new line, even if the chances of its financial success be
not great.
The capital of English railways amounts to upwards of £800,000,000.
One of the problems to be considered is how to raise a revenue
sufficient to pay on this sum even a moderate rate of interest?
The Companies might perhaps obtain it by charging for conveyance
according to equal mileage rates or according to cost of service.
Following such a course they might probably levy charges which a
great portion of the traffic would not bear; they might charge, for
example, as much for a consignment of pig iron as for a consignment
of copper of equal weight carried equal distances--which is
generally what cost of service implies. If their sole object were
to obtain the necessary revenue, they might cease to regard the
effect of rates upon the interests of traders, districts, or ports,
and, while conforming to the statutory maximum, they might levy
rates detrimental to particular kinds of traffic. Their practice
has been altogether different: they have sought to give full effect
to the intention which Parliament had in view in framing the rude
statutory classifications. They have endeavoured to suit the charges
to the capacity of the traders, and in the words of Section 90 of
the Railways Clauses Consolidation Act of 1845, “To accommodate
them (the rates) to the circumstances of the traffic.” Such is the
only sound principle working to the interest alike of railways and
their customers. If rates were too high, and the traffic could not
bear them, traders would suffer; the companies themselves would
also suffer; their traffic would diminish, or would not expand as
it might do. Such was the principle, speaking generally, on which
the classification in railway Acts was framed. Such, too, is the
principle of existing rates, only instead of being an hypothesis
as to what will suit particular kinds of traffic, the existing
classification and rates are based on facts carefully ascertained,
verified by long experience, and corrected from time to time.
It is not unimportant to bear in mind that much the same principle
as that which we have discussed is applied in regard to indirect
taxation, or the taxation of commodities.[32] What an article will
bear--in other words what the owner can with convenience pay--is
a rule alike applicable to taxation and railway rates. In more
civilised countries articles of prime necessity are not taxed, or
very little; articles of luxury and of great value are taxed more. A
distinction is made between wheat and tobacco, sugar and wine; and
whenever it is practicable, without opening the door to fraud, to
put indirect taxes on _ad valorem_ basis, it is done. A similar rule
is observed, so far as possible, with respect to direct taxation.
Income tax, for example, is payable only by those whose incomes
exceed £150. An endeavour is made to obtain the revenue of the
country from the persons who can best afford to pay, and to levy it
upon articles, the taxation of which will, to the least practicable
extent, be a burden on the trade of the country. To fix railway
rates on any other principle than that described above would be much
like raising the national revenue from all persons alike, rich or
poor, to impose the Customs and Excise upon all commodities, whether
articles of luxury or necessity, and irrespective of their value.
[32] See Ricardo (Principles of Political Economy and Taxation, 3rd
Section, page 144): “Of all commodities none are perhaps so proper
for taxation as those which, either by the aid of nature or art,
are produced with peculiar facility. Taxes on luxuries have some
advantage over taxes on necessaries, they are generally paid from
income, and therefore do not diminish the productive capital of the
country.”
See also Leroy Beaulieu, _Science des Finances_, vol. i.
When railways were first authorised, it was everywhere anticipated,
strange though it may now appear, that the companies would be
merely toll takers, and that the public, or carriers, would use them
in the same manner as turnpike roads. Every railway was to be a
highway; every one of the King or Queen’s subjects was to be free to
use it. Many statutes bear traces of this, now apparently, curious
assumption. The private Acts, as a rule, contained no provision for
the companies themselves acting as carriers. The classification of
the articles to be carried and the tolls to be taken were borrowed
from the canal Acts. No very clear principle of classification ran
through the special Acts. The classification in the main, however,
probably accorded with the considerations pointed out by Adam
Smith, who drew attention to the inconvenience of levying tolls on
turnpike roads solely according to weight.[33] Speaking broadly,
the tolls were in accordance with the ideas as to indirect taxation
prevalent at the time when canals began to be largely constructed.
In the original classification one may trace a desire to encourage
agriculture, and the manufacture of iron, and such articles as
were, generally speaking, carried in large quantities. Articles of
general use in manufactures and raw materials were to be carried
cheaply. The omissions from the lists of articles are remarkable.
Such commodities as coal, iron ore, bricks, clay, manure, slates,
stone, bar and pig iron, heavy iron castings, anvils, chains,
timber, grain, flour, sugar, hides, dye-woods, earthenware, drugs,
cotton and wool, were enumerated. On the other hand, machinery,
hardware, hollow-ware, cutlery, glass, ale, wines and spirits,
grease, oils, soap, drysalteries, paints, colours, paper, leather,
floor-cloth, and textile fabrics, were not named; they came under
the general description of “manufactured goods, articles, matters or
things,” and might be charged the highest maximum rates. The special
Acts contained, as a rule, an enumeration of only 40 to 50 articles
in three to five classes.
[33] “A tax upon carriages in proportion to their weight, though a
very equal tax when applied to the sole purpose of repairing the
roads is a very unequal one when applied to any other purpose, or
to supply the common exigencies of the State. When it is applied to
the sole purpose above mentioned, each carriage is supposed to pay
exactly for the wear and tear which that carriage occasions of the
roads. But when it is applied to any other purpose, each carriage is
supposed to pay for more than that wear and tear and contributes to
the supply of some other exigency of the State. But as the turnpike
toll raises the price of goods in proportion to their weight, and
not to their value, it is chiefly paid by the consumers of coarse
and bulky, not by those of precious and light, commodities. Whatever
exigency of the State, therefore, this tax might be intended to
supply, that exigency would be chiefly supplied at the expense of
the poor, not of the rich; at the expense of those who are least
able to supply it, not of those who are most able.”--(_Wealth of
Nations._ Book 5 part 3.)
In a few years, experience proved that the theories on which
Parliament had proceeded were impracticable. In the first place,
the notion that railways could be used by all comers in much the
same way as canals or roads was found to be erroneous. Railway
companies accordingly applied, in their special Acts, for powers
not only to find locomotive power and wagons, but also to convey
traffic as common carriers. In 1845, the Railways Clauses Act (s.
86) authorised every company to convey on their railway all such
passengers and goods as might be offered to them for that purpose,
and to make such reasonable charges in respect thereof as might be
from time to time determined upon, not exceeding the tolls by the
special Act authorised to be taken. The special Acts contained,
as has been stated, imperfect classifications of merchandise, the
maximum rates chargeable for conveyance, and powers to charge for
loading, unloading, and other services incidental to the business of
a carrier. About 1845 a second great change in the mode of charging
for conveyance came to pass; and it is a circumstance worth noting
that about that date a similar change took place, without concert,
in France, Belgium and wherever railways existed. Up to that time
railways had, as a rule, acted on the principle of equal mileage
rates. This proved disadvantageous; it did not meet the requirements
of trade; it was particularly unsatisfactory to distant traders; it
prevented the opening up of new districts; and it needlessly limited
the amount of traffic.
About the time which we have mentioned, the imperfection of the
statutory classifications became manifest. Such rates as were
intended to be _ad valorem_ were not in fact on that basis; so
far as it was intended to favour raw produce this object was not
sufficiently accomplished. The advantages of differential rates, the
necessity of adapting charges to the traffic, the power of railways
to open up new districts, and develop new industries, began to
be understood. Accordingly the Legislature enacted the following
provision, the words of which merit attention:[34]
S. 90, “And whereas it is expedient that the company should
be enabled to vary the tolls upon the railway so as to
_accommodate them to the circumstances of the traffic_,
but that such power of varying should not be used for the
purpose of prejudicing or favouring particular parties,
or for the purpose of collusively and unfairly creating
a monopoly either in the hands of the company or of
particular parties, it shall be lawful, therefore, for
the company, subject to the provisions and limitations
hereinafter and in the special Acts contained, _from
time to time to alter or vary the tolls by the special
Act authorised to be taken, either upon the whole or
upon any particular portion of the railway as they shall
think fit_; provided that all such tolls be at all times
charged equally to all persons, and after the same rate,
whether per ton, per mile or otherwise, in respect of all
passengers, and of all goods or carriages of the same
description, and conveyed or propelled by a like carriage
or engine passing over the same portion of the line of
railway under the same circumstances, and no reduction or
advance in any such toll shall be made either directly or
indirectly in favour of any particular company or person
travelling upon or using the line.”
[34] In the same year a Statute (8 & 9 Vict. c. 28) was passed
giving canal companies powers to vary tolls in the same manner as
railway companies might. By 8 & 9 Vict. c. 42, which was passed the
same session, canal companies were authorised to become carriers on
their canals and “to make such reasonable charges for conveying,
warehousing, collection and delivery as they might respectively from
time to time determine upon, in addition to the several tolls or
dues which any such company or undertakers were then authorised to
take for the use of the said canals, navigations or railways.” Two
years later canal companies were authorised to borrow money for the
purpose of becoming carriers on their own waterways. (10 & 11 Vict.
c. 94.)
Personal preferences were forbidden. But the companies were to
accommodate their rates to the circumstances of the traffic, the
Legislature’s mode of expressing the rule that the traffic should
pay what it could bear; and within the statutory maxima, the
companies were to be free to alter their tolls as they thought fit.
How far this was altered by s. 2 of the “Railway and Canal Traffic
Act, 1854,” need not here be considered. It is enough to say here
that, so far as s. 90 was concerned, differential rates were not
only not prohibited, but distinctly sanctioned. S.90 required
equality only in regard to traffic “passing between the same points
of departure and arrival, and passing over no other part of the
line.”[35]
[35] Earl of Selborne in _Denaby Main Colliery Company_ v.
_Manchester Sheffield and Lincolnshire Railway Company_.--L.R. 11
A.C. p. 113.
Consumers may profitably bear in mind the report of the Select
Committee on Railways (Rates and Fares), of 1881-2. Whilst stating
“Your Committee cannot recommend any new legislative interference
for the purpose of enforcing upon Railway Companies equality of
charge.” They add: “Some of the inequalities of charges complained
of are to the advantage rather than to the disadvantage of the
public, where there is an _undue preference_ the law now gives a
remedy.” They also give the following illustration:--
“That Greenock sugar refiners should be in the same markets as the
sugar refiners of London, while it may be a grievance to London
refiners, must be an advantage to Greenock refiners, and cannot be a
disadvantage to buyers of sugar.”
It is added that the effect of interference with the freedom to fix
rates according to special circumstances would in this instance be
“to give a practical monopoly to the London sugar refiners who would
be the real gainers by the transaction. It does not appear to your
Committee that such a result would be either just or reasonable.”
For more than forty years railway companies have been conforming
to these principles. They have been developing long as well as
short distance traffic, and aiding the opening of new industries.
They have done so to their own advantage, for though the return
on the capital expended on railways has been small, it has been
obtained on a large volume of traffic. They have been able to
benefit the commerce of the country to a degree which would have
been impracticable if, instead of rates being elastic and freely
accommodated to traffic, the traffic had been forced to adapt
itself to the rates. Producers pay what they find it worth while
to pay; they pay no more. In framing the statutory classification,
the Legislature assumed that producers would probably find it worth
while to pay the authorised charges. The companies find out what
such producers can in fact pay, and what rates will best promote
traffic. What preferable rule could be substituted?