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.