transportation, concerning, as has been said, not one but two distinct
carriages of entirely different goods, needs to be in turn subdivided
still further. The products of agriculture and mines afford the best
instances. The lumber business is peculiarly suggestive in this
connection, owing to the fact that in the United States a vast treeless
area in the Middle West is surrounded with forest tracts available
for development. The market again in this case is limited only by our
national frontier. Omaha is supplied with yellow pine and cypress from
Louisiana after a 1,200-mile haul; Oregon fir brought 1,800 miles in
each instance for fifty cents per hundred pounds; and with Michigan
hemlock and pine transported less than 500 miles for eleven and a half
cents. These various sorts of lumber are all more or less competitive.
And in each case the final cost of laying down the product in Omaha is
determined; first, by the rate from the stump to the mill, and then,
as sawed lumber, thence on to destination. The Eau Claire, Wisconsin,
lumber case[87] before the Interstate Commerce Commission, fully
describes the intricacies of adjustment needed to hold a number of
such producers on a parity. In this instance Eau Claire, "next the
stump," as an important lumbering centre was shown to be declining in
importance relatively to Mississippi river towns, which received their
logs by raft down stream. A differential of a few cents was threatening
the welfare of a considerable population. The Wichita, Kansas, cases
are suggestive in a similar way.[88] Sugar is laid down at this market
from every point of the compass. From Hawaii it is shipped in the
raw state to San Francisco, and then brought East, like the Oregon
lumber, cheaply, as a back-load to counter-balance westbound shipments
of grain and manufactures. From New Orleans refineries comes the
Louisiana product, and from the Atlantic sea ports the Cuban sugar; but
in each case the carriage is broken at an intermediate point, at which
manufacture or jobbing ensues. A large class of operations analogous to
this, known as "milling in transit" and "floating cotton," elsewhere
described in detail, involve the same complexity and interrelation of
rates.[89] The point to carry forward is that commercial competition
demands that in every case not single rates but the sums of all the
connecting rates for each competing person or region shall be properly
adjusted. If this be not done, some one will be excluded from the
market and "put out of business."
By this time in our ascending scale of complexities, it will be
observed that manufacture now begins to outweigh mere transportation
in importance. With low-grade products, like salt or sugar, the
increment of value due to transportation is relatively high as
compared with manufacturing costs. As the grade of product rises,
however, the differences in value and in form between the raw and the
finished product, render the problem of location of the manufacture
more difficult as affected by the relative adjustment of rates of
transportation for the two. According to the data of the Federal Bureau
of Corporations, the cost of refining crude petroleum, worth three to
four cents a gallon at the wells in Pennsylvania, should not exceed
one-half cent a gallon. This sum would barely pay for the first hundred
miles of its carriage by rail, as ordinarily shipped. The market is,
of course, extraordinarily extensive; hence the persistent flagrancy
of the practices of secret rebating by the Standard Oil Co.[90] To
obtain such special favors in transportation outweighed in importance
the incentive to introduce economies in production. In this industry,
where little waste occurs in manufacture, the refineries may well be
located at the consumers' door. The manufacture of furniture for the
Pacific states, on the other hand, must be located "next the stump," in
North Carolina or New England. The long carriage must be applied, not
to the bulky lumber but to the finished product. The freight rate on
lumber from Oregon to Pittsburg is just about equal to the value of the
logs at the mill. Obviously, the large proportion of waste or common
lumber will not bear a high addition to its cost by carriage to any
distance. In the manufacture of fur hats a shrinkage of weight occurs
of one-half between the fur scraps and the finished product. In such
a case it is imperative, either that the factory be near the source
of supply or that the rate on the two distinct commodities be nicely
adjusted. The decision of the United States Steel Corporation to build
a large plant at Duluth for supplying the northwestern market is the
outcome of such considerations. The main point is that the adjustment
of a number of rates may determine, not only the general welfare of the
industry but even its specific geographical location with reference to
the raw material on the one side and the market on the other.
The jobbing or wholesale business of the United States exemplifies the
most highly involved and complex details of commercial competition.[91]
In this field it appears most clearly that, as is so often alleged,
railway traffic managers hold the welfare of entire communities, as it
were, in the palms of their hands. In all the cases heretofore cited,
great natural forces outweighed the purely personal and human ones.
Soil, climate and mineral resources more or less completely determined
the final outcome of commercial competition. But the distributive
business of a country is more largely artificial. It is more subject
to human control, and may be influenced by personal considerations.
Shall the economically dependent southern planter be supplied with
manufactures of all sorts,--from harnesses to tin dippers--from
mid-western cities like Cincinnati and Chicago or from eastern centres,
such as New York and Baltimore? This is the underlying economic issue
raised in the notable Cincinnati Freight Bureau Case in 1894; in the
course of whose determination the Supreme Court of the United States
raised the more immediate and pressing question of the authority of the
Interstate Commerce Commission to regulate rates at all. In the dust
raised by the controversy over this purely legal question, the basic
economic dispute was lost to view.[92] Shall the people of the Pacific
slope be supplied with hardware and analogous products from their own
large cities which buy at wholesale from the East, break bulk at San
Francisco or Seattle and ship out to smaller towns in less than carload
lots; or shall the distribution take place at the hands of jobbing
houses located several thousand miles away at Chicago or St. Louis?
This is the economic dispute raised in the St. Louis Business Men's
League case.[93] The very existence of San Francisco as a commercial
centre may depend upon it. For the primary and secondary operations of
commerce are often complementary. At the large cities, concentration
of raw staples moving inward naturally entails back loads outward at
low rates for manufactured goods distributed by jobbers. Or, taking
the smaller places, the farmer will of necessity buy his cotton cloth,
sugar and coal in the town to which he drives by wagon to deliver his
cotton, corn or wheat.[94]
The entire puzzling class of cases dealing with the southern basing
point system are primarily concerned with such issues as these.[95]
Three distinct classes of cases arise. There is, first, the competition
between cities of equal size, be they large or small, such as Memphis,
Tenn., and Little Rock, Ark.; Danville, Va., and Lynchburg; or
Cleveland, and Cincinnati, Ohio: secondly, the rivalries between large
cities and what may be called secondary local centres in the same part
of the country,--such as Seattle, Wash., _v._ Spokane; Chicago _v._
Burlington or Dubuque, Iowa; or Atlanta, Ga., _v._ Macon: and thirdly,
the intense rivalries between the great first-class cities, like New
York, Philadelphia, and Chicago, and the rest of the field, big and
little.[96] The mail order houses, the express business and the parcels
post intervene at this point. But in all of these issues, series of no
less than three separate transportation costs have to be totalized and
kept more or less on a parity. The intricacy is increased by reason
of the fact that shipments must be made, first at wholesale to the
jobbers, and thereafter usually in less-than-carload lots to retailers.
If the carload rate be relatively too low, with reference to the rate
on small lots, the jobbers near the market will be upbuilt and the
jobbers at a distance cannot compete. If the opposite relation obtains,
the jobber in a distant great city will be able to ship out small
orders cheaper than the local dealer can obtain them by carload and,
breaking bulk, peddle them from his own town. So narrow is the margin
of profit on staple goods that a difference of a fraction of a cent per
pound may exclude a dealer from the field entirely. This question of
carload ratings is, however, treated elsewhere; impinging, as it does
upon matters of freight classifications.[97]
The rivalries of jobbers and middlemen in different cities are
inevitably borne into the offices of traffic managers. Were all
railways equally interested in all cities alike, the matter need not
go further, engendering railway rivalries. But such is seldom the
case. Hardly a road can be named, whose interests are not more or less
identified with some particular city. Commercial rivalry thus at once
leads to railway competition. Four or five railways, like the Chicago
and Northwestern, radiate out to the west from Chicago, and have no
interest in St. Louis. Almost as many, like the Missouri Pacific, go
out from St. Louis without entering Chicago. Others, like the old Union
Pacific and, formerly, the Atchison system, only come to the Missouri
river, and consequently wish to upbuild their eastern termini, Omaha
or Kansas City. Only a few, like the Illinois Central, reach them
all. Such a road is usually called upon to act as a mediator in all
disputes. "It is a continual struggle between the line from Kansas City
to St. Louis with no interest in Chicago, and the line from Kansas
City to Chicago with no interest in St. Louis," as one witness before
the Industrial Commission phrases it. Compromise is the only outcome.
And in this manner an involved structure of differentials is built
up, oftentimes top heavy and always susceptible of collapse on the
defection of any party to the agreement. When a truce was patched up
between the trunk lines and the Gulf roads after the sugar rate war of
1905, it is said to have taken twenty experts three entire days merely
to "line up" rates on a parity between the competing jobbing centres.
[Illustration]
The simplest compromise in any dispute over rates between competing
centres is the concession of absolute equality or, as it is called, of
flat rates between all points irrespective of distance. This shifts
the burden from the carriers and places competition entirely upon
the shoulders of the merchants. Oddly enough, also, this result of
equal rates regardless of distance between various competing centres,
especially when they are secondary distributing or concentrating points
rather than original sources of traffic, may sometimes evolve naturally
out of commercial conditions imposed by tariffs built up upon the
basis of distance. The accompanying theoretical diagram, based upon
actual traffic conditions prevalent in Missouri river territory, serves
to illustrate the way in which, under certain circumstances, such
equalization of rates may take place. Two groups of cities are here
represented as though lying respectively along two river valleys north
of their separation at a point G. Let us call them the Mississippi
and the Missouri for purposes of identification. The starting point
is equality of rates from such a distant point as New York (O) to
all places along the Mississippi from A to G. Such equality properly
arises in theory from the substantially equal distance from New York.
In practice also, under the trunk line rate system,[98] such equality
prevails, inasmuch as the rates from New York to such a series of
Mississippi river crossings is fixed at 125 per cent. of the rate from
New York to Chicago. By a similar course of reasoning, namely, the
approximately equal distance from New York (O), rates from that place
to a second series of points along the Missouri river should be and are
in effect made equal. From these two facts it logically follows that
the balances of the rates from all points on the Mississippi river out
along an extension of their lines from New York toward the west should
also be equal. This is obviously in conformity with the mathematical
principle that equals subtracted from equals leave equal balances.
Thus the rates B X, D Y and F Z are compelled to equality. From this
relationship in turn follows still another. All rates from any point on
the inner series of towns to any point whatsoever on the outer western
series of places along the Missouri river must remain equal regardless
of distance. For each line from New York to A, B, C, D, etc., wishes,
of course, to participate in business not only on the direct extension
of its own line, but to as many other points as possible.[99] Without
some agreement, however, it would normally enjoy traffic only on the
direct extension of its own line. The point Y would most naturally be
reached by way of C, D or E, over the shortest routes. Competitors on
either side would similarly enjoy an advantage in more direct lines
from New York to the places immediately beyond them. Thus for business
from New York to Z, the more direct lines through E, F or G would
obviously have an advantage over lines which passed around through A,
B, C or D. An almost irresistible incentive to cut-throat competition
would exist. The only way the lines east of the inner circle can
peaceably partition business to the outermost western points is by an
agreement to make all rates between the inner and outer circles the
same. In this manner the rates from A to Z or from G to X are reduced
to an equality with the rates offered by the shortest route between the
two rivers, which, in this case, is E Z. The rate for this shortest
line then becomes the basic one, upon which all the others depend.
[Illustration: Traffic Conditions in Missouri River Territory]
The foregoing economic reasoning underlies the actual tariff system
prevailing in what is known as Missouri river territory.[100] Two
great streams separating at St. Louis form the eastern and western
boundaries of Missouri and Iowa. All along the two edges of these
states are located important river cities, each of which has more or
less direct communication with every other crossing on the other river,
over a complicated system of interlaced lines. There are no physical
barriers, the country being plain and open. The starting point and
basis of the whole scheme is the shortest direct distance between the
two nearest points, namely Hannibal on the Mississippi, and St. Joseph
and Kansas City on the Missouri. The situation is shown by the map
herewith. At these points the two rivers are approximately two hundred
miles apart. For this distance the base rate of sixty cents per hundred
pounds, first class, is fixed by common agreement. Were local business
only to be considered, and were the railways not competing, the rate
between other points on the two rivers at greater distances apart,
such as for instance, Burlington on the Mississippi and Omaha on the
Missouri, might be determined on a relative distance basis, as in trunk
line territory. But the commercial fact is that a large proportion
of the business between all these points consists of long-distance
traffic from the eastern seaboard which may cross the Mississippi at
any one of these gateways between Dubuque and St. Louis on its way to
the cities on the Missouri river. All of these through long-distance
shipments must, of course, enjoy the same competitive rate to the
ultimate western destination on the Missouri river. And, inasmuch as
the rate from the east to the Mississippi crossings is everywhere the
same, namely 125 per cent. of the New York-Chicago rate, it follows
that the balance of the rate from these points on to the Missouri river
across Iowa and Missouri, irrespective of distance, must likewise be
the same. In other words, the rates between all these Mississippi and
Missouri river points must be equalized, irrespective of the length
of the intervening route, whether it be two hundred miles by the
shortest direct line from Hannibal to Kansas City across Missouri,
three hundred and fifty miles from Burlington to Omaha across Iowa,
or even seven hundred miles by the roundabout line of the Illinois
Central skirting both states. In brief, every railway which touches
both rivers, however circuitous its route, is compelled to quote the
same rate from every point on the Mississippi river to every other
point on the Missouri. This rate must be the one fixed, as already
described, for the shortest direct line, namely sixty cents per hundred
pounds first class. Furthermore, in precisely the same way that these
rates to Missouri river points from the eastern seaboard are built up
and equalized, the rates from Chicago to the same Missouri river points
must be kept even. The rate through from any one of the long chain of
Mississippi gateways must be the same irrespective of distance. This
figure, by common agreement, has for many years been twenty cents per
hundred pounds higher than the rate across Illinois to the Mississippi
river gateways from Chicago alone. The dominant note of this whole
tariff is equalization of rates between all points in competition with
one another over all possible routes. Freight thus moves freely in
every direction and all markets are held on an absolute parity.[101]
It is one of the most remarkable features of American commercial
organization, this practical elimination of the element of distance
from interstate trade over wide areas.
The possible evil lurking in too widespread an acceptance of the
principle of the flat rate is clearly apparent in the reasoning of the
Eau Claire, Wisconsin, lumber case.[102] This town complained of the
disability under which it labored in shipping lumber to Missouri river
points by comparison with other places round about. It appeared in the
evidence that as early as 1884, under arbitration, all the rates from
competing centres had been adjusted on the basis of differentials;
and that, as interpreted by the carriers, the purpose of these
differentials was to even up the differences between competing towns;
to the end that all manufacturers should be put upon an equality in
the consuming territory. But this necessarily involved the practice
of penalizing or nullifying in a way the advantages of location. "If
Eau Claire could produce lumber cheaper than Winona or La Crosse, then
the latter points were to have a lower rate in order to enable them to
compete." This practice the Interstate Commerce Commission condemned at
that time; and it has consistently adhered to the precedent then laid
down. Obviously, any other general course of action would be analogous
to hobbling the fleetest horse in a race to bring him down to the rate
of progress of the slowest laggard. The principle of the handicap
applied within moderate limits makes for an exciting athletic contest;
but if it be overdone, it eliminates all interest from the contest
whatever. The race becomes one, not of skill or endurance in running,
but of securing a sufficiently liberal handicap. Competition to be of
advantage in the way of progress must always have in view the survival
of the fittest and the elimination of the unfit.
The vast extent of the United States, the necessity of transporting
commodities great distances at low cost and the progressiveness of
railway managers, has led to an extraordinary development of the phase
of rate making above-mentioned. The principle of the flat rate, based
upon the theory that distance is a quite subordinate, if not indeed
entirely negligible, element in the construction of freight tariffs
under circumstances of competition, was fully accepted twenty-five
years ago.[103] J. C. Stubbs, traffic manager of the Harriman lines,
speaking of transcontinental business in 1898, clearly expressed it as
"the traditional policy of the American lines as between themselves to
recognize and to practise equality of rates as the only reasonable and
just rule ... regardless of the characteristics of their respective
lines, whether equal in length or widely different." It is the theory
upon which the southern basing-point system is founded; and it is the
common practice in making rates into and out of New England--being
in fact vital to the continued prosperity of this out-of-the-way
territory.[104] President Tuttle, of the Boston & Maine, has most
ably supported this principle of equality of rates irrespective of
distance. "It is the duty of transportation agents," he says, "to so
adjust their freight tariffs that, regardless of distance, producers
and consumers in every part of this country shall, to the fullest
extent possible, have equal access to the markets of all parts of this
country and of the world, a result wholly impossible of attainment if
freight rates must be constructed upon the scientific principle of
tons and miles." This is the principle of the blanket rate attacked in
the famous Milk Producers' Protective Association case in 1897;[105]
and it is the practice which has been so fully discussed of late, as
generally applied to lumber rates from the various forest regions of
the United States into the treeless tract of the Middle West. The
principle, while applied thus generally in the construction of tariffs,
is of far greater applicability in the making of special or commodity
rates. Wool rates afford one of the best examples. Under such rates
the bulk of the tonnage of American railways is at present moved. The
essential principle of such special rates, constituting exceptions
to the classified tariffs, is that of the flat rate; namely, a rate
fixed in accordance with what the traffic will bear, without regard
to the element of cost, that is to say, of distance. But a noticeable
trend away from the flat rate is evident in recent decisions of the
Interstate Commerce Commission; especially in the Intermountain
case,[106] revision of the wool and cattle rates,[107] and the general
disposition to lessen special tariffs all along the line.
* * * * *
The intricacy of freight rate adjustment in response to the subtleties
of commercial competition depends only in small measure upon the
absolute freight rate imposed. The main problem is really that of
relativity. But this does not mean mere relativity as between directly
competing commodities or places. A strict relativity based upon
commercial conditions must often obtain as well between the rates on
raw materials and their own finished products; between all the various
by-products in an industry; and, of course, always as between goods
capable of substitution one for another. A few illustrations will serve
to make these details clear.
The matter of properly correlating the freight rate on raw materials
and the finished products made from them, is more far-reaching than it
seems. The location and development of manufacturing depends upon it.
The country may be broadly divided into agricultural and manufacturing
sections. The first of these is ambitious to develop its resources;
not only to feed, but to clothe itself and make other provision for
its needs. No sooner does it seek to develop local manufacturing than
it finds itself exposed to competition from the older established
manufacturers at a distance. Sometimes, even, these remote
manufacturers draw their supplies of raw material from its own fields
and forests. These supplies are then shipped long distances as raw
material; manufactured and thereafter returned to sell in competition
with the local product. The local market in relatively undeveloped
areas is probably insufficient to provide support for manufactures on
a profitable scale. It is essential to dispose of the surplus product
over a wider area. Thus there arise two classes of manufacturers: one
"next the stump," manufacturing at the source of the raw material and
desiring to ship the finished product; the other, remote perhaps from
supplies of raw material, but favored by long experience, by abundant
supplies of capital and of skilled labor and by other advantages.[108]
Neither class of shippers can prosper without overflowing into the
domain of the other. The outcome of this competition depends in part
upon the policy of the carriers. If the rate on the raw material be
relatively low, the remote manufacturer is aided. Cotton mills and shoe
factories in New England prosper in competition with establishments
in the South or the Middle West. If, on the other hand, the rate
on raw materials be inordinately high, while at the same time low
on outward-bound shipment of manufactures from the seat of the raw
materials, the tendency is in favor of the upbuilding of manufactures,
not near the historic centres of population and consumption, but
near the sources of natural wealth, which are the potential homes of
manufacturing.
The long-standing controversy over relative rates on wheat and flour
for export affords an interesting illustration of the difficulties of
properly correlating charges of this sort.[109] Originally the rates on
wheat and flour--the raw material and the manufactured product--were
the same. In 1890 the railways leading to the Gulf ports began to
discriminate by giving lower rates on wheat, but the trunk lines until
1899 held to the original equality between the two. Finally, however,
the struggle between the trunk lines and the Gulf roads for business
forced the former to lower their rates on wheat, leaving the flour
rates--not subject to Gulf competition--undisturbed. At times the rate
on wheat for export was as much as nine cents per hundred pounds lower
than the rate on flour. Thus the rate on wheat for export from the
Mississippi river to the seaboard was frequently twelve cents, while
the rate on wheat from the same points to Chicago added to the rate on
flour there manufactured and sent on in barrels or bags to New York,
was twenty-two cents--a clear discrimination against the domestic
manufacturer in this instance of ten cents per hundred pounds. For
his American-made flour, sent abroad in competition with flour made
in Liverpool from American wheat, would evidently cost that much more
at delivery. In other words, wheat could be transported to England
and there ground much cheaper than it could be ground here and then
shipped. This bore with particular severity upon small millers, partly
because their costs of manufacture were relatively high, and also
because any limitation of export business forced the large millers to
bid more keenly for local domestic trade. Inasmuch as a fair margin
of profit to the American manufacturer would not exceed two cents
per hundredweight, it is apparent that this discrimination operated
severely against the American miller. Minneapolis fortunately was
unaffected by this discrimination, much of its exports going out by
Canadian lines to the Lakes. The carriers defended this difference in
rates on the ground of water competition by the Lakes or combined rail
and water routes, which were alone open to wheat, and which thereby
unduly lowered the rate on that commodity; and also on the basis of the
lower cost of service in moving the raw material as compared with the
finished product. It is apparent that issue was really raised in such a
case between the interests of the farmer and of the manufacturer. The
United States, producing a surplus of wheat the price of which is made
on the Liverpool market in competition with the world, is compelled to
find an outlet for this product. It is obvious that any reduction of
the freight rate--the prices in Liverpool remaining fixed--would inure
to the benefit of the farmer, who would thereby receive a higher price
for his product. Viewed in this way the railways by discriminating
in favor of the rate on wheat were helping the farmers. But, at the
same time, by moving this wheat more cheaply than flour the railways
were encouraging the location of flour milling abroad and rendering it
impossible to manufacture flour for export at a profit in the cities
of the Middle West. In these export cases it does not appear clearly
why the rate on flour for export might not have been reduced somewhat.
The Interstate Commerce Commission finally rendered a decision to the
effect that the existing difference in rates constituted an undue
preference in favor of the foreign manufacturer, adding at the same
time that these discriminations seemed to be due primarily not to a
desire of the railways to aid the American farmer in disposing of this
surplus wheat, but to the bitterness of competition between the Gulf
and trunk line railways.[110] They decided that any discrimination
greater than two cents per hundred pounds in favor of wheat for export
as against flour was unreasonable. This difference was permitted,
however, on account of the greater cost of handling the manufactured
product. It is significant of the then state of the law that the
railways paid no attention to this order, and, although conditions
improved somewhat, there is still great complaint.
The relative rates on wheat and flour, even when for domestic
consumption, illustrate the same difficulty of commercial
competition--the necessity of adjusting the rate on raw materials to
that on the finished product.[111] The rate on wheat from Wichita,
Kan., for example, to California is fifty-five cents per hundred
pounds, while the rate on flour between the same points is sixty-five
cents. Is this difference in rates economically justifiable? California
wheat is soft, so that flour produced from it is much improved by the
admixture of hard wheat, such as may be obtained in Kansas. California,
formerly a large wheat exporting state, has of late years relied to
a considerable degree upon the Middle West for part of its supplies.
Kansas flour sells for seventy-five cents a barrel more than California
wheat flour. Shall this Kansas wheat, to be consumed in California, be
ground in Wichita or in California? Here is material for controversy,
not between one particular railway and another, but in reality between
the millers in Kansas and the millers in California. It is quite
analogous to the issue raised over export wheat and flour between the
miller in Chicago and his rival in Liverpool. In this instance, if
milled in Kansas, the railways enjoy the carriage of flour; while, if
ground in California, the railways carry the commodity in the form of
wheat. Owing to certain practical conditions, such as the percentage
of waste and relative differences in labor costs, the Kansas miller
appears to enjoy a certain advantage over his far western competitors.
At this point the interest of particular railway companies appears.
The Rock Island, if the milling industry in Kansas develops, obtains
the haul not only of the flour but also of the fuel and of supplies
for the communities engaged in the business. On the other hand the
Southern Pacific is more largely interested in the local development
of manufactures in California. The Rock Island by maintaining a lower
rate on flour than on wheat, would tend to hold its clients in the
field. The Southern Pacific, on the other hand, by securing the reduced
rate on the wheat from Kansas would materially advance the welfare
of its constituents. Thus the rivalries of the competing localities
immediately become the direct and immediate concern of rival railways.
Cases precisely analogous in principle to those concerning the
relativity of rates on grain and grain products have troubled the
carriers for years in respect to the rates upon cattle and packing
house products.[112] A low rate on cattle as compared with beef favors
Chicago today as against Missouri river points, the latter being
nearer the cattle ranges; just as a generation ago it enabled cattle
to be brought to New York and Boston to be there slaughtered and sold
on the spot. The history of this controversy throws much light upon
the difficulties of rate making in practice. Originally the railways
encouraged cattle raising by a rate which was only about one-third of
the rate charged for beef. Slaughtering was carried on in the East
adjacent to the great markets. To this policy the western packers
objected strenuously. They demanded a relatively low rate on their
finished product in order to enable them to bid against the local
eastern slaughter houses. The stockmen, on the other hand, naturally
desired a continuance of the low rate on cattle, as it perpetuated
competition between eastern and western buyers. The controversy between
the stock raisers and the packers was thus shifted onto the shoulders
of the traffic managers of the railways. The dispute culminated in
1883 when the Trunk Line Association appointed a special committee to
consider what the proper adjustment should be.
This committee in turn referred the matter to Commissioner Albert
Fink, "Seeking a relativity of rates so as to make the charges for
transportation, including the expenses incident to the transportation
of dressed beef, the same per pound as the charges per pound of
dressed beef transported to the East in the shape of live stock." A
difficult task this, considering the variety of by-products emerging
into value year by year. Cattle rates had been for some time fifty-two
per cent., and then later sixty per cent. of the dressed beef rates.
This was relatively higher for cattle than had been charged during the
seventies. But the western packers demanded that the relativity in
favor of the finished product be still further advanced until cattle
rates should equal seventy-five per cent. of the rates on beef. This
would effectually discourage the shipment of cattle to eastern centres,
and would tend to upbuild Kansas City and Chicago at their expense.
In 1884, the matter being still in dispute, was referred to Hon. T.
M. Cooley, afterward chairman of the Interstate Commerce Commission.
He decided that a fair compromise would be forty cents on cattle from
Chicago to New York with coincident rates of seventy cents on beef.
This would make the cattle rate about fifty-seven per cent. of the beef
rate. It was a victory for the stockmen as against the western packers,
who at once raised a great outcry.
It would have been difficult to predict the final outcome had not an
entirely new factor appeared, which transformed the conduct of the
beef packing industry.[113] Specially constructed stock cars owned by
private companies began to be built. These favored the perpetuation of
competition between eastern and western packers. To checkmate this,
the western packers had already embarked in 1879 upon the ownership of
privately owned refrigerator cars for the carriage of their finished
products. The custom was adopted by the railways of paying for the use
of these cars by making an allowance of so much a mile as a deduction
from the established tariffs. This at once opened the way to secret
rebates of all sorts. The refrigerator traffic in these private cars
was large in volume, very regular and highly concentrated as to source.
A large tonnage could be diverted at any time to that road which
could best show its appreciation of the favor. The Grand Trunk, for
instance, in 1887 swept the board, monopolizing this entire business
for a brief time, obtaining it by secret and discriminating rates. The
railways, jointly, sought to free themselves from the domination of
the large packers; but the phenomenal growth of their business, both
domestic and export, rendered them too powerful to resist. According to
expert data, during nine months to May 1, 1889, three shippers alone
received from one line of road $72,945 for the use of their cars. This
about equalled the initial cost of eighty new cars. For the fiscal
year 1895, $8,744,000 was paid by the railways of the United States
for the use of these cars--about $4,000,000 of this being in the form
of rental. At this rate, profits of from twenty-five to fifty per
cent. upon the investment accrued to the great packers. These virtual
rebates, of course, drove all competitors from the field. The story
of the gradual extension of this system of private cars to include
fruit and produce business belongs in another place. Suffice it to say
that the bondage was broken only by the passage of the Hepburn Act of
1906. The growth of these private refrigerator car lines caused the
disappearance of live stock shipments. Packing and slaughtering on a
large scale at the seaboard, either for domestic consumption or export,
was doomed. Meantime, however, the controversy over the relative rates
on beef and cattle continued just as if anything really depended upon
it. The issue was again submitted to the commissioner of the Trunk
Line Association in 1887. In the following year a select committee
of the United States Senate was appointed at the urgent request of
the cattle raisers. Testimony before this committee showed in detail
how eastern packers were striving to build up establishments near
the points of consumption, but were driven out of the business by the
relatively high costs of shipping cattle, as compared with the rates
at which dressed beef could be actually delivered from Chicago and
Missouri river points. This entire history, aside from its significance
as a study of personal discrimination, illustrates the effect of
a relatively increasing differential rate, partly open and partly
secret, against the raw material of an industry as compared with the
finished product. The result, at all events, has been to concentrate
the packing industry in the Middle West. Nor is the controversy closed
even yet.[114] But this time it is a question, not between the seaboard
and Chicago, but between Chicago and Missouri river points, or those
still nearer the southwestern ranges. Fort Worth and Oklahoma City now
become complainants against the Missouri river points.[115] Always and
everywhere the manufacture seeks to develop at or near the source of
the raw material. Whenever this tendency does not appear in an industry
it is pertinent to inquire how far the relative adjustment of rates is
responsible for the phenomenon.
Complexities in rate adjustment often arise from the fact that in
the manufacture of many commodities the marketing of by-products is
of increasing importance. The rate on the whole series of related
commodities must be taken into account at once. Thus in lumbering, a
large amount of waste or very low-grade lumber is necessarily produced.
This common lumber cannot bear long transportation; it must be utilized
locally, if at all. On the other hand, the choicest specialties will
command a price even in remote markets. A monopoly price is enjoyed in
such a case. The Pacific coast lumbermen can market their long timbers
anywhere in the United States; but the demand for the common lumber,
restricted to a sparsely populated region, tends to be exceeded by the
supply.[116] The real competition between the southern, the Michigan,
the Wisconsin and the Pacific coast manufacturers thus narrows down
to the sale of the medium-grade product. And the cost of production
of this is, of course, in part dependent upon the profit made upon
the other two sorts, each of which in its own field appears to be a
monopoly. A wide market and a good price for medium-grade lumber may so
lessen the cost of the cheapest by-products that they in turn may be
so reduced in price as to widen their reach to the consumer. Each rate
reacts upon the others. The situation can be successfully controlled
only by adjusting them all at once.
Not only are rates competitive as between raw materials and the
finished product made from them, but the circle of competition
immediately widens to include all commodities capable of substitution
one for another.[117] Coal rates, of course, are partly determined
by rates on cordwood, and _vice versa_. During the great coal strike
in Pennsylvania in 1903, soft coal rates and hard coal rates were
sadly disturbed. Such substitutions are always likely to occur. But
the conditions are not always so simple as this. An instance in
point is given by a witness before the Senate (Elkins) Committee on
Interstate Commerce in 1905.[118] This shows how a reduction in the
rate for transportation of corn from Kansas to Texas brought about
a corresponding reduction in the rate on flour from Minneapolis to
Chicago. There was a large crop of corn in Kansas; and the Chicago
lines anticipated brisk business in the carriage of this product. The
traffic managers of lines from Kansas to Texas, however, discovered a
large demand for corn in Texas at a price higher than then prevailed
in Kansas. Any rate less than the difference in prices between the
two districts would cause shipments of corn to flow from Kansas to
Texas, just as inevitably as water flows down hill. This rate would
needs be low; but the corn could be loaded on empty southbound cars
which had been used to haul cotton out of Texas to the north. This, of
course, entailed a diversion of corn from the Chicago railways, which
promptly reduced rates in order to hold their traffic. For years the
rates upon wheat and corn had been fixed in a definite relation to
one another, based upon commercial experience. Any reduction of the
corn rate compelled a reduction of the wheat rate. A fall in the wheat
rate brought about a drop in the rate on flour. These reductions in
corn started in southern Kansas; but parallel lines in northern Kansas
were compelled to follow suit. Grain in the territory between the two
roads could be hauled by wagon either north or south corresponding
to a fraction of a cent per bushel difference in the price. Thus the
reduction in rates spread from one line to another all over Kansas,
throughout Nebraska up into Dakota and finally to Minnesota. It not
only affected the corn rate everywhere but it caused a reduction in the
rate on flour from Minneapolis to Chicago. The reliance of Texas for a
portion of its corn supply upon the surplus product of Kansas sometimes
leads to odd results. This commodity is sometimes shipped as corn meal
and sometimes transported as corn to be afterwards ground in Texas.
The Texas millers at one time demanded a relative reduction of the
rate on grain as compared with corn meal, and the railway commission
of that state upheld them in that demand. For ten years down to 1905
the differential in favor of the raw product had been three cents a
hundred pounds. Then the railways, in connection with a general advance
of rates, increased the charge on corn meal until it amounted to about
nine cents per hundred pounds more than the rate on corn. One cent a
hundred pounds being a good profit in grinding corn meal, this change
shut the Kansas millers out of Texas business. Application was made
to the Interstate Commerce Commission for relief. It then appeared
on investigation that the carriers had made use of the Texas millers
in order to prevent a general reduction of _both_ grain rates and
rates on grain products. The Texas millers on general principles had
favored both these reductions. What happened is best described in the
evidence before the Senate Committee on Interstate Commerce of 1905.
"The railways went to the millers of Texas and they said to them,
'Is there anything you want here?' 'Why,' said the [Texan] millers,
'yes; we would like to have that differential between corn and corn
meal increased; we think you ought to put the rate on corn meal up.'
The railway said, 'All right; you just stay away from that meeting
down at Austin so that there will not be any excuse for the Texas
commission, and if it undertakes to reduce these rates we will raise
this differential; we will raise the rate on corn meal to the rate on
flour.' The millers kept away from Austin--they kept their part of
the bargain--and they stayed away, and the Texas commission was left
without any support for their proposition to reduce the corn rates, and
the railway kept their part of the bargain and lifted up the rate on
corn meal so that the differential was from nine to seven and one-half
cents, and that put the Kansas mills out of business."
Apparently insignificant details often determine the outcome of
commercial competition. Thus in the milling business, where the margin
of profit in the manufacture of flour may not be over three cents per
barrel, an infinitesimal change in the freight rate may mean success
or failure to long-established industries. And the conditions vary
indefinitely. Thus, as between flour milling in Duluth and Buffalo,
Duluth can buy its wheat from the farmer direct during the entire
winter, but must ship its product mainly during the period of open
water navigation on the lakes. The reverse is true with the Buffalo
miller who can ship out his flour during the entire season, but who
must accumulate his whole stock of wheat before navigation closes. And
then Minneapolis as a milling centre has to be taken into account.
Eighty per cent. of the spring wheat grown in the United States is
in territory from which the freight rates to Minneapolis and Duluth
are the same. But the basic rate to the East and Europe, fixing the
all-rail rates, is the combined lake and rail. By this route Duluth
is one hundred and fifty miles nearer the market than is Minneapolis,
and consequently enjoys a lower rate on its flour shipped out. A
three-cornered competitive problem exists, in which any change at one
point entirely upsets the commercial equilibrium.
The obligation on the part of a railway to protect its constituency,
not only in respect of particular rates, but in general conditions as
well, introduces still further complications. The freight business
of New England, for example, consists, first, of the carriage of raw
materials and supplies inwards; and, secondly, thereafter of the
transportation of the finished product out to the consuming markets.
Narrowly considered, it may seem expedient to crowd the rate on coal
as high as the value of service probably will permit; but viewed in a
large way, it may prove to be a far better business policy to maintain
the rate on coal, cotton, and other staple supplies so low, that the
growth of population and production may in the long run yield far
greater returns on the high-grade manufactures which the territory
produces. Turning to the southern field, where the economic conditions
are reversed, it may be the better policy to hold down the rate on
raw cotton in order thereby to stimulate this great basic industry
and thereby enhance the demand for the merchandise and foodstuffs
which depend upon general prosperity. A free hand afforded for the
suitable adjustment of such apparently independent services may
contribute far more to the general welfare than an insistence upon
a petty and near-sighted policy of extorting from each individual
service all the rate it can possibly endure. American railway managers
are gradually but surely coming to take a more liberal view of these
great possibilities and to consider the economic development of their
territories, not narrowly, but in a generous way.
FOOTNOTES:
[64] Testimony before the Hepburn Committee, in 1879, p. 2921, is
interesting on this point.
[65] U. S. Reports on Internal Commerce, 1876, p. 25.
[66] U. S. Industrial Commission, 1900, IX, p. 631. _Cf._ also diagram
of European tariffs in Senate (Elkins) Committee, 1905, V, App. p. 271.
[67] P. 165, _infra_.
[68] _Cf._ chap. VII, _infra_.
[69] Such a tariff on the Illinois Central is charted in Reports, U. S.
Industrial Commission, IX, p. 295.
[70] Such are commodity as distinct from class rates, described in
connection with classification in chap. IX.
[71] Tapering rates are discussed by J. M. Clark in Columbia University
Studies in History, etc., XXXVII, 1910, chaps. IX and X. _Cf._ also
Hammond, Railway Rate Theories, etc., 1911, p. 70.
[72] From A. B. Stickney, Railroad Problems, p. 69.
[73] _Cf._ note on p. 375.
[74] P. 380, _infra_.
[75] Chapter X, p. 360, _infra_.
[76] The voluminous record in _U. S._ v. _Union Pacific_, etc. (The
Merger case), U. S. Supreme Court, October term, 1911, No. 820 abounds
in concrete illustrations of all three. _Cf._ esp. Appellant's Brief of
Facts, p. 34.
[77] Senate (Elkins) Committee, 1905, Digest, App. II, p. 10.
[78] Cincinnati Freight Bureau case, 1910, p. 447.
[79] Chapter VIII, _infra_. _Cf._ also p. 255. Which line has the
advantage?
[80] Albert Fink's detailed description of the numberless alternative
routes by which traffic moved into the South, is perhaps one of the
best instances in print. U. S. Reports Internal Commerce, 1876, App.
pp. 1-16. The Danville, Va., case is an admirable instance. 8 Int. Com.
Rep., 409; reprinted in Railway Problems, chap. XVI.
[81] A notable instance between the Southern and Union Pacific roads
since their combination. Described fully in our Railway Problems, rev.
ed., chap. XXII.
[82] Albert Fink's description in U. S. Reports Internal Commerce,
1876, App. p. 38, is a classic.
[83] _Cf._ p. 621, _infra_. Also the dialogue in 21 I.C.C. Rep.,
356-359; and _Ibid._, 414.
[84] 5 I.C.C. Rep., 299; or 22 _Idem_, 407. Reprinted in Railway
Problems.
[85] 14 I.C.C. Rep., 476.
[86] P. 178, _infra_.
[87] 5 I.C.C. Rep., 264; reprinted in our Railway Problems.
[88] Discussed on p. 232, _infra_.
[89] Chapter IX.
[90] Details in chap. VI.
[91] _Cf._ Carload Minimum in chap. IX and the Texas system on p. 393,
_infra_.
The following cases best illustrate these principles: Burnham, Hanna,
Munger, etc., 14 I.C.C., 299; and 20 _Idem_, 141; later in 218 U.
S. Rep., 88. (P. 442, _infra_.) Greater Des Moines Committee, 14
_Idem_, 294. Indianapolis, Kansas City and Fort Dodge, 16 _Idem_, 57,
195, and 572. Warnock, 21 _Idem_, 546 and 23 _Idem_, 195. St. Louis
Business Men's League, 9 _Idem_, 318. And the Wichita cases in chap.
VII, p. 232, _infra_.
[92] Pp. 248, 392, and 588. Both cases are reprinted in our Railway
Problems.
[93] Pp. 125, 241, 398. Also in Railway Problems.
[94] I.C.C. Rep., No. 861; decided Aug. 23, 1906.
[95] Chapters VII and XI.
[96] Read testimony on p. 278, _infra_.
[97] P. 325, _infra_.
[98] Described in chap. X.
[99] Procedure is described at p. 282, _infra_.
[100] Admirably described in _Annals Amer. Acad. Pol. Science_, April
11, 1908; reprinted in our Railway Problems, rev. ed., Chap. XX.
[101] Similarly in the South, p. 246; and also Texas rates on p. 393.
[102] 5 I.C.C. Rep., 264; reprinted in Railway Problems, chap. VIII.
[103] Theoretical explanation of the flat rate is offered in Chapters I
and X.
[104] Best described in McPherson, Railroad Freight Rates, 1909,
pp. 67-70. The bitter opposition by New England senators in 1910 to
amendment of the long and short haul clause is thus explained.
[105] 7 I.C.C. Rep., 92.
[106] P. 610, _infra_.
[107] 23 I.C.C. Rep., 151 and 657. Also _ibid._, 404.
[108] _Vide_ chapter on Localization of Industry in the Twelfth Census
of Manufactures, I, pp. 190-214.
[109] Int. Com. Rep., 214; reprinted in Railway Problems. A typical
later one is 15 I.C.C. Rep., 351 and Opin. 817, 1909, p. 363. Also Ann.
Rep., I.C.C., 1901 and 1902. Hammond, Railway Rate Theories, etc.,
1911, p. 21; also, p. 160.
[110] _Cf._ p. 31, _supra_.
[111] I.C.C. Rep., No. 917; decided June 24, 1907. Later ones are in 10
_Idem_, 35 and 16 _Idem_, 73.
[112] Older cases in Hammond Railway Rate Theories, etc., 1911, p. 45;
such as 10 I.C.C. Rep., 428, etc. Later are 11 _Idem_, 296; 21 _Idem_,
491; 22 _Idem_, 77 and 160; and 23 _Idem_, 656.
[113] The best accounts are in connection with the history of private
car abuses. _Cf._ references on p. 192, _infra_.
[114] U. S. Supreme Court decision in the Chicago Live Stock Exchange
case in 1908; 209 U. S. 108.
[115] 22 I.C.C. Rep., 160; 22 _Idem_, 656.
[116] 14 I.C.C. Rep., 1-74.
[117] _Cf._ Hammond, Railway Rate Theories, etc., 1911, pp. 14-17,
mainly with reference to classification, however.
[118] Testimony, vol. II, p. 1676. 11 I.C.C. Rep., pp. 212 and 220.
CHAPTER V
RATE MAKING IN PRACTICE (_Continued_)
Effect of changing conditions, 147.--Lumber and
paper rates, 148.-- Equalizing industrial
conditions, 148.--Protecting shippers, 149.--
Pacific Coast lumber rates, 150.--Elasticity and
quick adaptation, 152.--Rigidity and delicacy
of adjustment, 153.--Transcontinental rate
system, 154.--Excessive elasticity of rates, 155.--More
stability desirable, 159.--Natural v. artificial territory
and rates, 159.-- Economic waste, 159.--Inelastic
conditions, 161.--Effect upon concentration of
population, 162.--Competition in transportation and trade
contrasted, 163.--No abandonment of field, 165.
Cost _v._ value of service, 166.--Relative merits
of each, 167.-- Charging what the traffic will
bear, 169.--Unduly high and low rates, 171.--Dynamic
force in value of service, 177.--Cost of service in
classification, 179.--Wisconsin paper case, 181.--Cost
and value of service equally important, checking one
another, 184.
Not only must rates of all sorts be delicately adjusted to suit the
immediate exigencies of trade; they must be constantly modified
in order to keep pace with its ever changing conditions. This is
peculiarly true of a rapidly growing country like the United States.
An admirable instance is afforded by the complaint of the Lincoln
Commercial Club before the Interstate Commerce Commission.[119]
Lincoln, Nebraska, lies about fifty-five miles southwest of Omaha.
Originally all its supplies came from the East, as both cities were
for a time outposts of civilization. The coal supply came from Iowa
and Illinois, and the salt from Michigan. On these and most other
commodities the rates to Lincoln were made up of a through rate from
the East to the Missouri river, plus the local rate on to destination.
The city of Lincoln thus paid considerably more than Omaha for all of
its supplies. Gradually conditions have changed; until in 1907 it
appeared that over half the soft coal consumed in Lincoln was brought
from Kansas and Missouri; four-fifths of the lumber from the South and
nearly all the rest from the Pacific coast; glass and salt from the gas
belt and salt beds of Kansas; and a great deal of beet sugar from the
western fields. For a large proportion of these and other supplies,
Lincoln was actually as near or nearer the point of production than
Omaha, and yet the difficulties of effecting an adjustment between
rival carriers had prevented any modification of rates corresponding
to these changes in economic conditions. On every one of these
commodities the rate to Lincoln remained steadily higher than to Omaha,
regardless of the source of supply. Unanimous consent was necessary
for readjustment. So long as any single road refused assent, a general
rate disturbance might be precipitated by any independent action. The
beneficent effect of the exercise of governmental authority, powerful
enough over all interested parties to compel acquiescence, has been
clearly apparent in affording relief.
A similar instance in the state of Wisconsin is afforded by the
compulsory readjustment of the freight rate on wood pulp, lumber and
sawed logs.[120] On investigation it appeared that, despite a very much
lower commercial value for the raw material used in paper manufacture,
the rates on pulp wood were more than double those on logs to be sawed
up for lumber. It appeared, furthermore, that this apparent anomaly was
due not so much to high rates on the pulp wood as to very low rates
on sawed logs. These latter rates for many years had been fixed at a
very low figure because originally the bulk of such logs, cut in the
river bottoms, was floated down stream to mills along the Mississippi
river. Competition with lumber raft rates originally determined the
charges on lumber by rail. The paper industry did not begin until these
conditions of water competition had quite disappeared. Gradually, with
the progress of deforestation, all the timber is now found on the
uplands far from navigable water courses; so that the rates today
are not at all influenced by competitive rates on the lumber rafts
down river. Nevertheless the old tariffs on lumber remained in force
despite the changed conditions, while the new rates on pulp wood were
fixed independently of any rates by water. It was only after careful
investigation that the injustice to the paper manufacturers from the
disparity in charges appeared. Here again it was the rigidity and
interlocked complexity of adjustment which placed it in the power of
one road to block change of any sort.[121] The compulsory exercise
of governmental authority cut the Gordian knot with the result that
substantial justice now obtains.[122]
From the preceding statements it will be observed that carriers have
another important commercial function beside that of equalizing
industrial conditions.[123] They also act in a protective or insurance
capacity to the merchant or manufacturer. The policy of "keeping
everyone in business" implies not only variety but variability of
conditions. Capital is proverbially timid. It will not venture into a
new and uncertain enterprise unless either profits are immediate and
high or, if moderate, likely to endure. In any event some guarantee of
permanence is required. This guarantee the carrier is often able to
offer. It may assume the obligation of protecting its clients; that is,
of saving them harmless against the intrusion or irruption of hurtful
competition. It thus exercises in a certain sense the function of an
insurance company, but with this important difference: that while it
has the strongest interest in protecting its established industries
against ruinous competition from abroad, it may desire to share in
some degree in their development and prosperity by way of reward. In
this latter sense the relation of the carrier to its clients partakes
of a profit-sharing arrangement. One of the broadest issues between
American railways and the public at the present time is precisely this:
whether the carriers are to share in business profits; or merely, in
addition to furnishing transportation, are to collect a fixed fee for
a service in the nature of industrial insurance. That it lies in their
way to furnish such protection under modern economic practice is an
indisputable fact.
This nice question is almost daily pressing for solution at the
hands of the Interstate Commerce Commission. It arises every time an
increase of freight rates occurs. Take, for example, the Pacific coast
lumber cases of 1908. The dissenting opinions of the Commission show
how debatable the proposition is.[124] Up to about 1893 the lumber
interests of the Pacific coast were quite undeveloped and entirely
dependent upon water transportation for reaching markets. At this
time low rates of forty to sixty cents per hundred pounds on forest
products to markets in the Middle West were introduced, partly to
build up the industry and partly to create a back loading for the
preponderantly westbound tonnage of all transcontinental lines. Under
these rates the business has enormously developed until, on the
Northern Pacific road in 1906, the shipments of lumber east bound
amounted to one-third of its entire traffic both ways, and yielded
nearly one-fifth of its freight revenue. So greatly had this traffic
expanded that it aided, if not actually produced, a reversal of the
direction of transcontinental empties. Practically all these roads now
have an excess of tonnage to the east whereas ten years ago much the
larger volume of freight was moving westward. Meantime the lumbermen
under the stimulus of these lower rates, and of the phenomenal rise in
the price of lumber, had been wonderfully prosperous. The price of
logs had risen since 1893 from about $2.50 per 1,000 feet to $13.50
in 1906; partly in consequence of the extraordinary demand consequent
on the Valparaiso and San Francisco earthquakes. The mills had moved
in from the rivers and the coast, and had become absolutely dependent
upon rail transportation for reaching markets. At this stage, and
most unfortunately in November, 1907, just at a time of industrial
panic, the carriers raised their rates by about ten cents per one
hundred pounds. The market price of logs had already dropped from
$13.50 per thousand by approximately one-third. These two causes,
commercial depression and the increased freight rate, brought about a
complete collapse in the industry. And the increased freight rates were
contested before the Interstate Commerce Commission in the hope that,
as in the southern field the rate increases from Georgia points had
been annulled,[125] these might also be found unreasonable. The broad
question concerns the obligation of carriers, once having brought about
an investment of capital in the industry, to continue to give the same
rates as those under which the ventures had been undertaken, due regard
being had, of course, to such changes in costs of service as might have
ensued. The lumbermen demand that all the increment of profit due to
prosperous developments shall remain unto them; in other words, that
the carriers' share of the increased values shall remain fixed. On the
other hand, the railways defend their increases, partly upon the ground
of increasing expenses of operation, and partly upon the broader ground
that the freight rate being proportioned to the price of the product,
should rise in harmony with it. Upon this question the Commission was
divided, the majority holding in favor of annulling the increase,
while the chairman and one other member decided that the increase was
justifiable.[126]
Elasticity and quick adaptation to the exigencies of business are
peculiarities of American railway operation. Our railway managers
have always been most progressive in seeking, in and out of season,
to develop new territory and build up traffic. The strongest contrast
between Europe and the United States lies in this fact. European
railways more often take business as they find it. Our railways
_make_ it. Much of this business is made possible only by special
rates adapted to the case in hand. These need not be secret or
discriminating, as has already been observed. For although offered with
reference to particular cases, they may be open to all comers. The
economic justification lies in the fact that the railway can afford
to make a low rate, leaving a bare margin of profit above the _extra_
cost of adding this traffic to that which is already in motion. Such
rates cannot exceed a definite figure based upon what the traffic will
bear. A higher rate than this would kill the business. Something is
contributed toward fixed charges by the new traffic, so far as the
railway is concerned; and at the same time the shipper on his part
is enabled to enlarge his operations. Yet such a scale of rates if
applied to the whole traffic of the railway might be ruinous in the
extreme. The domestic shipper of wheat may conceivably be helped,
rather than injured, by a special rate on grain for Liverpool without
which the railway would lose the business entirely. To transport
California fruit for a mere fraction of the rate per ton mile which
is laid upon other traffic may actually enable those other goods to
be carried more cheaply than before. Of course, if the other traffic
be directly competitive, as for instance in this case, oranges from
Florida, that is an entirely different matter. Railway representatives
rightfully insist upon these special rates to develop new business as
a boon to the commercial world. They contrast them with the hard and
fast schedules of European railways. They allege that such elasticity
loosens the joints of competition, "keeps everyone in business,"
equalizes prices over large areas, and is in fact the life of trade.
One of the stock objections to railway regulation is that it may
lessen this elasticity, "substitute mile posts for brains," and produce
stagnation in place of activity.
Paradoxical as it may seem, a certain rigidity of rate schedules is a
natural consequence of the very delicacy with which individual rates
are adjusted to meet the demands of trade. Each road is jealously
and aggressively alert to protect its own constituency regardless
of the rights of others. No single traffic manager is free to grant
reductions of rates, even when considered to be just, by reason of
the opposition of competing lines. The consent of every one of these
interests is necessary in order to insure stability, and the penalty
for acting independently may be a rate war, disastrously affecting
relations with connecting lines. Thus, for example, in the South the
Southern Railway for some time was willing to concede, as a measure
of justice, a reduction of rates on cotton from Mississippi river
points to the mills in North and South Carolina.[127] The growth of
the textile industry had resulted in a demand for cotton far exceeding
the production of the Carolinas. At the same time the increasing
attention devoted to manufacturing of a higher grade had forced the
manufacturers to draw upon the long-staple supplies of the Mississippi
bottom lands. The Piedmont cotton was too short in fibre for the finer
sort of goods. The Carolina mills were, however, compelled to pay a
higher rate upon cotton from such points as Memphis than was paid for
the long haul up to New England. Thus, for instance, as late as 1900,
rates were fifty-nine cents to South Carolina, while they were only
fifty-five and one-half cents per hundred pounds from the same points
to New England mills. This was obviously unjust. But the Southern
Railway alone, interested in the welfare of its Carolina clients, was
powerless to act without the consent of its competitors operating
from Memphis west of the Alleghanies. These latter lines, having no
interest in the southern mills and a unity of interest in the long haul
traversed to New England, sought to prevent an equalization of the
differences. Controlling rates also on cotton for export to various
seaports, they were for a long time able to prevent a change. On the
other hand, in the same territory the railways operating south from
Cincinnati and Louisville desired to reduce rates on manufactured
products from the Central West.[128] These were the very lines which
in the former instance prevented the reduction of cotton rates on the
Southern Railway to Carolina points, by threats to meet such reductions
by cutting their own rates on cotton going north through the Ohio
gateways. Yet a reduction of their rates on manufactures for building
up western trade threatened the business of the Southern Railway, which
had been mainly interested in the traffic from Atlanta seaboard points.
It may readily be seen that this situation, extending to practically
every important point, "jacked up" all these rates, not because of
their inherent reasonableness and not even because the railways
independently acknowledged them to be just, but simply and solely
because any disturbance of this house of cards might lead to a general
downfall of the whole system.
Another interesting example of the difficulty of bringing about a
change in rate adjustment is afforded in the transcontinental field.
For some years a general agreement seems to have been adopted as a
sort of a compromise between the various conflicting interests. Under
present conditions Chicago and all points east of the Mississippi
from Maine to Florida enjoy precisely the same rate to the Pacific
coast.[129] Chicago has at various times contended before the
Interstate Commerce Commission for graded rates which should recognize,
for instance, that being 1,200 miles nearer San Francisco than Boston
on the basis of distance, it should have proportionately lower freight
rates. Apparently some of the transcontinental roads, such as the Great
Northern, have been willing to make this concession. They could not,
however, take any action without first obtaining the consent of every
railway and steamship company with which they compete. Inasmuch as
almost every railway in the country participates in transcontinental
business, an agreement was practically impossible. Entirely aside from
the merits of this particular intricate question, it must be borne in
mind that there is no such thing as independence of action on behalf of
any single carrier. It becomes exceedingly easy for one road to play a
dog-in-the-manger part. The shipper may be subjected to an extortionate
policy, not dictated by the road over which he ships, as a matter of
fact, but by roads operating perhaps a thousand or more miles away.
Praiseworthy as is the elasticity of railway rates in the United
States, there is, nevertheless, much to be said in support of the
contention that at times this has been carried to an extreme. Stability
and certainty have been treated as of secondary importance. Particular
shippers have been aided, but the general interests of trade have
suffered some injurious consequences. It is not entirely clear whether
the advantage gained from elasticity has at all times been worth the
cost. Certain of the disadvantages of instability of rates seem to have
been overlooked.
In the first place railway tariffs have in the past undoubtedly
been too voluminous and complex. The number of these filed with the
Interstate Commerce Commission is extremely large. Eleven railways
alone during the year to November 30, 1904, filed 30,125. The total
schedules of all American railways filed during the year to November
30, 1907, was 220,982. One single carrier had 15,700 tariffs in force
at the same time. The New York Central & Hudson River in December,
1899, had no less than 1,370 special commodity rates in force. There
were endless contradictions and conflicts. Secret rates were hidden in
devious ways in this mass of publications. Special tariffs "expiring
with this shipment"; rates quoted not numerically but by numbered
reference to tariffs of other carriers and applicable by different
routes; agreements to meet rates of any competing carriers, were among
the irregular methods of concealment adopted. Although literally
complying with the law by publicly filing all tariffs, conditions
were often such that not even an expert in rates could discover in
this maze of conflicting evidence what the rate at any time actually
was. The door was opened wide to personal discrimination and abuses
of all kinds.[130] Those conditions are not necessary. They do not
obtain on the best roads in other parts of the world. Nor is such
instability found in respect of some important lines of trade. No
agricultural product fluctuates in price more abruptly or widely than
raw cotton,--from five to seventeen cents a pound. Yet the rates on
that commodity have remained quite undisturbed throughout the southern
states for many years. But the best proof of all that rates have been
unduly numerous, is the great reduction in volume which has taken place
since 1910 under compulsion of law. This feature will be especially
considered in another connection.[131]
The second disadvantage of too great elasticity in freight rates
is that it may, at times, promote rather than lessen that state of
economic unrest inevitable in all business, especially in a new
country. Under a continual disturbance of rates, the merchant is unable
with security to enter into long-time contracts. Rates are sometimes
changed, not to suit the shipper but to serve the railway's interests.
Sometimes traffic may be diverted from its natural channels. The
spirit of initiative and self-reliance on the part of shippers may be
undermined. Persistent titillation of competition may be pleasant for
a time, but its final results may be injurious. Constant appeal to the
traffic manager of his road for aid and comfort may quite naturally
divert the shipper's attention from an aggressive commercial policy
which would render him independent of minor changes in freight rates.
The more responsibility the traffic manager assumes, the more may be
put upon him. And it must always be remembered that each move by one
road to protect a client, will probably be checkmated by the tactics
of rival lines. Economic peace, not warfare, should be encouraged
by the services of common carriers. One of the positive advantages
of governmental regulation of railway rates is that it contributes
to stability. That this view is shared by experienced railway men,
appears from the following testimony of President Mellen of the New
Haven road.[132] "I think that great trouble comes to the business of
this country through the fact of these little breaks in rates. During
November two new railways were opened into the city of Denver. They
sought to make themselves popular by lowering rates, and rates went
down very low. They went down legally, but they went down very low.
Just before the rates went down the merchants of the city had stocked
Denver with goods and the lowering of the rates demoralized their
prices; they lost a large amount of money, and dissatisfaction was
caused from Chicago to Denver. Lowering of rates demoralized business
generally. I think if those roads had known that the rates which they
made had to remain in force thirty days they would have hesitated
before they lowered them. I would increase the time required before
rates could be reduced."
The foregoing consideration suggests still another argument in favor
of stability of freight rates, even at the expense of a certain amount
of flexibility. Special rates which create new business should be
carefully distinguished from special rates which merely wrest business
from other carriers or markets. Any expedient which will make two
blades of grass grow where one grew before; which puts American wheat
into Liverpool in competition with India and Argentina; which cheapens
California fruit on the eastern markets; which offers a wider choice
of building stone for Chicago; which will establish new industries
for the utilization of local raw materials, deserves the greatest
encouragement. Our country has been unprecedentedly developed in
consequence of the energy and progressiveness of its railway managers.
But thousands of other special rates have no such justification, even
where they are public and open to all shippers alike. These are the
expression of railway ambition to build up trade by invading territory
naturally tributary to other railways or traders. A significant feature
of commercial competition is the utilization of distant markets
as available "dumping grounds" for the surplus products left over
from the local or natural market. In the St. Louis Business Men's
League case[133] the Pacific coast jobbers complained that the large
distributing houses in the Middle West thus invaded their territory.
Having met their fixed charges from their own natural territory, they
invaded the remotest districts by cutting prices to the level of actual
production cost per unit of new business. The Florida orange growers
protest against the relatively lower rate on California fruit, which
is carried twice the distance for less money per box. This, it is
urged, enables the western grower, having glutted his natural market
in the Middle West, to "dump" his surplus into the eastern field, to
which alone the Florida orange is restricted. This line of argument
is the same as that which upholds the systems under which lower rates
are given for exported or imported commodities than those on goods for
domestic consumption. It is always alleged that such sales at long
reach actually benefit the consumer or producer near at hand, inasmuch
as they contribute something toward the fixed expenses of the business,
which must be borne in any event. This raises at once the much broader
question as to what constitutes a "natural market" or the "natural
territory" which rightfully belongs to any given economic agent. It
is, however, too extended an issue to be discussed at this time.[134]
Too many special commodity rates, intended to meet the needs of
particular shippers instead of increasing new business, may merely
bring about economic waste through exchange between widely separated
markets or by causing an invasion of fields naturally tributary to
other centres.[135] Whenever a community producing a surplus of a given
commodity supplies itself, nevertheless, with that same commodity from
a distant market, economic loss results. Numerous instances could be
cited where identical products are redistributed after a long carriage
to and from a distant point in the very area of original production.
Dried fruits may be distributed by wholesale grocers at Chicago in the
great fruit-raising regions of the West and South. Cotton goods made
by southern mills may be shipped to New York or Chicago, and then sent
back again for final distribution with the addition of a middleman's
commission and a double freight rate. The Colorado Fuel & Iron Company
seeks special rates in order to sell goods over in Pittsburg territory;
while its great competitor, the United States Steel Corporation, has
an equal ambition for the trade of the Pacific Slope. In another case
it appeared that a sash and blind manufacturer in Detroit was seeking
to extend his market in New England. Manufacturers of the same goods
in Vermont were simultaneously marketing their product in Michigan.
The Detroit producer did not complain of this invasion of his home
territory, but objected to the freight rate from Boston to Detroit,
which, probably because of back loading, was only about one-half the
rate on his own goods from Detroit to the seaboard. Is not this an
economic anomaly? Two producers, presumably of equal efficiency, are
each invading the territory naturally tributary to the other and are
enabled to do so by reason of the railway policy of "keeping everyone
in business." The New England railways are compelled by reason of the
remoteness to their territory to defend this policy. As President
Tuttle, of the Boston & Maine, expresses it, "I should be just as much
interested in the stimulating of Chicago manufacturers in sending
their products into New England to sell as I would be in sending
those from New England into Chicago to sell. It is the business of
the railways centering in Chicago to send the products from Chicago
in every direction. It is our particular business in New England to
send New England products all over the country. The more they scatter
the better it is for the railways. The railway does not discriminate
against shipments because they are east bound or west bound. We are
glad to see the same things come from Chicago into New England that
are manufactured and sent from New England into Chicago." No one
questions for a moment that the widening of the sphere of competition
by transportation agencies is a service of incalculable benefit to
the country. But it should also be borne in mind that superfluous
transportation is economic waste. The industrial combinations in
seeking to effect a strategic location of their factories in order to
divide the field have apparently come to a full recognition of this
fact.
A fourth objection to undue development of special commodity rates is
that they may entail increased burdens upon the local constituency of
each railway. The proportion of such special rates is fifty per cent
greater in America than in the United Kingdom. It is plain that each
shipment which fails to bear its due proportion of fixed charges, even
though contributing something thereto, leaves the weight of interest
and maintenance charges upon the shoulders of the local shipper. To
be sure, those special rates which permanently create new business,
operate otherwise. But in the vast complex, each railway often wrests
from competing carriers only about as much tonnage as it loses. It
invades rival territory, but its own constituency is invaded in
retaliation. Thus there is rolled up an inordinately large proportion
of such special traffic, leaving the regular shipments and the local
trade to bear the brunt of fixed charges. Momentous social consequences
may result. Not only the cost of doing business, but the expense of
living in the smaller places is increased. One of the most dangerous
social tendencies at the present time is the enormous concentration
of population and wealth in great cities. Increased efficiency and
economy in production are much to be desired; but social and political
stability must not be sacrificed thereto. Is it not possible that a
powerful decentralizing influence may be exerted by checking this
indiscriminate and often wasteful long-distance competition, through
greater insistence upon the rights of geographical location?
Finally, an abnormal disregard of distance, which is always possible
in the making of special rates to meet particular cases, may bring
about a certain inelasticity of industrial conditions. This may occur
in either one of two ways. The rise of new industries may be hindered;
or the well-merited relative decline of old ones under a process of
natural selection may be postponed or averted. The difficult problem
of fairly adjusting rates on raw materials to finished products in
order that the growth of new industries may take place, while at the
same time the old established ones shall not be cramped or restricted,
has already been discussed. It is equally plain that at times there
may be danger of perpetuating an industry in a district, regardless of
the physical disabilities under which it is conducted. One cannot for
a moment doubt the advantages of a protective policy on the part of
railways; safe-guarding industry against violent dislocating shocks.
An inevitable transition to new and perhaps better conditions may
perhaps be rendered easier to bear. To New England, constantly exposed
to the competition of new industries rising in the West, this policy
has been of inestimable value. On the other hand, it is incontestable
that in the long run the whole country will fare best when each
industry is prosecuted in the most favored location, conditions of
marketing as well as of mere production being always considered. If
Pittsburg is the natural centre for iron and steel production, it may
not be an unmixed advantage to the country at large, however great its
value to New England, to have the carriers perpetuate the barbed wire
manufacturers at Worcester. If California can raise a finer or more
marketable variety of orange, and at a lower cost, than Florida, it
would be a backward step to counteract the natural advantage of the
western field by compelling the southern railways to reduce their rates
to an amount equal to the disability under which the Florida grower
works. The principle laid down by the so-called "Bogue differentials"
in the lumber trade[136] bears upon this point. In order to equalize
conditions between a large number of lumbering centres sending their
products to a common market, certain differentials between them
were allowed under arbitration, "to enable each line to place its
fair proportion of lumber in the territory." Did this mean that the
disability of any place in manufacturing cost, should be compensated by
a corresponding reduction in the ensuing transportation cost? This was
the view of some of the carriers who were zealous to keep the market
open to all on equal terms. Yet it is evident that, carried beyond a
certain point, such a policy would not only nullify all advantages of
geographical location, but it would also reverse the process of natural
selection and of survival of the fittest, upon which all industrial
progress must ultimately depend. Each particular case, however, must be
decided on its merits. Our purpose is not to pass judgment on any one,
but merely to call attention to the possible effect of such practices
upon the process of industrial development.
Centralization, or concentration of population, industry and wealth
is characteristic of all progressive peoples at the present time.
Great economic advantages, through division of labor and cheapened
production, have resulted; but, on the other hand, manifold evils
have followed in its train. Sometimes it appears as if American
railway practices, in granting commodity and flat long-distance
rates so freely, operated in some ways to retard this tendency. But
the influence is not all in that direction. Many staple industries,
utilizing the raw material at their doors, might supply the needs of
their several local constituencies, were it not that their rise is
prevented by long-distance rates from remote but larger centres of
production. Denver, in striving to establish paper mills to utilize its
own Colorado wood pulp, is threatened by the low rates from Wisconsin
centres. Each locality, ambitious to become self-supporting, is
hindered by the persistency of competition from far away cities. This
is particularly true of distributive business. The overweening ambition
of the great cities to monopolize the jobbing trade, regardless of
distance, has already been discussed. And it follows, of course, that
the larger the city the more forcibly may it press its demands upon the
carriers for low rates to the most remote hamlets. The files of the
Interstate Commerce Commission are stocked with examples of this kind.
The plea of the smaller cities and the agricultural states--Iowa, for
example--for a right to share in the jobbing naturally tributary to
them by reason of their location, formed no inconsiderable element in
the recent popular demand for legislation by the Federal government.
The marked difference between competition in transportation and trade
has long been recognized in economic writing, but has not as yet been
accorded due weight in law. The most essential difference arises from
the fact, already fully set forth, that a large proportion of railway
expenditures are entirely independent of the amount of business done.
This involves as a consequence, the exemption of carriers from the
fundamental law of evolution. Survival of the fittest does not obtain
as a rule in railway competition. The poorest equipped, the most
circuitous and most nearly insolvent road is often able to dictate
terms to the standard and most direct trunk lines. This has been
exemplified time and again in the history of rate wars the world
over.[137] The bankrupt road having repudiated its fixed charges has
nothing to lose by carrying business at any figure which will pay
the mere cost of haulage. The indirect line having no business at
the outset has nothing to lose, and everything to gain. The Canadian
Pacific, for example, was perhaps originally built without any
expectation of being able to participate in San Francisco business; and
yet, like the Grand Trunk, it has always been an active factor in the
determination of transcontinental tariffs.
The fact is that cost of production, while in trade fixing a point
below which people may refuse to produce or compete, in transportation
may merely mark the point at which it becomes more wasteful to stop
producing than to go on producing at a loss. Hadley's classic statement
is so admirable that it cannot be improved upon. "Let us take an
instance from railway business, here made artificially simple for the
sake of clearness, but in its complicated forms occurring every day. A
railway connects two places not far apart, and carries from one to the
other (say) 100,000 tons of freight a month at twenty-five cents a ton.
Of the $25,000 thus earned, $10,000 is paid out for the actual expenses
of running the trains and loading or unloading the cars; $5000 for
repairs and general expenses; the remaining $10,000 pays the interest
on the cost of construction. Only the first of these items varies in
proportion to the amount of business done; the interest is a fixed
charge, and the repairs have to be made with almost equal rapidity,
whether the material wears out, rusts out, or washes out. Now suppose
a parallel road is built, and in order to secure some of this business
offers to take it at twenty cents a ton. The old road must meet the
reduction in order not to lose its business, even though the new figure
does not leave it a fair profit on its investment; better a moderate
profit than none at all. The new road reduces to fifteen cents; so
does the old road. A fifteen cent rate will not pay interest unless
there are new business conditions developed by it; but it will pay for
repairs, which otherwise would be a dead loss. The new road makes a
still further reduction to eleven cents. This will do little toward
paying repairs, but that little is better than nothing. If you take at
eleven cents freight that cost you twenty-five cents to handle, you
lose fourteen cents on every ton you carry. If you refuse to take it at
that rate, you lose fifteen cents on every ton you do not carry. For
your charges for interest and repairs run on, while the other road gets
the business."[138]
Another peculiarity of railway competition, distinguishing it from
competition in trade, is that there is no such thing as abandonment of
the field. This is tersely expressed by Morawetz in his Corporation
Law. "It should be observed that competition among railway companies
has not the same safeguard as competition in trade. Persons will
ordinarily do business only when they see a fair chance of profit, and
if press of competition renders a particular trade unprofitable, those
engaged in that trade will suspend or reduce their operations, and
apply their capital or labor to other uses until a reasonable margin
of profit is reached. But the capital invested in the construction of
a railway cannot be withdrawn when competition renders the operation
of the road unprofitable. A railway is of no use except for railway
purposes, and if the operation of the road were stopped, the capital
invested in its construction would be wholly lost. Hence it is for
the interest of the railway company to operate its road, though
the earnings are barely sufficient to pay the operating expenses.
The ownership of the road may pass from the shareholders to the
bond-holders, and be of no profit to the latter; but the struggle
for traffic will continue so long as the means of paying operating
expenses can be raised. Unrestricted competition will thus render
the competitive traffic wholly unremunerative, and will cause the
ultimate bankruptcy of the companies unless the operation of their
traffic which is not the subject of competition can be made to bear
the entire burden of the interest and fixed charges." So profoundly
modified in short are the conditions of railway competition by contrast
with those in industry, that it is clear beyond a shadow of doubt
that a railway is essentially a monopoly. This requires no proof so
far as local business, in distinction from through or competitive
traffic, is concerned. It is equally true in respect to all traffic of
sufficient importance to bring about pooling agreements or a division
of the business, in order to forfend bankruptcy and consolidation.
To attempt to perpetuate competition between railways by legislation
is thus defeating its own end. The prohibition of pooling agreements
which refuses to recognize the naturally monopolistic character of the
business, can have but one result, namely, to compel consolidation as a
measure of self-preservation. Such legislation defeats itself, bringing
about the very result it was intended to prevent.
* * * * *
Two general theories governing the rates chargeable by railways are
entertained, known respectively as cost of service and value of
service. According to the first, the proper rate for transportation
should be based upon the cost for carriage of the persons or goods,
with an allowance for a reasonable profit over and above the expenses
of operation involved. This line of argument is commonly advanced by
representatives of shippers and the public, who reason by analogy from
other lines of business. In several European countries when railways
were first built, and afterward, especially in Germany in 1867,
attempts were made to apply this principle widely in the construction
of tariffs. Practical railway men, on the other hand, usually adhere
to the second principle of value of service. This argument maintains
that, while theoretically cost of service should determine minimum
rates, owing to the nature of commercial competition, as a matter
of fact rates must be based upon the principle of charging what the
traffic will bear. This is accomplished by proportioning the rate to
the commercial value of the service. Practically the rate is found
by charging as much as the traffic will stand without evidence of
discouragement. Thus if the price per bushel of wheat in New York
is twenty-five cents higher than in Chicago, it would obviously be
absurd to charge a rate which would absorb all of that increment of
place value due to transportation. Enough margin must be left to the
shipper who buys wheat in Chicago and sells it in New York, to permit a
reasonable profit on the transaction, after payment of the freight rate.
These two principles of cost of service and value of service are
directly opposed in one regard; inasmuch as the cost of service theory
harks directly back to railway expenditure; while the value of service
principle contemplates primarily the effect upon the railway's income
account. Any charge is justified according to the latter view, which
is not detrimental to the shipper as indicated by a positive reduction
in the volume of business offered. No charge, on the other hand, may
be deemed reasonable according to the cost of service principle,
which affords more than a fair profit upon the business, regardless
of its effect upon the shipper. As a matter of fact neither of these
views is entirely sound by itself. Both have large elements of truth
in them. Each qualifies the other. In the first place, it is to be
noted that between them they fix the upper and lower limits of all
possible charges. Less than the cost of service cannot be charged;
else would a confiscatory rate result. This was the plea set up by
the railways in the now celebrated Texas Cattle Raisers' Association
case against the cancellation by the Interstate Commerce Commission
of an extra charge of $1 per car for switching charges at Chicago. At
the other extreme, more than the traffic will bear cannot be charged
without a disproportionate decline in volume of tonnage. This would
be bad business policy, as it could at once entail loss of revenue.
The railway could not submit to the former alternative; it would not
conceivably resort to the latter.
Attempts have been made by various authors to account for the phenomena
of rate making on other grounds. The German author, Sax, has sought to
trace an analogy between the imposition of taxes and railway charges,
alleging that both should be proportioned to what the shipper "can
afford to pay," from an ethical rather than an economic point of view.
Acworth interprets the phrase "charging what the traffic will bear" to
mean something analogous to this. His allegation is that rate schedules
are built up upon the principle of "equality of sacrifice," otherwise
characterized as "tempering the wind to the shorn lamb." High class
traffic contributes liberally of its abundance of value, while third
class passengers and low grade tonnage are let off lightly on the
ground of their poverty. Taussig in his memorable contribution to the
subject[139] has, however, shown how untenable this theory of "equality
of sacrifice" is. Not ethical but purely economic considerations are
applicable in such circumstances except, of course, in so far as common
carriers, enjoying privileges by grant of the state, may be considered
as imposing taxes for the performance of a quasi-public duty. This
latter test of a reasonable rate has underlaid a long line of Supreme
Court decisions since the Granger case.[140] Nevertheless, as so
frequently happens, legal and economic bases of judgment seem to be
lacking in harmony.
There can be no question that for an indispensable public service
like transportation, conducted under monopolistic conditions, the
ideal system of charges would be to ascertain the cost of each service
rendered and to allow a reasonable margin of profit over and above this
amount. To the application of this principle alone, however, there are
several insuperable objections both theoretical and practical. Such
cost is practically indeterminate, being joint for all services in
large part, as we have seen: it is highly variable, being perhaps never
twice the same, as circumstances change from time to time; cost is
unknown until volume is ascertained, and volume is ever fluctuating;
the cost of service, obviously, could never be ascertained until after
the service had been rendered, while, of course, the schedule of rates
must be known in advance, in order that the shipper may calculate his
probable profits; and finally the principle of increasing returns,
flowing from the dependence of cost upon volume of traffic, imposes
such an incentive for development of new business, which in turn
depends for its volume upon the rate charged, that cost of service is
subordinated at once to other considerations in practice.
Of these objections to rate making upon the principle of cost of
service alone, it would indeed appear as if the first should be
conclusive. If the cost is simply indeterminable, why bother about any
further refutation of the principle at all? But the persistency of the
idea that somehow railway operations are analogous to the business of
an ordinary merchant; and that cost and profits are ascertainable;
renders it necessary to pile proof upon proof of the limitations upon
its applicability to real conditions in service.
Not only is the mere cost of service indeterminable; if it could
be ascertained, it would not establish the chargeable rate in many
instances. The freight service of a railway comprises the carriage of
all kinds of goods simultaneously, from the most valuable high-priced
commodities, such as silks and satins, down to lumber, coal, cement,
and even sand.[141] To compel each of these classes of goods to bear
its proportionate share of the cost of carriage, would at once preclude
the possibility of transporting low-priced goods at all. One dollar a
hundred pounds may not be too much to add to the price of boots and
shoes for transportation from Boston to Chicago.
It would still form only a small part of the total cost of producing
and marketing them. But to add anything like that sum to the cost of
one hundred pounds of salt or cement would put an end to the business
at once. Only about so much can in practice be added to the price of
any given commodity for freight without widely limiting the area of its
available market. Thus raw cotton seems to be able to bear an addition
of about fifty cents per hundred pounds for freight to its total cost.
Experience demonstrates that anything more than this one-half cent per
pound charged on cotton, entails more loss than gain. In the case of
fancy groceries or fine furniture, there may be no considerable demand
in any event above a certain ascertainable level of prices. For boots
and shoes or cut building stone it may be that competition from some
other centre of production nearby, precludes any great addition to
the price for freight. The business simply will not bear more than a
certain proportion of charge. Not only would the rigid application of
the cost of service principle hinder all transportation of low-grade
traffic; it would also prevent any development of long distance
business. It is indubitable that sole reliance upon cost of service as
a basis for rate making is theoretically unsound, and impossible of
practical application.[142]
Cost of service, while unsound as a sole reliance, nevertheless affords
an important check upon the value of service principle. Without it
there is always grave danger that traffic managers, seeking to enlarge
their revenues, may push rates unreasonably high. At first sight it
would appear as if this could not occur, inasmuch as an inordinately
high rate would immediately reduce the volume of business offered.
It is constantly alleged by railway men that this must of necessity
occur. And it would indeed follow, were it not that the incidence of
the rate is rarely upon the actual shipper. He merely pays it, and at
once shifts it to the consumer. For low-grade or staple goods like
cement or kerosene, where transportation charges form a large part of
the total cost of production, it is conceivable that higher freight
rates might so far increase the price as to check consumption. Five
cents a hundredweight higher freight means $1.25 per 1,000 ft. added
to the price of soft lumber, $2 to hard lumber; three cents per bushel
added to the price of wheat, and $1 to the ton of pig iron or coal.
Such substantial additions might readily reduce the demand. Yet even
this would not be true of necessities of life like anthracite coal
or sugar, on which latter the freight rate amounts to about one-half
cent per pound. Is five cents a barrel added to the price of flour
likely to decrease the consumption of that staple commodity? Yet the
enhancement of railway revenues would indeed be enormous from such an
increase of freight rates. For these necessities of life, an increased
freight rate might become an actual charge upon the people, without
reducing their consumption, like a tax upon salt. Only upon goods the
use of which might be freely lessened, would higher freight rates
be reflected in a corresponding decline in the volume of business.
Moreover, with all high grade traffic, the value of service principle
fails utterly by itself alone to prescribe the upper level of a
reasonable charge. Competent testimony is ample upon this point. Thus
from the commissioner of the Trunk Line Association;[143] "The tonnage
of the higher class articles is an extremely difficult matter for
transportation companies to increase or decrease.... In that class of
articles the carrier can do but little to increase the transportation."
And the reason in part lies in the almost immediate diffusion of the
burden in the processes of distribution. That no complaints are made--a
defence often brought forward for higher rates--proves by itself the
uncertain incidence of the burden imposed.
That the principle of charging what the traffic will bear affords
no protection to the consumer against exorbitant rates on many
commodities, follows also from the relative insignificance of
transportation charges as compared with the value of the goods. This,
in fact, is naively conceded by railway managers themselves; when,
as in the case of the widespread freight rate advances of 1908-1909,
publicity agents flooded the country with calculations as to the
infinitesimal fraction which would be added to the price of commodities
by a ten per cent, rise in rates.[144] The rate from Grand Rapids to
Chicago on an ordinary dining room set of furniture, being $1.60, a
ten per cent. increase would add only sixteen cents to the cost. A
harvester transported one hundred miles would be enhanced seventeen
and a half cents in price; a kitchen stove carried from Detroit to
the Mississippi would only cost twenty-five cents more; and the price
of a Michigan refrigerator sold in New York, would be only seven
and one-half cents higher; were freight rates to be increased by
ten per cent, in each instance. On wearing apparel the proportions
were represented as even more striking. An ordinary suit of clothes
transported three hundred miles, under similarly enhanced rates, would,
it was alleged, cost only one-third of a cent more. For all their
apparel, made in New England, consisting of everything from hats to
shoes, each wearer in the Middle West would be affected by a ten per
cent. rise of rates by less than one cent apiece. True enough all this;
and a striking testimonial to the effectiveness of the railway service
of the country! But at the same time, if a ten per cent. increase of
rates is inappreciable to the consumer, why not increase them by twenty
per cent.[145]
And what becomes of the argument that charging rates according to
what the traffic will bear, is an ample safeguard against extortion?
Many of these small changes in price are diffused in the friction of
retail trade;[146] some of them are unfortunately magnified to the
consumer, especially under conditions of monopoly. When freight rates
on beef go up ten cents per hundredweight, the consumers' price is more
likely than not to rise by ten times that amount. But even assuming
the final cost to follow the range of transportation charges closely,
is it not evident that, so small relatively are many freight charges
by comparison with other costs of production, that consumption is
not proportionately affected by their movement one way or the other?
And yet the entire argument that the value of service principle is a
self-governing engine against unreasonable rates, is based upon this
assumption. Surely the increased income to the carriers when rates are
raised must come from someone. Because it is not felt, is no reason for
denying its existence as a tax. But the very fact that it is not felt,
undermines the argument that a safeguard against extortion obtains. The
theorem that value of service in itself affords a reliable basis for
rate making, pre-supposes that freight rates and prices move in unison;
a supposition which a moment's consideration shows to be untenable
in fact.[147] Such cases must be finally settled by some reference,
indefinite though it be, to the cost of conducting that particular
service; or rather, as Lorenz puts it, to the extra cost incident to
that service. This extra cost may oftentimes be segregated, where the
total cost could not be ascertained.[148]
That the problem is, however, a most difficult one is evidenced by the
periodic controversies over railway mail pay.[149]
Of course in order that any change of rates should be reflected in
prices, all carriers must of necessity agree upon the matter. The price
is made by the least expensive source of supply. So that any carrier
refusing to raise rates, might aid in the continuance of an already
established price. Under conditions of transportation prevalent in
the United States twenty years ago, the likelihood of an increased
freight rate becoming a tax upon the community, was lessened by the
probability that either by means of secret rebates, or by special
and perhaps open commodity rates, some roads might choose to protect
their clients against enhancement of prices. Markets were local--not
reached by great systems operating from remote sources of supply.
The policy of the northern transcontinental lines in making lumber
rates from Oregon to the Middle West, might be quite independent of
any policy in force on the southern hard pine carrying roads. But
under present day conditions, the entire area of the United States is
one great market. Hence, with rebates eliminated and with practical
monopoly established through actual consolidation, control or harmony
of policy, the carriers have the consumers much more completely at
their mercy. Only two safeguards for the public interest remain. One is
government regulation, or at all events supervision, of charges. The
other is "enlightened self-interest"--which in transportation matters
means a full appreciation of the possibilities and limitations in the
application of the value of service principle to the determination of
rates.
Considerations of cost of service afford protection, not only against
unreasonably high rates, but also against unduly low charges. The evil
in such cases is not only that the carriers operate at a loss, but that
inequality and discrimination are inevitable concomitants of too low
rates. No railway conceivably, of course, will charge unremunerative
rates for a long time. But it sometimes happens that managements may be
led to the adoption of policies of temporary expediency, not compatible
with the long-time welfare of stockholders. During the presidency of
Charles Francis Adams on the Northern Pacific in 1890 an unaccountable
and unnatural diversion of traffic from this road to the Atchison,
Topeka & Santa Fe suddenly occurred.[150] A large volume of freight
from the East to Oregon was diverted to the roundabout route _via_
Southern California. On investigation it appeared that the English
banking house of Baring Brothers, having become involved in unfortunate
Argentine speculation, and being obliged to force a market for its
investments in Atchison securities, demanded an immediate showing of
large gross earnings regardless of the net profits. Orders to get
traffic at any price went forth. A market was made for Atchison stock;
although it was powerless to prevent the firm's final bankruptcy.
In such a case the only safeguard against unreasonably depressed
rates by the Atchison road, which, of course, immediately compelled
corresponding reductions by the natural routes to the Northwest, should
have been consideration of the actual cost of moving traffic by so
long and roundabout a route. And yet this consideration was entirely
ignored. Another illustration of the same danger occurred in April,
1903.[151] A gang of western speculators unobtrusively acquired control
of the Louisville & Nashville road, by taking advantage of the issue
by that company of a large amount of new stock. This they did by the
use of borrowed money. They had no intention, even had they been
sufficiently well financed to do so, of permanently controlling the
road as an investment. They bought the stock merely in order to resell
it at a higher figure. They threatened the railway world with a general
disturbance of rate conditions throughout the South. Their plan was
to cut rates and steal traffic from other roads in order to make a
large show of gross earnings; and to unload their stock holdings on
the market thus made, before the public learned the truth. This was
prevented only by repurchase of their stock at very high prices. In
such a case, what guidance would the principle of charging what the
traffic would bear, afford? Cost of service must be invoked in order to
determine the reasonableness of the low rates in force.
In any industry where rates are made under conditions of monopoly
rather than of free competition, it is imperative that cost of service
be constantly held in view. Under conditions of free competition it
is bound to obtrude itself automatically; but under monopoly it must
oftentimes be forcibly invoked. The shipper whose manufacturing plant
has once been located in a certain place is no longer free to accept or
reject a certain rate. He can afford neither to move nor to abandon his
works. In order to continue in business he must meet the prices made
by competitors. This price may be made elsewhere under more favored
circumstances. To a manufacturer an increase of freight rates instead
of curtailing output, may lead to attempts to lessen the costs of
production per unit by an enlarged output sold at cut prices. Under
such conditions an enhanced freight rate is a positive deduction from
profits without any gain to the consumer. It is impossible to trace any
safeguard against extortion in the operations of a value of service
law under such circumstances. An instance in point is afforded by a
complaint of the Detroit Chemical works in 1908.[152] This company
imported iron pyrites through Baltimore from Spain; that being the
source of the bulk of the material used here in the manufacture of
sulphuric acid. The Detroit Company sold its product throughout the
West in competition with companies at St. Louis, Chicago and Buffalo.
The companies at Chicago and St. Louis enjoyed low import rates by way
of the Gulf ports. The Buffalo concern used to be favored by a low rate
said to be due to canal competition on shipments from New York. Since
1903, however, the rate on pyrites from Baltimore to Detroit had been
steadily increasing, from $1.56 to $2.72 per long ton. Even this latter
rate by itself does not seem absolutely excessive, yielding a revenue
of less than four mills per ton mile. But here again, it was not the
absolute but the relative rate upon which the continued welfare of the
industrial concern depended. The question had to be decided, not on the
basis of cost, but from the point of view of the value of the service
to the user. The carriers after this petition was filed voluntarily
reduced the rate fifty-one cents per ton in January, 1908. The relative
rate as compared with that to other competitive points was thus more
equitably adjusted. The Interstate Commerce Commission on a review of
the evidence held that this increase to $2.72 was unreasonable and
unjust so long as it had been in effect; and awarded reparation to the
amount of fifty-one cents per ton on all shipments made during its
continuance.
It is indisputable that the great dynamic force in railway operation
inheres in the value of service idea. The traffic manager who is always
considering how much it will cost to handle business, will seldom
adventure into new territory. The United States, as a rapidly growing
country, is consequently the field in which charging what the traffic
will bear, has been most ardently upheld as the only practicable basis
for rate making. A few detailed illustrations will serve to show
the results of its application in practice. Not infrequently does
it happen that rates are different over the same line for shipments
between two given points in opposite directions. Where this is due
to a preponderance of traffic in one direction, and a consequent
movement of "empties" which invite a back loading at very low rates,
the difference of charges according to direction may actually be due to
differences in the cost of carriage.[153] An empty train, which must
be returned from New York to Chicago for another loading of grain,
or to Georgia or Oregon for shipments of lumber, if loaded with
merchandise, can be moved with no allowance for dead weight of cars
or locomotives; inasmuch as the train must move in any event, whether
loaded or empty. But even where this defence of difference in the cost
of service fails, the practice may be entirely proper from every point
of view. By increasing the total tonnage a special rate may ultimately
contribute to lower charges all along the line. Raisin culture began in
California in 1876. Prior to that time the Spanish product had supplied
the American market. The first thing to do was to find a market for
the California raisins in the East. They would not bear the freight
rate which had previously been charged for Spanish raisins moving over
the transcontinental lines westward. A very low rate was all that the
new traffic would bear. During the year 1876 therefore 70,000 lbs. of
California raisins were carried east at one and three-fourths cents
per 100 lbs., while simultaneously 1,000,000 lbs. of Spanish raisins
were carried west over the same lines at a rate of three cents. No
such difference in the cost of service in opposite directions existed,
although a preponderance of empties moving eastward undoubtedly
cheapened the service from California. The aim of the commodity rate
was to upbuild a new industry. How far this succeeded appears from the
fact that in 1891, no Spanish raisins were carried west at all; while
the eastbound shipments amounted to 37,600,000 lbs.[154] The preceding
illustration leads us then to this further conclusion. The cost of
service principle might most conceivably be applied to a railway in
a purely static state. But, dynamically considered, as involving the
growth and development of business, it fails utterly by itself to meet
the necessities of the case.
At times it is inevitable that cost of service and value of service
considerations come flatly into opposition. Usually, as in the
California raisin case or in the grant of low rates on Oregon lumber
east bound about 1893, they reinforce one another; that is to say,
the lower rate given to build up business obtains on a service given
at lower cost. But it sometimes happens that shipments of the same
commodities over a line in opposite directions may occur and that the
lower rate applies to the (presumably) more costly service. In 1906 a
manufacturer in Menasha, Wis., complained to the Interstate Commerce
Commission[155] that his rates on woodenware to the Pacific slope
were ten cents per 100 lbs. higher than were rates on the same goods
between the same points east bound, _notwithstanding_ the fact that the
empty car mileage west bound was then three times as great as in the
contrary direction. The movement of empties west bound would certainly
seem to justify as low if not lower rates on the basis of comparative
cost of operation, supposing that there was coincidence in time.
Only one satisfactory explanation for this apparent anomaly suggests
itself; viz., that this low eastbound rate was given to build up a new
industry in the West. In other words, the cost of service, a dependable
guide for a road in a static condition, failed of effect upon a line
possessed of great dynamic possibilities. Occasionally opposition of
principles like this may occur in questions of classification. It may
temporarily be worth while, in order to build up a new industry, to
accord a lower rating to a commodity actually more valuable or more
expensive to handle than others. Here again the dynamic force in the
value of service principle out-weighs all other considerations of
relative cost of service.
The value of service principle in general fails, not only in the
determination of absolutely reasonable rates, but it is inadequate
also to the solution of perhaps the more difficult problem of relative
rates. This question of relativity is twofold; first as between
different places, and secondly as between different commodities.
These are, in other words, the problems respectively of distance
tariffs and of classification. The manner in which distance tariffs
evolve, has already been discussed, and it is evident that the cost
of service principle is of fundamental importance, even though it be
tempered by considerations of commercial expediency, that is to say,
by the necessity of at all times under stress of competition, charging
only what the traffic will bear. But while the value of service
principle--charging according to demand in other words--applies at the
competitive points, the other principle of relative cost should be the
fundamental one in fixing upon the scale of local non-competitive rates.
The second phase of the problem of relativity arises in connection
with classification.[156] How shall goods be graded in respect of
their freight charges for identical services in carriage? Besides
illustrating the interplay of the two fundamental principles, this
topic serves also to clear up another possible confusion of terms.
Proportioning transportation charges to the value of the service must
always be clearly distinguished from basing them upon the mere value
of the goods. Nothing is more certain than that no direct causal
relation between freight rates and the intrinsic value of commodities
is traceable. On wire the freight rate between two given points may
be about one-fourth of the commercial value; on sheet iron one-third;
on lumber somewhat more, and on hay two-fifths; while on cattle and
hogs the freight rate may range as low as one-tenth to one-eighth of
their commercial value. On coal, on the other hand, the freight rate
often more than equals the price of the coal at the mine, and on very
low grade commodities like bricks, the transportation charges may
equal two or even three times the worth of the goods.[157] For each
locality or even direction, these percentages will change. Positive
reasons for these varying relationships are discernible in local trade
conditions. While in general cheap goods are rated lower; if for any
reason--bulkiness or risk--they cost relatively more to transport,
they may very properly be advanced in grade. Normally, raw products
move at lower rates than finished products--for instance, wheat and
flour or cattle and beef. This is in accord with charging what the
traffic will bear in relation to value. But in the making of export
rates, it may be to the interest of the carrier to reverse this order,
actually according to the finished product the lower rate, thereby
encouraging the development of manufactures at home rather than
abroad.[158] Classification committees and regulative commissions are
thus compelled to waver between the two opposing considerations of cost
and value. One cannot avoid the conclusion, however, that, contrary
to the usual rule, in this field of classification undue weight is
often accorded by railway managers to that small element of total
cost of service arising from risks of damage in transit--insurance
cost, in other words--to the neglect of the financially more important
consideration of what the traffic will bear. This emphasis upon the
cost side of the account by classification committees, oddly enough is
peculiarly characteristic of ratings in the higher class commodities.
Among low grade goods, like grain, lumber or coal, the risk of damage
is small, so that insurance cost becomes almost negligible. The
insistent consideration among these low grade commodities is much more
apt to be that of relative demand; arising from the necessity of close
and constant adjustment to the behests of trade. Special or commodity
rates, based directly upon what the traffic will bear, rather than upon
the element of cost, are likely to prevail in these cases. But the very
large revenue which could be obtained from increasing the rates upon
the higher grade of goods seems not to be fully appreciated.