value of service in the classification of freight rates is afforded by
the complaint in 1908 of the pulp paper makers in Wisconsin, already
cited in another connection.[159] It appeared that for similar service
over the same roads, the rates per carload on saw logs for lumber were
only about one-half those charged for carriage of logs to be ground
into paper pulp. Judged on the basis of commercial value, hemlock and
spruce bolts, too short and often otherwise unfit for lumber, were
worth much less than saw logs; and yet they paid double the freight
rates. This was not because the pulp wood was less desirable as
traffic. In many ways it was more so. The haul was twice as long as for
saw logs. The paper mills brought relatively more supplementary tonnage
in the form of coal, food stuffs and supplies for workmen and their
families. Fully as much of the finished product to be reshipped to
consumers resulted. While smaller in volume, the pulp wood business was
far more permanent. It was growing rapidly while the lumber business
was declining. Moreover, the actual cost of service in hauling pulp
wood was fully as low as for lumber logs. Carloads were much heavier,
and were more regular in movement. In practice they involved no
milling-in-transit obligation, that is to say, no obligation to re-ship
the finished paper out over the same road; while all the saw log rates
carried this obligation--a matter of some moment to the railways. And
finally the value of the service to shippers of pulp wood was less than
to mere lumbermen; in other words, the paper makers were operating
under closer margins of profit; their plants were more costly, and
depreciated more rapidly. The defence of the carriers in this case was
not that the rates on pulp wood were too high in themselves, but that
the rate on saw logs was perhaps unduly low--the latter having been
crowded down to a minimum figure by competition in the early days of
the business by the lumber raftsmen who floated the saw logs downstream
from the forest to the saw mills. But of equal importance probably in
perpetuating the higher rates on pulp logs, was the assumption that
while the value of the bolts themselves was perhaps even less than
that of saw logs, the value of the resultant product, paper, was much
greater than that of lumber. But the Wisconsin Railroad Commission, in
entire harmony with the principle repeatedly laid down by the Federal
commission, held that the carriers must be guided by real distinctions
of cost from a transportation standpoint and not by gradations
of value. If the goods were bulky, awkward, or risky to handle,
perhaps requiring special appliances or equipment, relatively high
classification was permissible. But if they were substantially similar
for purposes of carriage, no gradation in rates based upon differences
in the ultimate uses to which the commodity might be put would be
upheld. Such was the reasoning of the Interstate Commerce Commission
in a decision, holding that fire, building and paving brick must be
accorded equal rates, regardless of their differing values.[160]
That the element of value is, however, not negligible is brought out
in a later Federal case,[161] wherein it was recommended that cheap
china, to be given away as premiums in the tea trade, be rated nearer
ordinary crockery or earthenware, even though shipped in the same
manner as high grade china ware. Under the official classification,
chinaware is rated first class if in boxes, and second class in casks.
Earthenware or crockery is carried at twenty per cent, less than third
class, in small packages (L. C. L.). On the basis of mere cost of
service, it would seem as if boxes of chinaware should have a lower
rating than casks. Boxes stow better than casks, with less risk of
breakage. But the commercial practice being to ship the finer grades
of chinaware in boxes, such shipments are graded higher because the
traffic will usually bear a higher rate. Thus considerations of cost of
service yield to those of value. The Interstate Commerce Commission,
however, noting the exceptional circumstances under which the tea
company distributed its cheap chinaware, recommended a revision of the
classification to meet the needs of the case; in other words ordering
a greater emphasis upon the elements of the value of the service, even
at the expense of relative cost of operation.
Our final conclusion, then, must be this: That both principles are of
equal importance; and that both must be continually invoked as a check
upon each other. The tendency to the elevation of cost of service to
a position of priority--rather characteristic of regulative bodies
and of legislators--is no less erroneous than the marked disposition
of railway managers to insist upon the universal applicability of
the principle of charging what the traffic will bear. Neither will
stand the test of reasonableness alone. Whether the one or the other
should take precedence can only be determined by a careful study of
the circumstance and conditions in each case; and in practice, the
instances where either principle becomes of binding effect to the
entire exclusion of the other, are extremely rare.
FOOTNOTES:
[119] 13 I.C.C. Rep., 319. The general investigation of wool rates is
another admirable instance. 23 _Idem_, 151.
[120] Wisconsin Railroad Commission, 1908. _Cf._ p. 181, _infra_.
[121] The diverse interests to be reconciled must also include the
lumbering centres once "next the stump," but now placed at a relative
disadvantage. The Eau Claire lumber case [reprinted in Railway
Problems, pp. 203-233] should be read in this connection.
[122] The remarkable rise of the sash, door and blind industry in
the South, as prejudiced by comparison with Chicago under an outworn
schedule of rates, is given in 23 I.C.C. Rep., 110.
[123] On the parity cases, consult Hammond, Railway Rate Theories,
etc., 1911, pp. 120 and 149.
[124] 14 I.C.C. Rep., 1-74 and Ann. Rep. I.C.C., 1911, p. 46. The later
judicial history will be found at p. 543, _infra_.
[125] P. 489, _infra_.
[126] Rates must not vary with profits. 13 I.C.C. Rep., 429; and
consistently held ever since.
[127] Arbitration of Cotton Rates, etc., Nov. 15 and 16, 1900; pamphlet
arguments of Southern v. Illinois Central Railways. Wool rates are the
same. 23 I. C. C. Rep., 151.
[128] This was the gist of the complaint in the Cincinnati Freight
Bureau case; pp. 248, 392 and 588, _infra_.
[129] Chapters XI and XIX, _infra_.
[130] Now covered by law since 1910. Pp. 512 and 571, _infra_.
[131] Pp. 324 and _infra_.
[132] Senate Committee on the Transportation Interests of the United
States and Canada, 1890, p. 362.
[133] 9 Int. Com. Rep., 318; in our Railway Problems, chap. XVII.
[134] Hammond, Railway Rate Theories, etc., 1911, p. 82, cites cases.
[135] Chapter VIII, _infra_.
[136] 5 Int. Com. Rep., 264; in our Railway Problems, chap. VIII.
[137] _Cf._ p. 255 _et seq., infra_.
[138] A carload of bamboo steamer chairs from San Francisco to New York
for $9.40 in the course of a rate war, would seem to be rather below
bed-rock. 21 I. C. C. Rep., 349.
[139] _Quarterly Journal of Economics_, V, 1891, pp. 438-65; reprinted
in Railway Problems, chap. V.
[140] _Cf._ Int. Com. Reports, 1903, p. 436.
[141] The Hepburn Committee testimony in 1879, p. 2893, is eloquent
upon this aspect of the question.
[142] 1st Annual Report, I.C.C., 1888. _Cf._ Strombeck, Freight
Classification, pp. 35-60.
[143] C., N. O. & T. P. case, testimony, vol. II, pp. 332-333.
[144] _Cf._ The Freight Rate Primer, bearing no authors or publishers
name, but largely compiled from addresses by President W. C. Brown of
the New York Central & Hudson River. Similar arguments and computations
occur in the testimony before the Senate (Elkins) Committee of 1905,
pp. 1162 and 2276.
[145] Now who will say that it is unreasonable to charge 7-1/2 cts. to
carry a suit of clothes from Chicago to New York.... Railways could
charge three or four times the cost of transportation for a pair
of drawers and the rates would still be reasonable.... But all the
first-class rates are of that nature.--Albert Fink, testimony, C., N.
O. & T. P. case, p. 290.
[146] Senate (Elkins) Committee, 1905, p. 1162.
[147] In _re_ Proposed Advances in Freight Rates, I.C.C., April 1, 1903.
[148] An interesting illustration of such determination of separable
or extra cost was the computation by which the movement expenses of a
train load of 50 cars of grain, 80,000 lbs. to the car, from Buffalo to
New York were fixed at $520. I. C. C. Reports, 1903, p. 397. Or again
in the estimation of the costs of operation in the express service
from New Orleans to Kansas City in the banana trade. I. C. C. Rep.,
No. 1235, 1908. The able Wisconsin Railroad Commission has carefully
studied a number of such cases, notable in its Two-Cent Fare decision
of 1906.
[149] _Cf._ Tunell, Railway Mail Service, Chicago, 1901.
[150] Personal correspondence.
[151] Details in vol. II.
[152] 13 I.C.C. Rep., 357.
[153] 5 I.C.C. Rep., 299.
[154] On raisins compared with citrus fruits: 22 I.C.C. Rep., 1.
[155] Interstate Commerce Commission, No. 797.
[156] More in detail in chap. IX.
[157] Senate (Elkins) Committee, 1905, testimony of Mr. Bird, Traffic
Manager of the St. Paul road. This is best measured, of course, by
revenue per ton mile, chap. XII, _infra_.
[158] Flour _v._ wheat, p. 135, _supra_.
[159] P. 148, _supra_.
[160] More in detail at p. 318, _infra_. Also Hammond, Rate Theories of
the I. C. C., 1911, p. 32.
[161] U. P. Tea Co.; I.C.C. Rep., No. 1569, 1908.
CHAPTER VI
PERSONAL DISCRIMINATION
Rebates and monopoly, with attendant danger to carriers, 185.--
Personal discrimination defined, 188.--Distinction between
rebating and general rate cutting, 188.--Early forms
of rebates, 189.--Underbilling, underclassification,
etc., 190.--Private car lines, 192.--More recent
forms of rebating described, 195.--Terminal and
tap-lines, 196.--Midnight tariffs, 197.--Outside
transactions, special credit, etc., 198.--Distribution
of coal cars, 199.--Standard Oil Company
practices, 200.--Discriminatory open adjustments from
competing centres, 202.--Frequency of rebating since
1900, 204-6.--The Elkins Law of 1903, 205.--Discrimination
since 1906, 207.--The grain elevation
cases, 211.--Industrial railroads once more, 212.
The philosophy of rebating has perhaps never been better described than
in the following quotation from the Cullom Committee investigation of
1886:
"Mr. WICKER. I am speaking now of when I was a railroad man.
Here is quite a grain point in Iowa, where there are five or
six elevators. As a railroad man, I would try and hold all
those dealers on a 'level keel,' and give them all the same
tariff rate. But suppose there was a road five or six or eight
miles across the country, and those dealers should begin to
drop in on me every day or two and tell me that that road
across the country was reaching within a mile or two of our
station and drawing to itself all the grain. You might say that
it would be the just and right thing to do to give all the five
or six dealers at this station a special rate to meet that
competition through the country. But, as a railroad man, I can
accomplish the purpose better by picking out one good, smart,
live man, and, giving him a concession of three or four cents
a hundred, let him go there and scoop the business. I would
get the tonnage, and that is what I want. But if I give it to
the five it is known in a very short time. I can illustrate
that better by a story told by Mr. Vanderbilt when he and his
broker had a deal in stocks. The broker came in and said, 'Mr.
Vanderbilt, I would like to take in my friend John Smith.' Mr.
Vanderbilt said, 'Let us see how this will work. Here are you
and myself in this deal now. We take in John Smith; that makes
a hundred and eleven. I guess I won't do it.' When you take in
these people at the station on a private rebate you might as
well make it public and lose what you intend to accomplish. You
can take hold of one man and build him up at the expense of the
others, and the railroad will get the tonnage."
"SENATOR HARRIS. The effect is to build that one man up and
destroy the others?"
"Mr. WICKER. Yes, sir; but it accomplishes the purposes of the
road better than to build up the six."
The force of this description of the underlying motive for personal
discrimination, so far as the carrier is concerned; namely to build
up one man at the expense of his competitors and to attach him in
interest indissolubly to the company, is well exemplified in a case
which occurred in 1908 at Galveston, Texas.[162] Practically all
railway traffic entering Galveston was destined for export. Wharfage
facilities were limited to two concerns, one of them being the Southern
Pacific Terminal Co. A uniform charge of one cent per hundredweight for
cotton seed meal and cake passing over the wharves of both companies
had been the rule for a long time. Yet it appeared on complaint that
one merchant had been granted wharfage space under discriminatingly
favorable conditions. Exemption from demurrage charges, free storage
room and other favors and a fixed rental of $15,000 per year
irrespective of the amount of his shipments, had enabled him, having
been in business only since 1898, to build up a very large traffic. The
export of cotton seed cake instead of meal had greatly increased since
1904. The business of all other competitors since this contract was
made had shrunk to insignificant proportions by comparison with that
done by this favored merchant. The margin of profit in the business
was so small that the difference between the charges and privileges
enjoyed by this individual and his competitors, was forcing them all
out of business. It was estimated by the Interstate Commerce Commission
that if the customary wharfage charges had been paid, the rental would
have been nearly $30,000 for the year 1907, irrespective of other
favors. The cotton planters complained also that this monopoly limited
their market and depressed business. It is clear that the larger the
business, that is to say the more nearly it became a monopoly, the
smaller became the wharfage charges per hundredweight under this system
of a fixed rental; and, in consequence, the greater was the disability
of the other shippers. The advantage to the railroad appeared in
a contract entered into, which provided that all traffic for this
individual should be routed over the Southern Pacific or its connecting
lines. As he had practically gathered in all the cotton seed export
business of Texas and the adjoining states within two years, it is
evident that this consideration was of great value to the railroad. The
economic motive in this case and in the one previously cited was the
same. It will be found in fact to underlie almost all cases of personal
favoritism and discrimination.
The supreme disadvantage in building up a great monopoly in order to
win traffic for a railroad is, of course, that the moment the shipper
becomes sufficiently powerful, he can play off one road against
another, thus becoming practically master of the situation. Sindbad is
soon overwhelmed by the old man of the sea. And the weaker the road
financially, the more powerful is the appeal, to which at last even the
strongest lines must succumb. The history of the Standard Oil Company
during the eighties clearly exemplifies this. The rapid rise of the
cattle "eveners" yet earlier, until, as the private refrigerator car
companies they controlled the situation, was primarily traceable to the
same causes. The late J. W. Midgly[163] gives a forcible illustration
in the attempt in 1894 of ninety-five railroads to reduce the mileage
allowance paid for use of oil tank cars owned by private companies
from three-fourths to one-half cent per mile, loaded and empty. The
Union Tank Line promptly replied that it would in that event at once
concentrate all its vast tonnage to points north and west of Chicago,
upon the single line--presumably the weakest one--which would continue
the old rate. This argument was irresistible; and in the old days of
unregulated competition was in the nature of things bound to be so.
Careful distinction must be made at this point, between personal
discrimination and general rate cutting. Rebating,--that is to
say, departure from published tariffs,--occurs in both cases. The
difference between the two is that in the one case it is special,
particular and secret; while in the other it is so general, if not
indeed universal, as to be matter of common knowledge. Rebating, in
other words, is a common feature of rate wars. But, on the other hand,
general harmony in the rate situation by no means implies the absence
of personal favoritism. During a wide-open rate war, indeed, the most
iniquitous aspect of rebating,--inequality of treatment as between
rival shippers,--may be quite absent. All may be getting the same
rate, namely a cut rate; although the chances are of course that the
bigger the shipper, the more substantial the concessions offered. It is
important to keep this distinction clear, especially since the railways
have awakened to the losses to themselves attendant upon rate wars.
All parties concerned are probably agreed in the hope of eliminating
the rate war forever. But there is not the same evidence of either
an intent or desire on the part of railway officials to get rid of
what, from a public point of view, is even more insidious and unjust;
that is to say, the secret concession of favors to a few chosen large
shippers. General rate wars, as will later appear, are probably a thing
of the past.[164] But secret rebating seems, on the other hand, to be
an evil which must be combatted vigorously and un-intermittently in
order to uproot it as a feature of American industrial life. And of
course it must cease. For it is the most prolific source of evil known
in transportation. It has probably had more to do with the creation
of great industrial monopolies than any other single factor. The first
feature of any reform of our intolerable "trust" situation, must be to
keep the rails open on absolutely even terms to all shippers, large or
small.
The keynote of discrimination is, as we have said, the creation of
monopoly, or, at all events, of so large an aggregation of shipments,
that a profitable partnership between the shipper and the railroad
results. This is clear in recent indictments which charge that the
railroads concerned, having selected one large firm of forwarders in
New York and Chicago are giving them a monopoly in respect of all
imports. In the case of the great beef packers, the railroad having
once built up a shipper by favored rates, may continue in the enjoyment
of this concentrated tonnage with greater security and profit than if
it moved in a multitude of small shipments by numerous competitors. Of
course there is another less common form of rebating which, so far as
its profit is concerned, is limited to the particular dishonest railway
official who arranges the matter. Such favoritism as this, however,
represents a loss to the company; and has always been stamped out by
the carriers when discovered. The principal form above described,
is much more difficult to uproot. And yet for some reason, it is a
distinctively American abuse. European countries seem never to have
suffered from it, to any such degree as has the United States. It is,
as has just been said, perhaps the most iniquitous, the most persistent
and until very recently the most nearly ineradicable evil connected
with the great business of transportation.
Rebating in the early days consisted in simply refunding by direct
payment to the favored shipper, a certain proportion of the freight
bill. This refund might be in cash, in presents to himself or his
family, in salary allowances to clerks, in free passes, or in free
transportation of other goods. In a recent case in New York it has
taken the form of importer's "commissions." But, since 1887 at least,
an inconvenience in all such transactions is their necessary entry
in some form or other upon the books of the company. Of course such
rebates could be covered up as a fictitious charge to operating
expenses; or, as in the case of the Atchison in 1893, might be
carried as an asset, as if such refunds would ever be paid. Nearly
$4,000,000 was thus entered as padding in Atchison assets, when it
went into a receiver's hands at that time.[165] Much of the flagrant
Standard Oil rebating in the eighties was almost openly, and certainly
boldly, carried on by these means. But public sentiment was always
against it; and of course, it was a breach of good faith as between
the railways themselves, in their endeavor to maintain agreed rates.
Secrecy, therefore, always attaches to these transactions; and the most
ingenious devices were invented to confer favors without detection.
Underclassification of freight was a very common device in the old
days. It has reappeared again since 1907 in much the same form. There
is a great difference between the freight on a keg of nails and of fine
brass hardware or cutlery. Who is to know whether a shipment be billed
as one or the other? Is every box of dry goods to be examined in order
to discover whether it contains silks or the cheapest cotton cloth? A
carload of lumber or cordwood might easily by prearrangement be filled
inside with high grade package freight. The utmost vigilance is in fact
necessary on the part of carriers, to prevent such fraudulent practices
by shippers. Under the Joint Rate Trunk Line Inspection Bureau in 1893,
183,575 such false descriptions or underweighings were detected on
westbound shipments from seaboard cities alone.[166] What the amount
of such Underclassification of freight by collusion between agent and
shipper was, can only be conjectured. Even more difficult to detect was
the practice of under-billing.[167] At a certain time, the rate on
flour from Minneapolis to New York was thirty cents per hundredweight,
divided between connecting roads in the proportion of ten cents from
Minneapolis to Chicago, and twenty cents from there on to destination.
In the meantime, as against this ten cent proportion of the through
rate to New York, the local rate from Minneapolis to Chicago was twelve
and one-half cents. As between two rival shippers, the one sending to
Chicago on a New York through rate instead of a local one, would enjoy
a clear advantage of twenty-five per cent. over his competitor. And
who was to know whether a car billed through to New York, was really
going beyond Chicago or not? In one period of three months, 1098 cars
thus through billed to New York were turned over at Chicago to a belt
line road; and only 468 actually went on to that destination. About
sixty per cent. of the traffic was being rebated by this means. Very
complicated arrangements of this sort were rife in the Missouri river
rate wars on grain in 1896. This was known as the "expense-bill"
system; or "carrying at the balance of the through rate."[168]
Many services or facilities are worth as much to a merchant as a direct
refund in cash. He may be given free cartage. This was a very common
expedient in the early days; being fully considered by the Interstate
Commerce Commission.[169] Or free storage on wheels or in freight
houses may be utilized as a cover for favoritism. A low carload rate
might be given, and then the goods be held, storage free, by the
railway at some central point; to be subsequently delivered piecemeal
as sold. The dealer would be relieved of all expense for warehousing
as well as of high less-than-carload rates from the initial point of
shipment. The competitor who paid the less-than-carload rate on an
equal volume of business would be sadly handicapped. Cases are on
record where fish was thus stored free from November to February,
being reshipped on order in small lots. Or an excessive allowance might
be made by the railway for some service or facility afforded by the
shipper. The beef interests first got their hold upon the carriers by
demanding liberal rebates in return for acting as "eveners" in the
partition of traffic between the trunk lines about 1873. Complaint
against excessive allowances to favored grain elevator owners, was
common all through the West for years. The elevator allowance cases
before the Interstate Commerce Commission in 1906-1910 concerning
practices on the Union Pacific lines illustrate the delicacy of the
issues involved.[170]
Deductions from the full tariff for the use of special equipment owned
by shippers, has been one of the commonest means of building up great
monopolies.[171] The allowances to the Standard Oil Company for the use
of its tank cars, before the construction of pipe lines, and especially
prior to 1888, were a source of great unrest.[172] But the construction
of pipe lines has not lessened their importance. It is on record that
the use of private cars in other lines of business has led to grave
abuses. When stock cars and beef refrigerator cars, owned by private
shippers, first began to be used about 1883-1884, they were much
sought after by the railroads as traffic. They moved regularly, not by
seasons; the volume of business was large and rapidly growing; it was
concentrated at a few large initial points; much of it was high class
and very remunerative. With the enormous extension of refrigeration
to cover the long-distance movement of fruit and vegetables, a still
more powerful encouragement came into play. These latter businesses
were highly seasonal. Few roads could afford to maintain highly
specialized equipment to care for a business of a few weeks length.
But a private company operating all over the country, could utilize
its cars first for early vegetables and fruits from the south, then
from the middle west or the Oregon-Washington region, and finally in
winter for oranges from California or Florida. The number of these cars
rapidly increased until by 1903 there were 130,000 in service,--in fact
about one-eleventh of all the freight cars in the United States were
privately owned. The so-called Armour interests, primarily engaged in
the packing business, were by far the largest single concern.
The system of payment for the use of these cars consisted of an
allowance, based upon the mileage performed. This used to be one cent
per mile, loaded and empty, for refrigerator cars. In 1894 a determined
effort was made by the carriers to reduce this below the point then
reached of three-fourths of a cent per mile. But the extraordinary
concentration both of ownership and traffic, rendered it easy for the
car companies to defeat the proposition. In the meantime the steady
increase in volume of traffic, making whole trainloads possible,
together with the growth of very long distance business, made it
imperative that these trains be operated at high speed with few stops.
This at once enormously enhanced the earning power of each car, as
based upon mileage. The performance was often as high as four times
that of the ordinary freight cars.
Under these new conditions, at the current rate of earnings, a car
would pay for itself in three years, besides paying all expenses of
maintenance. The burden of these allowances became very great. The
situation some years ago is well described by a former member of the
Interstate Commerce Commission, as follows:--
"Investigations made by the Interstate Commerce Commission at
different times have disclosed to some extent the very large
sums received by shippers as mileage for the use of such cars.
"By an investigation made in 1889 it appeared that on a single
line of road between Chicago and an interior Eastern point--a
distance of 470 miles--refrigerator cars owned by three
shipping firms made in nine months, from August 1, 1888, to May
1889, 7,428,406 miles, and earned for mileage $72,945.97, being
about $8,112 a month or substantially at the rate of $100,000 a
year.
"By another investigation, made in 1890, it appeared that
private stock cars to the number of 250 had been used upon
a line made up of two connecting roads between Chicago and
New York, beginning with 150 cars on September 1, 1880,
increased 30 more a month later, 20 more another month later,
and reaching the total of 250 in June, 1890; that the cars
altogether had cost $156,500, and had earned for mileage in
two years, from September 1, 1888, to September 1, 1890,
$205,582.68; that the entire expense to be deducted during that
period for car repairs and salaries for their management was
$34,050.48, leaving net revenue to the amount of $171,532.20,
being an excess of $15,032 above the whole cost of the cars.
The cars were, therefore, paid for and a margin besides in two
years, and, thereafter, under the same management and with a
corresponding use of the cars, an income of upward of $100,000
a year was assured on an investment fully repaid, or, in
effect, on no investment whatever."
By 1903 the railroads were paying over $12,000,000 annually for the use
of such equipment.
With the growth of their power, the extortionate demands of these
private car lines, both upon the railroads and the shipper, steadily
enlarged. From the roads they often compelled fictitious mileage
allowances; and from the shipper the most outrageous charges were made
for icing and other services en route. The reports of the Interstate
Commerce Commission for 1903-1904 and of the Senate (Elkins) Committee
of 1905 deal fully with these abuses. Moreover the Armour company
gradually forced other competitors out of business, and with the growth
of monopoly, its exactions became even more extreme. The following
instance is typical.
"In 1898 the Armour Car Lines Company was furnishing cars
for the movement of Michigan fruits from points on the Pere
Marquette Railroad to Boston in competition with other private
car companies, and its charge for refrigeration to Boston was
$20 per car. Its present charge to Boston is $55 per car.
Before the present exclusive contract was entered into between
the Armour Car Lines and the Pere Marquette Railroad Company
the actual quantity of ice required was charged for at $2.50
per ton. Under this system the cost of refrigerating cars from
Pawpaw, Mich., to Dubuque, Iowa, averaged about $10 per car,
while the present schedule of the Armour Car Lines is $37.50.
The cost of icing from Mattawan, Mich., to Duluth was $7.50,
as shown by an actual transaction in the year 1902, while the
present refrigeration charge between those points is $45. The
cost of icing pineapples from Mobile to Cincinnati under an
exclusive contract with the Armour Car Lines is $45, while
the cost of performing the same service from New Orleans to
Cincinnati over the Illinois Central is $12.50 per car."
Fortunately the progressive enlargement of Federal powers of
supervision has tended to check these exactions. But the system of
special allowances for the use of privately owned equipment, is one
which needs the most careful watching by the authorities.
With the passage of time, and especially since 1896, new and even more
elaborate schemes for rebating have come to light. One of the most
ingenious, which was discovered about 1904 to be very widespread,
was the use of terminal or spur track railway companies.[173] In
Hutchinson, Kansas, for example, were salt works having a capacity of
some 6000 barrels a day. Two railways were available for shipments.
A new company was incorporated, all its stock being held by the salt
works owners, which constructed sidings to both railroad lines. The
spur track was less than a mile long and cost only about $8000 to
build. But the company was chartered as the Hutchinson and Arkansas
River Railroad. Its officers were the owners of the salt mills.
It owned neither engines nor cars. Yet it entered into a traffic
agreement with the Atchison road for a division of the through rate
to many important points, its share being about twenty-five per cent.
So substantial a pro-rate was this, that in a few months the H. and
A. R. R. received back some fifteen thousand dollars as its share of
the through freight rates. And every dividend declared by it was, of
course in effect a rebate enjoyed exclusively by this particular mill,
as against less favored competitors.
Obviously, rebates assuming the above-described form are open only
to very large shippers, to whom it is worth while to incur the
considerable expense. But many concerns have already such trackage in
or about their works. Nothing is needed except to incorporate them
separately, and then to enter into suitable traffic agreements with
standard roads. Many of the so-called trusts were implicated in such
transactions, about 1904-1905. The International Harvester Company
at Chicago had for years performed much of its own terminal service;
and until 1904 was allowed as high as $3.50 per car for switching
charges by connecting railroads. It then incorporated the Illinois
Northern Railroad, which was promptly conceded twenty per cent, of
all through rates, with the Missouri river rate as a maximum. On this
traffic it would be allowed as high as $12 per car, instead of $3.50
as before. The Illinois Steel Company afforded in 1905 an even more
flagrant example. Apparently it had enjoyed extra-liberal proportions
of through rates since 1897, by means of its separately incorporated
and, in fact, really important terminal road. But an allowance of $700
to $1000 for hauling a trainload of coke some seven miles, yielded a
profit on the business of perhaps ninety per cent. It was an advantage
which no competitor could hope to equal. No doubt the practice of
switching allowances was properly used at the start. But the large crop
of cases discovered in 1904-1905 proved that they had come to be very
widely used as a cover for rebating. It is not always easy, however,
to decide when such an allowance ought to be made to a privately owned
terminal company. The Anheuser-Busch case, decided in June, 1911, with
a dissenting opinion by Commissioner Harlan, shows how intricately
involved such issues may become.[174]
The so-called "midnight tariff" was a strictly legal way of conferring
favors upon certain shippers. It was much in evidence during the grain
wars between lines serving the Gulf ports about 1903. And it seems
to have been a device used at times all over the country. A traffic
manager wishing to steal all the business of a large shipper from some
competing road, and to build him up at the expense of his rivals,
secretly agrees to put into effect a low rate on a given date. The
shipper then enters into contracts calling for perhaps several hundred
carloads of grain to be delivered at that time. This reduction is
publicly filed, perhaps thirty days in advance, with the Interstate
Commerce Commission at Washington. But who is to discover it, in the
great medley of new tariffs placed on file every day? Yet this is not
all. A second tariff, restoring the full rate, is also filed to take
effect very shortly,--perhaps only a day,--after the reduction occurs.
All these are public, and open to all shippers alike. But only the one
who was forewarned is able to take advantage of them. He rushes all
his shipments forward while the reduced rates are in effect. Before
other competitors can assemble their grain or other goods, the brief
reduction has come to an end; and rates are restored to their former
figure.
The President of the Chicago Great Western Railway has concisely
described the commercial effect of one of these midnight tariffs.
"A clean profit, he says, over all expenses of one half of a
cent per bushel is a satisfactory profit to the middleman;
and a guaranteed rate of transportation of even so small a
sum as one-quarter of a cent per bushel less than any other
middleman can get, will give the man possessing it a monopoly
of the business of handling the corn in the district covered by
the guaranty. Why? Such are the facilities of trade by means
of bills of lading, drafts, telegraphs, banks, etc., that
to do an enormous corn trade, the middleman requires only a
comparatively small capital to use as a margin. A capital of
$50,000 is ample thus to handle 15,000,000 bushels, and with
activity, double that amount, per annum. One quarter of a cent
per bushel profit on 15,000,000 bushels would amount to $37,500
which is equal to .75 per cent. per annum on the capital
employed."
A similar device was used by the Burlington road in its dealings with
the Missouri river packing houses on export traffic. They signed an
agreement making a rate to Germany of twenty-three cents per hundred
to last until December 31, 1905. Before the expiration of this time,
however, the roads concerned, publicly filed an amended tariff
presumably for all shippers of thirty-five cents per hundred. They
nevertheless continued the old rate to the packers. This case went to
the Supreme Court which decided in 1908 that the device was unlawful
and discriminatory.[175]
And then again there are all the possibilities of the printer's art to
be used, in connection with the preparation of elaborate tariffs.[176]
The tariff of "33 cents per hundredweight" may conceivably be a
typographical error, to be speedily corrected in a supplementary
hektograph sheet filed the next day. Involved and elaborate rate
sheets may be reprinted with only one little change among a thousand
items left as before. Different tariffs may interlock with complicated
cross references. In one case in 1902 it took seven different tariffs
to enable one to compute the rate for a given shipment. In twelve
months, to December 1907, there were filed with the Interstate Commerce
Commission 220,982 such tariffs, each containing changes in rates or
rules. Some "expire with this shipment,"--and some agree to "protect"
any rate of any competing carrier, that is to say, to meet it if it
happen to be lower.
An entirely different plan of rebating,--and a most effective one,--has
to do with apparently unrelated commercial transactions.[177] Many
shippers are large sellers of supplies to the railroad. How easy then
to make a concession in rates to an oil refinery for example, by
paying a little extra for the lubricating oil bought from a subsidiary
concern. The Federal authorities in recent years and especially
in connection with the prosecution of the Standard Oil Company in
1908-1911, have discovered the most extraordinary variations in the
prices paid by railroads for supplies. Independent concerns were often
not allowed to compete in the sale of lubricants at all. It would be
difficult to prove any connection between so widely separate sets of
dealings; and yet it is clear that rebates are often given in this way.
Or even more fruitful as an expedient, especially in these later days
when rebating is a serious offence, why not confer a favor by extra
liberality in allowances for damages to goods in transit? In 1909 the
so-called Beef Trust was specifically ordered by the Attorney General
of the United States to desist from such practices. Positively the only
way to detect such fictitious allowances for damages, is to ferret out
each case by itself. This is a slow and necessarily expensive process.
Damage allowances and _quid pro quo_ transactions in the purchase of
supplies, are indeed almost "smokeless rebates," as they have aptly
been termed.
Personal discrimination may be as effective upon competition through
denial of facilities to some shippers, as through conferring of special
favors upon others. Practices of this sort have been quite common in
the coal business, especially in the matter of furnishing or refusing
to furnish an ample supply of cars or suitable spur tracks to mines. In
the well known Red Rock Fuel Company case in 1905,[178] the railroad
definitely announced its policy, "not to have a lot of little shippers
on its line who would ship coal when prices were high and then shut
up shop and go home and let the large shippers have the lean years."
The development of over 4,000 acres of coal lands was thus denied in
favor of the large companies, until the Interstate Commerce Commission
took the matter up. A year later came the startling revelations upon
the Pennsylvania Railroad as to the practice of discrimination in
furnishing cars to coal mines.[179] A comprehensive investigation by
the company itself resulted in the discharge of a number of high
officials. It appeared, for example, that the assistant to President
Cassatt had acquired $307,000 in stock of coal companies without cost;
that a trainmaster for $500 had purchased coal mine stock which yielded
an annual income of $30,000; and that one road foreman was given three
hundred shares of the same company stock for nothing. In all these
cases the object was to secure not only an ample supply of cars for
the favored companies, but perhaps even the denial of suitable service
to troublesome competitors. In this regard, the old practices of the
Standard Oil Company in the eighties are recalled. Not only, as in
the celebrated Rice case,[180] did it demand heavy refunds on its own
shipments, but it also compelled the imposition of a surtax on its
competitors' traffic which was to be added to its own special allowance.
Yet other means of favoring large shippers at the expense of small
ones, are almost impossible to eradicate. Certain of these may be
illustrated by recently discovered practices of the Standard Oil
Company. They are fully described in a special report of the United
States Commissioner of Corporations in 1905. Upon the basis of this
evidence, extraordinary efforts were made by the Federal authorities
to secure convictions and to impose heavy fines for violation of the
Elkins law. But the company escaped heavy penalties, in the main, by
reason of legal technicalities. The prosecutions of 1906-1909, however,
cannot be regarded as valueless, merely because the company escaped
the imposition of fines aggregating millions of dollars. The moral
effect of it was thoroughly good; and it is now clear that laws can be
so drawn as to apply in future. Nor can any student of the evidence
doubt for a moment, that, whether strictly an infraction of the law
or not, the net result of these practices was to confer an advantage
upon this large shipper, not open to its smaller competitors. Certain
of its advantages, such as the ownership of pipe lines from the
wells to the seaboard refineries and the strategic location of its
plants, are the fruit of great resources and keen business acumen. But
other advantages, particularly the relative rates on refined oil from
Standard Oil plants and from centres of independent refining, are,
according to the report of the Bureau of Corporations, due to pressure
brought to bear upon the carriers. Whether they are or not, the result
is discriminatory just the same.
The reason for the persistent pressure for low rates on petroleum
products is, of course, that the cost of manufacture is so low
relatively to the expense of transportation. An ample manufacturing
profit is one-half cent per gallon of crude oil; and the average cost
of refining does not exceed that amount. Yet a half cent will scarcely
pay freight for more than one hundred miles. Hence it follows that
for distances greater than this, the question of profit or loss may
entirely depend upon the delicate adjustment of the freight rate. In
this regard, a great company shipping all over the country has a great
advantage over smaller competitors with a strictly local market, in
that it can play off one rate against another. Thus, in one notable
case, cited by the Bureau of Corporations, the Burlington road gave
an absolutely unremunerative rate from the Standard refinery at
Whiting near Chicago to East St. Louis, thereby enabling troublesome
competition to be subdued; but it was recompensed by the payment of
heavier charges on shipments to other points on the Burlington system,
where, there being no competition, the high freight rate could be
shifted on to the consumer. The Commissioner of Corporations gives
one instance on the Northwestern road of a carload rate from Whiting
to Milwaukee in order to meet water competition from independents at
Toledo, which netted the carrier just ninety-two cents for the carriage
of 24,000 pounds of oil a distance of eighty-five miles, with free
return of the empty car.
The peculiarity of many of these rate adjustments of the Standard Oil
Company of late years was that they were publicly filed; and hence not
open to legal attack. This does not however detract in the least from
their discriminatory character. One example, right here in New England,
now happily corrected, may be cited from the records of the Interstate
Commerce Commission for 1906.[181] The southern half of New England
was mainly supplied with kerosene from the great Standard refinery
at Bayonne, New Jersey. The oil was brought there from the fields by
pipe line; and, being refined, was distributed by tank vessels all
along the coast, with a short rail haul thereafter to inland points.
The total cost to the Standard company was estimated by the Bureau of
Corporations at between fourteen and sixteen cents per hundredweight.
To meet this, the independent western refiners had to ship all the
way by rail. This was more expensive in any event; but for some years
they found their handicap greatly increased by the refusal of the New
Haven road to join in any joint through rate. The western independents,
therefore, had to pay the sum of two local rates, up to and beyond the
Hudson river, thereby bringing their transportation up to approximately
thirty cents per hundred pounds. In other words, their cost of carriage
per gallon was enhanced more than enough to constitute a fair refining
profit in itself. The result was the practical exclusion of competition
from this source. Fortunately, however, after this investigation the
New Haven was ordered to pro-rate with the western roads, thereby
overcoming about half of this disability. This case clearly evinces
the necessity of effective Federal regulation of such matters as joint
rates; and it also shows how possible it may be to so adjust tariffs,
openly and even legally, as to favor one shipper over another.
Unlike the preceding instance, most of the Standard's rebates have
been, in fact if not technically, secret. Perhaps the most flagrant
case occurred in the rates from Whiting to the southeastern states. The
Bureau of Corporations estimated that $70,000 a year was saved by this
device; and all competition from independent sources was eliminated
within that territory. The Illinois Central and Southern roads cross at
an obscure point in Tennessee known as Grand Junction. This was made a
centre of distribution for the entire South.[182] But the rate under
which the oil moved,--and in one given month 169 carloads were thus
carried,--was given on a special tariff, publicly filed at Washington,
to be sure, but prescribing the rate, not from Whiting but from Dalton,
Illinois, to Grand Junction, Tennessee. Dalton was an almost unknown
station, near the refinery. Of course any other shipper who happened to
know of it, and who happened to have oil to ship from Dalton to Grand
Junction, could have had the same rate of thirteen cents a hundred
pounds. But he would find it moved over a roundabout route, over four
different connecting lines, instead of over the rails of a single
company. As against this rate of thirteen cents, the only routes known
to the Ohio independent producers charged from nineteen to twenty-nine
and one-half cents per hundred pounds. Meantime the Standard's oil was
by this devious means reaching every point in the South at prices which
no competitor could hope to meet. In one case, the oil going by way of
Grand Junction, travelled over one thousand miles when the direct route
from Chicago was only a little over five hundred miles. The adjustment
was everywhere such that, even on the commonly known tariffs, Whiting
enjoyed a special advantage over the sources of independent oil.
Atlanta, Georgia, is only 733 miles by short line and 1003 miles by
way of Grand Junction from Whiting. Toledo, with its independent
refineries, is distant only 687 miles. Yet despite this fact, the
commonly known rates were shown to be, from Whiting, 33.2 cents as
against 47.5 cents from Toledo. So, even without the Grand Junction
contrivance, the Standard was seemingly favored more than enough. It
should be added, in conclusion, that while the Grand Junction rate was
publicly filed, its discriminatory character stands proven by the fact
that all the actual shipments were "blind billed;" that is to say, no
local agent knew what was the rate actually paid. Such blind bills
of lading are photographically reproduced in the report above named.
Moreover the ill repute of the transaction was indicated by the prompt
cancellation of the rate when discovered in 1905. But in the meantime
it had done its work, and fixed monopoly prices for an indispensable
product over a quarter of the territory of the United States.
Aside from the palpably dishonest secret rebating, the real root of
the difficulty with many of the other big shippers beside the Standard
Oil Company,--and an abuse moreover exceedingly hard to correct,--is
the open adjustment of rates from competing centres of manufacture
or distribution in such a way as to confer favors. The Bureau of
Corporation's report on the Transportation of Petroleum Products deals
fully with this. Relative rates, as above stated, always seem to favor
Chicago (Whiting) as against the centres of independent refining such
as Cleveland, Pittsburg, or Toledo. Formerly, before the great refinery
was established in 1890 at Whiting,--which, by the way, produces
one-third of all the kerosene used in the United States,--the roads
from these centres made joint through rates all over the country. They
still do so on many other commodities. But on petroleum products they
have been withdrawn. The result is that everywhere, except where they
can secure entrance by water, the disability in rates against the
independent refiner is most effective. That much the same conditions
prevail in other lines of business is affirmed on the highest
authority. The _Railway Age Gazette_ has repeatedly protested against
the pressure which is now brought to bear against the carriers by such
organizations as the Illinois Manufacturers' Association to substitute
open but discriminatory local rates for the old secret favors upon
which the great shippers throve for so many years. Fortunately,
however, this situation in some cases relieves the Federal government
of the burden of detection of maladjustments of this sort. For the
communities aggrieved are constantly on the watch to protect their
interests against rival cities. This factor clearly appears in the
sugar and cement lighterage cases in 1908.[183] Carriers at New York in
order to equalize rates with carriers serving Philadelphia refineries,
grant "accessorial allowances" for the use of lighters or for cartage,
in order, as they aver, to overcome the disability against their
clients. But Philadelphia shippers are ever on the alert to detect
such favors given at New York; and substantially aid the government in
eradicating the evil. In the grain elevator allowance cases, likewise,
at Omaha and Council Bluffs in 1906-1909, not only unfavored shippers
at these points but St. Louis grain merchants as a body, intervened as
complainants against the system. The powerful motive of self-interest
thus invoked is of great service.
Before dismissing these recent and widely "muck-raked" oil cases,
it may not be out of place to mention the new interpretation of the
Elkins law which has resulted therefrom. One concerns the definition of
separate offences. In the notorious $29,000,000 fine case, the Federal
Circuit judge applied the maximum penalty of $20,000 for each offence
to each separate carload in a large aggregate of shipments. On review
of the case, each separate settlement of freight rates was defined as
the unit of an offence. As entire train loads had been forwarded or
paid for at one time, this materially reduced the aggregate of possible
penalties. And, in the second place, the question of legally provable
intent was raised. The turning point in the $29,000,000 fine case, was
the ruling of the judge on review, that it was necessary to prove that
a standard rate, higher than the one actually paid, had actually been
filed at Washington; and that the defendant had knowingly accepted a
concession from this figure. These points the government was unable in
fact to establish; and this ended the case.[184]
While general rate cutting has been less common since 1900, partly also
because the roads were rapidly forming great combinations especially
in order to eliminate it, subsequent developments have proved that
personal and secret favoritism to large shippers was still very common.
Despite all they could do to withstand pressure, traffic managers
seemed powerless without the aid of the law. Perhaps the greatest
revelation of the extent of personal rebating was afforded by the great
Wisconsin investigation under the leadership of Governor La Follette in
1903.[185] The original purpose of this inquiry was fiscal; namely, to
examine into the subject of railroad taxation. But its scope speedily
widened, and at last skilled accountants were put into the books of all
the railroads traversing Wisconsin.
The facts elicited by the Wisconsin investigation were startling. For
the years 1897-1903, the direct rebates appearing in the accounts of
the Wisconsin lines alone,--taking no account of other forms of rebates
such as excessive damage allowances and the like,--were $7,000,000.
The Chicago and Northwestern alone had allowed more than half of this
amount. And from what is now known of other forms of allowance, the
total must have been indeed very great. In one year recently, there
was evidence to the effect that rebates on the New York Central lines
amounted to $1,000,000. According to its own admission, the Michigan
Central road, in 1902-1903, made allowances of $586,000. The rebating
to the beef packers, especially on export business during 1902, was
notorious. No wonder the progressive railroad leaders desired to put
an end to this leakage of revenue. And at their request, the wise
legislation known as the Elkins Amendments to the Act to Regulate
Commerce was passed in 1903.[186]
The Elkins law of 1903 not only came at a time when the carriers were
in need of every cent of revenue to tide over a hard year, but it also
followed demonstration under the test of judicial procedure, that
convictions for rebating were practically impossible under the old
law. To convict for unjust discrimination it was necessary to show,
not merely the allowance to one favored shipper, but the fact also had
to be proved that no such allowances were made to others on the same
sort of traffic under similar conditions. This could scarcely ever be
done. In fact, during almost twenty years, there had been less than
a score of convictions. Most of the prosecutions had failed utterly.
Both government and carriers pressed for legislation. This was promptly
given in the Act of February 19, 1903. There were four important
features of this law. Railway corporations, not merely individuals as
before, were now made directly liable to prosecution and penalties. The
tariff filed became the lawful standard. The fact that all shippers got
the same low rate was, therefore, no longer a defence. In the third
place, the shipper as well as the carrier could be held accountable. In
other words, accepting as well as giving rebates, became unlawful. And,
finally, jurisdiction was conferred upon the Federal courts to restrain
any departure from published rates or any "discrimination forbidden
by law" by writ of injunction. This fully legalized a rather doubtful
course of procedure to which the Interstate Commerce Commission had
been compelled to resort as a last weapon in the rate wars on grain and
beef since 1901. It also abolished the penalty of adjustment; imposing
fines instead. But this action was subsequently rescinded in the law
of 1906.
The record of the vigorous prosecutions against rebating under the
Elkins law,[187] affords conclusive evidence, not only as to the
widespread extent of the evil, but as to its identification with many
of the large industrial combinations. The history of the activities
of the Interstate Commerce Commission is to be found in its file of
annual reports. But little seems to have been done for the first two
years; but great activity was displayed during 1905. The ensuing year
was rather notable by reason of the success in securing convictions.
Besides the Standard Oil cases, there was collected in fines for
rebating between October, 1905, and March, 1907, the sum of $586,000.
Several men were sent to jail, for from three to six months. Among the
trusts implicated were the beef packers, who have been indefatigable
in concocting rebating devices; the tin plate combination; and, most
notable of all, the American Sugar Refining Company. Nearly $300,000
in fines was imposed upon this concern alone. The secret allowances
in these cases were most ingeniously arranged. Some were "refund
of terminal charges;" some were "lighterage demurrage;" some were
allowances for damages. Many were paid by drafts instead of checks so
as to preclude identification of individuals; some were by special
bank account; but the sums involved were very large. Shipments of
sugar on which rebates of four to six cents per hundred were given,
amounted within a relatively brief period to upwards of 70,000,000
pounds on one line alone. As sugar shipments westbound from New York
constituted nearly one-third of the total tonnage, the importance of
these prosecutions appear. The following quotation from a letter from
an agent of the sugar trust accompanying a claim for overcharge of
$6,866 on shipments of syrup, introduced in evidence in one of these
cases, aptly describes the situation, both then, now, and always. "We
hope to devise some means to enable us to conduct our freight matters
with the transportation companies satisfactorily even under the new
conditions imposed by the Elkins bill; but there may be some cases that
cannot be taken care of, in the event of which we will, like all other
shippers, have to take our medicine and look pleasant." The Interstate
Commerce Commission reported as to the conditions in 1908 that "many
shippers still enjoy illegal advantages." Many convictions were,
however, secured. And investigations in California showed the existence
of an extensive system of preferential rates.[188] A list of 108 firms
was discovered on the Southern Pacific road alone, who were enjoying
"special inside rates" which often aggregated $50,000 per month. Many
of these assumed the form of refunds upon claims for damages.
Thus the rebate as an evil in transportation, even since amendment
of the law in 1906-1910, while under control, is still far from
being eradicated. Favoritism lurks in every covert, assuming almost
every hue and form. Practices which outwardly appear to be necessary
and legitimate, have been shown to conceal special favors of a
substantial sort. Among the latest forms, undue extension of credit
may be mentioned. It appeared, for instance, in 1910 that the Hocking
Valley Railroad was favoring the Sunday Creek Coal Company to the
extent of credit for transportation on its books to the amount of
$2,400,000.[189] Another device which amounted to favoritism whether
so intended or not, has been brought into court upon prosecution of
the so-called Beef Trust. Substantial concessions in the rate from
Kansas City to various foreign countries prevailed by reason of the
fact that long time contracts for shipments at an established rate
continued after a new higher general tariff had been put into effect.
This increase of rates in general, leaving the trust rates at the old
figure, of course created an undue and unlawful preference.[190] The
chapter might be further amplified by details concerning "substitution
of tonnage at transit points;"[191] excessive allowance for claims,
and, as in a recent important case against the New York Central,
exorbitant rates paid for advertising in a theatrical publication, in
order to secure transportation for an itinerant troupe of travelling
players.[192]
The extreme subtlety of personal favoritism was recently brought to
light in connection with the selling price of coal in the little
town of Durham, North Carolina.[193] Complaint was entered that
a certain retailer was charging but five dollars a ton while his
competitors were unable to dispose of theirs at a profit for less
than six dollars. The explanation offered, that this person employing
no bookkeeper and, paying no rent, was enabled to do this because of
these savings, proved inadequate. Investigation developed the fact
that no direct preference from railroads existed, but that there were,
nevertheless, various peculiar features as to division of rates which
invited further examination. Thus, for example, while the Norfolk
& Western received $30.80 for hauling a carload of coal 160 miles,
the Durham & South Carolina Railroad received $24.80 for hauling the
same car one mile. This little railroad was owned by a lumber company
which seemed in effect to have set up the defendant coal merchant in
business. An arrangement between this little switching road and the
Seaboard Air Line, as well as the Norfolk & Western, also favored the
Durham & Southern. The key to the situation lay in the fact that the
Dukes,--powerful financial interests controlling the American Tobacco
Company, the Southern Power Company and large cotton mills,--also
controlled the Durham & Southern through the lumber company. The
Seaboard Air Line, therefore, when it gave to this little switching
road for a twenty-mile haul, about forty per cent. of its division on
through business, surreptitiously conferred a heavy bonus upon its
little connection. It must have lost money under such a division of
rates. The only conclusion possible is that this little railroad was
specially favored in order to purchase the goodwill of financiers
controlling a large traffic in other lines of business. The rebate,
however, was not given to the American Tobacco Company, but constituted
a comfortable profit "on the side" for powerful interests in its
management.
The elevation cases concerning the legitimacy of a special payment
for unloading grain in private elevators, have been under dispute for
years. Their validity has recently been affirmed by the Supreme Court
in an important decision in 1911.[194] This litigation illustrates
the difficulty of defining rebates as an expression of personal
favoritism. In 1899, the Union Pacific Railroad made a contract
with Peavey & Company at Council Bluffs to erect an elevator and to
transfer grain for a charge of one and one-quarter cents a hundred
pounds. This arrangement was objected to by competing railroads on
the ground that it gave compensation to a private concern, engaged
in general grain business for the handling of its own property. The
Union Pacific insisted that the expedient was necessary and proper
as a means for promptly unloading its cars at Omaha. The Commission,
after investigation, sanctioned the contract. In 1907, the matter again
came before the Commission upon complaint of other railroads competing
with the Union Pacific along the Missouri river. It was alleged that
the continuance of the elevator allowance by the Union Pacific would
virtually compel all other roads to make similar allowances. Still the
Commission adhered to its former conclusion that undue discrimination
did not result. The practice, however, gradually spread until all the
roads at Missouri river points put in an allowance of three-fourths of
one cent as an elevator charge. This brought forth a complaint from the
lines at St. Louis that traffic was being diverted from that point as
a result; and the Commission, once more considering the matter, held
that the practice was prejudicial to public interest. Conditions, in
fact, had changed, mainly through the increase of through shipments
to the East without transfer at the Missouri river. The Commission,
therefore, held that when such transfer took place, it was for the
accommodation of local grain merchants, who ought to pay for the
service rendered. At this stage of the proceedings, the matter went
to the Supreme Court of the United States upon appeal. The decision
finally upheld the Commission, in holding that the payment of an
elevation allowance was not unlawful, but that if paid to one elevator,
it must be paid to all. The bearing of this case upon the larger issue,
of payments by railroads for special services rendered by, shippers
cannot fail to be of great importance in the future.
The use of the industrial railroad as a means of preferential treatment
still occasions difficulty.[195] The case is simple where but one
shipper makes use of the terminal plant; but where a number of shippers
may utilize it jointly, it becomes difficult to draw the line between
pro-rating allowances and actual rebates. The Manufacturers' Railroad
Company, with twenty miles of track, four locomotives and one hundred
and ten employees, serves a considerable manufacturing section in
South St. Louis. A majority of the stock of this terminal railroad is
held by persons controlling the Anheuser-Busch Brewery. The enormous
traffic of this concern, equal to about one-thirtieth of the total
tonnage of St. Louis, is handled over the line of the Manufacturers'
Railway. Almost nine-tenths of its business consists of shipments of
beer; but in 1910 some 5,424 carloads belonging to other patrons moved
over its rails. For this terminal service the Anheuser-Busch Company,
through the Manufacturers' Railway, got a very substantial allowance
for the service rendered. For example, in one month on ten carloads of
beer, the Louisville & Nashville allowed $45 out of a total revenue
of $391.60 for moving the traffic something less than four thousand
feet. The disparity is obvious between this allowance and the balance
remaining as compensation for moving the traffic 477 miles, including
three first-class railroad tolls and terminal charges at the other
end.[196]
A prime difficulty is to determine whether unduly low commodity rates
amount practically to special favors granted to large shippers. Much
evidence recently tends to show that the trusts enjoy advantages of
this sort not extended to other competitors. The Steel Corporation,
through its ownership of railroads and steamships, certainly has a
great advantage over its rivals.[197] But other trusts not controlling
common carriers of their own, are also accorded what seem to be unduly
low rates upon their products. Recent evidence before the Interstate
Commerce Commission seems to show that sugar, beef, and coffee do
not bear their proper share of transportation costs.[198] Copper,
the product of a powerful trust, enjoys a lower ton mile rate than
grain,--a rate, despite its high intrinsic value, actually below that
on soft coal.[199] The discrimination is too palpable to be passed over
without explanation.
From the survey of rebating and rate wars,--which latter of course
afford the most favored soil in which personal favoritism may
flourish,--one cannot avoid the conclusion that a great improvement in
conditions has been brought about. The strengthened arm of the Federal
government has come to the support of the carriers; and has assisted
them to a material enhancement of their revenues, by putting a stop to
serious leakages in income. But the carriers could undoubtedly do much
on their own account, could they be granted the right to make traffic
agreements, subject always, of course, to the approval and supervision
of the Interstate Commerce Commission. Whether Congress will ever
permit this, remains to be seen. The most important result of all
this Federal activity so far, has been the moral stimulus toward fair
business dealing which has been given. Thousands of shippers today,
quite apart from the fear of fines or imprisonment, would disdain to
ask or accept favors which a decade since would have been regarded
as entirely proper. No one can doubt that the morale of business is
distinctly higher than it used to be. Could such higher standards
become universal, the Department of Justice would be relieved of a
substantial part of its present duties.
FOOTNOTES:
[162] 14 I. C. C. Rep., 250. Upheld by the Supreme Court in 1911; 219
U. S., 498. Also 23 _Idem_, 535.
[163] Circular Letters of the Chicago Bureau of Car Performances;
undated.
[164] The latter half of chap. XII.
[165] The chapter on reorganizations in vol. II will afford other
instances with full references. Com. & Fin. Chron., LIX, p. 232.
[166] 55th Cong., 1st Sess., Sen. doc., 39, p. 29.
[167] Ann. Rep., I. C. C., 1896, p. 82: and 1897, p. 53. Fine cases in
1 I. C. C. Rep., 633-656.
[168] Investigation of grain rates at Missouri river points; 54th
Cong., 2nd Sess., Sen. doc. 115, pp. 17-22, etc.
[169] 167 U. S. Rep., 633.
[170] P. 211, _infra_.
[171] On private car lines, Columbia University Studies, etc., LXXXI,
1908, p. 185. J. W. Midgley's Circular Letters as chief of the Bureau
of Car Performances in 1901, costing him his position, by the way,
are most significant. Car service reform resulted nevertheless. _Cf.
Quarterly Journal of Economics_, 1904, p. 299. See pp. 96 and 140,
_supra_.
[172] U. S. Bureau of Corp., Rep. on Trans, of Petroleum, pp. 36, 60,
81, 88.
[173] 10 I. C. C. Rep., 1, 148, 385 and 661: 18th Ann. Rep., I.C.C.,
19 and 42: Senate (Elkins) Committee, 1905, pp. 2424-2495. Later cases
discussed at p. 212, _infra_.
[174] P. 212, _infra_.
[175] P. 209, _infra_.
[176] 11th Ann. Rep., I.C.C.; 16th _Idem_, p. 13; and 21st _Idem_, p.
14.
[177] Bureau of Corp., Rep. on Trans, of Petroleum, 1905, p. 105 _et
seq._
[178] 11 I.C.C. Rep., 438; _Cf._ 13 _Idem_, 70; and 19 _Idem_, 356.
[179] Report on Discriminations and Monopolies in Coal and Oil; Jan.
25, 1907, pp. 1-81.
[180] Ripley, Railway Problems, chap. II, fully described.
[181] 11 I.C.C. Rep., 558; U. S. Bureau Corp'ns Rep., p. 148.
[182] Routes shown by the map on p. 647, _infra_.
[183] 20 I. C. C. Rep., 200, with dissenting opinion. Reviewed by the
U. S. Commerce Court 1912; _Railway Age Gazette_, chap. LII, p. 1550.
P. 586, _infra_.
[184] U. S. Circuit Court of Appeals, decided March 12, 1902. The
history is in Ann. Rep., I.C.C., 1907, p. 114; 1908 pp. 26 and 36; and
1909, p. 26.
[185] Never published. Outlined in Wisconsin _Assembly Journal_, 1905,
chap. II, pp. 1463-1497.
[186] _Cf._ p. 492, _infra_.
[187] _Cf._ 59th Congress, 1st Session, Senate Doc. 526.
[188] 13 I.C.C. Rep., 123.
[189] Ann. Rep., I.C.C., 1910, p. 10.
[190] _Idem_, 1909, p. 32. Circuit Court of Appeals decision, April 29,
1911, Ann. Rep., I.C.C., 1908, p. 32.
[191] 18 I.C.C. Rep., 280. _Cf._ p. 401, _infra_.
[192] _Boston Transcript_, Feb. 20, 1912.
[193] 22 I.C.C. Rep., 51.
[194] 222 U. S., 42. The system is described in the _Railway Age
Gazette_, June 4, 1909.
[195] 21 I.C.C. Rep., 304. Compare also before the U. S. Commerce
Court; the Stock Yards case, 192 Fed. Rep., 330; the California
Switching case, 188 Fed. Rep., 229; and the Crane Iron Works case, No.
55, April session, 1912. The tap-line decision, 23 I.C.C., 277, most
fully discussed the general policy to be observed toward industrial
roads in the lumber business. _Cf._ also the use of boat lines. 23
_Idem_, 358.
[196] _Railway Age Gazette_, LII, pp. 269 and 340.
[197] Evidence before the Stanley House Committee on Steel Corporation,
Feb. 28, 1912, p. 3667; and Bureau of Corporations on U. S. Steel
Corporation, II, p. 72.
[198] _American Economic Review_, 1911, p. 789.
[199] S. O. Dunn, American Transportation Question, pp. 62, 81.
CHAPTER VII
LOCAL DISCRIMINATION
Concrete instances, 215.--Hadley's oyster case not
conclusive, 217.--Two variants: lower long-haul
rates by the roundabout route, as in the Hillsdale,
Youngstown, and some Southern cases, 221; or by the
direct route, as in the Nashville-Chattanooga and
other southern cases, 225.--Complicating influence of
water transportation, 232.--Market competition from
various regions, a different case, 234.--The basing
point (southern) and basing line (Missouri river)
systems, 238.--Their inevitable instability and probable
ultimate abandonment, 242.--Postage-stamp rates,
illustrated by transcontinental tariffs, 245.--Which
line makes the rate? 255.--Cost not distance,
determines, 256.--Fixed charges v. operating
expenses, 257.--Proportion of local business, 259.--Volume
and stability of traffic important, 261.--Generally the
short line rules, but many exceptions occur, 263.
Any unreasonable departure from a tariff graded in some proportion
according to distance is known as local discrimination. It constitutes
one of the most difficult and perplexing problems in transportation.
Personal discrimination now happily having been practically eliminated
since the enactment of the Elkins Amendments to the Act to Regulate
Commerce, this issue of local discrimination under the rehabilitated
long and short haul clause, has recently assumed an added significance.
A merchant of Wilkesbarre, Pennsylvania, purchased a carload of
potatoes at Rochester, New York, and had the freight bill made for a
delivery to Philadelphia, because the freight to Philadelphia was less
than it was to Wilkesbarre, which is 143 miles nearer. He stopped the
potatoes at Wilkesbarre, unloaded them, and paid the freight. A few
days later he received a bill from the Lehigh Valley Company for twelve
dollars additional freight. If the potatoes had gone to Philadelphia,
he would have paid forty-eight dollars freightage. As they stopped at
Wilkesbarre, he had to pay sixty dollars; that is, twelve dollars for
not hauling the carload 143 miles.[200]
A merchant in Montgomery, Alabama, shipped two carloads of fruit jars
from Crawfordsville, Indiana, to Montgomery. He shipped them to Mobile
and then paid the local rate from Mobile back, those fruit jars going
through Montgomery on the way out. By having them hauled 350 miles
farther, he saved seventy-five dollars on the two carloads.
On first-class goods, at one time, the rate from Louisville to
Montgomery, was $1.26 per hundredweight. On to Mobile, 180 miles
further south, it was only ninety cents. In the same territory the rate
on kerosene oil from Cincinnati at times has been three times as much
to interior points as to New Orleans, three times as far. West of the
Missouri river and in the Rocky mountain area similar complaints are
common. Denver, Colorado, pays $1.79 per hundredweight on cotton piece
goods, in small lots, hauled 2,000 miles from Boston; while the rate
to San Francisco, 1,400 miles further away, on the same line, is only
$1.50. This discrepancy is even greater in wholesale rates. No carload
rating is given to Denver; while for similar shipments to the coast the
rate is only one dollar per hundredweight. In the opposite direction,
sugar is carried from San Francisco through Denver to Kansas City for
sixty-five cents per hundredweight, as compared with a rate of one
dollar if the sugar is stopped at Denver. Smaller places in the West
afford equally striking instances. The rate on rope from San Francisco
to Independence, Kansas, is seventy-five cents; while the same goods
are hauled on through Independence, Kansas, much farther, to Missouri
river points for sixty cents per hundred pounds. Wichita, Kansas,
complains that cotton piece goods from New York by way of Galveston
are rated at $1.36; while by the same route Kansas City, 225 miles
longer haul by that route, the charge is only ninety-three cents. The
Southwestern Lumberman's Association complains,--
"that a train of cars of lumber starts from Camden or other
common point in Texas via Atchison, Topeka and Santa Fe
Railway, and one car is dropped off in Oklahoma at 27-1/2 cents
per 100 pounds; one each also at Wichita and Emporia, Kansas,
at 27-1/2 cents per 100 pounds; one at Kansas City at 23 cents,
and two cars also set off this same train at Kansas City,
destined for Omaha and Lincoln, Nebraska, at 23 and 24 cents
per 100 pounds, respectively. The balance of this train, now at
Kansas City, runs on to Chicago, and 24 cents per 100 pounds is
the charge then for most of the train which is left there....
Why should builders of homes in Wichita and Emporia, Kansas,
pay higher freight than builders in Kansas City, Omaha, and
Chicago when using yellow pine from Texas?"[201]
Such instances as these might be multiplied indefinitely. They are
often striking in character. The first impression is of intolerable
abuse. The simplest tenets of justice and fair dealing appear to be
violated. Careful analysis should, however, always be made before
drawing such conclusions. Railroad practice seldom departs so
flagrantly from the fundamental consideration of cost of service
without very substantial economic justification.
The reasoning underlying local discrimination is admirably set forth
by President Hadley in the following passage from his _Railroad
Transportation_:--[202]
"On the coast of Delaware, a few years ago, there was a place
which we shall call X, well suited for oyster-growing, but
which sent very few oysters to market, because the railroad
rates were so high as to leave no margin of profit. The local
oyster-growers represented to the railroad that if the rates
were brought down to one dollar per hundred pounds, the
business would become profitable and the railroad could be sure
of regular shipments at that price. The railroad men looked
into the matter. They found that the price of oysters in the
Philadelphia market was such that the local oystermen could
pay one dollar per hundred pounds to the railroad and still
have a fair profit left. If the road tried to charge more, it
would so cut down the profit as to leave men no inducement to
enter the business. That is, those oysters would bear a rate
of one dollar per hundred, and no more. Further, the railroad
men found that if they could get every day a carload, or nearly
a carload, at this rate, it would more than cover the expense
of hauling an extra car by quick train back and forth every
day, with the incidental expenses of interest and repairs. So
they put the car on, and were disappointed to find that the
local oyster-growers could only furnish oysters enough to fill
the car about half full. The expense to the road of running
it half full was almost as great as of running it full; the
income was reduced one-half. They could not make up by raising
the rates, for these were as high as the traffic would bear.
They could not increase their business much by lowering rates.
The difficulty was not with the price charged, but with the
capacity of the local business. It seemed as if this special
service must be abandoned.
"One possibility suggested itself. At some distance beyond
X, the terminus of this railroad, was another oyster-growing
place, Y, which sent its oysters to market by another route.
The supply at Y was very much greater than at X. The people
at Y were paying a dollar a hundred to send their oysters to
market. It would hardly cost twenty cents to send them from Y
to X. If, then, the railroad from X to Philadelphia charged
but seventy-five cents a hundred on oysters which came from
Y, it could easily fill its car full. This was what they did.
They then had half a carload of oysters grown at X, on which
they charged a dollar, and half a carload from Y on which they
charged seventy-five cents for exactly the same service.
"Of course there was a grand outcry at X. Their trade was
discriminated against in the worst possible way--so they
said--and they complained to the railroad. But the railroad men
fell back on the logic of facts. The points were as follows: 1.
A whole carload at seventy-five cents would not pay expenses of
handling and moving. 2. At higher rates than seventy-five cents
they could not get a whole carload, but only half a carload;
and half a carload at a dollar rate (the highest charge the
article would bear) would not pay expenses. Therefore, 3. On
any uniform rate for everybody, the road must lose money,
and 4. They would either be compelled to take the oyster car
away altogether, or else get what they could at a dollar, and
fill up at seventy-five cents. There was no escape from this
reasoning; and the oyster men of X chose to pay the higher rate
rather than lose the service altogether."
The logic of this oyster case seems convincing in its simplicity. But
it presents more complications than appear at the outset.
[Illustration]
First of all, what is the nature of the competition at the more distant
point which is alleged to "compel" the lower rate? Is it merely of
rival routes or of competing markets? It will be advisable to keep the
two distinct so far as possible. Under the first heading, competition
of routes, the subjoined sketches represent two possible situations. In
both instances, however, Y, enjoying the lower rate, is more distant
from Philadelphia than X. The difference between the two arises from
the fact that in the one case X is nearer Philadelphia than Y on a
roundabout line; while in the other X is actually nearer than Y by
the shortest direct route. We may safely assume that the compelling
competition alleged at Y as justifying the lower rate is by rail; as,
the commodity being a marine bivalve, both places presumably enjoy
equal facilities for water carriage. At all events, assuming that we
have to do with competing rail routes alone, what differences obtain
between the two sets of circumstances above sketched? Not insignificant
inequalities in the length or power of the two routes are implied by
the diagrams. They are supposed to represent substantially different
lines, which may, for the purpose of the argument, be denominated
strong, natural, or standard, and weak, unnatural, or abnormal,
respectively, so far as the particular traffic in hand is concerned.
That this distinction is not irrelevant, but frequently of determinant
force, is shown by an analysis of concrete cases which have arisen for
adjudication.
This proposition is clear beyond dispute. The actual cost of service,
which fixes an irreducible minimum rate between Y and Philadelphia, is
less on the short line than by the roundabout one. For either road to
accept less than the portion of the cost traceable to this particular
traffic, that is to say, the extra cost incident to its acceptance,
is economically inconceivable. From this it follows, other conditions
being equal, that the shortest line between Y and Philadelphia
rules the rate in the last instance. This is normally the case. The
roundabout route thereafter merely accepts the rate thus compelled.
To permit the roundabout line to rule the minimum rate would not only
violate a fundamental principle of operation: it would inevitably
lead to chaos. The analogy with cut-throat competition in business is
obvious. It is equally plain that the mere acceptance of a short line
rate by a roundabout road, so long as this rate is adequate to yield
some profit over the extra cost, while of advantage to some, may not
work positive injury to any one. This condition normally corresponds
to the state of affairs represented by diagram A. The nearer point, X,
as Hadley avers, has no just grievance against Y because the latter
has the good fortune to have a direct service to Philadelphia at a
low rate. For Y to withdraw shipments from the line via X might even
destroy the only chance of X for a market. It would also deprive Y
of whatever benefit it might have derived from competition either of
routes or of facilities. Of course, we have expressly omitted market
competition as a factor, reserving it for separate treatment. Yet
one objection arises. Normally, the direct line ought to maintain
a tariff conforming in some degree to the distance principle. The
roundabout line can compete at Y only by a violation of it, unless,
indeed, its local tariffs be graded much more gradually. In other
words, its progression towards the maximum must be distributed over
a much longer line. Even this would, on Hadley's statement of fact,
eliminate X from the Philadelphia market. Such reduction of local
rates upon the roundabout route would in turn discriminate against
places like Z on the direct line, equally distant with X from
Philadelphia. For the latter places would necessarily be assessed at
a higher rate per ton-mile.[203] This would constitute another form
of local discrimination, which will be discussed in due time. There
is, therefore, at best, only a choice of adjustments, either of which
leads to some form of inequality. But, upon the whole, balancing the
evil with the good, the first variant of our oyster case appears to be
best solved by according all shippers at Y a somewhat lower rate than X
enjoys.
Conditions corresponding to diagram A have frequently given rise to
complaints before courts and administrative tribunals. An interesting
illustration is afforded by the Hillsdale ice case in Michigan.[204]
Ice was moved from this town to Springfield and Columbus, two
neighboring Ohio cities, over several different routes. (See map on
next page.) To Columbus the shortest road was by the Hocking Valley
Railroad directly through Toledo. Another route by way of Sandusky
existed; and even a third through Sandusky, thence over to Springfield,
and in by the side door, so to speak, to Columbus. This last routing
was due to the fact that the Big Four road from Sandusky diagonally
across to Springfield had no access to Columbus except through a branch
line from Springfield. This last-named zigzag route was 295 miles in
length as against 190 miles by the direct line through Toledo. To
Springfield, on the other hand, no direct route from Hillsdale existed;
but freight might move either _via_ Sandusky by the Big Four road or
through Sandusky and around by way of Columbus. The shortest of any of
these lines to Springfield, however, was twenty-nine miles longer than
the shortest line to Columbus. This established Columbus, therefore,
as normally the nearer point. Complaint arose from the fact that ice
carried over the zigzag route to Columbus actually passed through
Springfield and forty-five miles beyond to reach its destination. For
such shipments over the Big Four road, Springfield instead of Columbus
was the nearer point. But, contrariwise, for ice coming to Springfield
through Columbus, the latter in turn became the intermediate
point.[205] The specific complaint was that the rate by all routes
to Springfield was one dollar per ton, while to Columbus it was only
eighty cents. Originally, the rate was higher ($1.25 per ton), but was
the same to both points. Is this a case of local discrimination or not?
[Illustration]
The Big Four road operating through Springfield answered that it was
not responsible for the eighty cent rate to Columbus; that this was
made by the direct line; and that it obviously must meet this rate or
withdraw from the ice business. It alleged, moreover, that the rate of
one dollar was reasonable in itself as compared with other rates in the
same territory, and was in fact substantially less than it formerly
was; nor would its withdrawal from Columbus ice business evidently be
of any advantage whatever to Springfield, but would indeed deprive it
of some small contribution to joint expenses of operation on all its
tonnage. No evidence being offered that Springfield was positively
injured by this adjustment, the Commission properly dismissed the
complaint.
The distinctive feature of this class of cases, as has been said, is
that the intermediate point preferring the complaint is always on a
roundabout route.[206] St. Cloud, Minnesota, and Wichita, Kansas, whose
contentions are described hereafter in detail, were thus situated. The
so-called "rare and peculiar" case of Youngstown, Ohio, cited in the
original Louisville and Nashville decision of 1889, was in no sense
different. It was a case of pure competition of routes.[207] Traffic
to New York was starting its journey from Pittsburg, over the rails of
the same company, in exactly opposite directions. Some of it went east
by the direct line; while other freight first moved due west, thence
north, by way of Youngstown, Ohio, until it reached the main line at
Erie, which took it on to New York. This traffic, therefore, described
three sides of a rectangle in reaching its destination, traversing a
route 172 miles longer than by the direct line. The issue was raised
by a demand for as low a rate to New York from Youngstown as Pittsburg
enjoyed, on the ground that it was nearer New York by this indirect
line; Pittsburg traffic, in other words, passing through it _en route_
to the seaboard. The reply, of course, was that, although nearer by an
indirect road, it was more distant by the natural and shortest route,
and consequently should pay more for the service. What the roundabout
line was really demanding was permission to compete at Pittsburg for
New York business, without being compelled to reduce its local rates
from intermediate points like Youngstown. In other words, the long line
was demanding exemption from the long and short haul clause, while the
direct short line conformed to it. Without such exemption it could not
continue to reach out for Pittsburg business, as the loss incident
to reduction of its local rates would outweigh the profit in the
competitive tonnage.
One side of the Savannah Freight Bureau Fertilizer case[208]--namely,
the complaints of local stations on a roundabout road--brings it
within our first category. The roundabout line from Charleston to
Valdosta, shown upon the map at p. 648, was 413 miles long as against
a direct route of only 273 miles. Kathleen, Georgia, is only 288
miles out from Charleston on this indirect line,--approximately the
same distance as Valdosta, which thus corresponds to Y in the oyster
case. Yet Kathleen paid a rate of $3.32 per ton on fertilizer from
Charleston as against $2.48 charged to Valdosta, 125 miles beyond.
But this excess distance is by an indirect route. Most of the notable
English cases concerning local discrimination appear to be of the same
stamp.[209] The complaints of a number of smaller places in the St.
Paul-Milwaukee territory, like Cannon Falls, Lacrosse, and Northfield
some years ago, reduce in part to the same thing.[210] Whether the
Troy, Alabama, and Wichita, Kansas, cases belong here or in the next
group is indeterminate, owing to the difficulty of comparing conditions
of carriage by rail and by water, respectively.
On the other hand, the set of circumstances shown in diagram B (page
219, _supra_) is of quite a different sort. The justification for
the local discrimination is much less clear. Here, as before, the
distant point Y enjoys a lower rate than X because of the presence of
competition; but it is important to inquire both as to the nature and
the amount of it. In the first case, competitive traffic from Y was
_extra_ rather than normal in character, so far as the line serving
X was concerned. It was relatively small in amount. Whatever surplus
revenue resulted from it aided the local tariffs, including those
at X, in supporting the burden of fixed expenses. This burden they
were bound to bear entirely in the absence of competitive business
picked up at Y. The distant point Y of course had no complaint in any
event, and the chances are that X was benefited, as we have seen.
But in the second case the great bulk of the traffic from Y belongs
naturally to the direct line through X. It constitutes the mainstay
of its business. The direct line, unlike the roundabout one, cannot
withdraw from the field when rates become unremunerative. It is in
this business passing directly through X to stay. Nine-tenths of the Y
traffic, perhaps, moves through X in this latter case; in the former
one, one-tenth would perhaps measure the proportion of the indirect
line. Under this assumption, it is obvious that the question of the
level of rates at Y, as determined by the presence of competition,
assumes a ninefold greater importance in the eyes of X, so far as the
effect upon local rates in supporting the fixed and joint expenses of
the road is concerned. In any event, even the line operating under
a disability supposedly earns some small net return on competitive
traffic, else it would withdraw from the field. This it is in fact free
to do at any time; and, however small the net return, it is at least
all gain. On the other hand, when the net return on a large volume of
its natural business becomes unduly small, the financial stability
of the direct line is put in jeopardy. The danger of local rates (as
at X) being actually enhanced or at least prevented from reduction,
because of an unduly low level of competitive rates at more distant
points, is thus much greater when X is a way station on a direct line
than when, as in our first instance, it is an intermediate point on
a roundabout route. For this reason the direct line through X is at
the outset put to a justification of its local tariffs, as to whether
they are inherently reasonable or not; first, by comparison with the
general level throughout the surrounding territory; and, secondly, as
yielding a return on the capital actually invested. This seems to have
been the line of reasoning which the Interstate Commerce Commission
adopted in the recent important Spokane, Washington, cases.[211] The
low through rates to the Pacific coast were established as reasonable
by the competition of sea routes round the Horn, and especially by the
newly-opened Tehuantepec Railroad. The only ground for finding there
was discrimination against Spokane was an inherent unreasonableness in
its rate. This was, in fact, the outcome; the decision being rendered
notable, further, by reason of the prominence given to the valuation of
the railroads' property as a basis of judgment.
The first important point to be established, then, in this second
variety of the oyster case was as to the relative distribution of
traffic from the more distant competitive point by the several lines
open to it. The next concerned the absolute reasonableness of the rate
at the intermediate point. In the third place, we must inquire whether
the rate at the more distant point may not be unreasonably low. This
was a contingency not possible, as we have just seen, in the Spokane
case. But others may be different in this regard. One is thus forced
to consider the effect of the presence of roundabout competitive lines
upon the level of rates at the more distant point. An indirect rival
road may, as in the St. Cloud case, carry only seventy-three carloads
a day as compared with a daily movement of one thousand cars by the
direct lines. On the other hand, as in the Savannah Freight Bureau
case, Valdosta, Georgia, may receive nine-tenths of its supply of
fertilizer by indirect roads. But in any event it is the potential,
not the actual, movement of tonnage, which may count in the long run.
It is indisputable that the short line between two points never pares
its rates down to an irreducible minimum except under compulsion.
The presence of a roundabout route affords just this pressure to
reduction. Even allowing that in the last analysis the long line will
strike bed-rock of no profit first, it is indisputable that such lines
frequently, instead of merely meeting rates made for them by the direct
routes, seek to divert business by actually undercutting those rates.
Having only a small share of the tonnage, they take risks which would
be fatal to others. To transport at an absolute loss is of course no
more defensible than the argument of the merchant that the only way
to compensate for selling goods below cost was to enlarge the volume
of his business. But, of course, there is always the chance that, by
enlarging this volume sufficiently, operating expenses may be so far
cut down that a loss may be transformed into a profit. The diversion
of enough traffic from the direct railroad line to accomplish this end
would, of course, reduce the volume of its traffic and thereby unduly
burden it, to the manifest injury of all local points like X.
Suggestive illustrations of lower rates at the more distant point
than are under the circumstances actually "compelled" by competition
of routes are to be had. In a recent case[212] the rates on bananas
from Charleston, South Carolina, to Danville and Lynchburg, Virginia,
respectively, were called in question. The traffic moved through
Danville on its way to Lynchburg, sixty-six miles beyond, at a rate
of forty-three cents to Danville as compared with a rate of twenty
cents to Lynchburg. The reason for the low rate at Lynchburg was the
presence of a rival route,--bananas, coming in through Baltimore. But
the lowest rate "compelled" by this competition was in fact thirteen
cents higher than the Danville line charged at Lynchburg. In other
words, the long-distance rate was that much lower than it need have
been. This instance is analogous in another way to our oyster case,
inasmuch as the demand at Danville being limited, one-half of the
same carload paid the Danville rate of forty-three cents, while the
other half went on at the lower rate of twenty cents enjoyed at the
more distant point. It is in this connection, of rates unduly low at
so-called competitive points, that the partial weakness in the railroad
arguments in many of the southern basing point cases appears. Since the
Supreme Court of the United States had held that competition at the
more distant point justified its lower rates, the Interstate Commerce
Commission was powerless to give effect to whatever opinion it might
entertain that at times it is neither water nor commercial competition
which actually brings about the low rate at the basing point; but
merely a consensus of opinion among carriers that that place will
respond quickly enough to favors granted, to make it worth while to
try the experiment.[213] This conviction is vastly strengthened, of
course, since entire monopoly among all the southern railroad lines
has become an established fact. It is an absurdity to speak longer of
any competition between rail carriers existing in a large part of this
territory.[214]
[Illustration]
Actual illustrations of this second variant of the oyster case, free
still from the complications of competition of markets, are not
common, but occasionally arise. Chattanooga, which aspires to be the
commercial and industrial centre of eastern Tennessee, is about 150
miles southeast of Nashville, as shown by the accompanying sketch map.
Owing to the southwestern trend of the Appalachian Mountain valleys,
it is only 846 miles from New York by rail, almost as the crow flies;
while Nashville has access to the North principally through Ohio river
gateways, over lines, at the best, 1,058 miles in length. By these
lines, therefore, the latter is 212 miles further from New York than
Chattanooga. But the two competitive places are only 151 miles apart;
whence it follows that the shortest possible all-rail line from New
York to Nashville, swings around to the south by way of Chattanooga.
The situation is complicated by other combined rail and water routes
from New York through Norfolk, Savannah, and Charleston. But all these
lines also reach Nashville by coming up through Chattanooga. From every
point of view, therefore, Chattanooga, on the basis of mileage, is the
nearer point to New York--151 miles nearer by the direct line, all
rail; equally nearer by all combined rail and water routes: and 212
miles nearer than is Nashville by the roundabout all-rail lines through
Louisville or Cincinnati. Its location corresponds to X in our second
variation of the oyster case; namely, an intermediate point on the
direct line to another more distant point Y, which latter enjoys the
competition of more roundabout routes.
[Illustration]
The disability against Chattanooga, against which it protested, was
substantial.[215] Its first-class rate from New York was $1.14 per
hundred pounds, while Nashville paid only ninety-one cents. On various
commodities the Chattanooga rates were from twenty-five to seventy-five
per cent, above those to Nashville. The effect of such differences
upon jobbing business at the places intermediate between Nashville and
Chattanooga is shown by the subjoined chart. The two upper sloping
lines represent the through rates from New York to each distributing
centre, plus the local rates out to way stations. Even at Bolivar, the
nearest place to Chattanooga, the Nashville combination is slightly
lower than that based upon Chattanooga. This disability steadily
increases as Nashville is approached, rates from Chattanooga rising
while those from Nashville fall, until at Kimbro the jobber located
at Chattanooga--the nearer point to New York on the direct line--must
lay down his New York goods at a rate of sixty-three cents a hundred
pounds higher than his competitor in Nashville enjoys. This adjustment
is partly an historical product. Nashville, by the old river routes
from Pittsburg down the Ohio and up the Cumberland, was formerly nearer
the Eastern cities than Chattanooga. Then, the trunk lines through
Cincinnati with heavy traffic and low rates shortened the distance;
and, finally, the Louisville & Nashville Railroad, supplanting the
river routes, undertook to build up Nashville as against Cincinnati
and Louisville. Historically, on the other hand, Chattanooga was long
an unimportant point. It took, as it still does, the same rate from
the North as prevailed at some twenty-three other southern cities from
Atlanta to Memphis. Here is the crux of the difficulty. The rates
at Nashville must be assumed as historically fixed. Whatever remedy
may apply must come from a reduction of the rates to Chattanooga,
the nearer point. This place has now become an important centre, the
meeting point of a number of rail and water lines. The long prevalent
grouping of all the southern cities with equal rates from the North
must be replaced by a system of differentials, if the discrimination
against Chattanooga is ever to be ameliorated.
By this time it will be observed that in the discussion of the
Chattanooga case we have drifted far beyond the mere competition of
rival routes. Commercial competition, which affords the justification
for grouping all these twenty-three important southern cities together,
is a topic to be treated elsewhere by itself. The difficulty in many
of these cases is to distinguish between the really strongest line and
the one which is merely the shortest. Upon this point one's decision of
the Chattanooga case might actually depend. The Louisville & Nashville
contends that Nashville even today is, from an operating point of view,
nearer New York than Chattanooga, although the distance is 212 miles
more. All the trunk lines compete at Ohio river points, and bring them
relatively much closer to New York. The density of traffic on these
lines is far heavier than on the air line to Chattanooga.
It happens that Chattanooga meets this allegation of greater trunk
line density and cheapness by proof of the still greater economy
of operation by the coastwise steamers to southern ports, traffic
coming thence north by rail through Chattanooga. The appearance of
water competition in any of these cases always introduces an almost
insuperable difficulty in the way of comparison of long and short
lines. Shipment by vessel differs from rail carriage, primarily in
the relatively high terminal costs, the absence of all maintenance of
way costs, and the low cost of actual propulsion. With a cargo once
securely stowed, the distance traversed by a vessel is of relatively
little importance, much less so than in the case of carriage by rail.
A powerful factor in determining water rates, moreover, especially
by sea, is the absence of local traffic. Wharves and terminals being
expensive to build and maintain, and the method of loading in a ship's
hold not being conducive to ease in access or assortment, vessels
are confined largely to bulk traffic at a few important points. The
expenses of operation must be more uniformly distributed over the cargo
than in the case of a trainload. The water line, therefore, is deprived
of one advantage in cutting rates. It cannot, so readily as a railroad,
recoup itself for losses on competitive business or at competitive
points by falling back upon its earnings from way stations.
From all these considerations it not infrequently comes about that,
unlike carriage by rail, the longest way round may indeed be the
shortest way home. This is clear in the highly involved Wichita,
Kansas, cases.[216] Wichita, a commercial centre of southern Kansas,
is 200 odd miles southwest of Kansas City. Its all-rail rates from
the East are higher than to Kansas City. Yet by the water route from
New York to Galveston and thence up by rail, as compared with Kansas
City, it is a nearer and intermediate point. The Interstate Commerce
Commission well expresses the difficulty:
"It is quite probable that the actual cost of transporting
cotton piece goods from New York to Wichita _via_ Galveston
does not exceed that of carrying them from New York to
Kansas City via the cheapest route. The all-rail haul is to
the latter point 1,300 miles and over. The ocean and rail
movement involves a rail carriage of from 1,100 to 1,300 miles,
depending upon the route selected. If the goods move through
some Gulf port, there is a rail carriage of not less than 850
miles. If, therefore, the rate were to be measured by the
expense of the service, it is probable that Wichita would today
enjoy as low a rate as the Missouri river."
The Wichita complication, moreover, works both ways. Wichita and Kansas
City form two angles of a narrow triangle with its apex at the Gulf
ports; but the distance from Kansas City is longer than from Wichita.
Railroad competition brought it about, however, that the rate on export
grain from Wichita _via_ Kansas City to the Gulf came to equal the
rate from Kansas City to the Gulf _via_ Wichita. But the former was a
much longer and more roundabout haul; and, moreover, was less than the
shorter haul rate from Wichita to the Gulf direct. The analogy to the
Hillsdale case, above-described, will appear clearly on inspection of
the map.
Summarizing the results so far reached, in all that concerns the
two sorts of cases considered in the preceding paragraphs, our
conclusion is that, when competition by rail at the distant point is
alone present, and when the nearer point is on a roundabout route, a
railway "is entitled to carry the traffic past X to Y (Philadelphia)
for considerably less than nothing"; but, when the nearer point is on
a direct line, the case is debatable. Proof that normal competition
compels the lower rate at the remoter station must be uncommonly clear
and conclusive. In other words, the facts that the rate at Y is not
unduly low and also that the rate at X is not unreasonably high must
both be firmly established.
A distinct class of cases of local discrimination is suggested by
the recent case of Montgomery, Ala., in the United States Commerce
Court.[217] These like other cross line cases, akin to that of Wichita,
Kansas, above-mentioned, arise in connection with practices as to the
division of joint rates. They will be discussed in connection with
pro-rating in our second volume.
The question has forced itself forward constantly as to whether the
existence of the alleged discrimination in rates is merely a matter of
relativity in cost of operation or whether it inflicts positive injury
upon the nearer point. Would it benefit the nearer point if the lower
rate beyond were withdrawn? It is here that the complexity of some of
these cases of local discrimination becomes apparent. To understand
this phase of the matter, the factor of commercial competition, as
distinct from mere rivalry of routes, must be introduced. Hadley's
analysis of the oyster case is quite inadequate on this point. Rates
in that instance were on commodities (oysters) produced at practically
uniform cost at both X and Y. They were, moreover, rates _from_ two
places out to a common market. Would it, however, make any difference
if the controversy concerned the rates in the opposite direction;
or, in other words, from a common centre of distribution out to two
competing consuming points? Would it make any difference whether
the goods were to be consumed at X and Y; or were to be used as raw
material in manufactures at those two points; or were to be distributed
throughout the countryside from X and Y as jobbing centres? It is at
once evident that these issues are more complicated than in the first
case. The two points X and Y being commercial and industrial rivals, is
it not possible that the growth of one may take place at the expense
of the other? At any given time there is only a fixed demand for the
goods consumed, manufactured in or redistributed from the two places.
Trade won by one is quite lost to the other. Of course, in a measure,
this might also have been true of the oyster production. But, inasmuch
as in that case the rate from Y was not affected by the entry of X,
its prosperity would not probably be disturbed. The Hillsdale ice case,
above described, is also one where the commodity (ice) is of relative
unimportance for Columbus and Springfield, respectively. How would
matters stand if the rates in question were on lumber or coal for
manufacturing purposes? The difference, no doubt, is merely of degree
and not of kind. Magnitudes, however, must not deceive us. The rights
of Kathleen or Danville are just as sacred as those of Youngstown and
Pittsburg.
[Illustration]
St. Cloud, Minnesota, is located upon a line of the Northern Pacific
Railroad, seventy-six miles northwest of St. Paul.[218] It is a
competitor not only with St. Paul, but with other local centres in
the vicinity, like Elk River, Princeton, and Anoka, either for flour
milling or for distributive jobbing business. It is about the same
distance as these other places from Duluth or Superior; through which
the entire district obtains its supplies, such as coal from the East
by lake boats; and by way of which its flour must be shipped to the
Eastern markets and to Europe. And yet the rate on flour made at
St. Cloud to New York in 1899 was twenty-eight and a half cents per
hundredweight, as against a rate of twenty-one and a half cents from
St. Paul, this latter rate being enjoyed also by Milaca, Princeton,
Elk River, and Anoka. The rates on coal and other supplies from the
East were likewise proportionately higher than to St. Paul and these
neighboring towns. The specific complaint in this case is of local
discrimination. The Northern Pacific Railroad operates the long line
between St. Paul and the head of Lake Superior by way of Brainerd.
On this business, passing through St. Cloud, it has to meet a rate
compelled at St. Paul by the competition of no less than three direct
lines to Duluth. It avers that this business, taken either way for
longer distances and at lower rates than are accorded to St. Cloud,
in no way affects the rates at that point; and that whatever it can
earn as a contribution to joint expenses decreases the burden of these
upon St. Cloud rates. This is all entirely true from the transportation
point of view; but, viewed in a large way, the situation is altered.
Wheat of local production about St. Cloud is rendered of less value by
practically the excess of the St. Cloud rate per hundredweight over
the rate enjoyed from St. Paul. The Interstate Commerce Commission
found that this was equivalent to a difference of fully $1 per acre
in the value of wheat lands tributary to St. Cloud. And on the other
hand, of course, the cost of all its supplies is enhanced above the
level of rival manufacturing centres. On soft coal this equalled no
less than eighty-five cents per ton. To this the Northern Pacific
replied that the discrimination against St. Cloud was not of its
creation, but had existed before its entry into any St. Paul business
by its indirect route. The Commission found, however, that in fact the
participation of this indirect line on St. Paul-Duluth business did
affect the short-line rate; and that its withdrawal would at least tend
to prevent any further reduction of the St. Paul and related rates. If
the withdrawal did not remove the discrimination against St Cloud it
would not at all events aggravate it. The vital point, differentiating
this case from that of the Savannah Freight Bureau, previously stated,
was the actual damage to the intermediate point due to the existence of
commercial competition between it and the place more distant.
An important feature in commercial competition is its entire
dissociation from all considerations of cost of service by long or
short routes. Neither strong nor weak lines make the rate. The business
is there. Market conditions are fixed. The carriers are free to take
traffic or leave it. Single-handed, at least they cannot rule the
price of transportation. The price of sugar at Kansas City is made
by competition of Louisiana sugar coming from New Orleans, of beet
sugar and Hawaiian sugar from Colorado and San Francisco, and of the
world's sugar from New York. This is why Kansas City, in the complaint
stated in the opening paragraph, enjoys a lower rate on sugar from San
Francisco than the transcontinental lines can accord to Denver. The
only possible justification for the apparent anomaly in lumber rates
from Texas points, cited in the same paragraph, is that, as the heart
of the Middle West is approached, lumber supplies from every point of
the compass converge upon common markets. As is so frequently averred
in such cases, no carrier makes the rate. The rate is made for all of
them by conditions beyond their control. The only rates, therefore,
which it is in their power to fix in some accordance with average costs
of operation, are the rates at local stations. For these rates alone
can they be brought to book.
Just here another characteristic of commercial competition as distinct
from rivalry of routes is to be noted. Local discrimination, wherever
it is alleged to occur, frequently assumes the form of complaint
against rates to various places, not on the same line but by different
and often widely separated lines. Complaints of this class might
arise, for instance, referring back to our diagrams of the oyster
cases, between X and Z. Philadelphia, we will assume, as before, to
be the common market. A multitude of different varieties of protest
are distinguishable. Point X equally distant from Philadelphia with Z
may pay a higher rate than Z. Or X may be less distant than Z, and yet
be called upon to pay the same rate. It may even be less distant than
Z and yet actually be charged a higher rate than Z. But in all these
instances the two points (X and Z) are not on the same route, but on
divergent routes. The issue remains the same. The conditions imposed
at the point of convergence being fixed, each line must exercise its
own ingenuity in conforming thereto. Methods in each case must differ,
according to the length of line, the direction and composition of the
traffic, and other factors.
* * * * *
Three general schemes of rate-making are distinguishable in American
practice. The most satisfactory one is that which obtains in trunk
line territory, of zone tariffs with a gradation in some degree
corresponding to distance.[219] At the other extreme is the system of
the flat or postage-stamp rate, exemplified in the Missouri-Mississippi
river territory,[220] and in Pacific coast rates from all points east
of the Mississippi.[221]
Intermediate between the two are the systems of basing lines and
basing points. The first of these, the basing line system, prevails
throughout the country west of the Missouri river. The second, the
basing point system, is found throughout the southern states east of
the Mississippi. In both the principle is the same. The two differ
only in detail. Through rates are made to certain designated places;
and from there on, a local rate to all other places, large or small,
is added. This local charge rises, of course, with distance. Thus the
first-class rate to Denver, Colorado, is made up of a rate of eighty
cents from Chicago to the Missouri river, plus $1.25 for the balance
of the haul. From Chicago to a point in central Nebraska the only
difference would be a lower local. In southern territory the rate to
Troy, Alabama, equals the sum of the through rate to the nearest basing
point, Montgomery, and of the local rate from there on to destination.
The only difference in detail between these two systems is that in
the western territory, all competing lines being parallel (until
the routes around by sea and back from the Pacific coast are met),
rates rise in all cases progressively with distance. The complaint of
local discrimination rests merely on the allegation that the rate of
progression with increasing distance is too rapid. In the South, on the
other hand, owing to the encircling seacoast with deeply penetrating
navigable rivers, the competing routes from the East or North converge
from different and even from directly opposite directions. Hence it
is impossible to base rates upon extended boundary lines, like the
Missouri river. Rates must be based upon certain designated points.
This introduces a serious complication. Points, instead of lines, being
used for basing purposes, in the South, local rates rise outward in
every direction around each basing centre until the sphere of the next
basing point is met. And local rates to points even back on the same
line, through which the traffic has already passed to reach the basing
point, are thus of necessity higher than rates to points beyond.
[Illustration]
The economic anomaly of rates actually falling progressively as the
length of the haul increases is graphically well illustrated in
the accompanying diagram, based upon data in the Georgia Railroad
Commission cases.[222] The charges from Cincinnati to local points
on all lines converging upon Atlanta equal the sum of the rates to
Atlanta plus the local charges out. This holds good even on the direct
line from Cincinnati through Chattanooga, as the diagram shows; yet
of course it also follows that rates must again decline as the next
basing point is approached in any direction; be it Montgomery to the
west, Macon to the south, or even Chattanooga to the north. The only
condition analogous to this in the Far West appears in those places
whose rates are made up by a combination of the low water rates to the
coast plus a local back eastward into the mountains. The transition
from this Pacific coast combination to the system based upon the
Missouri river occurs at those places where the aggregate charges from
either direction become equal. Viewed as a large matter of principle
the whole western system is analogous to the southern system. It is
inevitable in both that intermediate points should in all cases be
assessed at a higher rate than those adopted as bases.[223]
The reason advanced in support of these basing point or basing line
systems is that they are an outgrowth of commercial competition; in
other words, that they are compelled by conditions beyond the carriers'
control. Sometimes it may be the competition of widely encircling water
routes--as from New York around to Galveston and up to Kansas City in
the southwestern field, or to Mobile and up to Montgomery, Alabama, in
the southeastern states. But, in many other cases, market competition
from other centres of supply set the limit to the rate at the basing
point. Missouri river cities enjoy a great advantage over all
competitors, as meeting places of the ways. Generally, the low rates
to the base points have been originally accorded in order to build up
local distributive or industrial centres in the face of competition
from older places. Nashville undoubtedly owes a large measure of its
present prominence to the fact that in the old days its principal
railroad gave a foothold and made a clientage for its merchants as
against older rivals in Cincinnati and Louisville. Nor can it be said
that this was an injury to that clientage, composed of consumers all
through the adjacent countryside. Rates for these consumers were not
put up, in order to build up Nashville. On the contrary, Nashville
was given perhaps inordinately low rates, in order that the sum of
these low rates and of the local rates out to Four Corners should be
at least as low as those from Cincinnati and Louisville direct. This
last argument is the main economic defence of the southern basing point
system.[224] It applies equally to the advocacy of a low basing line at
Missouri river cities for rate making to points beyond.[225]