so flagrantly violates the distance principle, is first of all to
determine at what points to base; and thereafter to accommodate the
system to the normal growth and development of the country. The system
is inelastic. It tends to break down of its own weight. It must
enlarge, if at all, by fits and starts, in each case with violent
dislocation of trade. A generation ago towns in Iowa complained that
the Mississippi river was a basing line. Then, when the Missouri river
line was substituted, an outcry rose from all the points in Nebraska.
The persistent complaint from Denver against its rate adjustment as
compared with Kansas City,--a competitive distributing centre,--well
exemplifies it. The Denver Chamber of Commerce intervenes, and proposes
that the basing line be moved from the Missouri river out to Colorado
common points (like Denver). Indeed, in each case the argument in favor
of the change is identical. Each tier of complainants--thriving cities
which have recently come to more or less commercial maturity--plead
their inability to compete with the centres adopted some years ago for
basing purposes. Denver, for example, wishes to sell goods throughout
Utah. But its total charges there on goods purchased in the East amount
to eighty cents from Chicago to the Missouri river, plus $1.25 on to
Denver, plus $1.64 on to destination,--a sum of $3.69 per hundred
pounds. The Kansas City dealer, on the other hand, gets a low base
rate of only eighty cents with a single additional rate directly out
to Utah of $2.05. In other words, the latter can lay down his goods
in Utah for $2.85 as against $3.69 paid by the Denver competitor. The
point to be carried forward, however, is not so much the disparity
against Denver, as the fact that the moment Denver is promoted to be
a basing point it becomes defendant in a complaint of precisely the
same sort, brought by the places still further west. This inelasticity
of basing point schemes, together with their inability to expand
without abrupt dislocations of trade, is apparent everywhere in the
South. Just as Chattanooga complains against Nashville, so the little
intermediate stations between Chattanooga and Atlanta, as our diagram
on page 240 showed, become restive under rates of $1.27 as compared
with a rate twenty-one cents lower charged on to Atlanta. The system of
basing points or lines may be an inevitable concomitant of industrial
immaturity; but it is none the less difficult to defend as a permanent
system or as one inherently just. And its final relegation to the scrap
heap, in favor of a system of rates graded more or less according to
distance, is ardently to be desired.[226]
* * * * *
Does a constant rate applied over a long stretch on the same line
constitute local discrimination? May the nearer points rightfully
protest against the fact that equally low rates are accorded to remoter
points? This is the gist of the controversy in the very suggestive
Milk Rate cases in 1897.[227] Here the conflict of interest between
producer and consumer is obvious. The city of New York naturally
desires a wide market from which to draw its supply. On the other hand,
the nearby producers wish to enjoy the advantages of nearness to the
market to the fullest degree. Study of the evolution of rate sheets
clearly shows how such grouping of charges over long distances may be
in the nature of a compromise to avoid actual violation of the long and
short haul principle. Oftentimes places scattered along over a hundred
miles of railroad enjoy absolute equality of charges. Obviously, the
ton-mile rate steadily falls within such a group with progressive
remoteness. Yet it is an inevitable feature of tariff building.[228]
It is the kernel of the admirable trunk line rate system. Such an
equalization of rates between points unequally distant from a given
centre, not infrequently arises in connection with mere competition of
transportation routes. Referring back to the diagrams on page 219, it
may happen that a complainant at X, the nearer point, recognizing the
inevitableness of a low rate at Y, may succeed in securing an agreement
that, while its charges cannot be less than at Y, at least they shall
not be more. This was all that was asked in the "rare and peculiar"
case of Youngstown, Ohio.[229] But it is apparent that such a solution
differs only in degree from those previously discussed. The question of
principle remains the same. The roundabout route to New York up back
by way of Youngstown could continue to compete at Pittsburg for as low
a rate as on direct shipments, even if it observed the long and short
haul principle to which the Pennsylvania direct route was committed,
only by charging much lower rates per ton mile on Pittsburg traffic
through Youngstown than was levied on business there originating. This
raises precisely the same question of distribution of joint expenses
between local and competitive traffic, already discussed. In certain
contingencies under the second variety of the oyster cases, such a
solution might apply. Would Chattanooga, for example, assuming it to
belong in the second class of oyster cases, be contented with an
equality of through rates with Nashville, leaving its local rates out
to smaller towns as they are?
The most extreme instance of uniform or postage-stamp rates applied
over long distances occurs in the transcontinental tariffs from
different points in the East. These differ radically from the
adjustment of rates between different points on the Pacific slope,
already described. At the far western end the lowest rates are accorded
to coast cities, because of water competition by sea. Rates to interior
points progressively rise by the addition of locals inward toward the
interior. The rates thus compelled by water competition are accepted
by the all-rail lines. Thus the Pacific coast end is practically built
upon a basing line. It might be expected that in consequence of water
competition by sea a similar system would prevail at the eastern end
of the line; that rates to the Pacific coast from interior cities
would rise progressively according to distance inland, until at all
events the direct all-rail charge became as low as by the combined
rail-and-water rates. But such is not the case, and for two reasons.
The first is that in the East interior cities are large and powerful
factors in trade. There were no such interior cities in the Far
West, until Spokane came into its own. These inland eastern cities,
Pittsburg, for example, demanded equality of opportunity with the
seaboard cities in Pacific coast trade. They succeeded in obtaining it
by a grant of as low rates as New York or Boston enjoyed. In the second
place, all the Pacific coast carriers enjoy monopoly as far east as the
Missouri river. But east of that line there are many routes interested
in middle western cities, but having no interest in those in the East.
They, too, have insisted upon giving their clients in such places as
St. Louis and Chicago as low rates as Philadelphia or New York. Little
by little the equality of rates was extended until for many years
the blanket rate has covered the entire United States east of the
Mississippi river.
Does not this constitute local discrimination against the middle
western cities? This was one of the main contentions in the St. Louis
Business Mens' League case. Being one thousand miles nearer San
Francisco, it demanded recognition of that fact in its tariffs. The
difficulty is accentuated when both eastern and western point rates
are considered together. St. Louis enjoys no lower rate than New
York, although one thousand miles further east; and inland points in
the Rocky mountain area may be one thousand miles further east than
San Francisco and yet pay a higher rate. Thus it is possible to lop
off one thousand miles at each end of the line without affording any
recognition of it in the tariffs. The situation is too involved to
discuss in detail in this place; but one finds it difficult to avoid
the conclusion that the whole system will demand revision before
long. Geographical conditions are immutable. Trade conditions are
not. Perhaps it was inevitable that the former should by force of
circumstances have been somewhat overlooked during a period of rapid
growth. But, as commercial affairs approach a condition of stability
and permanence, the matter will call for most careful examination.
[Illustration]
Constant rates applied over long distances on the same line almost
inevitably tend to pass over into a system of equality of rates over
_different lines_.[230] The necessity was evident enough in the
Milk Rate case. This phase of the matter may theoretically best be
discussed by reference to the following diagram. Suppose A, B, C, and
D to represent any four inland "common points." It remains to show
how it comes about that they all finally enjoy equal rates to all
four seaports, regardless of location. Each appears to be naturally
tributary to some one of the seaports by a dominant or short-line
route. In each instance this route properly rules the rate. Moreover,
the four seaports may be considered for traffic purposes as equally and
interchangeably distant from one another without regard to location.
This follows from the fact that, except in extreme instances, rates
by water do not vary according to distance, so small is the cost of
mere propulsion by comparison with the terminal costs. In other words,
the rate is the same from Wilmington to Brunswick or Savannah as to
its next neighbor Charleston. From this it follows, further, that
Wilmington, Savannah, and Brunswick can all reach B--the point to which
Charleston is nearest--on even terms. They may each have a direct line
to B; but, as compared with a possible combined low water rate to
Charleston and a low direct rail rate inland to B, the Charleston route
may be at least able to hold its own. All three outside competitors,
then, are on even terms with one another in respect of access to B.
But how does Charleston stand towards B as against the field? We have
already concluded that a roundabout route must be allowed to meet,
though not to undercut, the ruling rate. Such a roundabout route from
Wilmington on this diagram to its own natural tributary A could be, and
as a matter of fact is, made by passing around by way of Charleston
or any other seaport. Charleston wishes to share in this trade at A,
and may reach it by similar tactics. It stands towards A precisely
as Wilmington stands towards B. They finally agree to enjoy both A
and B on even terms. But, as we have already seen, the admission of
Wilmington to B is equivalent to the admission of all the rest. Whence
it comes about that all four establish B as a "common point." And of
course the same procedure fixes all the others, A, C, and D in the same
way. In the Savannah Fertilizer case[231] it appeared that there were
no fewer than 148 points in ten states from Louisiana to Kentucky,
to which rates on fertilizers were absolutely the same from each of
the four seaports. The degree of local discrimination of course was
negligible at the remoter places; but it augmented in proportion as the
immediate neighborhood of each seaport was approached. The apparent
anomaly was greatest in a north and south direction along the seacoast.
Thus Dinsmore, Florida, was 275 miles from Charleston and only 160
miles from Savannah, yet the rates from both points were the same. The
governing feature usually was the entire equality of coastwise water
rates, regardless of distance, which in turn compelled the land lines
to follow suit.
The Cincinnati Freight Bureau case, otherwise known as the Maximum
Freight Rate case,[232] affords the best example of the difficulty in
practice of adjusting rates over different and widely separated lines
on a distance basis, in order to satisfy the demands of commercial
competition. Atlanta, Georgia, the key to the southern market, is 876
miles by rail from New York, but only 475 miles from Cincinnati and 733
from Chicago. In other words, Cincinnati is fifty-four per cent. as
far from Atlanta as is New York; and even Chicago is only eighty-four
per cent. as remote. In general, this valuable southern territory, on
the basis of mere distance, is really nearer to the leading middle
western cities than to those on the Atlantic seaboard. Yet this
geographical situation is not reflected in the railway tariffs. Rates
from the West, especially on manufactures, were much higher, always
relatively and often absolutely. Thus first-class goods in 1894 paid
$1.47 per hundred from Chicago (733 miles), while from New York
(876 miles) the rate was only $1.14. At points like Chattanooga the
disparity was even greater. This city is only 595 miles from Chicago
as against 1,060 miles from Boston. Yet the rates were actually lower
($1.14) from New England than from Chicago ($1.16). The principal
reason for this of course was the cheap coastwise water competition
by way of Charleston and Savannah. The eastern all-rail routes could
charge no more than the combined rail-and-water lines. The difference
in relative cost of operation by water was recognized by means of
so-called "constructive mileage." From New York to Savannah by sea is
about 750 miles; yet the allowance to the steamers was proportioned
upon a distance of only 250 miles. Water cost was thus fixed by
comparison with rail cost in the proportion of one to three. Yet, even
with this allowance in favor of eastern cities, New York remained more
distant from Atlanta than Cincinnati; the "rate-making" distance from
the former being 538 miles as against only 475 miles from Cincinnati.
The arbitrary reduction of the New York distance left Chicago more
remote (733 miles), but not in so great degree as its tariffs implied.
These tariffs were also peculiar in another regard. The handicap
against the western cities was much higher in respect of manufactures
and high-class freight than upon foodstuffs and raw produce. This in
turn was clearly due to a long-established agreement between the lines
east and west of the Alleghanies, as to a division of the field.
Originally each set of lines was harassed by roundabout competition
from the other. Western foodstuffs and raw produce were reaching the
South by way of the Atlantic seaboard; and eastern manufactures from
New York, for instance, were rambling about over western lines in order
to reach places like Atlanta and Augusta, naturally served by direct
routes from the East. The agreement to divide the field, dating from
1878, steadily became more irksome, however, to the West, with the
development of manufactures of its own. The problems raised by this
change are too large to be considered here. The main question for
the present inquiry is as to the relative fairness of rates from two
widely separated centres to a common market, those rates not being
proportioned to distance. The final settlement of this knotty question
is suggestive of the extreme difficulty of attempting to apply mileage
or distance rates over different railroads too rigidly. The complaint
being as to relativity, there were only two possible solutions.[233]
One was to increase the eastern rates, the other to order a reduction
of the charges from the West. The former course was impossible, owing
to the presence of water competition by sea, not under control. The
latter alternative was, therefore, chosen by the Interstate Commerce
Commission in its decision in 1894. The rates from western cities were
always composed of two parts. The charge from the Ohio south was kept
distinct as a local rate. The other portion of the rate applied from
Chicago, for example, down to the Ohio river. Of these two parts, the
trunk line portion appeared reasonable enough. It was the southern
local, often one hundred per cent. higher than the other, which seemed
most unreasonable; and which, according to all appearances, had been
used to bring about a closure of the market to western manufactured
goods. Consequently the Commission ordered a reduction of the southern
local rates, cutting them drastically, but leaving the northern
locals unchanged. This decision was never carried into effect; as
the Supreme Court of the United States held the Commission to have
no such rate-making power. Nothing was done apparently to remedy the
disparity in charges against the West, although the railroads serving
that territory urgently pressed for action. Every time they threatened
a reduction of their western rates, the eastern line came down in
proportion. This left the relative rates as before, although the
general scale would be lower all round.
At last, in 1905, the eastern lines from Baltimore south agreed to
permit a reduction of five cents in the rates from western cities by
lines _north_ of the Ohio river; but they refused to accede to any
change in the rates from the Ohio south. This was the exact opposite
of the Interstate Commerce Commission's proposition, although both
plans were intended to compass the same object; namely, to place
western shippers more nearly on a parity with the East. The Commission,
in 1894, laid all reduction upon the southern portion of the rate;
the railroads, in 1905, placed it all upon the northern part. This
obviously afforded no relief to the original complainant, Cincinnati.
In fact, it actually operated to its great disadvantage, inasmuch as it
let its two powerful rivals, Chicago and St. Louis, into the southern
field on distinctly more favorable terms. Such was the outcome as a
result of the friction of railroad competition. The reasonableness of
some reduction was clear. But to the layman, the fairness of laying the
reduction entirely upon the northern locals, already relatively low,
instead of upon the extremely high southern part of the rate is not by
any means so clear.[234]
One further detail of this adjustment of southern rates raises a
question:
"Rates between Richmond, Virginia, and Atlanta, Georgia, are
less than the rates between Richmond, Virginia, and Greenwood,
South Carolina (an intermediate point). This is due to
indirect competition between Richmond and Western jobbing
points; and in order to permit the jobber or manufacturer
in Richmond to do business as against his competitor in
Cincinnati, it has been necessary to fix the rates from
Richmond to Atlanta with some reference to the rates from
Cincinnati to Atlanta. At Greenwood, South Carolina, we find
that the Cincinnati shipper pays a very much higher rate than
to Atlanta, and that the rates from Richmond are already
sufficiently low to enable the Richmond shipper to compete at
Greenwood with the Cincinnati shipper."[235]
Is this not in a measure well described in the passage, "unto him that
hath shall be given; but from him that hath not, shall be taken away
even that which he hath"? This railway argument contains dangerous
possibilities. In effect, upon the theory of charging what the traffic
will bear, it means that a railway (in this case the Seaboard Air
Line) may increase its own local rates, not in proportion to the
length of its own haul (from Richmond to Greenwood), but according
to the remoteness of that local point from another competing market.
The inevitable effect of the general adoption of such a policy must
be to erect arbitrary barriers to the free and widespread movement
of commerce. The great advantage of the flat rate or of commodity
rates is that, placing all competing centres upon an absolute parity
irrespective of distance, they encourage the utmost freedom of trade.
* * * * *
Certain general conclusions seem to be warranted by the analysis
of these cases of local discrimination. The first is that they all
show the extreme delicacy of commercial adjustment and the existence
of conditions well beyond the control of the carriers, jointly or
singly. Trade jealousies in particular--the rivalry of producing and
consuming centres--render relativity of rates of paramount importance
to shippers. This class in the community is interested comparatively
little in the absolute level of rates, that being more directly the
concern of the general consuming public. To the public, as represented
by State and Federal legislatures, it is difficult to make these
complicated matters of commercial competition clear. The only basis
of rate making that is easily understood is one founded in general
upon the distance principle, or, in other words, correlated with
considerations of cost of operation. Any departure from this basis is
apt to breed suspicion, and at all events puts the carrier upon the
defence. It is bad policy, in their own interest, for railroads to
permit a continuance of such violations of the distance principle in
their general tariffs (commodity rates as a special resource to meet
the special needs of commercial competition may be set aside), except
in extreme cases. This was recognized by the trunk lines when they
almost unanimously acquiesced in the long and short haul provisions of
the Act of 1887. The people of the United States have the same right
that they had then, to expect that at the earliest possible moment
the wise provisions of the trunk line rate adjustment shall be widely
accepted in the West and South. Whether those regions, and the railways
that reach them, have yet sufficiently developed to warrant the change
is a matter requiring careful consideration in detail.
The necessity of some exercise of governmental control over these
carriers of the country, in order to mitigate, if not to eliminate,
local discrimination as far as possible, is evident. Many of the
instances previously cited have clearly shown how impossible it
often is for any railroad, single-handed, to deal with an involved
situation in a large way. Take the Cincinnati Freight Bureau case, for
instance. Conceding, as many would, the claim of western cities to some
readjustment of tariffs in their favor, is it not an anomaly that the
lines south from Baltimore, several hundred miles away, should finally
dictate the means to be employed to remedy the situation at Cincinnati
and Chicago? Who else but the Federal government could ever hope to
disentangle the almost hopeless snarl of competition involved in the
controversy over differentials to and from the Atlantic seaboard?[236]
This controversy is at bottom one of local discrimination. And yet
how is the Interstate Commerce Commission to aid in the solution of
these intricate problems under present conditions? Its hands formerly
doubly tied, are now in part freed by rehabilitation of the long and
short haul clause. But it cannot yet deal with minimum rates, nor is
it clear that it can prescribe differential rates.[237] True, the
commission may, in some cases, accomplish by indirection its purpose of
establishing a proper relativity between rates through the exercise of
its newly granted power to fix maximum rates. This, as we shall see,
was done in the recent Spokane and Denver decisions. Holding that the
charges at interior points were out of line with through rates to the
Pacific coast; and being unable to govern the long-distance tariffs,
it simply ordered a reduction of certain rates at Spokane and Denver
as inherently unreasonable. This solution is not, however, always
practicable. Not infrequently the lower rate at the remoter point will
drop as soon as the intermediate rate is lowered. Thus the former
relativity of charges is re-established on a generally lower scale. The
complaint in the Eau Claire lumber case required the exercise of such
power over minimum rates, in order to remove the disability against a
particular centre. And then, finally, it is indubitable that commercial
competition as a "compelling" factor has been somewhat over-emphasized
by the railroads. Too often conditions in part brought about by
themselves, or in which at least they have acquiesced, have been set up
as a defence for rates favoring certain points. This is especially true
of the southern basing point cases.[238] Whether any further grant of
powers to the Interstate Commerce Commission by Congress is necessary
at this time in order to enable progress to be made in this connection,
it is as yet too soon to predict. The course of affairs for the next
few years will at all events bear attentive watching.
* * * * *
In the case of competition between a direct and a longer, more
roundabout line, which one "controls" or fixes the rate? It is an
important matter, involving as it does the economic, if not the legal,
right of a carrier to participate in any given traffic. Concerning this
question the greatest diversity of opinion prevails. On the one hand,
both writers[239] and practical railway men[240] aver that the short
line makes the rate, while the long line merely meets the rate thus
made. This is probably the more prevalent opinion. Yet expert evidence
of an opposite sort is to be had for the seeking. The Interstate
Commerce Commission has repeatedly held that the short line is at
the mercy of the longer line under certain circumstances;[241] and
traffic managers not infrequently plead their inability to control rate
situations in the face of irrepressible, roundabout competition.[242]
There is evidently a confusion of thinking, or else a loose use of
terms where statements are so conflicting. As a matter of voluntary
agreement among roads, or of prescribed rates under government
regulation, the issue often assumes the form of controversy as to
whether a road operating under a physical disability shall be permitted
to participate in a given business by a concession in rates or not.
Thus in the notable Milk Rate cases it was a question whether roads
with heavy grades should be allowed to make concessions in rates. This
issue really also underlies the question of enforcement of the long
and short haul clause. In the recent Spokane case the Harriman lines to
St. Paul asked that they, being long lines, should not be compelled to
reduce their rates to the figure prescribed for the direct Hill roads.
It is clear in the first place that "short line" and "long line" are
merely used as convenient terms to designate differences in the cost
of operation. This was well put by James J. Hill before the Elkins
Committee of 1905.
"We will say that the distance from Cincinnati to New York is
800 miles, and that they haul 800 tons behind one locomotive
on one per cent. ruling grades. Now somebody else builds a
road with a 0.3 grade, and he can haul 2,000 tons--twice and
a half the amount; but that line is 200 miles longer. You can
see readily that to move a given number of tons the second road
runs less than half the train miles, so that the farthest way
round is the nearest way home in that case."
The problem should really be stated thus in terms of cost not of
distance. Suppose the roundabout line to be in part or wholly by
water, as in competition between the transcontinental roads and the
Isthmian or Cape Horn routes, or as between the direct all-rail line
from Boston to Nashville, Tenn., and the steamer line from Boston to
Savannah, and thence up to Nashville by rail. In such cases the rail
lines allow the water routes a differential or constructive mileage in
recognition of their relatively cheaper per mile expenses of operation.
The differential may sometimes exist, where, judging by the bulk of
traffic the advantage, irrespective of the differential, lies with
the line giving the lower rate. In other words, as measured by volume
of business, the stronger line and not the weaker one enjoys the
benefit of the differential. This is the case in the coastwise traffic
between Atlantic and Gulf ports; where the bulk of the tonnage goes
by steamer and at lower rates than by all-rail lines. The difficult
point to settle in all such cases is whether the allowance is made as a
voluntary _concession_ to the roundabout line because it _costs_ more
to operate; or whether it is a toll or tribute, because, irrespective
of the cost, the long line rate is made on the basis of value of
service. The problem, then, resolves itself into this: how far in
practice does cost of operation really "control" the rate in cases of
competition between two lines differently circumstanced in this regard?
If cost is of fundamental importance, the "short line," using the term
as above said in a figurative sense, "controls" the rate. If cost is
an entirely secondary matter, rates being made in accordance with
considerations of value of service, the "long line" holds the upper
hand, and the short one is at its mercy.
It is important, moreover, in the comparison of costs of operation,
to keep in view the interrelation between fixed charges and operating
expenses. This point is often neglected. Any well-considered outlay
upon permanent improvements, of course, increases fixed charges
according to the extent of the new capital investment; but at the
same time it presumably lessens the direct cost of operation. The
interest upon funds spent for heavier rails, reduction of grades,
straightening of curves, better terminals or heavier rolling stock,
must be set over against the direct economies resulting from heavier
train loads, lessened expenditure for wear and tear, for accidents and
claims or for wages. This relation between current expense and capital
cost was clearly emphasized in an arbitration decision by the late S.
R. Blanchard, already cited in another connection. Two roads were in
competition for business at New Orleans. One had costly but convenient
terminal facilities. The other was so far from the heart of the city
that the drayage expenses were an important item. This second railway
began by offering free cartage to shippers in order to even up with
its more favored competitor; but this soon gave way to the practice of
private teaming by shippers with an allowance on the freight bill for
"drayage equalization." The other road objected to this on the ground
that it constituted a virtual rebate; that in other words the weaker
line was taking business at an abnormally low rate. The arbitrator,
however, upheld the practice, on the ground that the heavier operating
expense for cartage was merely an alternative for increased interest
charges, had the road elected to construct costly and more convenient
terminals. One road virtually paid money for team hire, the other paid
it in interest on bonds.
Analyzing the main question two propositions are certain. Firstly,
the long line can never charge _more_ than the short line; whence it
follows that as the short line reduces its rate, the long one must
accept that rate as made; and, secondly, the long line, costing more
to operate, is, in the process of reduction of rates, bound to be
the first to strike the bed-rock of cost incident to that particular
service. To go below this point of particular cost would obviously be
indefensible from every point of view. The general rule, then, is that
"the short line rules the rate." This is accepted widely in practice,
as for example throughout trunk line territory and between the
so-called Missouri-Mississippi river points, where the short line from
Hannibal to St. Joseph determines all rates by longer routes.[243] But
the problem yet remains unsolved. The long line may never be able to
charge _more_ than the short line--may it, however, charge _less_ under
certain conditions? The moment it is enabled to do so, the long line
and not the short line, for the moment, "controls the rate." If, now,
we use the technically proper terms, the question becomes this: Under
what circumstances is average cost of service in railway competition
set aside in favor of other considerations; or, otherwise stated, when
may a line, operated under a disability as to cost, properly give
a lower rate than its competitors notwithstanding? Does disability
justify a handicap or the reverse? This was the form which the question
assumed in the notable Milk Rate case: as to whether the weaker lines
in respect of distance or grades should be allowed compensation
therefor by permission to charge higher rates.
One of the common instances of rate control by a line operating
under a disability as to distance or normal cost is the competition
of a bankrupt with a solvent property. The "roundabout" line, like
the Erie or the old New York and New England, having repudiated its
fixed charges, undoubtedly "makes" the rate which the other roads must
meet or lose the traffic. Usually they prefer to absorb or control
it otherwise, financially, thus substituting monopoly for a ruinous
condition of competition. Yet such instances resolve themselves,
evidently, into questions of relative cost of operation after all. The
bankrupt road holds the whip hand, because, having repudiated its fixed
charges, its average costs of operation are correspondingly reduced.
The validity of operating cost as a basis of charges is surely not
shaken by this exceptional case.
The relative proportions and the distribution of local and through
traffic upon two lines of differing length in competition with one
another are primary factors in determining the ability of either one
to "make the rate." This is, of course, especially true under the
operation of any long and short haul law, under which any reduction
of the competitive rates would necessitate a lowering of the charges
at intermediate points. No road is going to sacrifice lucrative rates
upon a large volume of local traffic unless it can gain either a large
volume of business or a very long haul from a competitive point.
Many of the notorious rate disturbers in our industrial history have
been "short cut" roads--the shortest lines between given important
points, regardless of the nature of the intervening territory--like
the old New York and New England, the Erie or the Canada Southern.
Other roads, like the Chicago Great Western or the Central Vermont,
were more roundabout, and yet enjoyed but little local business,
depending almost exclusively for their livelihood upon long hauls
between termini. On the Central Vermont at one time, through business
constituted seventy-nine per cent. of the total; and only five per
cent. was strictly local in origin. On the other hand, the Louisville
& Nashville, in its original petition for exemption from the long
and short haul clause, stated that eighty per cent. of its income
was derived from local business. This consideration, as applied to
competition between the two primary trunk lines, may not be without
significance. As compared with the Pennsylvania Railroad, rich in
local business, the New York Central, running along the narrow Mohawk
and Hudson valleys, has not inaptly been described as operating
"between good points, but not through a good country." Under a strict
enforcement of the long and short haul clause, the dilemma on the
former road would be more serious than on the latter. To choose
between its rich local traffic in iron and steel or coal and the long
haul business from the West, would be a more difficult matter for the
Pennsylvania, than for the New York Central management to weigh its
through grain business against the local traffic from interior New York
points.
In one way the persistence of locally high rates in the South and West,
irrespective of the low charges at competitive points, is defensible on
the ground that local business is scanty.[244] The roads cannot live
upon it. Their mainstay is the long-distance traffic from important
points.[245] On the other hand, where there is no obligation to
maintain a distance tariff, of course the road with rich local business
enjoys a great advantage in making rates at competitive points. It
can practically subsist upon its revenue from its own particular
constituency, meeting all its fixed charges thereby; and can afford to
cut rates on the competitive tonnage down to the bone. Such a road,
quite irrespective of the length of its line, would obviously "control"
the rate at competitive points, as against any rival without such a
subsidiary and independent source of income.[246]
Volume of traffic is another fundamental element in the determination
of cost of operation. No matter how short the line or how easy its
curves and grades, unless it can handle its tonnage in large bulk
it will operate at a disadvantage. Hence a most important factor to
be reckoned with, in deciding which of two competing lines is in a
commanding position as to rates, is the volume of traffic, both in
gross and as susceptible of concentration on either line. In the
notable Chattanooga case, for example, although the line from New York
to Nashville, passing around to the south by way of Chattanooga, is
212 miles shorter than the lines _via_ Cincinnati or Louisville, the
latter, by reason of the density of traffic in trunk line territory,
seem to stand at least on an even footing. On the other hand, the
enjoyment of the bulk of the tonnage sometimes places its possessor
at the mercy of a petty rival. The Fall River water line to New York,
carrying an overwhelming preponderance of the business, obviously could
not afford to cut rates to prevent the Joy Line from stealing a small
portion of the traffic. The same principle holds good in other lines
of business. The Standard Oil Company can better afford permanently to
concede a small fraction of business to a small independent dealer,
so long as he knows his place and refrains from ambition to enlarge,
rather than to attempt to drive him out entirely by cutting prices on a
huge volume of business. Occasionally independents are shrewd enough to
take advantage of this; and so to distribute their business that they
shall in no single place menace a powerful rival, and yet comfortably
subsist on the gleanings over a wide area.[247] In no single locality
are they important enough to exterminate, at the cost of cut rates
applied to a large volume of business; and yet in the aggregate they
may make quite a fair livelihood. The only difference between the
status of a railway and other lines of business in this regard is
that the railway may not be quite so free to deploy its forces. Its
territory and tonnage are more definitely circumscribed by physical
conditions of location.
A point to be noted in this same connection is the relative stability
of the traffic. Is it concentrated in a few hands or does it arise
from many scattered sources? In the former case either road by making
a bold stroke may so entirely capture the business that, by reason
of the enhanced volume, a handicap in operation may be overcome.
Thus, in the notable instance of trunk line competition for the beef
traffic some twenty years ago, the Grand Trunk, although much more
roundabout, besides being handicapped in other ways, by securing
_all_ the business, could afford to make rates impossible under other
circumstances.
Whether the business in question is natural or normal to a road, or
is an extra, diverted from other more direct lines, is still another
factor of importance affecting ability to compete successfully for any
given traffic. The best statement of this is found in the argument
of J. C. Stubbs before the Arbitration Board on Canadian Pacific
Differentials in 1898.[248] "These are differentials in favor of
weaker lines--lines which upon the merits of their service cannot
successfully compete for the business, but claim a share of it as the
reward of virtue, the price of maintaining reasonable rates.... For
example, the Canadian Pacific road was not projected or built for
the purpose of developing, fostering, or sharing the carrying trade
between San Francisco and the eastern part of the United States....
After they were built and the various connections made, then, and not
until then, it was seen that there was a business opened. The route
having been opened, the newer and longer lines entered the field of
competition against the older, shorter, and more direct lines by
cutting the latter's rates.... In a fight of this kind, paradoxical
as it may seem, the stronger line always got the worst of it.... The
weaker or longer line, not having any business at the outset, had
nothing to lose. Everything was gain to it, which appeared to show
an earning above the actual cost of handling the particular lot of
freight. Quite a distinction between that and the average cost of
handling all business. Such an unequal warfare could not long continue,
and the common result was that the stronger line sought for terms, and
ultimately bought the weaker line off, ... this class of differentials
is and always has been obnoxious."
Our final conclusion must therefore be that the outcome in cases of
unequal competition in respect of cost of operation can seldom be
predicted with certainty. Everything depends upon local circumstances
and conditions. Sometimes the long line and sometimes the short line
will dominate. Careful analysis of every feature of the business
must be made before positive affirmation is possible. This result is
at all events worth noting. A due appreciation of the complexity of
the business of rate making may safeguard us against the cocksure
statements of the novice, who has never closely examined into the
subject. President Taft has recently emphasized the need of expert
service in the field of customs and tariff legislation. It is greatly
to be hoped that a similar appreciation of the care with which railway
legislation should proceed may prevail at Washington during the present
session of Congress.
FOOTNOTES:
[200] Cullom Committee, Report, Testimony, p. 532. _Cf._ instances in
Hudson's Railways and the Republic; and Parson's Heart of the Railway
Problem as showing popular misunderstanding.
[201] Senate (Elkins) Committee Report, 1905, p. 1892.
[202] Pp. 116-117.
[203] Another instance is afforded by the Savannah Freight Bureau case:
7 Int. Com. Rep., 458. See our Railway Problems, chap. XII.
[204] Interstate Commerce Commission Reports, decided May 14, 1903.
_Cf._ the extraordinary diversion of traffic over the long route in
Troy-Chatham, N. Y. case: 23 I. C. C. Rep., 263.
[205] This recalls Traffic Manager Bird's testimony relative to
Wisconsin controversies before the Senate (Elkins) Committee, 1905.
[206] Using this term technically as described on p. 256, _infra_.
[207] Chapter XIV, p. 480, _infra_. The original correspondence setting
forth these conditions is reprinted by the Senate (Elkins) Committee,
1905, Digest, App. III, p. 46. 21 I. C. C. Rep., 64, and 17 _Idem_, 335
are analogous cases.
[208] 7 Int. Com. Rep., 458: reprinted in our Railway Problems, chap.
XII.
[209] Brief of Ed. Baxter, Alabama Midland Railway case, U. S. Supreme
Court, p. 71; and Acworth, p. 83. Details in chap. XIV and XIX, _infra_.
[210] 14 I. C. C. Rep., 299.
[211] Details at pp. 245 and 610, _infra_.
[212] Interstate Commerce Reports, No. 696, decided June 25, 1904.
[213] _Cf._ the opinion in the Savannah Fertilizer case in our Railway
Problems, chap. XII.
[214] Chapter XI, _infra_, also in volume II.
[215] 10 Int. Com. Rep., 111; reprinted in full in our Railway
Problems, chap. X. Also the Commerce Court decision in chap. XVI,
_infra_.
[216] The leading Wichita cases are as follows: 9 I.C.C. Rep., 507, 534
and 558.--10 _Idem_, 460. (Lehmann Higginson Co.).--13 _Idem_, 389.
Also 189 U. S. Rep., 274.--Also Senate (Elkins) Committee, 1905, IV. p.
2874 _et seq._
[217] Chapter XVIII, p. 590, _infra_.
[218] 8 Int. Com. Rep., 346; reprinted in full in our Railway Problems,
chap. XI.
[219] Chapter X, _infra_.
[220] Chapter IV, _supra_, p. 128.
[221] Chapters XI and XIX, _infra_.
[222] 5 I.C.C. Rep., 324; p. 480, _infra_.
[223] _Cf._ Commissioner Fifer's dissenting opinion in the St. Louis
Business Men's League case, 9 Int. Com. Rep., 318; reprinted in our
Railway Problems, chap. XVII.
[224] Chapter XI, _infra_.
[225] 11 I.C.C. Rep., 495; 15 _Idem_, 555; U. S. Industrial Commission,
IV, p. 264 and IX, p. 287. Also pp. 129, _supra_, and 442, _infra_.
[226] The feasibility of doing this in the South could all parties
concerned be whipped into line, is demonstrated by the ingenious
adaptation of the trunk line system to local conditions by a special
committee of the Southern Railway and Steamship Association in 1880.
Report of meeting August 12, 1880, in Proceedings, VII.
[227] 7 I.C.C. Rep., 92. The report and opinion is reprinted in full by
the Senate (Elkins) Committee, 1905, as Appendix H.
[228] P. 103, _supra_.
[229] Pp. 223, _supra_; and 296, _infra_.
[230] Similar cases are 12 I.C.C. Rep., 564; 14 _Idem_, 476 on oranges;
16 _Idem_, 276; 22 _Idem_, 93 and 115; and 23 _Idem_, 195; are local
but identical problems of distances. Also the Superior Commercial
Club case, just handed down June 25, 1912, on grain rates. _Cf._ also
Hammond, Railway Rate Theories, etc., p. 94.
[231] 7 Int. Com. Rep., 458; reprinted in our Railway Problems, chap.
XII.
[232] Chapter XIV, _infra_, discusses its legal aspect. Reprinted in
full in our Railway Problems, chap. VI.
[233] _Cf._ testimony in Elkins Committee Report, 1905, p. 2726. The
Commerce Court case on page 588, _infra_, brings it to date.
[234] _Cf._ Answer of Receivers' and Shippers' Association of
Cincinnati to statement of W. J. Murphy, etc., March 15, 1907.
[235] Senate (Elkins) Committee Report, 1905, Digest, Appendix III., p.
231.
[236] 22 I.C.C. Rep., 99 is a case of conceded injustice for fourteen
years; yet of a complete deadlock between carriers, broken only by
Federal intervention.
[237] _Infra._
[238] Chapter XI, _infra_.
[239] Acworth, "Elements of Railway Economics," p. 125.
[240] Testimony of J. J. Hill, Senate (Elkins) Committee, 1905, p.
1507; certainly in the Missouri-Mississippi river territory, the
Hannibal-St. Joe distance rules.
[241] Especially in the Danville and St. Cloud cases; 8 Int. Com. Rep.,
357 and 429. _Cf._ the Vermont Central case, 1 _Idem_, 182 and 82: and
7 _Idem_, 481.
[242] An especially notable instance was the Canadian Pacific
differential arbitration in 1898. Proceedings, etc., p. 73, argument of
J. C. Stubbs.
[243] It is also the rule in France. Senate (Elkins) Committee, V,
p. 273. _Cf._ the Superior grain case. I.C.C., decided June 25, 1912.
[244] _Cf._ Mr. Fink's testimony in Hearings Senate Committee on
Interstate Commerce, 51st Cong. 1st session, Sen. Rep., 847, p. 29.
[245] Solution of transcontinental dilemma depends upon this choice.
_Railway Age Gazette_, Nov. 25, 1910. _Cf._ chaps. XI and XIX, _infra_.
[246] 19 I.C.C. Rep., 218 affords an excellent example as between the
Union Pacific and the Denver and Rio Grande. Also the Montgomery, Ala.,
case in the Commerce Court, p. 590, _infra_. Also the Union Pacific
Merger case, Brief of Facts for Appellants, 1912, p. 276.
[247] For an instance in the tobacco business: _Cf. The Atlantic
Monthly_, 1908, p. 487.
[248] Page 72.
CHAPTER VIII
PROBLEMS OF ROUTING
Neglect of distance, an American peculiarity, 264.--Derived
from joint cost, 265.--Exceptional cases, 265.--Economic
waste in American practice, 268.--Circuitous
rail carriage, 269.--Water and rail-and-water
shipments, 273.--Carriage over undue distance, 277.--An
outcome of commercial competition, 278.--Six causes
of economic waste, illustrated, 280.--Pro-rating
and rebates, 281.--Five effects of disregard
of distance, 288.--Dilution of revenue per ton
mile, 289.--Possible remedies for economic
waste, 292.--Pooling and rate agreements, 293.--The long
and short haul remedy, 295.
The general acceptance, both in practice and theory, of the principle
that distance is a relatively unimportant element in rate making[249]
is significant at this time, in connection with the recent amendment
of the Act to Regulate Commerce. It is important also because of the
marked tendency toward the adoption by various state legislatures of
the extreme opposite principle of a rigid distance tariff. The old
problem of effecting a compromise between these two extreme theories
by some form of long and short haul clause--the original section 4 of
the act of 1887 having been emasculated by judicial interpretation--is
again brought to the front. For these reasons it may be worth while
to consider certain results which inevitably follow the widespread
acceptance of this principle of the blanket rate. Its benefits are
indeed certain; namely, an enlargement of the field of competition, and
an equalization of prices over large areas, and that too at the level
of the lowest or most efficient production. But these advantages entail
certain consequences--of minor importance, perhaps, but none the less
deserving of notice.
The subordination of distance to other factors in rate making is a
logical derivation from the theory of joint cost. This theory justifies
the classification of freight, namely, a wide range of rates nicely
adjusted to what the traffic in each particular commodity will bear,
while always allowing each to contribute something toward fixed and
joint expenses. In the same way it explains a close correlation of
the distance charge to what each commodity will bear. It assumes
that any rate, however low, which will yield a surplus over expenses
directly incidental to the increment of traffic and which thus
contributes something toward indivisible joint costs, serves not
only the carrier by increasing his gross revenue, but at the same
time lightens the burden of fixed expenses upon the balance of the
traffic. This principle of joint cost, so clearly set forth by
Professor Taussig,[250] is fundamental and comprehensive. It pervades
every detail of rate making. But it rests upon two basic assumptions
which, while generally valid, are not universally so. In the first
place each increment of traffic must be new business, not tonnage
wrested from another carrier and offset by a loss of other business
to that competitor. And secondly, each increment of traffic must be
_economically suitable_ to the particular carriage in contemplation.
The first of these assumptions fails wherever two carriers mutually
invade each other's fields or traffic. Each is accepting business at
a virtual loss, all costs including fixed charges on capital being
taken into account, in order to secure the increment of business. Each
gain is offset by a corresponding loss. It is the familiar case of
the rate war. A less familiar aspect of the matter is presented when
traffic is disadvantageously carried by two competing roads, each
diverting business from its natural course over the other's line. The
sum total of traffic is not increased. Each carries only as much as
before but transports its quota at an abnormal cost to itself. This
may, perhaps, swell gross revenues; but by no process of legerdemain
can the two losses in operating cost produce a gain of net revenue to
both. And each increase of _unnatural_ tonnage, where offset by a loss
of natural business, instead of serving to lighten the fixed charges,
becomes a dead weight upon all the remaining traffic. The commonest
exemplification of this is found in the circuitous transportation of
goods, instances of which will be given later.
The second case in which the principle of joint cost fails to justify
charges fixed according to what the traffic will bear may arise in the
invasion of two remote markets by one another; or, as it might be more
aptly phrased, in the overlapping of two distant markets. A railroad
is simultaneously transporting goods of like quality in opposite
directions. Chicago is selling standard hardware in New York, while
New York is doing the same thing in Chicago. Prices are the same in
both markets. Of course if the two grades of hardware are of unequal
quality, or if they are like goods produced at different cost, an
entirely distinct phase of territorial competition is created. But we
are assuming that these are standard goods and that there are no such
differences either in quality or efficiency of production. What is the
result? Is each increment of business to the railroad a gain to it
and to the community? The goods being produced at equal cost in both
places, the transportation charge must be deducted from profits. For it
is obvious that the selling price cannot be much enhanced. The level of
what the traffic will bear is determined not, as usual, by the value of
the goods but by other considerations. The traffic will bear relatively
little, no matter how high its grade. The result is that the carrier,
in order to secure the tonnage, must accept it at a very low rate,
despite the length of the haul.
This is the familiar case of the special or commodity rate granted to
build up business in a distant market. Special rates confessedly form
three-fourths of the tonnage of American railways, as has already been
said. The assumption is usually made that such traffic is a gain to
the railways, justified on the principle of joint cost as already
explained. But does it really hold good in our hypothetical case? There
is a gain of traffic in both directions, to be sure. But must it not
be accepted at so low a rate that it falls perilously near the actual
operating cost? It is possible that even here it may add something to
the carriers' revenue, and thereby lighten the joint costs in other
directions. But how about the community and the shipping producers?
Are any more goods sold? Perhaps the widened market may stimulate
competition, unless that is already keen enough among local producers
in each district by itself. The net result would seem to be merely that
the railroads' gain is the shippers' loss. There is no addition to, but
merely an exchange of, place values. Both producers are doing business
at an abnormal distance under mutually disadvantageous circumstances.
It may be said, perhaps, that the situation will soon correct itself.
If the freight rates reduce profits, each group of producers will
tend to draw back from the distant field. This undoubtedly happens in
many cases. But the influence of the railway is antagonistic to such
withdrawal. It is the railway's business to widen, not to restrict,
the area of markets. "The more they scatter the better it is for the
railroads." "Keep everyone in business everywhere." And if necessary
to give a fillip to languishing competition, do so by a concession in
rates. Is there not danger that with a host of eager freight solicitors
in the field, and equally ambitious traffic managers in command, a good
thing may be overdone, to the disadvantage of the railway, the shippers
and the consuming public?
An objection to this chain of reasoning arises at this point. Why need
the public or other shippers be concerned about the railways' policy
in this regard? Is not each railway the best judge for itself of the
profitableness of long-distance traffic? Will it not roughly assign
limits to its own activities in extending business, refusing to make
rates lower than the actual incidental cost of operation? And are not
all low long-distance rates, in so far as they contribute something
toward joint cost, an aid to the short haul traffic? The answer will in
a measure depend upon our choice between two main lines of policy; the
one seeking to lower _average_ rates, even at the expense of increasing
divergence between the intermediate and the long distance points, the
other policy seeking, _not so much lower rates as less discriminatory
rates_ between near and distant points. In the constant pressure for
reduced rates in order to widen markets it is not unnatural that the
intermediate points, less competitive probably, should be made to
contribute an undue share to the fixed sum of joint costs. The common
complaint today is not of high rates but of relative inequalities as
between places. It is a truism to assert that it matters less to a
shipping point what rate it pays than that its rate, however high,
should be the same for all competing places. This immediately forces
us to consider the consumer. What is the effect upon the general level
of prices of the American policy of making an extended market the
touchstone of success, irrespective of the danger of wastes arising
from overlapping markets? That the result may be a general tax upon
production is a conclusion with which we shall have later to do. Such
a tax, if it exists, would go far to offset the profit which unduly
low freight rates in general have produced. In short, the problem is
to consider the possible net cost to the American people of our highly
involved and most efficient transportation system. Our markets are
so wide, and our distances so vast, that the problem is a peculiarly
American one.
Having stated the theory of these economic wastes, we may now proceed
to consider them as they arise in practice. Concrete illustration of
the effect of disregard of distance naturally falls into two distinct
groups. Of these the first concerns the circuitous carriage of goods;
the second, their transportation for excessive distances. Both alike
involve economic wastes, in some degree perhaps inevitable, but
none the less deserving of evaluation. And both practices, even if
defensible at times, are exposed to constant danger of excess. It will
be convenient also to differentiate sharply the all-rail carriage from
the combined rail and water transportation. For as between railroads
and waterways, the difference in cost of service is so uncertain and
fluctuating that comparisons on the basis of mere distance have little
value.
Recent instances of wasteful and circuitous all-rail transportation are
abundant. A few typical ones will suffice to show how common the evil
is. President Ramsay of the Wabash has testified as to the roundabout
competition with the Pennsylvania Railroad between Philadelphia and
Pittsburg by which sometimes as much as fifty-seven per cent. of
traffic between those two points may be diverted from the direct route.
"They haul freight 700 miles around sometimes to meet a point in
competition 200 miles away."[251] Chicago and New Orleans are 912 miles
apart, and about equally distant--2,500 miles--from San Francisco.
The traffic manager of the Illinois Central states that that company
"engages in San Francisco business directly _via_ New Orleans from the
Chicago territory, and there is a large amount of that business, and we
engage in it right along."[252] Wool from Idaho and Wyoming may move
west 800 miles, to San Francisco; and thence _via_ New Orleans over the
Southern Pacific route to Boston.[253] This case, therefore, represents
a superfluous lateral haul of nearly a thousand miles between two
points 2,500 miles apart. The Canadian Pacific used to take business
for San Francisco, all rail, from points as far south as Tennessee and
Arkansas, diverting it from the direct way _via_ Kansas City.[254]
Goods moving in the opposite direction from San Francisco have been
hauled to Omaha by way of Winnipeg, journeying around three sides of a
rectangle by so doing, in order to save five or six cents per hundred
pounds.[255] Between New York and New Orleans nearly one hundred
all-rail lines may compete for business. The direct route being 1,340
miles, goods may be carried 2,051 miles _via_ Buffalo, New Haven
(Indiana), St. Louis and Texarkana.[256] A generation ago conditions
were even worse, the various distances by competitive routes between
St. Louis and Atlanta ranging from 526 to 1,855 miles.[257] New York
business for the West was often carried by boat to the mouth of the
Connecticut river, and thence by rail over the Central Vermont to a
connection with the Grand Trunk for Chicago. To be moved at the outset
due north 200 miles from New York on a journey to a point--Montgomery,
Alabama--south of southwest seems wasteful; yet the New York Central
is in the field for that business.[258] The map herewith, prepared in
connection with the Alabama Midland case, shows the number of lines
participating in freight carriage between New York and the little town
of Troy, Alabama. It is nearly as uneconomical as in the old days when
freight was carried from Cincinnati to Atlanta _via_ the Chesapeake and
Ohio, thence down by rail to Augusta and back to destination.[259] It
was common for freight from Pittsburg to go by boat down to Cincinnati,
only to return by rail _via_ Pittsburg to New York at a lower rate than
on a direct shipment.[260] Even right in the heart of eastern trunk
line territory, such things occur in recent times. The Cincinnati,
Hamilton and Dayton prior to its consolidation with the Pere Marquette
divided its eastbound tonnage from the rich territory about Cincinnati
among the trunk lines naturally tributary. But no sooner was it
consolidated with the Michigan road than its eastbound freight was
diverted to the north--first hauled to Toledo, Detroit and even up to
Port Huron, thence moving east and around Lake Erie to Buffalo.[261] In
the Chicago field similar practices occur. Formerly the Northwestern
road was charged with making shipments from Chicago to Sioux City via
St. Paul. This required a carriage of 670 miles between points only
536 miles apart; and the complaint arose that the roundabout rate was
cheaper than the rate by the direct routes. I am privately informed
that the Wisconsin Central at present makes rates between these same
points in conjunction with the Great Northern, the excess distance
over the direct route being 283 miles. Complaints before the Elkins
Committee[262] are not widely different in character. Thus it appears
that traffic is hauled from Chicago to Des Moines by way of Fort Dodge
at lower rates than it is carried direct by the Rock Island road,
despite the fact that Fort Dodge is eighty miles north and a little
west of Des Moines. The Illinois Central, having no line to Des Moines,
pro-rates with the Minneapolis and St. Louis, the two forming two sides
of a triangular haul. An interesting suggestion of the volume of this
indirect routing is afforded by the statistics of merchandise shipped
between American points which passes through Canada in bond.[263] The
evidence of economic waste is conclusive.
[Illustration]
A common form of wastefulness in transportation arises when freight
from a point intermediate between two termini is hauled to either one
by way of the other. Such cases are scattered throughout our railroad
history. One of the delegates to the Illinois Constitutional Convention
of 1870, cites, as an instance of local discrimination, the fact that
lumber from Chicago to Springfield, Illinois, could be shipped more
cheaply by way of St. Louis than by the direct route.[264] And now a
generation later, it appears that grain from Cannon Falls, forty-nine
miles south of St. Paul on the direct line to Chicago, destined for
Louisville, Kentucky, can be hauled up to St. Paul on local rates and
thence on a through billing to destination, back over the same rails,
considerably cheaper than by sending it as it should properly go.[265]
The Hepburn Committee reveals shipments from Rochester, New York, to
St. Louis, Minneapolis or California, all rail, on a combination of
local rates to New York and thence to destination.[266] Presumably the
freight was hauled three hundred miles due east and then retraced the
same distance; as New York freight for southern California is today
hauled to San Francisco by the Southern Pacific and then perhaps three
hundred miles back over the same rails. Even if the rate must be based
on a combination of low through rates and higher local rates, it seems
a waste of energy to continue the five or six hundred miles extra haul.
Yet the practice is common in the entire western territory. From New
York to Salt Lake City by way of San Francisco is another instance in
point.[267] Of course a short haul to a terminal to enable through
trains to be made up presents an entirely different problem of cost
from the abnormal instances above mentioned.[268]
Carriage by water is so much cheaper and as compared with land
transportation is subject to such different rate-governing principles,
that it deserves separate consideration. Mere distance, as has already
been said, being really only one element in the determination of cost,
a circuitous water route may in reality be more economical than direct
carriage overland. Yet beyond a certain point, regard being paid to
the relative cost per mile of the two modes of transport, water-borne
traffic may entail economic wastes not incomparable to those arising
in land transportation. In international trade, entirely confined
to vessel carriage, a few examples will suffice for illustration.
Machinery for a stamp mill, it was found, could be shipped from
Chicago to San Francisco by way of Shanghai, China, for fifteen cents
per hundredweight less than by way of the economically proper route.
Were the goods ever really sent by so indirect a route?[269] It would
appear so when wheat may profitably be carried from San Francisco to
Watertown, Massachusetts, after having been taken to Liverpool, stored
there, reshipped to Boston, thereafter, even paying the charges of a
local haul of nearly ten miles;[270] or when shipments from Liverpool
to New York may be made _via_ Montreal to Chicago, and thence back to
destination.[271] I am credibly informed that shipments of the American
Tobacco Company from Louisville, Kentucky, to Japan used commonly to go
_via_ Boston. Denver testimony is to the effect that machinery, made
in Colorado, shipped to Sydney, Australia, can be transported _via_
Chicago for one-half the rate for the direct shipment; and that on
similar goods even Kansas City could ship by the carload considerably
cheaper by the same roundabout route. Conversely straw matting from
Yokohama to Denver direct must pay $2.87 per hundred pounds; while if
shipped to the Missouri river, five hundred miles east of Denver, and
then back, the rate is only $2.05.[272]
As a domestic problem, water carriage confined to our own territory has
greater significance in the present inquiry. Purely coastwise traffic
conditions are peculiar and in the United States, as a rule, concern
either the South Atlantic seaports or transcontinental business. As
to the first-named class, the volume and importance of the traffic is
immense. Its character may be indicated by a quotation from a railroad
man.
"Now a great deal has been said, chiefly on the outside, about
the Canadian Pacific Railway seeking by its long, circuitous
and broken route to share in a tonnage as against more direct
and shorter lines all rail, and I propose to show to you
gentlemen that not only have we a precedent on which to claim
differentials, many of them, and that we also have numerous
precedents to show that there are numerous broken, circuitous
water and rail lines operating all over the country that are
longer and more circuitous than ours, and still they do operate
with more or less success.... In saying this I do not wish
to be understood as criticising the right of any road to go
anywhere, even with a broken and circuitous line, to seek for
business, so long as they are satisfied that taking all the
circumstances into account such business will afford them some
small measure of profit. * * *
"The distance by the Chesapeake & Ohio Road, Boston to Newport
News, is 544 miles by water; Newport News to Chicago, 1071
miles, total 1615 miles from Boston to Chicago, against 1020
miles by the shortest all-rail line from Boston, showing the
line _via_ Newport News, 58 per cent. longer. The distance by
the Chesapeake and Ohio from New York to Newport News is 305
miles, to which add 1071 miles, Newport News to Chicago, total
1376 miles, against the shortest all-rail line of 912 miles,
50.87 per cent. longer. Again the distance between Boston and
Duluth by all-rail is 1382 miles, against 2195 miles _via_
Newport News and Chicago, 58.82 per cent. longer by the broken
route.
"The Southern Pacific Co., or System rather, in connection with
the Morgan line steamers, carries business, _via_ New York, New
Orleans and Fort Worth, to Utah points at a differential rate.
The distance from New York to Denver _via_ water to New Orleans
thence rail to Fort Worth is 3155 miles, against 1940 miles by
the direct all-rail line, showing it to be longer _via_ New
Orleans 62.61 per cent."[273]
Allowing a constructive mileage of one-third for the last named
water haul,[274] many of these even up fairly well with the all-rail
carriage; although a route from New York to Kansas City by way of
Savannah, Georgia, would appear to be an extreme case, owing to the
relatively long haul by rail.[275] The increasing importance of
Galveston and the necessity of a back haul to compensate for export
business make it possible for that city to engage in business between
New York and Kansas City, although the roundabout route is two and
one-half times as long as the direct one.[276] As compared with these
examples, it is no wonder that the competition for New York-Nashville
or New England-Chattanooga business by way of Savannah, Mobile, or
Brunswick, Georgia, is so bitter. The roundabout traffic thus reaches
around by the southern ports and nearly up again to the Ohio river.[277]
The second great class of broken rail and water shipments consists
of transcontinental business. Goods from New York to San Francisco
commonly go by way of New Orleans or Galveston,[278] as well as by
Canadian ports and routes.[279] In the opposite direction, goods are
carried about 1000 miles by water to Seattle or Vancouver before
commencing the journey east. But more important, as illustrating this
point, is the traffic from the Central West which reaches the Pacific
coast by way of Atlantic seaports. As far west as the Missouri, the
actual competition of the trunk lines on California business has since
1894[280] brought about the condition of the "blanket" or "postage
stamp" rate. The same competitive conditions which open up Denver or
Kansas City to New York shippers by way of New Orleans or Galveston,
enable the Southern Pacific Railroad or Cape Horn routes to solicit
California shipments in western territory to be hauled back to New
York, and thence by water all or part of the way to destination.
How important this potential competition is--that is to say, what
proportion of the traffic is interchanged by this route--cannot readily
be determined.
Transportation over undue distances--the carriage of coals to
Newcastle in exchange for cotton piece goods hauled to Lancashire--as
a product of keen commercial competition may involve both a waste of
energy and an enhancement of prices in a manner seldom appreciated.
The transportation of goods great distances at low rates, while
economically justifiable in opening up new channels of business,
becomes wasteful the moment such carriage, instead of creating new
business, merely brings about an exchange between widely separated
markets, or an invasion of fields naturally tributary to other centres.
The wider the market, the greater is the chance of the most efficient
production at the lowest cost. The analogy at this point to the
problem of protective tariff legislation is obvious. For a country
to dispose of its surplus products abroad by cutting prices may not
involve economic loss; but for two countries to be simultaneously
engaged in "dumping" their products into each other's markets is quite
a different matter. In transportation such cases arise whenever a
community, producing a surplus of a given commodity, supplies itself,
nevertheless, with that same commodity from a distant market. It may
not be a just grievance that Iowa, a great cattle raising state, should
be forced to procure her dressed meats in Chicago or Omaha;[281] for
in this case some degree of manufacture has ensued in these highly
specialized centres. But the practice is less defensible where the
identical product is redistributed after long carriage to and from a
distant point. Arkansas is a great fruit raising region; yet so cheap
is transportation that dried fruits, perhaps of its own growing, are
distributed by wholesale grocers in Chicago throughout its territory.
The privilege of selling rice in the rice-growing states from Chicago
is, however, denied by the Southern Railway Association.[282] An
illuminating example of similar character occurs in the Southern cotton
manufacture, as described by a Chicago jobber:
"Right in North Carolina there is one mill shipping 60 carloads
of goods to Chicago in a season, and a great many of these same
goods are brought right back to this very section.... I might
add that when many of these heavy cotton goods made in this
southeastern section are shipped both to New York and Chicago
and then sold and reshipped South, they pay 15 cents to 20
cents per hundred less each way to New York and back than _via_
Chicago. This doubles up the handicap against which Chicago
is obliged to contend and renders the unfairness still more
burdensome."[283]
The overweening desire of the large centres to enter every market is
well exemplified by recent testimony of the Chicago jobbers.[284]
"A few years later, when the railroads established the relative
rates of freight between New York and Philadelphia and the
Southeast, and St. Louis, Cincinnati and Chicago and the
Southeast, giving the former the sales of merchandise and the
latter the furnishing of food products, the hardware consumed
in this country was manufactured in England. At that time
we, in Chicago, felt that we were going beyond the confines
of our legitimate territory when we diffidently asked the
merchants in western Indiana to buy their goods in our market.
Today, a very considerable percentage of the hardware used
in the United States is manufactured in the Middle West, and
we are profitably selling general hardware through a corps
of travelling salesmen in New York, Pennsylvania and West
Virginia, and special lines in New England.
"What we claim is that we should not have our territory stopped
at the Ohio river by any act of yours. It is not stopped,
gentlemen, by any other river in America. It is not stopped
by the greatest river, the Mississippi. It is not stopped by
the far greater river, the Missouri. It is not stopped by
the Arkansas; it is not stopped by the Rio Grande. It is
not stopped even by the Columbia; and, even in the grocery
business, it is not stopped by the Hudson. There are Chicago
houses that are selling goods in New York city, groceries that
they manufacture themselves. Mr. Sprague's own house sells
goods in New York city, and Chicago is selling groceries in New
England. As I say, even the Hudson river doesn't stop them."
All this record implies progressiveness, energy, and ambition on
the part of both business men and traffic officers. Nothing is more
remarkable in American commerce than its freedom from restraints.
Elasticity and quick adaptation to the exigencies of business are
peculiarities of American railroad operation. This is due to the
progressiveness of our railway managers in seeking constantly to
develop new territory and build up business. The strongest contrast
between Europe and the United States lies in this fact. European
railroads take business as they find it. Our railroads make it. Far be
it from me to minimize the service rendered in American progress. And
yet there are reasonable limits to all good things. We ought to reckon
the price which must be paid for this freedom of trade.
One further aspect of economic waste may be mentioned, especially as
bearing upon Federal regulation so far as it affects carload ratings
and commercial rivalry between remote middlemen in the large cities
and provincial jobbing interests. The actual cost of handling small
shipments being about one-half that of carriage by carloads, the
cheapest way in which to supply, let us say, the Pacific slope or Texas
territory, is to encourage the local jobber who ships by carload over
the long haul. For, obviously, distribution by less-than-carload lots
from New York, or even Chicago direct, direct to the cross-road store,
is bound to be a wasteful process by comparison.[285] But in addition
there are also, of course, the social factors to be considered, which
are of even greater weight.
The causes of economic waste in transportation are various. Not
less than six may be distinguished. These are: (1) congestion of
the direct route; (2) rate cutting by the weak circuitous line; (3)
pro-rating practices in division of joint through rates; (4) desire for
back-loading of empty cars; (5) strategic considerations concerning
interchange of traffic with connections; and (6) attempts to secure
or hold shippers in contested markets. These merit consideration
separately in some detail.
Congestion of traffic upon the direct line is a rare condition in
our American experience. Few of our railways are over-crowded with
business. Their equipment may be overtaxed, but their rails are seldom
worked to the utmost. Yet the phenomenal development of trunk line
business since 1897 sometimes makes delivery so slow and uncertain that
shippers prefer to patronize railways less advantageously located, even
at the same rates. The congestion on the main stem of the Pennsylvania
railway between Pittsburg and Philadelphia is a case in point.
Special rates or rebates often divert traffic. The weak lines, in that
particular business, are persistently in the field and can secure
tonnage only by means of concessions from what may be called the
standard or normal rate. The differential rate is an outgrowth of this
condition. The present controversy over the right of the initial line
in transcontinental business to route the freight at will involves such
practices. The carriers insist that they can stop the evil only by the
exercise of choice in their connections. An interesting recent example
is found in the Elkins Committee testimony. It appears that lumber
from points in Mississippi destined for Cleveland instead of going by
the proper Ohio river gateways was diverted to East St. Louis. The
operation was concealed by billing it to obscure points,--Jewett, Ill.,
near East St. Louis, and Rochester, Ohio,--and there issuing a new bill
of lading to destination:
SENATOR DOLLIVER. And these people carry it up to this little
station near St. Louis and then transfer it to another station
near Cleveland?
Mr. ROBINSON. Oh, no; to any point on the Central Traffic
Association territory. In other words, it may go to Cleveland.
SENATOR DOLLIVER. Why do they bill it to Rochester?
Mr. ROBINSON. In order to get the benefit of keeping it in
transit fifteen days without any extra cost, first.
SENATOR DOLLIVER. I do not see how that would affect the
question of billing it to Rochester.
Mr. ROBINSON. Because that enables the wholesaler to have
fifteen days extra time in which to sell the lumber.
The CHAIRMAN. Why haul it all around the country and then
reduce the rate on that long haul?
Mr. ROBINSON. In order that roads that are not entitled
naturally to this traffic may by this process get the traffic.
SENATOR DOLLIVER. What roads from Mississippi to East St. Louis?
Mr. ROBINSON. Any of the trunk lines--the Illinois Central,
the Louisville or the Southern Railway lines. The roads
in Mississippi south of the river are not parties to this
arrangement, you understand. In fact, as fast as they find it
out they break it up, or try to. They do not want their traffic
diverted.
SENATOR KEAN. Does it not come down to this, that some road is
trying to cheat another on the use of its cars?
Mr. ROBINSON. Not only that, but it is trying to get traffic
that does not belong to it.[286]
Wherever a large volume of traffic is moving by an unnatural route,
the first explanation which arises therefore is that rebates or
rate-cutting are taking place.[287]
[Illustration]
A third cause of diversion of traffic is akin to the second; and
concerns the practices in pro-rating. Much circuitous transportation
is due to the existence of independent transverse lines of railway
which may participate in the traffic only on condition that it move
by an indirect route. This situation is best described by reference
to the following diagram. Let us suppose traffic to be moving by two
routes passing through points B and C, and converging on A, which
last-named point might be Chicago, St. Louis, New York or any other
railroad centre. Cutting these two converging lines of railway, we
will suppose a tranverse line passing through B and C. Obviously the
proper function of this railway is as a feeder for the through lines,
each being entitled to traffic up to the half-way point, D. But over
and above serving as a mere branch, this road, desirous of extending
its business, has a powerful incentive to extend operations. The longer
the tranverse haul, the greater becomes its pro-rating division of the
through rate with the main line. Traffic from C is of no profit to the
tranverse road so long as it is hauled directly to A. But if hauled
from C to the same destination by way of B, the profit may be enhanced
in two ways. In the first place the pro-rating distance is greater; and
secondly, such traffic from C not being _naturally_ tributary to the
main line B A but merely a surplus freight to be added to that already
in hand, the main line A B is open to temptation to shrink its usual
proportion of the through rate in order to secure the extra business.
This same motive may on proper solicitation induce the other main line
C A to accept traffic from B and its vicinity. The result is a greatly
enhanced profit to the cross line and circuitous carriage of the goods
in both directions around two sides of a triangle. Only recently in a
case in Texas the Interstate Commerce Commission found that two roads
thus converging on a common point were each losing to the other traffic
which rightfully was tributary to its own line. In a recent case,
ninety-nine per cent. of the business from Chatham to New York was
moving over a route 249 miles long, when it might have gone directly
only 144 miles, by pro-rating with another road.[288] Our illustrative
examples are not fanciful in any degree.[289]
This roundabout carriage becomes of course increasingly wasteful in
proportion to the width of angle between the main lines converging on
the common point. And several cases indicate that in extreme instances
the two main lines may converge on a common point from exactly opposite
directions, while the transverse or secondary road or series of roads
forms a wide and roundabout detour. The well known Pittsburg-Youngstown
case, cited in the original Louisville & Nashville decision in 1887,
serves as illustration. The Pennsylvania was competing from Pittsburg
directly eastbound to New York with certain feeders of the New York
Central lines which took out traffic bound for the same destination
but leaving Pittsburg westbound.[290] Other instances of the same
phenomenon occur at Chattanooga, where freight for New York may leave
either northward or southward, at Kansas City and in fact at almost any
important inland centre.
Another extreme form may arise even in the competition between two
parallel trunk lines cut transversely by two independent cross roads.
One of these latter may induce traffic to desert the direct route, to
cut across to the other trunk line, to move over that some distance
and then to be hauled back again to a point on the first main line
where it may find a "cut" rate to destination. Grain sometimes used
literally to meander to the seaboard in the days of active competition
between the trunk lines. Wheat from Iowa and northern Illinois finally
reached Portland, Maine, by way of Cincinnati in this manner, with a
superfluous carriage of from 250 to 350 miles:
"Starting within 90 miles of Chicago, though billed due
northeast to Portland, wheat has travelled first 97 miles due
southwest to avail of the connection of the Baltimore and Ohio
Railroad for Cincinnati, and thence north to Detroit Junction,
a total of 716 miles to reach the latter point and save 5 cents
in freight. The direct haul through Chicago would have been 340
miles less, or a total of 376 miles only."[291]
Another witness describes the route as follows:
Property billed for Portland, Me., started 90 miles below
Chicago, although Chicago is on a direct line, and took a
southeasterly course, then to Springfield, from Springfield
to Flora, then to Cincinnati, and then over the Hamilton and
Dayton system to Detroit, there to take the Grand Trunk road
to Portland. This was owing to the billing system adhered to
here with great tenacity. Property ran around three sides of a
square, and I lost money on some of that property.[292]
This ruinous diversion of freight seems to have been dependent upon the
existence of active competition at Detroit and ceased when the Grand
Trunk came to an agreement with the American lines. But there can be no
doubt that wherever these cross lines exist there is a strong tendency
toward diversion. In the recent hearings of the Senate Committee on
Interstate Commerce on railway rate regulation, a railroad witness
again describes the operation:
Mr. VINING. Well, for instance, take the time when I was on
the Grand Rapids and Indiana Railroad. Its connection at the
south was at Fort Wayne, with the Pittsburg, Fort Wayne and
Chicago Road. We took lumber out of Michigan and wanted to
send it east. We had to compete with lines that went by way
of Detroit, that went perhaps through Canada and that in some
cases were shorter. Of course, if we wanted to send lumber
from Grand Rapids to New York we had to make at least as low
a rate as was made by other lines leading from Grand Rapids
to New York. That rate might be just the same from Fort Wayne
as from Grand Rapids, so that we could not get any more than
the low rate from Fort Wayne. We had to go in that case to the
Pittsburg, Fort Wayne and Chicago Railway and say: "Here are so
many carloads of lumber, or so much lumber, at Grand Rapids, a
part of which could be shipped to New York if we had through
rates that would enable us to move it. These other lines are
carrying it for 25 cents a hundred pounds to New York. You join
us in a through rate of 25 cents and we can give you some of
that business." ... But if I were with a short line and wanted
to negotiate with a long one, I should try to put my case just
as strongly as possible before the long line. I should say to
them: "We can not take 5 per cent. of a rate of 25 cents. It
would not pay us. You know that; you can see that"; and they,
as business men, would admit it. "Well," I would say, "give us
5 cents a hundred pounds and we will bring the business to you,
and if you do not, we can not afford to do it."
SENATOR CULLOM. I think in some instances they have stated
before us that they gave 25 per cent.
Mr. VINING. They might.[293]
Whenever the cross road was financially embarrassed, the tendency to
diversion was increased. For then, of course, having repudiated fixed
charges, the cross line could accept almost any rate as better than the
loss of the traffic. And that this was in the past almost a chronic
condition in western trunk line territory appears from the fact that
eighteen out of the twenty-two roads cutting the Illinois Central
between Chicago and Cairo have been in the hands of receivers since
1874.[294]
It not infrequently happens that the initial railroad may entirely
control a roundabout route, whereas shipments by the most direct line
necessitate a division of the joint rate with other companies. In such
a case the initial line will naturally favor the indirect route, at the
risk of economic loss to the community and even to its own shippers. An
interesting illustration is afforded by a complaint of wheat growers
at Ritzville in the state of Washington concerning rates to Portland,
Oregon.[295] By direct line with low grades along the Columbia river
the distance was 311 miles. This was composed of several independent
but connecting links. The Northern Pacific on the other hand had a
line of its own, 480 miles long, which moreover crossed two mountain
ranges with heavy grades. It based its charges upon the cost of service
by this roundabout and expensive line; and insisted upon its right to
the traffic despite the wishes of the shippers. The Commission upheld
the shippers' contention for the right to have their products carried
to market in the most efficient manner.[296] Another instance on the
Illinois Central is suggestive, concerning shipments from Panola,
Illinois, to Peoria, a distance of about forty miles by the shortest
line of connecting roads. Yet the Illinois Central having a line of
its own _via_ Clinton and Lincoln transported goods round three sides
of a rectangle, a distance of 109 miles, presumably in order to avoid
a pro-rating division of the through rate.[297] Of course elements of
operating cost enter sometimes, as in the case of back-loading;[298]
but in the main, the pro-rating consideration rules.
Rebates may or may not be given in connection with circuitous routing.
Sometimes the same result may be obtained when one carrier merely
shrinks its proportion of a joint through rate, leaving the total
charge to the shipper unaffected. Of course it goes without saying that
an implication of improper manipulation of rates does not always follow
the diversion of freight from a direct line. The rate may be the same
by several competitive routes, shipments going as a reward for energy,
persistency, or personality of the agent. A recent case, concerning
rates on lumber from Sheridan, Indiana, to New York illustrates this
point.[299] Sheridan is twenty-eight miles north of Indianapolis on
the Monon road. Quoting from the decision:
"In the division of joint through rates on percentages based on
mileage, the defendant line naturally prefers arrangements with
connections giving it the longest haul and largest percentages.
Therefore, it carries this freight at rates based on a carriage
through Indianapolis by a direct line eastward, while in fact
it carries it in an opposite direction north and west by a
longer route, the reduced ton mileage being accepted to secure
the traffic."
The Iowa Central, cutting across the four main lines between Chicago
and Omaha, derives a large revenue from such diversion. Coal from
Peoria west, instead of moving by the shortest line to Omaha, is hauled
across the first three to a connection with the devious Great Western
line.[300] The motive is obvious.
A fourth cause of diversion of traffic has to do rather with the
operating than the traffic department. An inequality of tonnage in
opposite directions may make it expedient to solicit business for
the sake of a back load. The Canadian Pacific may engage in San
Francisco-Omaha business by way of Winnipeg, because of the scarcity
of tonnage east bound. The traffic to and from the southeastern states
is quite uneven in volume. The preponderance of bulky freight is north
bound to the New England centres of cotton and other manufacture;
while from the western cities, the greater volume of traffic is south
bound, consisting of agricultural staples and food stuffs. To equalize
this traffic it may often be desirable to secure the most roundabout
business. A disturbing element of this sort in the southern field has
always to be reckoned with. A good illustration elsewhere occurs in the
well known St. Cloud case.[301] The Northern Pacific accepted tonnage
for a most circuitous haul to Duluth, but seems to have done so largely
in order to provide lading for a preponderance of "empties." In this
case it did not lower the normal rate but accepted it for a much longer
haul.
Not unlike the preceding cause, also, is a fifth, the desire to be in
position to interchange traffic on terms of equality with powerful
connections. Mr. Bowes, traffic manager of the Illinois Central,
justifying the participation of this road in Chicago-San Francisco
business by way of New Orleans, well stated it as follows:[302]
"Of course the Southern Pacific Railroad, as you gentlemen
know, originate and control a very large traffic, which they
can deliver at various junctions; at New Orleans, where they
have their long haul to the Missouri river, and we naturally
want some of that business, a long haul traffic to New Orleans,
and in giving it to them we place them under obligations to
reciprocate and give us some traffic. That is one of the things
that occurs to a railroad man as to increasing the volume and
value of his traffic for the benefit of his company."
A sixth and final reason for diversion of traffic from the direct line
may be partly sentimental, but none the less significant. It concerns
the question of competition at abnormal distances. We may cite two
railroad witnesses, who aptly describe the situation. "We can haul
traffic in competition, and we frequently do, as I stated, at less
than cost, or nearly so, in order to hold the traffic and our patrons
in certain territory--Kansas City for instance--but we do not like to
do it."[303] Or again, "The Charleston freight is not legitimately
ours.... We make on these through rates from Chicago to Charleston, for
instance, scarcely anything. But it is an outpost. We must maintain
that or have our territory further invaded."[304] In other words, the
circuitous or over-long distance haul is a natural though regrettable
outcome of railroad competition.
* * * * *
What are the effects of this American practice of unduly disregarding
distance as a factor in transportation? Not less than five deserve
separate consideration in some detail. It inordinately swells the
volume of ton-mileage; it dilutes the ton-mile revenue; it produces
rigidity of industrial conditions; it stimulates centralization both of
population and of industry, and it is a tax upon American production.
One cannot fail to be impressed with the phenomenal growth of
transportation in the United States, especially in recent years.
It appears as if its volume increased more nearly as the square of
population than in direct proportion to it.[305] But do these figures
represent all that they purport to show? Every ton of freight which
moves from Chicago to San Francisco over a line one thousand miles too
long adds 1000 ton miles to swell a fictitious total. Every carload
of cotton goods hauled up to Chicago to be redistributed thence in
the original territory and every ton of groceries or agricultural
machinery exchanged between two regions with adequate facilities for
production of like standard goods contribute to the same end. How large
a proportion of this marvellous growth of ton mileage these economic
wastes contribute can never be determined with certainty. That their
aggregate is considerable cannot be questioned.
These practices must considerably dilute the returns per mile for
service rendered by American carriers--in even greater degree than they
enhance the apparent volume of transportation. Long-distance rates
must always represent a low revenue per ton mile, owing to the fixed
maximum for all distances determined by what the traffic will bear.
Furniture made in North Carolina for California consumption[306] cannot
be sold there in competition above a certain price. The greater the
distance into which the possible margin of profit is divided, the less
per mile must be the revenue left for the carrier. Yet this is not all.
Such would be true of simply over-long distance carriage. But to this
we must add the fact that some of this long-haul tonnage reaches its
remote destination over a roundabout line, which increases the already
over-long carriage by from twenty-five to seventy-five per cent. It is
apparent at once that a still greater dilution of the average returns
must follow as a result. From 1873 down to 1900 the long and almost
uninterrupted decline of rates is an established fact. Has the volume
of this economic waste increased or diminished in proportion to the
total traffic throughout this period? If it is relatively less today,
at a time when ton mile rates are actually rising, it would be of
interest to know how far such economies offset the real increases of
rates which have been made. Rates might conceivably rise a little, or
at all events remain constant, coincidently with a fall in ton mile
revenue produced through savings of this sort.
The third result of undue disregard of distance is a certain
inelasticity of industrial conditions. This may occur in either of two
ways. The rise of new industries may be hindered, or a well-merited
relative decline of old ones under a process of natural selection
may be postponed or averted. The first of these is well set forth as
follows:[307]
"It is always considered desirable to have a long haul, and
the rates on a long haul should be much less, in proportion
to distance, than on a short haul. This is a principle of
rate-making which has grown up as one of the factors in the
evolution of the railroad business in this country, and it has
greatly stimulated the movement of freight for long distances,
has brought the great manufacturing centres in closer touch
with the consumer at a distance and the producer in closer
touch with centres of trade. It has been of undoubted benefit
to both, though it may oftentimes retard the growth of new
industries by a system of rates so preferential as to enable
the manufacturer a long distance from the field of production
of raw material to ship the raw material to his mills,
manufacture it and return the manufactured goods cheaper than
the local manufacturer could afford to make it, and thus, while
building up the centres of manufacture, have retarded the
growth of manufacturing in the centres where the raw material
is produced."
The other aspect of industrial rigidity is manifested through the
perpetuation of an industry in a district, regardless of the physical
disabilities under which it is conducted. Another quotation describes
it well.[308]
SENATOR CARMACK. Is it the policy of the roads, wherever they
find an industry established, to keep it going by advantages in
the way of rates regardless of changes in economic conditions?
Mr. TUTTLE. I think in so far as it is possible for them to do
so. It has not been possible in all cases. We could not keep
iron furnaces running in New England; they are all gone.
One cannot for a moment doubt the advantages of such a policy as a
safeguard against violent dislocating shocks to industry. It may render
the transition to new and better conditions more gradual and easier to
bear. It has been of inestimable value to New England, as exposed to
the competition of newer manufactures in the Central West. But on the
other hand, it is equally true that in the long run the whole country
will fare best when each industry is prosecuted in the most favored
location--all conditions of marketing as well as of mere production
being considered. If Pittsburg is the natural centre for iron and steel
production, it may not be an unmixed advantage to the country at large,
however great its value to New England, to have the carriers perpetuate
the barbed wire manufacture at Worcester.[309] Each particular case
would have to be decided on its merits. My purpose at present is not to
pass judgment on any of them but merely to call attention to the effect
of such practices upon the process of industrial selection.
In the fifth place, every waste in transportation service is in the
long run a tax upon the productivity of the country. More men may be
employed, more wages paid, more capital kept in circulation; but it
still remains true that the coal consumed, the extra wages paid and the
rolling stock used up in the carriage of goods, either unduly far or
by unreasonably roundabout routes, constitute an economic loss to the
community. In many cases, of course, it may be an inevitable offset
for other advantages. In the Savannah Freight Bureau case[310] (map, p.
648, _infra_) Valdosta, Georgia, was 158 miles from Savannah, while it
was 275 and 413 miles by the shortest and longest lines respectively
from Charleston. Valdosta's main resource for fertilizer supplies,
other things being equal, would naturally be Savannah, the nearer
city. Yet in the year in question it appeared that nine-tenths of the
supply was actually drawn from Charleston; and much of it was hauled
413 instead of a possible 158 miles. No wonder the complainants alleged
"that somebody in the end must pay for that species of foolishness."
Whenever the Colorado Fuel and Iron Company succeeds in selling goods
of no better grade or cheaper price in territory naturally tributary
to Pittsburg, a tax is laid upon the public to that degree.[311] When
Chicago and New York jobbers each strive to invade the other's field,
the extra revenue to the carriers may be considerable; but it is the
people who ultimately pay the freight. The analogy to the bargain
counter is obvious. The public are buying something not necessary
for less than cost; while the carriers are selling it for more than
it is worth. Economies would redound to the advantage of all parties
concerned.
* * * * *
What remedy is possible for these economic wastes? Both the carriers
and the public have an interest in their abatement. The more efficient
industrial combinations have taken the matter in hand, either by
strategic location of plants or, as in the case of the United States
Steel Corporation, by the utilization of a Pittsburg base price scheme,
with freight rates added.[312] But probably the large proportion of
tonnage is still shipped by independent and competing producers. To
this traffic the railways must apply their own remedies. Either one of
two plans might be of service. The right to make valid agreements for
a division either of traffic or territory, if conceded to the carriers
by law under proper governmental supervision, would be an effective
safeguard. This would mean the repeal of the present prohibition of
pooling. The amendment of the long and short haul clause in 1910 (p.
601 _infra_) seems likely to do much toward accomplishing the same
result.
Agreements between carriers previous to 1887 were often employed to
obviate unnecessary waste in transportation. The division of territory
between the eastern and western lines into the southern states is a
case in point. Thirty years ago competition for trade throughout the
South was very keen between the great cities in the East and in the
Middle West. Direct lines to the northwest from Atlanta and Nashville
opened up a new avenue of communication with ambitious cities like
Chicago, St. Louis and Cincinnati. The state of Georgia constructed
the Western and Atlantic Railroad in 1851 for the express purpose
of developing this trade. As western manufactures developed, a keen
rivalry between the routes respectively east and west of the Alleghany
mountains into the South was engendered. A profitable trade in food
products by a natural, direct route from the Ohio gateways was,
however, jeopardized by ruinous rates made by the warring trunk lines
to the northern seaboard. Corn, oats, wheat and pork came down the
coast and into the South through the back door, so to speak, by way
of Savannah and other seaports. On the other hand the eastern lines
into the South were injuriously affected by the retaliatory rates on
manufactured goods made by the western lines for shipments from New
York and New England. Freight from each direction was being hauled
round three sides of a rectangle. Finally in 1878 a reasonable remedy
was found in a division of the field and an agreement to stop all
absurdly circuitous long hauls into one another's natural territory. A
line was drawn through the northern states from Buffalo to Pittsburg
and Wheeling; through the South from Chattanooga by Montgomery, Ala.,
to Pensacola. Eastern lines were to accept goods for shipment only
from their side of this line to points of destination in the South
also on the eastern side of the boundary. Western competitors were to
do the same. The result was the recognition of natural rights of each
to its territory. This agreement has now formed the basis of railway
tariffs into the southern states for almost a generation. Similar
agreements, on a less extensive scale, are commonly used to great
advantage. Thus in the "common point" territory formerly tributary to
Wilmington, Savannah and Charleston, the first named city insisted upon
its right to an equal rate with the other two, no matter how great the
disparity of distance. The Southern Railway and Steamship Association
arbitrated the matter, fixing a line beyond which Wilmington was to be
excluded.[313] Obviously such agreements have no force in law at the
present time. The only way to give effect to them is for connecting
carriers to refuse to make a joint through rate. This effectually bars
the traffic. Moreover entire unanimity of action is essential. Every
road must be a party to the compact. Otherwise the traffic will reach
its destination by shrunken rates and a more circuitous carriage even
than before.
One cannot fail to be impressed in Austria and Germany with the
economic advantages of an entirely unified system of operation. No
devious routing is permitted. Certain lines are designated for the
heavy through traffic, and concentration on them is effected to the
exclusion of all others. Between Berlin and Bremen, for example,
practically all through traffic is routed by three direct lines. No
roundabout circuits occur because of the complete absence of railway
competition. No independent lines have to be placated. The sole
problem is to cause the tonnage to be most directly and economically
transported. And this end is constantly considered in all pooling or
through-traffic arrangements with the railway systems independently
operated.
The Prussian pooling agreements with the Bavarian railways are typical.
Each party to the contract originally bound itself not to route freight
over any line exceeding the shortest direct one in distance by more
than twenty per cent. Compare this with some of our American examples
of surplus haulage of fifty or sixty per cent! And within the last
year, the renewal of these interstate governmental railway pools in
Germany has provided for a reduction of excessive haulage to ten per
cent. The problem of economical operation in Austria-Hungary with
its mixed governmental and private railways is more difficult. But
no arrangements are permitted which result in such wastes as we have
instanced under circumstances of unlimited competition in the United
States.
A more consistent enforcement of the long and short haul principle
might provide a remedy almost as effective as pooling. The Alabama
Midland decision nullified a salutary provision of the law of 1887
by holding that railway competition at the more distant point might
create such dissimilarity of circumstances as to justify a higher rate
to intermediate stations. Turn to our diagram on page 282 and observe
the effect. Traffic around two sides of a triangle from A to C by way
of B is carried at a rate equal to the charge for the direct haul from
A to C; or it may be even at a lower differential rate. Complaint
arises from the intermediate points y and x of relatively unreasonable
charges. The roundabout route replies with the usual argument about a
small contribution toward fixed charges from the long haul tonnage,
which lessens the burden upon the intermediate rate. This is cogent
enough up to a certain point. It might justify a lower rate to D, on
the natural division of line territory. It might be defensible on
principle to accord D a lower rate than x or possibly even than y. To
deny the validity of lower rates to z or C would however at once follow
from the same premises.
Under the new long and short haul clause, what may be done by the
Interstate Commerce Commission? This body roughly determining the
location of D, a natural division point, would then refuse to permit
A B, B C to charge less to either z or C than to any intermediate
point, x, B or y. Coincidently it would bar the other road A C, C B
from any lower through rate to points beyond D, such as x, B or y
than to any intermediate station. Two courses would be open to the
roads. They must either mutually withdraw from all business beyond
D or reduce their rates to all intermediate points correspondingly.
In a sparsely settled region with little local business, they might
conceivably choose the latter expedient. But in the vast majority of
cases the roads would prefer to withdraw from the unreasonably distant
fields.[314] Simultaneously taken by each line, such action would put
an end to the economic waste. At the same time it would terminate one
of the most persistent causes of rebates and personal favoritism. To be
sure it would generally operate in favor of the strong, direct lines as
against the weak and roundabout ones. Great benefit would accrue to the
Pennsylvania, the Illinois Central or the Union Pacific railroads. The
activities of the parasitic roads and the scope of parasitic operations
by the substantial roads would inevitably be curtailed. Much justice
would be done and much local irritation and popular discontent would be
allayed.
FOOTNOTES:
[249] P. 133, _supra_.
[250] _Quarterly Journal of Economics_, V, 1891, p. 438.
[251] Senate (Elkins) Committee Report, 1905, III, pp. 2152-2153. The
transverse Buffalo, Rochester and Pittsburg seems to be the feeder for
the New York Central and the Reading.
[252] _Ibid._, IV, p. 2849.
[253] U. P. Merger case: Supreme Court, October term, No. 820,
Appellant's Brief of Facts, pp. 135-193 and also p. 493.
[254] Question of Canadian-Pacific Differentials, Hearings, etc., Oct.
12, 1898, p. 115. Privately printed. _Cf._ also the Sunset Route,
_ibid._, p. 116.
[255] 51st Congress, 1st sess., Sen. Rep., No. 847, p. 176.
[256] _Pubs. Amer. Stat. Ass._, June, 1896, p. 73.
[257] Reports Internal Commerce, 1876, pp. 54-59.
[258] Map in Brief of Ed. Baxter, U. S. Supreme Court in the Alabama
Midland case.
[259] Windom Committee, II, p. 795.
[260] Cullom Committee, p. 530. Hudson also cites similar cases from
the Hepburn Committee. _Cf._ also Report on Internal Commerce, 1876,
App. p. 57.
[261] New York _Evening Post_, Sept. 30, 1905.
[262] Senate (Elkins) Committee, 1905, III, p. 1831.
[263] Only once compiled in detail. U. S. Treasury Dept., Circular No.
37, 1898. The volume of traffic by tons between points in designated
states by way of Canada was as follows:
From Illinois to California 11,800
From Illinois to New Jersey 80,000
From Illinois to Pennsylvania 123,000
From Kentucky to Pennsylvania 1,005
From Kentucky to New York 5,516
From Missouri to Pennsylvania 5,000
From Pennsylvania to Missouri 13,824
From New York to Kentucky 3,357
From New York to Missouri 12,869
From New York to Tennessee 609
From Ohio to Pennsylvania 26,801
From Pennsylvania to Ohio 5,251
From Ohio to New York 211,657
From New York to Ohio 55,243
[264] Debates, II, p. 1646, cited in University of Illinois Studies,
March, 1904, p. 21.
[265] Senate (Elkins) Committee, 1905, I, pp. 32-34. _Cf._ also 10 I.
C. C. Rep., 650. Another good instance on Arizona is in 16 _Idem_, 77.
[266] Page 2031.
[267] Senate (Elkins) Committee, 1905, II, p. 921.
[268] Cullom Committee, II, p. 101.
[269] 10 I.C.C. Rep., 81.
[270] Senate (Elkins) Committee, 1905, II, p. 919.
[271] _Ibid._, p. 1624.
[272] 11 I.C.C. Rep., 508.
[273] Question of Canadian Pacific Freight Differentials, Hearings,
etc., Oct. 12, 1898, p. 17. Privately printed. See also pp. 72 and 116
on the same point.
[274] Record Cincinnati Freight Bureau case, II, p. 306.
[275] Hearings, Question of Canadian Pacific Freight Differentials,
Oct. 12, 1898, p. 55.
[276] U. S. Industrial Commission, IV, p. 134.
[277] 55th Cong., 1st sess., Sen. Doc. No. 39, p. 88.
[278] By water from New York, 1800 miles to New Orleans, with 2489
miles by rail. Or to Galveston 2300 miles with 2666 miles by rail, a
total of 4966 miles. The direct line, all rail, is about 3300 miles.
Allowing constructive mileage of 3 to 1 for water carriage, they are
far from equal.
[279] Texas cotton bound for Yokohama by way of Seattle.
[280] On these matters the Record of the Business Men's League of St.
Louis case before the Interstate Commerce Commission, 9 Int. Com.
Rep., 318; and the Hearings on Canadian Pacific Differentials are
illuminating.
[281] Senate (Elkins) Committee, 1905, III, p. 1830.
[282] Record before the I.C.C.; Cincinnati Freight Bureau case, I, p.
166.
[283] Senate (Elkins) Committee, 1905, III, pp. 2540-2541.
[284] Senate (Elkins) Committee, 1905, III, pp. 2538 and 2550.
[285] Briefly discussed in the St. Louis Business Men's League case: 9
Int. Com. Rep., 318.
[286] Testimony, III, p. 2495 _et seq._
[287] The Report of the U. S. Commissioner of Corporations on the
Transportation of Petroleum, 1906, affords admirable examples. _Vide_,
pp. 5, 7, 14 and the map at p. 256.
[288] 23 I.C.C. Rep., 263.
[289] Similar triangular cross-road competition is in evidence in the
Wichita, Kan., cases on export grain, p. 232, _supra_.
[290] 1 I.C.C. Rep., 32; and Industrial Commission, XIX, p. 442.
[291] Statements taken before the Committee on Interstate Commerce of
the U. S. Senate with respect to the Transportation Interests of the
U. S. and Canada. Washington, 1890, p. 616. _Cf._ chap. X, p. 363,
_infra_; also the Wichita cases, in chap. VII, p. 232, _supra_.
[292] _Ibid._, p. 631.
[293] Senate (Elkins) Committee, 1905, II, p. 1706.
[294] Quoted from Acworth, 55th Cong., 1st sess., Sen. doc. 39, p. 33.
[295] _Newlands v. Nor. Pac. R. R. Co._; 6 Int. Com. Rep., 131.
[296] _Cf._ the case of the C. H. & D. R. R. on p. 271, _supra_.
[297] Record, Illinois Railroad Commission, concerning Reasonable
Maximum Rates, 1905, p. 165.
[298] _Cf._ p. 287, _infra_.
[299] 10 I.C.C. Rep., 29.
[300] _Boston Transcript_, Oct. 14, 1905.
[301] 8 Int. Com. Rep., 346; reprinted in our Railway Problems, chap.
XI.
[302] Senate (Elkins) Committee, 1905, IV, p. 2850.
[303] President Ramsey of the Wabash; Senate (Elkins) Committee, 1905,
III, p. 1971.
[304] Windom Committee, II, p. 796.
[305] P. 78, _supra_.
[306] Senate (Elkins) Committee, 1905, III, p. 2008.
[307] Senate (Elkins) Committee, 1905, IV, p. 3115.