report was the proposed abolition of the "dollar mark" upon capital
stock. However desirable it might be for mining companies and the
lesser industrials, as in Germany, to do away with any stated par
value for share capital in order to disabuse the public mind of its
purely artificial character, the proposition is quite different when
applied to an industry like a railroad. There is all the difference
in fact between purely private and competitive conditions of a
more or less speculative character, and those under which monopoly
privileges are conferred by gift of the public. Space does not permit
a criticism of this proposition in detail. I have elsewhere discussed
it more at length.[708] Many objections occur at once, none of them
mentioned in this report which, almost jauntily, as it seems, proposed
to revolutionize all of our customary habits of financial thought.
Among these objections there is the fact that abolition of par value
removes the restraint upon the promoter or management, for liability
to creditors in case of part-paid shares. The experience of the
Asphalt Company of America is illuminating in this regard. May we
trust mere publicity to provide corresponding safeguards for honest
promotion with this liability removed? Then again, how about the issue
of stock in exchange for property acquired, as had frequently occurred
in the course of railway consolidation? Was it immaterial whether
the absorbing company put out 500,000 "participating shares," with a
market value of $100 each, or twice that number of "certificates of
participation" commanding half that figure per unit in exchange for the
property acquired? And still further, there is the inevitable effect
upon speculation. One of the primary needs of the time was to effect a
separation of our common carriers from Wall Street influence. Did it
make no difference whether the Southern Railway "participating shares"
were traded in around $25; or those of the Louisville & Nashville
commanded a price of $150? Low quotations always offer a great stimulus
to speculative manipulation--as any student of Rock Island affairs
must concede. To do away with par, which means permission to emit,
without reproach, at any figure "below par"--how hard it is, indeed,
to get rid of that conception of some standard of normality--could not
but exert a malign influence. And then, finally, over and above all
other considerations there was the need of some general standard of
comparison for all sorts of purposes--some base from which to judge of
normality. The proposal to wipe out all such standards, with the mere
warning to public and investors alike to beware, seemed like a step
backward.
This brings us to the insistence of the commission upon the need of
the railroads for more capital for development; and the difficulty of
financing new enterprises under regulative provisions of law, such as
the prohibition of the issue of shares at a discount. Massachusetts had
recently passed through an experience of probably excessive regulation.
But simple modifications of its anti-stock-watering laws seemed to
have solved the difficulty. Of course the developmental problems of
the West and South are quite different from those of New England. Yet
there was the experience of Texas to fall back upon. Complaint had been
made, of course, especially by the Gould roads, of the insufficiency of
capital for new work. But the growth of mileage seemed, nevertheless,
to compare not unfavorably with progress in other states. Were the
Gould roads, for example, any better off in other states where greater
liberality of laws prevails? The fact was that much new construction
and improvement remained to be done all over the country, as this
report duly emphasized; but much of it would probably have to be
done by companies already in the field. Not many new steam railroad
companies are now needed even in the West. It must be confessed that
the recently authorized extension of the Grand Trunk Railway into the
heart of New England shows how persistent is the demand for new roads
even in the East. But whoever may build, let them learn the lesson, so
often forgotten, that honest management and conservative financing,
to the end that solid credit be first established, has far more to
do with facilitating development than non-interference by law. This
was probably a time when encouragement to the railroads in a period
of stress should properly be given. But let it not be forgotten that
good faith to the public and to stockholders, together with prudent
financing, must be the primary source of credit.
Many admirable features of this report deserve mention, did space
permit. The clear exposition of the distinction between stocks and
bonds, and especially the discussion of inter-corporate financing,
occupied a prominent place. The document promised to play a large part
in the determination of governmental policy in future. It well merited
the most careful perusal by legislators, financiers and economists. In
the nature of things so conservative a document could never hope for a
popular reception. But many of its financial platitudes were probably
in need of reiteration for the good, both of the carriers and the
public.
The Hepburn Act of 1906, despite the agitation over its enactment in
Congress, "came in like a lion and went out like a lamb," imitating
thereby the month of March in which its crucial changes were effected.
In the end it proved to be a much less drastic measure than the
railroads feared. This Mann-Elkins law, four years later, on the other
hand, introduced by the presidential bill as a merely supplementary
piece of legislation,[709] "rounding out the Roosevelt policies,"
emerged from Congress really radical in character. Every change
made was "progressive"; and yet there was little public interest
manifested on either side. No publicity campaign was carried on by
the carriers. No extended discussion took place in the press. There
were several reasons for this contrast. It is partly true, as one
writer has suggested, that "the marrow had already been extracted
from railroad regulation as a political issue; and that it had become
merely a bone of contention in a factional strife." Moreover, the
fundamental principle of effective governmental regulation had been
indisputably affirmed in 1906. The Act of 1910 had for its purpose a
firmer intrenchment of the position already occupied. Debate centred
largely upon uninteresting technical questions. The broader issues
were relegated to second place. Even the carriers on their part were
extremely reserved in stating their position. It was conceded on all
sides that the less public opinion in general was aroused, the lighter
would be the sentence passed upon the prisoners at bar. It is difficult
to determine in how far the marked advance made in this statute was
due to contemporary happenings, like the general advances of freight
rates, the Illinois Central scandals and the like; or to a deep-seated
conviction on the part of the progressive element in Congress. But that
the law, as a whole, was a surprise in the end even to its proponents
is beyond doubt.
A word may be added concerning the omissions in the Mann-Elkins law.
The most important was the elimination of the administration plan
for authorizing agreements between carriers as to rates, subject to
supervision by the Commission. The Republican platform had definitely
promised relief of this sort to the railroads. The Democratic party
had somewhat equivocally promised an amendment of the law prohibiting
pooling "to make it unlawful, unless approved by the Commission." The
plan, however, met with persistent opposition on all sides, largely
on the ground that it conflicted with the Sherman Anti-Trust law.
Other details which fell by the way concerned proposals to extend
jurisdiction over water carriers on inland waterways.[710] Whether
the Commission might exercise any control over those which formed
parties to a through line still remained an open question.[711] And
then at the last there was the omission of Congress to deal with the
question of fixing minimum rates or differentials between rates. This
was responsible, as will shortly appear, for much of the difficulty
encountered in the application of the long and short haul clause to the
transcontinental rate problem.
FOOTNOTES:
[688] Characterized somewhat heatedly by Senator La Follette in his
Autobiography (_American Magazine_, 1912, p. 189), as "in all the
history of railroad legislation, the rankest, boldest betrayal of
public interest ever proposed in any legislative body."
[689] The best references are the following:--F. H. Dixon, _Quarterly
Journal of Economics_, vol. XXIII, 1910, pp. 593-633; reprinted in the
_Railway Age Gazette_, vol. XLIX, p. 688 _et seq._; _American Political
Science Review_, vol. IV, 1910, pp. 537-554. Our other sources are the
files of the Annual Reports of I. C. C.; the Congressional Record,
_Railway Age Gazette_, and daily press reports.
[690] P. 452, _supra_.
[691] Concrete instance in 17 I. C. C. Rep., p. 317. Also p. 510,
_supra_, and 587, _infra_.
[692] The suspension of increased rates on Maine potatoes in October,
1912, long enough to permit the entire season's crop to be marketed on
the old tariffs is a case in point.
[693] P. 474, _supra_.
[694] Volume IV, p. 3293.
[695] The following is the form in which the Fourth Section now stands:
"SECTION 4. That it shall be unlawful for any common carrier
subject to the provisions of this act to charge or receive any
greater compensation in the aggregate for the transportation
of passengers, or of like kind of property, for a shorter
than for a longer distance over the same line or route in the
same direction, the shorter being included within the longer
distance, or to charge any greater compensation as a through
route than the aggregate of the intermediate rates subject to
the provisions of this act; but this shall not be construed as
authorizing any common carrier within the terms of this act
to charge or receive as great compensation for a shorter as
for a longer distance: Provided, however That upon application
to the Interstate Commerce Commission such common carrier
may in special cases, after investigation, be authorized by
the Commission to charge less for longer than for shorter
distances for the transportation of passengers or property; and
the Commission may from time to time prescribe the extent to
which such designated common carrier may be relieved from the
operation of this section: Provided, further, That no rates
or charges lawfully existing at the time of the passage of
this amendatory act shall be required to be changed by reason
of the provisions of this section prior to the expiration of
six months after the passage of this act, nor in any case
where application shall have been filed before the Commission,
in accordance with the provisions of this section, until a
determination of such application by the Commission.
Whenever a carrier by the railroad shall in competition with a
water route or routes reduce the rates on the carriage of any
species of freight to or from competitive points, it shall not
be permitted to increase such rates unless after hearing by
the Interstate Commerce Commission it shall be found that such
proposed increase rests upon changed conditions other than the
elimination of water competition."
[696] P. 476, _supra_.
[697] _Cf._ the example on p. 590, _infra_.
[698] The following account, by W. M. Acworth in the _Railway Age
Gazette_, of a conversation with the late Collis P. Huntington
illustrates the possible abuse:
"The Southern Pacific built two fine steamers to run between
San Francisco and Sacramento, Cal. They gave a daily service,
each boat running up one day, and down the next, and the
passenger fare was $2. A private individual thought he saw his
way to compete with advantage, and bought a smaller boat, which
only gave a service every other day, but, on the other hand,
only charged $1 for this service.
"The Southern Pacific began to lose money, and when Mr.
Huntington next came to California the position was put before
him. 'Would you like to leave me to run this fight?' said he
to the local manager. 'Certainly, sir,' was the reply. 'Is
there an old boat you can buy that could give a service?' Being
told that there was, Mr. Huntington bought it, ordered the two
first-class boats to be laid up, and announced that the new
purchase would run alongside the rival boat at a fare of 50
cents. 'Why, sir,' said the local manager. '50 cents won't pay
for the coal.' 'No, I do not suppose it will,' was the answer,
'but when you go to war you have got to fight!"
"Before long the owner of the rival boat came to Mr. Huntington
and asked him what he was prepared to do about it. Mr.
Huntington replied that he would buy his boat for $10,000--I
think the sum was. 'But, Mr. Huntington, the boat cost me
$20,000, and she is worth it.' 'Very likely, but I am only
going to give you $10,000.' So the fight went on for a while
longer. When the spring came Mr. Huntington was on the point of
returning to New York. He sent word to his rival that he was
leaving California the following week, and that if the matter
was not settled before he left, his 50-cent boat would continue
to run till his return the following winter. Whereupon his
competitor at once threw up the sponge and then sold his boat
for $10,000. 'Since then,' concluded Mr. Huntington, 'there has
been no competition with the Southern Pacific on the Sacramento
river.'"
[699] Page 538, _supra_.
[700] Opinion No. 44, 1911, is the first Commerce Court case to
interpret this jurisdiction. _Cf._, also, p. 587, _supra_.
[701] 191 Fed. Rep., 37, first interprets this clause. P. 587, _infra_.
[702] _Quarterly Journal of Economics_, XXVI, 1912, p. 444.
[703] _Cf._ p. 537, _supra_.
[704] Report of the Railroad Securities Commission, Nov. 1, 1911.
[705] Page 515, _supra_.
[706] These will be fully described in our second volume in connection
with stock-watering, valuation and allied financial problems.
[707] Volume II, in the chapter on Valuation.
[708] Volume II, in the chapter on Capital Stock.
[709] _Cf._ Senator La Follette's characterization of it. Footnote, p.
559, _supra_.
[710] The National Waterways Commission Report of 1912 urged this
strongly. And the attempts in connection with fixing the tolls for the
Panama Canal in the same year, to prohibit all railway ownership or
interest in coastwise steamships, were significant of legislation yet
to come. _Cf._ pp. 591 and 638, _infra_.
[711] _Cf._ the Goodrich Transit Co. case. Page 586, _infra_.
CHAPTER XVIII
THE COMMERCE COURT: THE FREIGHT RATE ADVANCES OF 1910
The Commerce Court docket, 581.--The Commerce Court in
Congress, 582.--Supreme Court opinions concerning
it, 583.--Legal _v._ economic decisions, 586.--Law
points decided, 586.--The Maximum (Cincinnati) Freight
Rate case revived, 588.--Real conflict over economic
issues, 590.--The Louisville & Nashville case, 590.--The
California Lemon case, 592.--Broad _v._ narrow court review
once more, 593.
The freight rate advances of 1910, 594.--Their
causes examined, 595.--Weakness of the railroad
presentation, 596.--Operating expenses and wages
higher, 597.--The argument in rebuttal, 598.--"Scientific
management," 598.--The Commission decides adversely, 599.
The three vital features of the Mann-Elkins law of 1910 were: the
creation of the Commerce Court, for the purpose of expediting the
judicial review of cases appealed from the Interstate Commerce
Commission; the grant of power to suspend rate advances pending
examination as to their reasonableness; and the rehabilitation of the
long and short haul clause. The law was passed on June 18, 1910. Within
the brief period of two years it successfully emerged from a supreme
test respecting rate advances; enough experience had already been had
with the new Commerce Court to warrant an opinion as to its merits
as a special tribunal for the review of transportation decisions;
and, finally, an opinion by the Interstate Commerce Commission was
rendered, and is at this writing under review by the Supreme Court of
the United States, in the most important case ever likely to arise
under the long and short haul clause. Predictions were freely made in
1910 that certain shortcomings in the revised law, particularly the
failure to grant control over minimum rates and the establishment of
differentials between rates, would soon have to be remedied. Experience
promptly threw light upon these questions also. The present is thus
an opportune time to review the entire situation respecting Federal
railroad regulation.
* * * * *
When the Commerce Court was created, fears were entertained that there
would not be enough business to employ its time. This prediction was
far from being realized, judging by the record of the first year.[712]
Including thirty-six cases transferred to it from the various Federal
circuit courts, a total of fifty-seven suits were placed upon its
docket up to December 20, 1911. Fifty-four of these cases directly
concerned orders of the Interstate Commerce Commission, the large
majority--forty-four--being suits brought by carriers to set aside such
orders. The Commission appealed to the court but once for enforcement
of its mandates, the remaining nine cases being appeals of shippers
for relief. But a number of these suits were withdrawn or dismissed,
or else lay outside the class of what may fairly be called contested
cases. Only thirty-eight of them were in reality of significance as
throwing light upon the function of the court as an appellate tribunal,
standing between the Interstate Commerce Commission and the Supreme
Court of the United States. Thirty of these were disposed of up to
December 20, 1911. That the court took itself seriously as a check
upon, rather than a coördinate body with the Commission, was evidenced
by the fact that restraining orders or final decrees in favor of the
railroads and against the shippers and the Commission were issued in
all but three really important cases out of the entire thirty. And even
of these three cases the Commerce Court held two to be outside its
jurisdiction, while in the third the carriers had already joined in the
view of the Commission, so that there was really no contest.[713]
A bitter campaign for the abolition of the Commerce Court, as a
result of the tendency of its decisions, was waged in Congress during
the session of 1911-1912. The House of Representatives, in response
to popular feeling, promptly passed a bill abolishing it forthwith,
the vote standing 120 to 49, with many Republicans joining the
Democrats in its condemnation. A sharp contest was precipitated in
the Senate over "the legislative recall of judges," as the matter was
not inaptly termed. The Administration, through the Attorney-General,
ably defended the imperilled court.[714] Evidence was adduced to show
that the Commission had been sustained in a larger proportion of cases
than under the old circuit court system;[715] that injunctions had
not issued with greater freedom than formerly and that none of them
turned upon questions of fact; and, finally, that the Administration
plan had been very much more expeditious. But so far as Congress was
concerned this evidence seems not to have been convincing. The Senate
soon followed the House of Representatives, by a vote of thirty-six to
twenty-three defeating an amendment to the Legislative, Executive and
Judicial Appropriation Bill that made provision for further maintenance
of the court. So strong was the feeling that only by a close vote
was an amendment prevented which sought to legislate the justices
out of office as well as out of the Commerce Court. For without such
provision, of course, they would, under the law of 1910, be reassigned
to service in the circuit courts, from which most of them were drawn.
The final conference agreement between the two houses, appended to the
appropriation bill above mentioned, definitely abolished the court,
but followed the House plan of reassignment of the justices to duty in
the circuit courts. This bill was twice vetoed by the President; but
the second time, it failed of re-passage in the Senate over his veto
by a narrow margin. In the House the popular view was expressed by
re-passing the abolition measure by a vote of 149 to 53. These details
are highly significant as indicating the impatience of Congress with
any attempt at interference with the positive program of administrative
control of railroads decreed in 1906-1910. The fate of the court then
rested in the hands of the President, its original sponsor. A delicate
situation, concerning the relations between Congress and the executive
in the matter of legislative "riders" to appropriation bills, resulted.
Whether such summary proceedings as those initiated by Congress were
warranted by the facts, depended upon the final disposition of the
contested cases by the Supreme Court, before which tribunal most of
them were then pending on appeal. If it appeared that the court had in
reality, as alleged, sought to usurp powers legitimately exercised by
the Commission, the case for abolition would be greatly strengthened.
But in any event, the certainty of a presidential veto of any law
affecting this pet project of the Administration rendered the attack
upon the Commerce Court for the time being abortive. As the matter was
finally left, Congress acceded to the President's wishes, continuing
the appropriation for maintenance of the court until March 4, 1913.
What will happen in the meantime after Congress reassembles, remains to
be seen.
The determination of the proper scope and function of judicial review
was substantially forwarded by several decisions of the Supreme Court
of the United States in June, 1912. The general effect of these was
substantially to curtail the overweening ambition of the Commerce
Court as an intermediate judicial body. Following the Goodrich Transit
Company opinion[716] which first reversed the Commerce Court, all
three of these latest opinions on appeal again favored the Interstate
Commerce Commission as against its judicial reviewer. In two instances,
the assumed jurisdiction of the new court was denied; while in the
third, although jurisdiction was recognized, its decision was reversed.
Because of their bearing upon subsequent developments, a brief review
of these cases may not be out of place.
The Proctor and Gamble Company, well-known soap manufacturers, had
complained of certain regulations concerning demurrage upon their tank
cars. The Commission upheld the carriers, affirming that their rules
were proper and lawful. The complainants thereupon appealed to the
Commerce Court, which claimed jurisdiction to award pecuniary relief,
although in this instance it declined so to do, on the ground that the
Commission had rightfully decided the matter in the first instance.
Appeal then followed to the Supreme Court, with the odd circumstance
that the Commission and the railways joined issue against the
shippers. The question was largely a legal one, involving definition
of the jurisdiction of the new tribunal. The Supreme Court in this
instance,[717]--and, it may be added, in the Cincinnati Freight Bureau
case,[718] which similarly involved the relative powers of the court
and the Commission,--unanimously affirmed the right of the Commission
to decide such matters of fact finally.
To recognize the existence in the court below [the Commerce
Court] of the power which it deemed it possessed, would result
in frustrating the legislative public policy which led to
the adoption of the act. The act creating the Commerce Court
was intended to be but a part of the existing system for the
regulation of interstate commerce.... It was not intended to
destroy the existing machinery or method of regulation, but to
cause it to be more efficient.... Wholly irrespective of the
general considerations stated, we think the conclusion of the
[Commerce] Court, as to its possession of jurisdiction over the
subject referred to, was clearly repugnant in other respects to
the express terms of the act.
Such a pronouncement, following the line of decisions headed by
the Illinois Central Car Distribution case,[719] must make for
concentration of responsibility and more effective regulation in the
years to come.
The third decision of the Supreme Court, above referred to, was known
as the "Restrictive Rate case."[720] Might railway companies--the
Baltimore & Ohio and others--charge a different rate for the carriage
of coal to railways than to other shippers, the coal being intended
for the use of the railways as fuel? In this instance the Commission
forbade the practice. Its order was then promptly enjoined by the
Commerce Court. Jurisdiction of the Commerce Court was conceded by the
Supreme Court in this instance also, but its opinion was again flatly
reversed. The issue at bottom was really one of value of service as
against cost of service in the determination of reasonable rates.
Obviously the cost of carrying railway-fuel coal between two given
points is practically the same as that of carrying commercial coal.
The Commission, supported now by the Supreme Court in frowning upon
any difference in the charge, was thus according priority to this
consideration of cost. The view of the Commerce Court, which was here
reversed, tended, on the other hand, to emphasize such facts as that
the two sorts of coal were intended for different purposes and did
not come in competition with one another as to price. In other words,
value of service--what the traffic would bear--was given greater weight
than mere considerations of cost. The Supreme Court declined to accept
this view, preferring to regard transportation as a matter of physical
carriage of goods, rather than to look beyond this essential service
"to the greater or less inducement to seek the service"--that is to
say, to regard its commercial aspects.
The last of this batch of Supreme Court decisions was mainly a
question at law, namely the right of the Commerce Court to enjoin
the enforcement of an order of the Commission concerning certain
allowances for lighterage and terminal service on sugar in New
York harbor.[721] The judicial poise of the Supreme Court was here
evidenced in its affirmation of the right of the Commerce Court to
issue the injunction. The plain purpose of the law in setting up this
intermediate tribunal as a safeguard against abuse of administrative
authority was given effect; but it was ordered, nevertheless, that the
case be remanded, to be disposed of on its merits before the Interstate
Commerce Commission, the forum selected by Congress for that purpose.
The grist of cases appealed to the Commerce Court may profitably be
divided for discussion into two groups, namely, those which clearly
concerned questions of law and those in which matters of fact, or
economic conclusions based thereon, were primarily at stake. The first
group of purely law cases need detain us but briefly. There could be
little doubt about the necessity of judicial review of law findings
of the Commission. The best illustration is afforded by the first
decision of the Commerce Court to be reviewed by the Supreme Court of
the United States.[722] Inland water carriers were not placed under
the jurisdiction of the Act to Regulate Commerce by the Mann-Elkins
amendments of 1910, except in so far as they were joined in control
with railroads or might enter into arrangements for continuous
shipments with carriers by land. But the Commission, having always
required railroads to file accounts covering both their local and
interstate business, called upon the carriers on the Great Lakes to
render similar statements as to their entire traffic, whether subject
to Federal control or not. This the water lines refused to do. The
Commerce Court, in overruling the Commission, did not question the
power of Congress to require such accounts, but held that it was its
intention to confine publicity to that portion of the lake traffic
over which the jurisdiction of the Commission actually extended. It
thus appears that the law point was doubly important; inasmuch as
its determination affected not alone the enforcement of publicity
for water lines but also of all carriers by land, so far as their
intrastate business was concerned. Fortunately the Supreme Court, in
sustaining the Commission, held that the Commerce Court had erred in
confusing "knowledge" of intrastate business with its "regulation."
As to the former, the authority of the Commission was fully upheld.
This and the important question upon which the entire Intermountain
rate controversy rested, namely, as to the authority of the Commission
to prescribe relativity of rates,[723] were the most important points
of law at first raised before the new tribunal. Other legal questions
decided by the Commerce Court--generally in favor of the railroads,
be it observed--were: whether reparation might be claimed for an
unreasonable rate when the burden had been already passed on to the
consumer;[724] whether the Nashville Grain Exchange might lawfully
intervene in proceedings before the Commission under the liberal terms
of the law of 1910;[725] whether "separately established rates" applied
by a carrier to through traffic when there is a through rate but no
joint rate are matters of interstate commerce or not;[726] as to the
limitations by law of the right of carriers to refund overcharges to
shippers;[727] and whether the Union Stockyards Company was a common
carrier engaged in interstate commerce, and thus subject to control
as to preferential treatment of shippers.[728] However these cases
might be finally decided by the court of last resort, there could be
no conflict of powers between the Commerce Court and the Commission in
regard to such matters of law. The real bone of contention between the
two bodies--administrative and judicial, respectively--was the question
of their respective powers outside the field of law.
Before leaving the disputes over law points, we may profitably
consider one further case, important because of its bearing upon the
determination of reasonable rates. This occurred in 1911 through a
revival of the old Maximum (Cincinnati) Freight Rate case of 1896.[729]
It will be recalled that this involved the relative rates to southern
centres from eastern and middle western cities.[730] In the original
case in 1894, the Commission held that the rates from Cincinnati were
too high by comparison with the rates from New York; ordering those
for first-class freight, for example, to be reduced from seventy-six
cents to sixty cents per hundred pounds. The Supreme Court directed a
dismissal of the bill of complaint, on the ground that the Commission
had no authority to establish rates for the future. This defect in the
law being remedied by the amendment of 1906, the Commission, upon a new
complaint, made a second order in 1910. This differed from its earlier
decision in prescribing a reduction of the rate from Cincinnati from
seventy-six cents to only seventy cents, whereas the first decision had
ordered it reduced to sixty cents per hundred pounds. The Cincinnati
shippers, not content with this reduction, then promptly appealed to
the Commerce Court for a review of the case. The proceeding was unique,
therefore, in that the appeal to the Commerce Court was taken, not by
the carriers but by shippers who complained that the rates _established
by the Commission were too high_. The Commerce Court in sustaining
the order of the Commission, therefore, in reality acted in favor of
the railroads, being thereby consistent with its general attitude of
conservatism. But its right to take cognizance of such questions was
denied by the Supreme Court. Thus, in all probability, this famous and
protracted litigation was brought to a close.
The specific law point in this Cincinnati case was as to whether the
reasonableness of a rate should be determined in the light solely of
its effect upon the particular carrier concerned; or whether the
result for other competing lines and for the entire territory served,
should also be taken into consideration. The Cincinnati Southern
Railroad extended as a short and direct route 336 miles due south to
Chattanooga. It was neither expensive to construct, to maintain or to
operate. It was the first in the field; having been constructed by the
city of Cincinnati to reach the southern markets. It was not burdened
by unremunerative branch lines. Its net earnings amounted to over forty
per cent. upon the capital stock. Other competing railroads between the
same points were one-third longer and were otherwise burdened by the
necessity of maintaining unprofitable branches. These other roads could
not be so economically operated. But they had voluntarily entered the
field in competition _after_ this direct line was constructed, and they
had elected to continue therein. The rates established, however, for
the Cincinnati Southern,--the short line,--naturally fixed the rates
at which these others had to participate in the traffic. At the rate
of seventy cents, prescribed in this second order of the Commission,
all the carriers concerned could make a living. The short line alone,
presumably, could have endured the rate of sixty cents as prescribed at
first. Was it lawful, however, to decide a complaint preferred against
a particular most-favored railroad by a city which built it to attain
a certain object, upon the basis of the effect of such rates, not upon
this road but upon others subsequently built and less fortunately
situated? To do so would, of course, enable the most-favored carrier to
prosper exceedingly; even more so than it did then. But these higher
rates would, most unfortunately, thwart the very purpose animating its
construction. The Commission, sustained by the majority of the Commerce
Court, adopted the latter view.[731] A dissenting minority, on the
other hand, presented strongly the opinion that under such special
circumstances, in the determination as to reasonableness, no right
existed for considering the effect of a rate upon other roads than
the particular one against which the complaint lay. The Supreme Court
in affirming the sole authority of the Commission to pass upon such
issues, nevertheless, left this detail concerning the determination of
reasonableness of rates for possible reargument in future.
[Illustration]
Attention may be now directed to the controversy as to the seat of
authority, not over law points, but concerning distinctly economic
issues. A typical case before the Commerce Court concerned rates from
New Orleans to several competing cities on the line of the Louisville &
Nashville Railroad.[732] An interesting phase of local discrimination
appeared. The accompanying map discloses the situation. Normally the
through rate from New Orleans to Montgomery (the long-distance point)
would be less than the sum of the local rates from New Orleans to
Mobile (the intermediate point) and then from Mobile on to Montgomery.
This would conform to the general rule, which is based on the simple
fact that through rates, being competitive, are usually forced below
the level of local charges, commonly unaffected by such competition.
In this case the situation was reversed. Water competition affected
the local rates, both into Mobile from New Orleans by sea on the one
side, and then up the Alabama to Montgomery by river steamer on the
other. But such water competition did not apply to the through rate,
probably because through shipment by water would necessitate a transfer
_en route_ from a gulf steamer to a river boat at Mobile. Thus in this
case it came about that local competition was keener than the rivalry
as to through traffic. The Louisville & Nashville, nevertheless, had
secured the bulk of the business to Mobile by reason of the low local
rates by rail which had been in effect for many years, even after
practical elimination of the water lines. The situation was certainly
anomalous, from the viewpoint of cost of service by rail alone; in that
the freight rate was higher on goods sent to Montgomery direct than
when shipped on a combination of local rates on Mobile. This situation,
it is apparent, enabled Mobile jobbers to buy goods in New Orleans and
actually lay them down in Montgomery for less than the freight charges
to the Montgomery dealers who were on the spot. The same situation
prevailed at Pensacola.
The immediate cause of dispute was the promulgation by the Commission
in 1907, under the new powers conferred by the Hepburn Act, of a rule
that through rates must not exceed the combination of locals between
the same points. To comply with this rule, the Louisville & Nashville,
in this instance, faced the alternative either of reducing the through
rate from New Orleans to Montgomery to the sum of its local charges or
else of raising one or both of the latter. The railroad naturally chose
the latter course--now enabled to do so with safety as the boat lines
had long since been put out of business. It advanced its local rates
from New Orleans to Mobile sufficiently to make the new combination of
local charges equal the through rate to Montgomery. The Commission, on
complaint of Montgomery, suspended this advance,--seeking to compel
the railroad to even things up, not by advance of the local charges
but by a reduction of the through rate. This, it is obvious, would
relieve Montgomery of the discrimination as against Mobile of which it
complained. As to none of the facts above outlined, was there dispute
between the court and the Commission. The controversy turned solely
upon which of the two remedies should be chosen to meet the situation.
Were the through rates unreasonably high? This was the Commission's
contention. If so, equalization should be attained by their reduction.
Or, on the other hand, were the local rates unreasonably low? If so,
they might be evened upward with propriety. This was the contention
of the Commerce Court, leading it to set aside the order of the
Commission. Which was the body competent to pass upon such an issue?
The Supreme Court had to be called upon to decide. And in the meantime
there was the same old story of delay, while irreparable loss to
shippers went on.
In another instance,--the California lemon case,--[733] the issue
was even more sharply drawn between the Commission and the Commerce
Court. The latter, it was averred, not even content to draw its own
conclusions in matters of fact, had made an "attempt to look into the
mind of the Commission for the purpose of ascertaining the reasons
on which its order was based." The case dated from 1909, when the
blanket rate from the entire territory east of the Rocky mountains was
advanced by the railroads from $1.00 to $1.15. This action followed the
imposition of a high protective duty on lemons in the Payne-Aldrich
tariff. After careful investigation the Commission, reviewing the whole
matter of rates upon citrus fruits, ordered the lemon rate to be
reduced once more to $1.00. Appeal was promptly taken to the Commerce
Court, which set aside the order as beyond the scope of authority
delegated by Congress. The court held that the Commission had sought
so to adjust rates as to afford protection to the California lemon
industry against foreign competition, especially from the growers
in Sicily; in place of confining its attention to the "intrinsic
reasonableness" of the transportation charge. The gage thus thrown
down was promptly taken up by the Commission in a second opinion,
rendered within two months of the injunction granted by the Commerce
Court. This time it exhaustively considered all phases of the cost and
manner of transportation for oranges and lemons and re-affirmed its
opinion that the rate of one dollar per hundred pounds was reasonable.
At this writing the matter rests there. What the Commerce Court will
do, remains to be seen. The case, as re-stated by the Commission, is
masterly in its discussion of the responsibilities laid upon it by the
law. "Is the country to be treated as a whole for commercial purposes,
or shall it be infinitely divided?"
The Intermountain Rate cases, discussed in the next chapter as a phase
of the long and short haul question, illustrate even more clearly these
conflicts between the court and the Commission on matters of economics.
But they introduced no new legal technicalities. They merely emphasized
the critical nature of the controversy, so far as it concerned the
larger constitutional question of separation of powers between the
three main branches of our government.
The situation, as revealed by these typical cases, reduced itself, in
brief, to this: it was the same old question of broad _versus_ narrow
court review all over again. The Commerce Court held it to be its
proper function, as a court of law, to review in the broadest way all
cases which came before it on appeal. The Commission, on the other
hand, maintained that not only all matters of fact, but all inferences
as to economic facts, of necessity lay solely within the range of
its own authority, And it was certainly true that, without some such
limitation upon the right of review, the Commission might about as
well have retired from the field of regulation entirely, and contented
itself with enforcing the safety appliance laws, collecting statistics
and serving as a general publicity office.[734] Fortunately the
situation promised to be saved by the line of Supreme Court decisions
flowing from the Illinois Central case.[735] The making of a rate for
the future being a legislative and not a judicial function, the power
to determine that a particular rate was or was not reasonable for the
future, or that a particular discrimination was or was not undue, was
a discretionary legislative power which could not be reviewed by the
judiciary. If the Supreme Court in due time applied this reasoning to
these later cases, the Commerce Court might confidently be expected to
take its proper place in the Federal scheme of things. Until it was
forced to do so, much of the railroad legislation of recent years would
fail to ensure that full measure of certainty and promptitude of relief
to which the country was entitled, and which it was bound to have.
* * * * *
The decision of the Interstate Commerce Commission in 1910 in the
matter of freight rate advances[736] was of prime importance; not alone
because of the great monetary and commercial interests involved, but
also because it might afford a forecast of the policy of the government
in such matters in future. Public interest was quickened also because
of the novelty of resting the burden of proof upon the railroads rather
than upon the shippers, as in the past. The effect of this change in
procedure was apparent throughout. The representatives of the shippers
were, in most cases, content to point out the inadequacy of the reasons
advanced by the carriers. The railroads, on the other hand, were forced
to come forward aggressively with positive arguments favoring their
side of the case. The only exception to the negative task of appearing
in rebuttal against the carriers' arguments was in the somewhat
spectacular presentation of the novel issue of "scientific management,"
shortly to be discussed.
The movement of freight rates since 1900 was insistently upward. On
two separate occasions prior to 1910, as we have seen,[737] general
advances by concerted action of the carriers took place, namely in 1903
and 1907. These earlier changes had been mainly confined to commodity
rates. All the great staples, such as iron and steel, grain, coal and
coke, glass, brick and cement, were affected. The rate increases of
1910, on the other hand, which gave rise to the first important test
of the Mann-Elkins law, were mainly confined to advances in class
rates,--that is to say, the rates upon merchandise and the better
grades of freight. It was doubtless true, as alleged, that the steady
decline throughout a generation before 1900 had unduly depressed
the scale of charges for transportation service; and that prices in
general, and especially wages and costs of operation, had greatly
enhanced since that time. To meet this situation, the carriers had
proceeded either to get together by an understanding not to compete;
or else they had permanently put an end to competition by downright
consolidation. After the first upward movement which paused about
1904, some time elapsed without further efforts in this direction.
Then, after postponement of a concerted attempt in 1908 matters went
on quietly enough until 1910. Many changes were unostentatiously
made in individual instances by modification of traffic rules or
classification;[738] but no widespread action took place. The occasion
for the renewal of the upward movement in 1910 was an insistent demand
of railroad employees all over the country for a rise in wages. And the
acquiescent attitude of the railroad managers toward their employees,
suggested a tacit understanding that wages were to be raised on
condition that the brotherhoods support the movement to recover this
advance from the public through an increase in freight rates.
The trunk lines filed their new tariffs in 1910, even while Congress
was in the throes of debate over the Mann-Elkins Act. These schedules
substantially increased all class rates,--by from eight to twenty
per cent;--and affected about half the commodity rates, mainly of
the lesser sort. The western railroads promptly followed suit,
filing higher tariffs by about ten per cent, for approximately 200
commodities. In response to vehement protest from all over the country,
Congress, as we have seen,[739] promptly conferred authority upon
the Interstate Commerce Commission by the Mann-Elkins amendments to
suspend such rate advances temporarily for examination as to their
reasonableness. By virtue of this authority the Commission took
testimony for several months and rendered its decisions both for
the eastern and western railroads on February 22, 1911.[740] The
strongest impression which one gains from examination of the testimony,
is that the case for the railroads was imperfectly organized and
inadequately presented. There was no division of the field in argument,
with intensive cultivation in each case; but all of the railway
representatives traversed much of the same ground, so widely scattering
their effort that but superficial treatment of each point was possible.
The shippers, on the other hand, evidently laid out their plan of
campaign with more system and had correspondingly better results.
The railroads in the presentation of their case were somewhat
embarrassed by several complications, some applicable to all the
roads alike, while others arose from the diversity of financial and
operating conditions on different lines. All alike were denied resort
to the main argument advanced in favor of the general rate advances in
earlier years, particularly in 1900. It had been expected that stress
might be laid upon the increased cost of materials used in construction
or operation; but the fact that, largely as an aftermath of industrial
depression, prices of many commodities were actually lower in 1910
than they had been on the average for a decade, deprived the railroads
of this powerful argument. The main exceptions in this respect were
in the prices of fuel and lumber. Owing to the diversity of operating
conditions among the carriers, difficulty was also experienced in
adducing the wage increases of 1910 as a warrant for advancing freight
rates. Considering the entire railroad net affected, it appeared
that the augmentation in revenue from the proposed advances would be
$27,000,000; whereas the already conceded wage increases were in excess
of $34,000,000,--in each case calculations being based upon the same
volume of traffic and employment as in the preceding year. The wage
argument, generally applied, was thus valid. But taking the carriers
one by one, it appeared that the changes in wages and revenue which
might result, varied greatly. On the New York Central, the increase in
revenue would just about cover the rise in wages; on the Pennsylvania,
it was less than half of the enlarged payroll. It was thus apparent
that emphasis upon the increase in wages would not be equally valid for
argument by all roads alike. The possible advantage of a united front
was thereby denied.
Broader ground for rate increases was taken by the carriers, in the
argument that operating expenses had greatly augmented in recent
years, not so much because of higher prices or even wages, but
because of the exactions of the public in the way either of better
facilities and service or of greater safety. It was alleged that vast
expenditures had been necessarily made for such purposes without a
commensurate increase in revenue.[741] The main proof of this point lay
in statistical presentation of the greatly increased operating ratio
within recent years; that is to say, the higher percentage of gross
revenue which it was necessary to expend in operation. Here again, the
carriers failed to agree in the particular margin of safety above a
reasonable return upon the investment, paid in dividends, which should
be put back into the property. It was also urged by the carriers that
the necessary funds for constructive development in future could be
obtained only by such improvement in railroad credit as would result
from a substantial margin of net earnings above reasonable dividends.
Such were, in the main, the arguments presented by the railroads on
behalf of their plea that the proposed rate advances should not be
suspended.
The case in rebuttal, as presented by representatives of commercial
organizations, was carried aggressively into the enemy's territory
in only one line of argument. It was alleged that sufficient economy
in operation could be effected by means of "scientific management"
to more than offset the increase in wages together with the general
demand for better service and improvements by the public.[742] On
the whole the arraignment of the carriers in this regard failed to
establish its point. Whatever results from "efficiency" had been
obtained in manufacturing establishments, the limited experience in
railroading outside of shop management, while generally satisfactory,
had not been altogether convincing. Essential differences between
railroads and factories, particularly in respect of minute supervision
of labor scattered over hundreds of miles of line, tended to render
impracticable many of the improvements in process advocated by
efficiency engineers. The demands incident to the operation of
public-service companies are also different from those applicable in
private business. Railroads must consider not only profit-making,
but adequate and satisfactory service. And, finally, the thorough
organization of labor among carriers was a bar to the untrammelled
introduction of new methods. Nevertheless, the publicity which was
derived from the presentation of this case before the Commission could
not fail to draw attention to the need of determined and general
application of such sound and businesslike methods as were found
practicable.
The shippers attempted, in general, to meet the railway arguments
point by point. Thus the plea of steadily increasing operating ratios
absorbing an ever larger proportion of gross earnings, was met by
statistical evidence showing that gross revenues had so rapidly
augmented during the decade as, nevertheless, to permit of a steady
increase in net revenue year by year. In this regard, the time was
certainly opportune for establishing this point. Recovery from the
depression following 1907 was actively under way during 1909-1910.
Not even the indications that a less rosy future was to ensue in
1911,--judged by the then course of net earnings,--sufficed to offset
statistical evidence in this regard. Even if for all the roads taken
together the wage increases would more than absorb the increasing
revenues, the fiscal year 1910 had produced so large an increase in net
earnings,--$55,000,000,--as to still leave the carriers better off than
they were before, even without the increased freight rates for which
they were asking.[743]
The decisions of the Commission in both cases, covering advances east
and west, was unanimously against the railroads.[744] It was held that
the carriers had failed to prove their case at practically every point.
While it was true that cost of operation had increased for various
reasons, it was also plain that the growth of the business had more
than absorbed these additional outlays. And as to the contention that
a fair return upon the value of the property was not being earned, the
entire field of argument concerning the reasonableness of railroad
rates as related to investment, was necessarily held in abeyance
pending more positive data than was then at hand. The decisions,
however, contained a ray of hope for the carriers in the promise that
while this general increase would not be upheld, particular changes
in future would be considered on their merits in each case.[745] The
railroads accepted the decision as final, and withdrew the proposed
tariffs with surprisingly little protest.[741] Whether the great
increase in prices in 1912 over preceding years, operating indirectly
through insistent pressure for wage increases to enhance costs of
operation, will necessitate a reopening of this issue in a large way,
seems likely to depend upon the rate at which the volume of traffic
augments in the immediate future. It is clear, in any event, that
a sufficient surplus earning power must be permitted to insure a
continuance in favor of railway securities as compared with other forms
of investment.
FOOTNOTES:
[712] Interstate Commerce Commission, Annual Report 1911, pp. 53, 57,
59 and 206.
[713] Since this time a number of decisions have been rendered, on
the whole more favorably to the Commission. Notably in the Willamette
lumber case, for example, it was fully upheld: no. 59, April
session, 1912; and also concerning southern rates: no. 40, February
session, 1912. In June several petitions were dismissed for lack of
jurisdiction. In the Shreveport case, notable as involving conflict of
Federal and state authority, the Commission's order was enjoined in
June on the ground of confiscation of property.
[714] 62nd Cong., 2nd sess., House Rep., no. 472: Hearings on H. R.
1907-1908 before the House Committee on Interstate Commerce, March 14,
1912: Hearings on H. R. 25596 and 25572, July-August, 1912, pp. 1-298.
[715] _Cf._ p. 460, _supra_.
[716] Discussed _infra_, p. 586.
[717] 32 Supreme Court Rep., 761.
[718] 188 Fed. Rep., 242. At p. 588, _infra_.
[719] P. 538, _supra_.
[720] 32 Supreme Court Rep., 742.
[721] 32 Supreme Court Rep., 817.
[722] _Goodrich Transit Company v. I.C.C._; Commerce Court, nos. 21-24,
April term, 1911. Decided by the Supreme Court, April 1, 1912; 32
Supreme Court Rep., 436; 190 Fed. Rep., 943.
[723] _Cf._ p. 624, _infra_.
[724] 193 Fed. Rep., 678.
[725] 191 Fed. Rep., 37.
[726] 195 Fed. Rep., 968.
[727] 193 Fed. Rep., 667.
[728] 192 Fed. Rep., 330.
[729] 32 Supreme Court Rep., 769.
[730] Pp. 248 and 391, _supra_.
[731] Other cases similarly decided are as follows: 9 I.C.C. Rep., 382;
15 _Idem_, 376 and 555.
[732] 195 Fed. Rep., 541, _L. & N. R. R. v. I. C. C_. In this case
there was no dispute as to facts, but only as to the conclusion to be
drawn therefrom. A straight difference on points of fact was raised in
the Pacific Coast Switching cases (188 Fed. Rep., 229). The dissenting
opinion as to usurpation of the rights of the Commission is significant.
[733] 190 Fed. Rep., 591. Second opinion in 22 I. C. C. Rep., 149.
[734] Precisely like the situation following the earlier emasculation
of the law. P. 473, _supra_.
[735] 215 U. S., 452. P. 538, _supra_.
[736] 61st Cong., 3rd sess., Senate doc., p. 725, 1911, 10 vols.
Admirably summarized in _American Economic Review_, I, 1911, pp.
766-789. _Yale Review_, 1910, pp. 268-288. Haines Problems in Railway
Regulation, 1911, pp. 143-154; and files of the _Railway Age Gazette_,
especially 1910, p. 1108. H. A. Bullock in _Boston Transcript_, Nov.
12, 19, and 21, 1910, offers suggestive comment.
[737] Pp. 411 and 488, _supra_.
[738] P. 427, _supra_.
[739] P. 561, _supra_.
[740] 20 I. C. C. Rep., 243 and 307.
[741] This point has since been well presented in Suffern, _Railroad
Operating Cost_, New York, 1911. _Cf._ chap. II, _supra_.
[742] This argument is critically examined in the _Quarterly Journal of
Economics_, XXV, 1911, pp. 539-562. _Cf. Railway Age Gazette_, 1912,
p. 287.
[743] Data as to gross and net earnings at this time by comparison with
former years will be found at p. 79, _supra_.
[744] 20 I. C. C. Rep., 243 and 307.
[745] _Cf. Railway Age Gazette_, LIV, 1912, pp. 10-14, and 803. A
peculiarly suggestive instance is the allowance of increases on soft
coal. Not a mere motive,--the need of more revenue,--but proof of
reasonableness in detail was offered in evidence. 23 I. C. C. Rep., 617.
CHAPTER XIX
THE LONG AND SHORT HAUL CLAUSE: TRANSCONTINENTAL RATES
"Substantially similar circumstances and conditions"
stricken out in 1910, 601.--Debate and probable
intention of Congress, 602.--Constitutionality
of procedure, 603.--Nature of applications for
exemption, 604.--Market and water competition, 605.
The Intermountain Rate cases, 610.--The grievances
examined, 611.--The "blanket rate" system, 611.--Its
causes analyzed, 612.--Previous decisions
compared, 615.--Graduated rates proposed by the
Commission, 616.--The Commerce Court review, 620.--Water
_v._ commercial competition again, 620.--Absolute
_v._ relative reasonableness, 622.--Legal
technicalities, 625.--Minimum _v._ relative
rates, 624.--Constitutionality of minimum rates, 625.
The original long and short haul clause, as we have seen, forbade a
greater charge for a short than for a long distance over the same
line under "substantially similar circumstances and conditions."
The principal amendment in 1910 was the elimination of this
troublesome clause, "substantially similar circumstances and
conditions";--responsible, as experience had shown for the practical
nullification of the entire fourth section of the law of 1887 through
the interpretation placed upon it in 1896 by the courts.[746] The
insertion of a new provision in 1910 prohibiting carriers from
charging "any greater compensation as a through route than the
aggregate of the intermediate rates," concerned a somewhat different
question, and may be omitted from consideration in this connection.
The Commission was given authority under the amended law to relieve
carriers from the prohibition of the statute, which, in this regard,
did not become effective until February 17, 1911. It was uncertain at
the time how extensive was the violation of the distance principle;
although a comprehensive investigation by the Elkins Committee in
1905[747] showed the existence of many irregular tariffs all over the
country. Within the first ten months after the law took effect, 5723
applications for relief under this section were filed. Of this number
only two hundred and ninety concerned passenger fares: making it
clear that the problem was mainly one of adjustment of freight rates.
Inasmuch as the Commission held that each application should be treated
as a formal complaint to be separately passed upon, it will be seen
that these applications for relief considerably outnumbered the total
of 4570 formal complaints which had otherwise been filed since 1887.
Amendment of the fourth section obviously imposed a heavy additional
burden upon this administrative arm of the Federal government.
The proposition to amend the long and short haul clause in 1910 called
forth the same divergence of opinion in Congress as to regulation
which characterized the original debate twenty years before. One
party wanted an absolute long and short haul clause, permitting of
no departure from the distance principle. The other stood for a more
elastic plan, whereby carriers under certain economic justification
should be allowed to make a higher charge at the intermediate point.
The prime difficulty lay in defining these exceptional cases. Had
Congress left this solely to the discretion of the Commission without
such definition, the law might be held unconstitutional, as involving
a complete delegation of legislative power. The situation was clearly
stated at the time by the Chairman of the House Committee on Interstate
Commerce. "Practically what we do here is to give the Commission power
to say what, in a particular case, shall be a just and reasonable rate;
although we declare as a general proposition that it shall be unjust
and unreasonable to charge more for a short haul than for a long haul."
In brief, it is clear that Congress intended that the general language
of the statute should furnish the rule which the Commission was to
adopt in applying this section of the law.
Was there any further intention of Congress in thus amending the long
and short haul clause? The carriers contended that the only effect was
to deny the railways the right to decide for themselves whether they
might disregard the rule of the section: in other words, that they
must conform to the interpretation laid down by the Commission itself
in the Georgia Railroad Commission cases in 1892.[748] The Commission,
on the other hand, at once interpreted the amendment, as defining the
purpose of Congress differently. It held that the railroads must assume
the burden of justification. The carriers, therefore, must become the
advancing party in proving that violation of the distance principle was
warranted by the necessities of the case. It is obvious that, without
this interpretation placed upon the amendment, Congress would not be
providing a remedy for local discrimination, but would be merely giving
power to declare the existence of a wrong.
The constitutionality of the amended section seemed likely to depend
upon the manner in which it was applied administratively. If construed
as conferring unrestricted power to grant or deny applications for
relief, it would probably be held void, as already observed, as an
unfettered delegation of legislative authority. Rate making being
a legislative function, this attribute of the Congress could not
constitutionally be vested in entirety in an administrative body.
The Commission must, in other words, be restricted and guided by
certain rules and standards set by the legislature. This point had
been well established respecting the exercise of control over the
issue of capital stock by railroads by the state commissions. It was
clear, also, that the long and short haul clause did not impose an
inviolable rule to be enforced against all carriers. This had been the
contention of complainants against the railroads in the Spokane case,
soon to be considered. It seemed clear that the proper function of
the Commission under the law, was to investigate each case by itself
in the light of the first three sections of the Act in general. After
such investigation, if it appeared that a departure from the distance
principle would result neither in unreasonable rates nor in undue
discrimination, permission therefore must be granted. Under such
circumstances it could not lawfully be withheld. And in the contrary
case deviation from the long and short haul principle must likewise be
refused.
The Commission in enforcing the new long and short haul clause, in the
first place laid down certain general rules for its own guidance.[749]
Perhaps the most important of these was that the different rates or
fares to be compared, must apply to the same classes of transportation.
It would be obviously unjust to compare a one-way fare with either
excursion or commutation rates. Export and import freight rates,
usually lower than regular domestic rates, must each be dealt with in
a class by themselves, in determining whether the more distant point
by having a higher rate prejudiced the rights of intermediate ones.
Congress certainly did not intend to make the charging of a commodity
or carload rate in transcontinental traffic unlawful, merely because it
happened to be lower than local rates or less-than-carload classified
shipments from intermediate points. Violation of the distance principle
must properly always be determined by comparison between rates of the
same kind. A number of similar rules were promulgated for the sake of
duly standardizing practice.
Applications from the carriers for exemption from the long and short
haul clause in freight tariffs fell into four distinct groups. The
largest number of petitions,--more than one-fourth of the total
filed,--had to do with the necessities of circuitous lines in meeting
through rates made over more direct routes.[750] In such cases the
lowest through rate was often made by the longer line, which might,
at the same time, conceivably be operated at a lower cost. Permanent
relief was granted by the Commission in comparatively few of such
instances; and then only when it appeared either that the short line
had observed the distance principle throughout, or else that the
intermediate rates upon the long line were apparently reasonable and
just, in and of themselves. Under such conditions the Commission
sometimes permitted the circuitous route, especially if it were
manifestly so, to meet, not only the prevailing rate over the short
line, but also any future rate which it might put into effect.
Next in importance, measured by the number of applications for relief
from the long and short haul clause in freight tariffs, were those
based upon the exigencies of market competition. The familiar case of
the rivalry of Florida and California orange growers in the eastern
markets may illustrate the situation.[751] The growers must be put
into that market and held there in each case in competition with one
another, each served by the carriers who profited by their traffic.
Should it be said that because such market competition compelled a
low through rate, irrespective of distance, that no higher rate at
any intermediate point where such market competition did not exist,
should be allowed? The difficulty and danger, however, of accepting
the justification of market competition was, of course, the fact that
exemption from the distance principle might deny to the intermediate
points the advantage to which they were justly entitled by reason
of their geographical location.[752] The compelling force of market
competition is exemplified also in the transportation of pine lumber
from all along the southern tier of states to the consuming territory
of the treeless Middle West. The mills in Mississippi, Louisiana,
Arkansas, and Texas are so much nearer than those in Florida or
Georgia, that exceptionally low rates per mile must be put in
from these latter states to enable them to hold their own. Such
exceptionally low rates, if applied to all intermediate points, would,
of course, prove ruinously unprofitable to the railroads concerned.
There were certainly contingencies of this sort entitled to relief.
Closely akin to market competition in compelling departure from the
long and short haul clause, were the practices arising in connection
with commodity rates to meet special circumstances in production or
consumption. A public building, perhaps, was to be erected at a given
point; and active competition arose from quarrymen in different parts
of the country for supplying the cut stone. A carrier serving such a
quarry put in a special carload rate in order to enable the shipper
on its line to compete for the contract. No similar commodity rates,
as a fact, were called for from intermediate stations, inasmuch as no
other quarries on the line were interested in this particular job.
The Commission ruled in such cases that no tariffs from intermediate
points need be filed, unless desired for the benefit of some other
shipper. Such cases are obviously analogous in principle to those above
mentioned under the heading of market competition.
The third and perhaps, as it may appear in the future, the most
substantial ground for seeking relief from the long and short haul
clause in freight rates was the force of water competition. For
example, all along the Atlantic seaboard the low rates of coastwise
steamships were absolutely compelling in their effect upon through
rates by rail. Obviously the railroads could not share in the
business, unless they met the low water rate,--a low water rate which,
very properly, ought not to affect the higher charges at interior
intermediate points not enjoying such competition by water. On the
other hand, it was evident that the utmost care needed to be exercised
in accepting this excuse for the lower rate at the more distant point;
or, otherwise stated, for higher rates at the intermediate points
not in the enjoyment of water competition. It was unquestionable, as
experience all over the country had demonstrated, that the force of
such competition upon internal waterways had been greatly exaggerated
by the railroads for their own purposes. The steamboats had disappeared
from the Mississippi and all its branches, and from the smaller rivers
of the southern states, not because they were surpassed either in
speed or in economy, but by reason of the superior organization and
certainty of through shipments by land.[753] The railroad always beat
the steamboat, mainly because it was not hampered by the difficulty
of breaking bulk at transfer points. The river boat served relatively
few places, while the railroad could make connections everywhere. And,
finally, the water lines, being open at all times to competition for
the worth-while business from rivals who needed merely to assemble
enough capital to buy a boat, could not distribute their margin of
profit according to the pressure of competition at different points
along every line.[754] Whether a revival of commerce upon our inland
waterways will ever change the nature of this competition between water
and land transportation remains to be seen. But, in the meantime, it
was indubitable that the plea of competition by water required careful
examination before being accepted at its face value. The importance of
this consideration appears clearly in connection with the Intermountain
rate cases, soon to be discussed.
[Illustration]
The petition of the Southern Pacific Railroad for exemption from the
prohibition of the amended long and short haul clause in 1912,[755]
as to rates between San Francisco points and Portland, Oregon,
presented a concrete problem in the fair adjustment of distant and
intermediate rates under the force of coastwise water competition.
There was no question as to the force of this rivalry; more than
three-fourths of the traffic between the distant seaports moving
by boat. The geographical situation is shown by the map herewith.
But the difficult point to decide was as to whether the intermediate
rates were not too high by comparison,--being made, in other words,
to compensate unduly for the low rates and loss of traffic at the
two ends of the line. The high intermediate point was Talent. The
first-class San Francisco-Portland rate for 746 miles was 51 cents
per hundred pounds, as against a San Francisco-Talent rate for 409
miles of $1.66,--more than three times the charge for about one-half
the haul. Moreover, the inadequacy of water competition as a full
explanation appeared at many points. Albany, for example, was no
farther from Portland than Sacramento was from San Francisco. Yet while
Sacramento enjoyed the low water rate north bound, neither Albany nor
other places much nearer Portland were given the same advantage in
southerly shipments. This case, left open for further examination as
to facts, is also interesting as to points at law. The carrier, as in
the Intermountain rate cases, contended that under the amended long
and short haul clause, the Commission need consider only the force of
water competition; and need not concern itself with the reasonableness
of the intermediate rates. The Commission held this not to be a right
construction of the law.
The reasons for seeking exception from the long and short haul clause
in passenger business, judging by the petitions filed by carriers
under the new law, had to do mainly with complications following the
establishment of mileage schedules by law in the different states. Some
of these states had also enacted two-cent fare laws, in which case
it often happened that intrastate fares were arbitrarily higher than
those which applied on interstate business. But the main reason for
seeking exemption from the Fourth Section was the desire of circuitous
routes to meet the charges made by the short lines. Obviously, as in
freight traffic, the long line could not charge more than the short
line, and usually the short line made the rate. Practically under such
circumstances, the long line carrier could not well maintain a higher
fare to the intermediate point, since in passenger traffic, unlike
freight, the traveller could if he pleased buy his ticket to the more
distant point and then get off at the intermediate one. The Commission,
in view of this fact, naturally found less flagrant violations of the
distance principle in passenger fares than in freight rates.
What economic reasons among all these advanced by the railroads,
should be accepted by the Commission as warranting a departure from
the distance principle? Originally, as we have seen, it was held
that competition either with carriers by water, with railroads
not subject to the Act, or other rare and peculiar cases, created
such dissimilarity of circumstances and conditions as to warrant a
modification of the distance principle.[756] In the first great case
under the amended law, the Commission held, more broadly, that other
factors than these might properly be taken into account. It considered
itself authorized not merely to decide whether circumstances in respect
of competition at the two points were dissimilar, but also whether,
and to what extent, that dissimilarity justified a departure from the
rule. In other words, as interpreted by the Commission, modification
of the rule might be permitted to just the degree which would seem to
be called for by consideration of the whole situation. The best way to
understand the bearing of these considerations, however, will be to
examine this first great case in detail.
* * * * *
The Intermountain rate cases, affording the first crucial test of
the long and short haul amendments of 1910, were doubly significant.
They afforded a prime example of the struggle for supremacy between
the administrative and the judicial branches of the government. And
they also stood foremost among all the transportation controversies
of the last generation.[757] The grievances were long-standing. They
had been before the Interstate Commerce Commission since 1889.[758]
They comprehended geographically a range of interests covering the
entire northern half of the United States. While the Rocky mountain
territory and the Pacific coast terminals were most directly concerned,
the rights in trade of every factory and distributing point east of
Denver were indirectly involved, in so far as they participated in
commerce with the Far West. Not even the inevitable conflict over
remodelling the southern basing point system by enforcement of the
new fourth section of the Mann-Elkins law, was equal to this one,
either in geographical scope or commercial importance. And at the same
time the fact that the new Commerce Court was in 1912 on trial for
its life--this being one of its leading cases on appeal--endowed the
controversy with an even greater significance. Both in the eyes of the
law and of commerce and finance, the issue was plainly of the first
importance.
The transportation grievance of the tier of Rocky mountain communities
from Washington to Arizona, although simple, divided naturally
into two parts.[759] The first was that the freight rates from all
eastern territory to these localities were from one-quarter to over
one hundred per cent higher than to the Pacific coast, although
the goods in transit passed their very doors and might be hauled a
distance greater by one-fourth. A carload of glassware from Pittsburg
to Spokane, Washington, paid a freight rate of $649.44; while the
charge to Seattle, four hundred miles farther west, was only $393.60.
A first-class commodity (carload) rate from Omaha to Reno, Nevada,
was $858. If the goods were delivered 154 miles farther west, at
Sacramento, passing through Reno _en route_, the freight bill amounted
to but six hundred dollars. But this discrimination was less than half
the indictment, inasmuch as the compelling force of ocean competition
at the coast was conceded by all. It might well be that San Francisco
and its sister terminal points were unreasonably favored, rather than
that the intermountain rates were unduly high in themselves. The
carriers by land might indeed be, as they alleged, powerless in the
face of a water competition beyond their control. And if they were
thus impotent, surely the government could not account their tariffs
unlawful, however irregular they might be.
The second item in the complaint of the intermountain cities showed
the cloven hoof of the transcontinental carriers. These mountain
rates, relatively so high by comparison with more remote terminals,
were equally high from every point east of Denver over a territory two
thousand miles in width.[760] In other words, entirely regardless of
distance, the freight rate to Spokane or Reno, whether from New York,
Chicago, St. Paul, Omaha, or even Denver, was the same. It was indeed a
blanket rate, like the fixed charge of two cents for postage. And it
made no difference how near any point in this wide zone might be, the
disparity in rates against the intermountain points was relatively the
same. Thus our two concrete examples, above cited, were for shipments
from Pittsburg and Omaha, respectively; but in any case, were the point
of origin as remote as Portland, Maine, or even as near as Colorado
"common points," the disparity of rates was unchanged. They were always
very much higher to the intermountain cities than on to the Pacific
coast; although the carriers east of the Missouri river got no more for
their portion of the haul when the goods were bound for Spokane than if
they went on to Seattle for a much lower through charge. This latter
fact, of course, narrowed the complaint down to the policy of the
western lines. The discrimination, if it were one, was clearly of their
making. Whatever trouble there was, originated west of the Missouri
river. However much the other railroads all over the country might have
joined in transcontinental business, they remained impartial onlookers
in this particular contest.
Some of the causes of the apparently abnormal western rate adjustment
are perfectly plain. The low rates to the coast were due to water
competition, which, while now under some measure of railroad
control--partially "neutralized" in fact[761]--was always present
and potentially great. It will be even more controlling when the
Panama Canal is opened.[762] To meet this situation, the carriers had
established a series of through commodity rates which practically
covered all transcontinental business. For all this traffic exposed
to water competition, it was averred, the intermountain territory was
more remote, if not geographically, at least for purposes of rate
making. The railroads consequently added the charge for the local
haul back from the coast to the low transcontinental or through rate
in determining the charge to all the intermediate cities. Thus, they
alleged, a discrimination was forced upon them, not of their own
creation. They could not grade all their intermediate rates down to a
through tariff thus fixed at the farther end. It would mean bankruptcy.
Thus far the situation is analogous to Hadley's classic oyster car
case.[763] The main difficulty arose in satisfactorily explaining the
second half of the scheme. How did the blanket or "postage stamp" rate
zone arise, permitting exactly the same rates, whether to Spokane or
Seattle, from points scattered over a territory covering practically
two-thirds of the United States? Was it an artificial scheme,
modifiable at the will of the carriers or of the government; or, like
the law of gravitation, was it beyond the control of either?
The truth was that westbound rates from New York, Chicago, Omaha
and St. Paul had come to be fixed at the same level, not by water
competition primarily, but by the forces of commercial rivalry between
centres bidding for the far western market. They were originally
graded somewhat according to distance in the early days.[764] And it
is plain that water competition, at first confined to the Atlantic
seaboard, gradually extended inland. In order to secure the business to
San Francisco by steamer or clipper ship, rail charges from Pittsburg
or Buffalo back to Philadelphia or New York had been absorbed in
the through rate, thus gradually extending the benefits of water
competition farther and farther west from the seaboard cities.[765]
And, of course, as population and manufactures grew in the Middle West,
the narrow fringe of such competition steadily and inexorably spread in
from the Atlantic coast over a wide zone of blanket rates, all based on
New York. The direct all-rail carriers, naturally, met this competition
at all points. Manufactures and population continued to spread toward
the West; but, imperceptibly, a new competitive factor appeared. As the
force of direct water competition lessened with ever-widening distance
inland from the Atlantic, market competition began to gather strength.
One need not go so far as to concede that "market competition is a
euphemism for railroad policy," in order to realize that artificial
rather than natural influences gradually came to bear in the westward
extension of the blanket rate. The trans-Missouri lines, getting the
_whole_ rate on shoes made in St. Louis for the Pacific slope, while
only getting a part of it if the goods came from New England, had a
direct motive to put St. Louis into the western market and thereafter
to hold it there at all cost. Every increment in the St. Louis
traffic, moreover, was surely theirs for ever. It could not be stolen
away by Canadian railways or ocean steamship lines, as it might if
it originated at Boston. It became a settled policy of these western
lines, therefore, to meet even the water-compelled seaboard rates at
all points, no matter how far inland. The blanket zone thus steadily
widened, out of all semblance to its originally modest proportions as
based upon water competition alone. A competition originally natural,
gradually merged into another of an entirely artificial sort.
The importance of both the intermountain and Pacific coast traffic
originating along the western confines of the blanket zone, steadily
increased. One record showed that three-fourths of the business at
Reno, Nevada, originated west of Chicago.[766] It all moved on the same
rate as freight from Portland, Maine, whether destined to Nevada or to
the Pacific coast. The disparity against Nevada remained absolutely the
same in either case. It was to hold this traffic, originating west of
Chicago, against all eastern competitors, that the blanket zone was so
abnormally widened by the trans-Missouri railroads.
For years the transcontinental rate scheme had been before the
Interstate Commerce Commission. A number of decisions[767] were
rendered prior to 1910, under the old long and short haul clause,
emasculated as it was by the Alabama Midland decision of 1896. The
Hepburn amendments of 1906 had so far strengthened the hands of the
Commission that it made several attempts to deal with the question.
But the orders in these cases were confined to classified tonnage,
although it was clear that most of the transcontinental business
moved under commodity rates. Such carload or wholesale tonnage, of
course, was the only sort actually affected by the competition by
sea. This fact greatly aggravated the discrimination against which
the intermountain cities complained. For, in absence of such water
competition, they enjoyed relatively fewer commodity ratings. And their
youthful, though ambitious, jobbing trade was dependent upon just such
special carload rates in competition with middlemen on the Pacific
coast. If "tin boxes and lard pails, nested" moved in carloads, Seattle
got them from "anywhere east" for a commodity rate of eighty-five
cents, as against the regular fourth-class rate to Spokane of $1.90
per hundred pounds. The Commission grappled with the problem of such
discrimination manfully; but made little headway until the new law of
1910 put it in better case. Then for the first time it tackled the
heart of the matter, in revising the commodity rates in the great
cases now under review. There is evidence that the railroads were
already endeavoring to remodel their tariffs, under pressure in some
degree from the Commission even before the amendment of the law in
1910. It was recognized that some modification of the existing scheme
was needed.[768] And it was relatively easy to re-arrange mere class
rates.[769] They were little affected by water competition. But the
commodity schedules, concerned in these later cases, were far more
important commercially.
Two plans were possible to mitigate the violation of the distance
principle.[770] The rates to intermediate points might be lowered
conformably to the long-distance standard. This would enable the
railroads to hold the coast traffic against the water lines, but would
decrease the revenues from "way" business. Or, on the other hand,
the coast rates might be put up, regardless of water competition, in
the expectation that much through business would still go by rail.
Tariffs by land were already considerably higher than by the sea
routes. Possibly the rail rates might be increased somewhat further.
Some coast business would be lost to the water lines, but on what
remained a higher return would accrue. Moreover, a considerable
development of interior distributing centres would be bound to ensue.
And, best of all, the grievances of the interior places would be
somewhat mitigated.[771] Unfortunately the Pacific coast points were
in an uproar at this threat against their supremacy in the jobbing
business. And, in the meantime, the new powers under which the present
proceedings were taken had been conferred by the Mann-Elkins law. The
carriers unaided could probably not have greatly bettered matters.
But the government, at all events, chose to deal with it; so that
these private attempts came to naught. Subsequently such action as the
carriers took, naturally assumed the form of increases at terminals
rather than reductions at intermediate points.
The new orders[772] were radically different from the preceding
ones, not only in applying to commodity rates, under which most of
the tonnage really moved, but also in respect of the form of remedy
proposed. In order to correct the discrimination, the previous
decisions prescribed the absolute rates to be put into effect at
various points. The new orders did not establish absolute rates at
all, but endeavored, instead, to set up a system of relative rates or
differentials. All the former decisions had held the intermountain
rates inherently unreasonable. The new opinions treated them as
only relatively so. A clear distinction was drawn between real
water competition and that _pseudo_ water competition which, as has
been said, resolved itself practically into a mere competition of
markets with one another. The guiding principle adopted was that
the force of water competition,--the only one entirely beyond the
carriers' control,--of necessity increased with the proximity of
the shipping-point to the Atlantic seaboard. Business from New York
to Seattle by rail had to go at rates compelled by the rivalry of
steamship lines. Traffic from Omaha to Reno, Nevada, was surely free
from it. Yet under the then existing system no distinction whatever
was made between the two sets of circumstances. All rates were
blanketed, regardless of remoteness from the eastern seaports. The new
governmental order substituted a series of zones suggestive of those
so long prevalent in trunk line territory.[773] These are shown by
the map on page 618. As one passed westward from zone IV, with water
competition under full pressure at New York, the influence of the
roundabout carriers by sea progressively diminished; until, at last,
beyond the Missouri it became _nil_. Such water competition affording
the only pretext for a grant of lower rates to the Pacific terminals
than to intermountain points, it followed, logically, that the
disparity in charges between such interior and coastal places should
decrease _pari passu_ with the westward movement of the originating
point. A substantially lower rate from New York to San Francisco than
from New York to Nevada might be permitted; but no such difference,
relatively, ought to obtain from St. Paul or Omaha to San Francisco
as compared with Rocky mountain territory. For these inland initial
points were practically beyond the range of steamship rivalry.
[Illustration]
Specifically, the Commission in these orders forbade any higher charge
to the mountain points from any part of zone I than applied to the
Pacific terminals. From zone II, lying four hundred miles more to the
east, there would probably never be any considerable traffic coming
back to New York in order to go round by sea, but in rare instances
there might be some. From this zone, therefore, intermountain rates
might be not more than seven per cent. above those to the Pacific
terminals. And so on as one went east. Rates from zone III might be
not more than fifteen per cent. higher to Spokane than to Seattle.
From zone IV to Rocky mountain territory they might be twenty-five
per cent, above those to San Francisco; but the disparity against the
intermountain territory, even from here with water competition in full
effect, must never exceed this percentage.
This ingenious plan certainly commends itself in principle to the
economic student. It restored in a measure the gradations existing
in 1887.[774] It did not create the zones out of whole cloth. It
utilized a scheme for division of territory already adopted by the
transcontinental lines for other purposes.[775] And, most important
of all, it was elastic, not prescribing absolute rates, but resting
content with laying emphasis upon the need of gradation. Yet it granted
a substantial measure of relief from the present disparity of rates.
For, whereas the former intermountain tariffs from the East were from
fifty to one hundred per cent, above those to the Pacific coast, the
difference under this order might never exceed twenty-five per cent.
The new scheme was cleverly planned, also, from a legal-strategic point
of view. It could scarcely be attacked under the Fourteenth Amendment
as confiscatory, inasmuch as it left so much latitude to the carriers
in the readjustment of their tariffs.[776] To overset it on this
ground, they must prove that disaster would result from the particular
rates which they had chosen to adopt. This would be an impossible task.
The only choice remaining to the carriers, therefore, would be to
attack the order on the ground that the Commission was exceeding its
powers, delegated by Congress. This, in effect, was what was done.[777]
The opinion of the Commerce Court,[778] setting aside the intermountain
rate orders of the Interstate Commerce Commission, will shortly be
reviewed by the Supreme Court of the United States, to which tribunal
appeal was promptly taken.[779] Disregarding the dissenting opinion
that the entire long and short haul clause, as amended in 1910, was
unconstitutional, there were three significant differences between the
two tribunals.
The first point at issue between the court and the Commission
concerned the differentiation of water competition from so-called
market competition.[780] The Commerce Court refused to recognize any
distinction between the cause of lower rates to the Pacific coast from
Omaha or from New York, respectively. It ascribed the disparity in all
cases to competitive forces entirely beyond the railroads' control "If
the carrier from St. Paul, in order to meet new water competition from
New York," etc. The Commission, on the other hand, clearly set apart
market competition, applicable to western cities, from that due to
carriage by water, which controlled rates from the Atlantic seaboard.
The railways, it said, must conform in their rate-making policies to
the latter. They were not bound by the former. For market competition
(as already quoted) "is a euphemism for railroad policy."[781] And,
speaking as an economist, ignorant of the technicalities of the
law, I venture to affirm that the Commission in this contention was
absolutely right.[782] Even as far west as South Bend, Indiana, wagons
may go to California by the direct rail route; or, with a change of
ten cents in the rate, they may come back to New York and thence go
round by sea. Such is the delicacy of adjustment even as far west
as Chicago. Hence the failure to recognize that low rates to the
Pacific coast from points west of the Missouri river were due to an
entirely different cause--namely, the arbitrary determination of the
transcontinental lines to hold the fort for their local clients against
all odds--was to commit an egregious economic blunder. Furniture goes
from Chicago to San Francisco on rates as low as if compelled by water
competition.[783] But steamships never carry commodities of this bulky
sort, even from New York. How much less, then, could water competition
apply so far inland? The carriers were bent on keeping Chicago in the
Pacific market. That was the real reason. The Commerce Court clearly
missed the main point.
Equally sound economic evidence that water competition alone was not
responsible for the entire present transcontinental rate system, was
afforded by the fact that the wide blanket zone, already described,
covering two-thirds of the United States for westbound rates, found
no counterpart in the scheme under which rates were made up in the
opposite direction.[784] It is a poor rule which will not work both
ways. And surely water competition, when present, should be potent
in either direction. It was undeniable that the absence of pushing
cities along the Pacific slope, desirous of developing trade relations
with the Atlantic states, discouraged even the slightest extension of
terminal rates inland. The ironclad monopoly enjoyed by the Harriman
and Hill lines would probably have prevented this in any event. But
the significant point was that there was no demand for a blanket zone
for eastbound traffic. Hence water-compelled rates staid where they
belonged; that is to say, closely confined to the Pacific seaboard
cities. Thus it would also have been in the eastern half of the
country, had it not been for "market competition"--this artificial
factor which the Commerce Court failed utterly to recognize as in a
class by itself.
The second vital difference of opinion between the Commerce Court and
the Commission was economico-legal. The economist in the office of
critic here stands upon less firm ground. And yet, whatever the law
may be, the reasoning rests upon the interpretation of the facts.[785]
The Commerce Court held that "when the rate for the longer haul is
forced unreasonably low by competition, the only elements that can
enter into the consideration of the rate for the shorter haul are its
reasonableness," etc.[786] The controlling idea, in other words, in
the reviewing judicial mind, was that, so long as the rate at Spokane
or Reno was reasonable _in itself_, it was a matter of indifference
to that locality what rate might be made to Seattle. All that the
Commerce Court needed to do, therefore, was to consider the "intrinsic
reasonableness"[787] of the intermediate rate. Not so, held the
Commission. Whether this charge was reasonable or not was a question
of relativity. It depended upon what rate was made to other points all
around it and competitive with it. In other words, the intermediate
could not be dissociated from the long-distance point. Railroads as
public carriers owed a common duty to both points. No intermediate
rate, however low _per se_, could be reasonable, if the carrier was
voluntarily offering a lower rate to points beyond. If its lower rate
beyond was accorded under compulsion, that of course was a different
matter. But in so far as these low Pacific terminal rates were due to
an artificial railroad policy, any discrimination against the nearer
points was unwarranted.
The analogy is clear between this difference of opinion of Commission
and court and that between the two schools which would base judicial
determination of rates in general upon inherent or relative
reasonableness, respectively. The "remuneration" test, which the
carriers' representatives sought to insert in the law of 1906, seeks
to discover innate reasonableness of rates; not affected, that is to
say, by the revenue which may accrue from them in the aggregate. The
other standard declares such reasonableness to be always dependent
upon circumstances; notably upon the amount of the investment and the
resultant earning power arising out of the volume of business carried
at the rates in question.[788]
The third difference of opinion between court and Commission was
purely one of law.[789] Had the latter exceeded its powers delegated
by Congress in attempting to fix a _relation_ of rates, instead of
prescribing certain maximum rates applicable to particular points?[790]
The reasoning followed was apparently derived from the Supreme
Court opinion in the Chattanooga case.[791] This reasoning, the
government now contended in its argument on appeal to that tribunal,
was inapplicable to the since amended law. Limits of space and the
natural diffidence of an economist, alike forbid extended discussion
of this nice point at law. The Commission alleged that, except by
the exercise of such authority to prescribe relativity of rates,
it would be powerless to remedy such discriminations in future. In
consequence, inasmuch as Congress evidently intended to enable it to
afford such remedy, authority over relativity of rates must be derived
by necessary implication. And it is certain, economically speaking,
that in this position the Commission was once more perfectly right.
Whether it was legally so remained yet to be decided.[792] In this
connection, it seems odd that none of the briefs for the government
mentioned an important instance of the undisputed exercise of such
power to establish relativity of rates. The Commission had for years,
even in absence of any express authorization by law until 1910, freely
prescribed details of freight classification in a large number of
important cases.[793] It had never done more than to fix relativity;
and the constitutionality of its orders had never been attacked.
An entirely new issue arose at this point. Prescribing relativity
of rates implied determination of minimum rates. For if, as in this
transcontinental case, the freight rate to Nevada points from New York
might never be more than twenty-five per cent. greater than to San
Francisco, a lower limit as well as an upper one was thereby prescribed
for the latter point, and _vice versa_. The rate to one point once
fixed by the carrier, voluntarily if you please, the minimum rate to
the other might be necessarily determined thereby. If a dollar rate
prevailed at Spokane, the Seattle rate must not fall below seventy-five
cents. Was this not something new? Did it not suggest fixing, not
maximum rates alone, but absolute rates as well? And if an attempt to
fix absolute rates, was it not unconstitutional? There could be no two
minds about the need of conferring power upon the Interstate Commerce
Commission over minimum or differential rates, if effective government
regulation were ever to be attained. This had been my contention for
years.[794] It had the best possible expert support from the side
of the carriers.[795] Discriminatory rates could never be corrected
until such power was delegated by Congress or conferred by judicial
interpretation of the law. Kansas City now enjoys lower rates to
Chicago on packing-house products than are accorded to Omaha. On every
sound principle of rate making, the two cities ought to be placed on a
parity. But the Commission could not rectify the abuse; for the roads
from Kansas City promptly reduced their rates _pari passu_ with any
reduction of the charge at Omaha.[796] There was no bed rock below
which rates could not go. The Omaha railroads as well as the government
were powerless in face of the situation.
May power to fix minimum rates, so necessary to an adequate program
of control, be constitutionally delegated by Congress? The question
has never been squarely presented to the Supreme Court.[797] But the
language in many cases has been such as to indicate that maximum rates
alone may be lawfully established. Is the reiteration of the word
"maximum" intentional? Or may it be that the judicial mind has never
yet contemplated the need of regulating the minimum rate? Surely it
seems an anomaly that the government should ever seek to fix such a
lower limit, _below_ which compensation may not be had. And yet many
cases show that it is absolutely necessary, to the end that justice
may be done. Or may the unconstitutionality of fixing minimum rates
depend upon the fact that, if thus prescribed along with maximum
rates, it will amount, practically, to determination of the absolute
rate--the bogey which the carriers seem most of all to hold in dread?
Interesting and inviting possibilities of judicial interpretation are
indeed suggested along this line, were there opportunity to pursue them
further.
FOOTNOTES:
[746] The history of the clause will be found at pp. 473 and 564,
_supra_.
[747] Digest of the Hearings, Appendix III, Dec. 15, 1905, pp. 1-244.
An excellent body of unworked economic data on rate making is here
afforded.
[748] P. 240, _supra_.
[749] 25th Ann. Rep. I.C.C., 1911, discusses the matter fully.
[750] _Cf._ p. 255, _supra_, as to which line makes the rate.
[751] 14 I.C.C. Rep., 476.
[752] _Cf._ instances cited by Judge Knapp before the Senate (Elkins)
Committee, 1905, IV, p. 3294. Hammond, Rate Theories of the I.C.C.,
also marshals these cases.
[753] _Cf._ F.H. Dixon, A Traffic History of the Mississippi River;
Doc. 11, Report National Waterways Commission, 1911.
[754] _Cf._ pp. 385, 566, _supra_, and 638, _infra_.
[755] 22 I.C.C. Rep., 366.
[756] P. 473, _supra_.
[757] Already discussed in other connections in chapters VII and XI.
[758] 5 I.C.C. Rep., 478, 510.
[759] For Spokane, 15 I. C. C. Rep., 376 (1909); 19 _Idem_, 162 (1910);
21 _Idem_, 400 (1911). For Nevada: 19 _Idem_, 238 (1910) and 21 _Idem_,
329 (1911). The latest Denver case is 15 _Idem_, 555. For Salt Lake
City 19 _Idem_, 218.
[760] Shown by a map in 19 I. C. C. Rep., 241.
[761] 19 I. C. C. Rep., 250; 21 _Idem_, 351, 416-421; Dunn, The
American Transportation Question, pp. 178-221. _Railway Age Gazette_,
LIII, p. 202.
[762] _Cf._ chap. XX, _infra_.
[763] P. 217, _supra_.
[764] 9 I. C. C. Rep., 318 _et seq._ Reprinted in our Railway Problems.
[765] _Cf. U. S. v. U. P._, etc., Evidence, I, p. 295.
[766] _Cf. Railway Age Gazette_, LIII, p. 201.
[767] Best reviewed in Brief for the United States in _U.S. v.
Atchison, Topeka and Santa Fe Railway_, etc.: Supreme Court, October
term, 1911, p. 10.
[768] _Railway Age Gazette_, May 14, 1909, and November 25, 1910.
[769] Brief for U.S., _loc. cit._, p. 12.
[770] 191 Fed. Rep., 861.
[771] The plan is in _Railway Age Gazette_, June 4, 1909, p. 1182.
New tariffs are described in _ibid. Cf._ also _Boston Transcript_,
November 28, 1910, for other plans.
[772] 21 I.C.C. Rep., 329, 400. Both the Spokane and Nevada cases are
combined in the appeal to the Supreme Court; as is also the independent
order of the Commission denying relief from the fourth section to the
Union Pacific and other roads.
[773] Chap. X, _supra_, especially the map facing p. 365.
[774] 9 I. C. C. Rep., 318. The first suggestion I find of graded rates
is in the dissenting opinion in this St. Louis Business Men's League
case. Reprinted in our Railway Problems.
[775] Brief for U. S., _loc. cit._, p. 55. Annual Report I. C. C.,
1911, p. 31.
[776] A compromise offered by the railways and accepted by commercial
bodies pending the Supreme Court decisions was filed June 18, 1912. It
is estimated to save Spokane shippers alone about $500,000 annually.
Class rates are the Commission's from the seaboard, but from interior
points are somewhat lower. The acceptance of the distance principle is
the significant point.
"As the distance, St. Paul to Spokane, approximately 1500 miles, is
150 per cent. of the distance Omaha to Salt Lake, approximately 1000
miles, a reasonable rate from St. Paul to Spokane would not be less
than 130 per cent. of the rate from Missouri river to Salt Lake, and
in the proposed tariff rates from St. Paul to Spokane would be made
accordingly.
"From Mississippi common points as defined by current tariffs, the
rates would be 112-1/2 per cent. of the St. Paul rates.
"From Chicago and common points, the rates would be 116-2/3 per cent.
of St. Paul rates.
"From Detroit and common points, 125 per cent. of the St. Paul rates.
"From Buffalo, Pittsburg and common points, 130 per cent. of St. Paul
rates.
"From New York, Boston and common points, 130 per cent. of St. Paul
rates.
"From Colorado common points, 90 per cent. of St. Paul rates."
[777] _Cf. Railway Age Gazette_, July 28, 1911, p. 162.
[778] 191 Fed. Rep., 856.
[779] Decided favorably to the I. C. C., 1914; 234 U. S. 476, 495.
[780] Market competition as such is discussed at p. 118, _supra_.
[781] 21 I. C. C. Rep. 355, 367: the Transcript of Testimony in
the Supreme Court record is especially illuminating. _Cf._ also
Twenty-fifth Annual Report I. C. C., pp. 30-40.
[782] S. O. Dunn in _Railway Age Gazette_, November, 25, 1910.
[783] _Railway Age Gazette_, 1910, p. 1005.
[784] 21 I. C. C. Rep., 418-423 is best on this. _Cf._ also p. 608,
_supra_.
[785] As analyzed in chapter VII, _supra_.
[786] Brief for the U. S., _loc. cit._, p. 37; Annual Report I. C. C.,
1911, p. 36.
[787] In the Lemon rate cases also; 190 Fed. Rep., 593. _Cf. supra_,
p. 592.
[788] H. S. Smalley in _Annals of the American Academy of Political
Science_, March, 1907, pp. 299-304. _Cf._ also our Railway Problems,
chap. XXIV. The point will be more fully discussed in vol. II, dealing
with matters of finance, valuation, etc.
[789] Annual Report I. C. C., 1911, p. 38. Brief for U. S. Supreme
Court, no. 883 _et seq._, pp. 23-37. Also Brief for I. C. C. in the
same case.
[790] Commerce Court opinion, p. 15. _Cf._ p. 507, _supra_.
[791] 181 U. S., I. _Cf._ also p. 592, _supra_.
[792] Of significance on this point is Commissioner Lane's dissent in
the Lemon rate case. P. 592, _supra_.
[793] For details, _Cf._ Hammond, Rate Theories of the Interstate
Commerce Commission (1911) and J. Strombeck, Freight Classification
(1912). Also p. 468, _supra_.
[794] _Atlantic Monthly_, September and October, 1905. On shortcomings
of the later amendments of the law, _cf._ F. H. Dixon, in _Quarterly
Journal of Economics_, vol. XXIII, 1910, p. 630.
[795] _Railway Age Gazette_, editorial, January 12, 1912, p. 41; and S.
O. Dunn, The American Transportation Question, 1912.
[796] _Cf._ the Fort Worth case decided June 6, 1912; also the Eau
Claire case, 5 I. C. C. Rep., 264. The latest case in which the
Commission held that it had power to suspend a proposed reduction in
rates arose from just such a condition of affairs, 22 I. C. C. Rep.,
160.
[797] I am indebted to Professor Smalley of Ann Arbor, certainly the
best authority among economists, for many citations on this point; as
well as to Professor F. H. Dixon for suggestions. _Cf._ also 21 I. C.
C. Rep., 415; Annual Report I. C. C., 1911, p. 34; and the Commerce
Court opinion under discussion. Commissioner Harlan in his dissent in
the Shreveport case asserts a clearer right over minimum than over
maximum rates as against state authority. 23 I. C. C. Rep., 54.
CHAPTER XX
THE CONFLICT OF FEDERAL AND STATE AUTHORITY; OPEN QUESTIONS
History of state railroad commissions, 627.--The legislative
unrest since 1900, 628.--New commissions and special
laws, 629.--The situation critical, 630.--Particular
conflicts illustrated, 631.--The clash in
1907, 632.--Missouri experience, 633.--The Minnesota
case, 634.--The Governors join issue, 634.--The Shreveport
case, 635.
Control of coastwise steamship lines, 638.--Panama Canal
legislation, 641.--The probable effect of the canal upon
the railroads, especially the transcontinental lines, 643.
Historically, the attempt of the separate American states to control
railways began with a law after the English model in New Hampshire
establishing a commission in 1844.[798] Three other New England states
then followed suit prior to the Civil War.[794] But these early
experiments were mainly concerned with matters of safety rather than
of rates. The first real step was taken by Massachusetts in 1869. The
Railroad Commission created in that year has served ever since as a
model of the so-called "weak" or "advisory" type of regulation. Others
of this sort were more common in the eastern states. Such commissions,
in Massachusetts for example, rely mainly upon public opinion for the
enforcement of their decisions. They possess very limited authority
over rates, although they are empowered to recommend such changes as
may be deemed advisable. Back of this authority, of course, lies the
legislative power of the General Court, invoked on special occasions.
But, in general, the activities of the Massachusetts type of commission
have been mainly confined to supervision, either of construction or of
capitalization.[799] New York and several other states conformed in
the main to this type, although none of them had any authority over
matters of finance. A second variety of the older railroad commissions
dates from the period of the Granger Movement in the West. Maximum
rate laws were passed by a number of commonwealths in the seventies,
notably Illinois, Minnesota, Iowa, and Wisconsin. The outcome of
this legislation was the decision of the Supreme Court of the United
States, elsewhere discussed,[800] holding that state legislatures had
the power to fix rates. The so-called "strong" commissions had their
rise in connection with these events. Railway boards of this second
type exercised control over rates in two ways; namely, by means of
the promulgation of freight classifications and the prescription of
maximum distance tariffs. For the purposes of such regulation most of
the western states grouped the carriers according to their earning
capacity, with a different schedule in each case. In certain of the
southern states these older commissions adopted even more drastic
policies which brought about prolonged litigation. The peculiar case of
Texas, adding financial legislation to the direct prescription of rate
schedules, has been discussed by itself.[801]
A new chapter in railroad regulation by the separate states dates from
the general public unrest and Congressional activity of the Roosevelt
period. An almost frenzied activity after 1900 culminated in 1907
in a legislative wave which swept over the entire country. No less
than fifteen new or remodelled commissions were created in the two
years 1905-1907, bringing the total number by 1908 to thirty-nine.
Practically all of these were of the so-called "strong" type; that is
to say, possessing the most extensive powers over all matters of rate
operation and in many cases of finance as well. The most notable of
these, of course, were the so-called Public Utility Commissions of
Wisconsin (1905) and New York (1907). The subjugation of the formerly
dominant railway interests in New Jersey and Pennsylvania was also
highly significant.[802] The movement even invaded the New England
States,--so long a sanctuary of the "weak" or advisory commission.
Vermont and New Hampshire set up powerful boards, and Massachusetts,
in 1913, amplified the powers of its commission in harmony with the
general movement. Several features of this new lot of state commissions
contrast markedly with even the old-fashioned "strong" type. Many of
them permit the fixing of absolute rates. The majority now provide
for appointment rather than election of the commissioners; and also
by salary and in other ways enhance the dignity of the office. This
operates naturally to lift these boards out of a semi-political
atmosphere formerly too characteristic in many cases; and to bring them
more to a par with the state courts.
The "Wisconsin Idea," achieving its full flower under the remarkable
leadership of Governor La Follette in 1905, ably seconded by a number
of prominent University of Wisconsin men, notably Hon. B. H. Meyer,
now a member of the Interstate Commerce Commission, most completely
realizes the progressive policy of sane state regulation.[803] The
principle is laid down "that it was as much the duty of the state to
furnish transportation facilities as it ever had been to make roads or
build bridges; and that if the function was delegated to any one, it
was the duty of the state to regulate it so that the agent should be
required to furnish adequate service, reasonable rates, and practise
no discrimination." And, it is added, that this procedure should be
"so simple that a man can write his complaint on the back of a postal
card, and if it is a just one, the state will take it up for him."
The three fundamental principles of the Wisconsin programme, now
happily incorporated in the Federal law, were full authority over
future rates; secured without expense to the complainant; and with the
burden of proof laid upon the railroad in cases of appeal. In short,
the Wisconsin plan provided for thoroughgoing administrative control,
that is to say, with strict limitation of judicial review to the
determination of points at law. The issues were in no wise different
from those already discussed heretofore in connection with the
development of the recent Federal policy; except possibly in respect
of the persistency of opposition, which has had to be overcome more
gradually in the Senate of the United States,--the natural stronghold
of corporate influence.
The creation of powerful state commissions since 1905 has, oddly
enough, been accompanied by a great activity of the state governments
in the enactment of statutes aiming independently to regulate common
carriers. Laws of this class are not new. As far back as 1890 there
were twenty-two maximum rate and fare statutes. A period of quiescence,
marked by only four such laws in twelve years, was followed by the
passage within five years to 1907 of no less than twenty-two maximum
fare laws and nine maximum rate schedules.[804] To these may be added a
large grist of statutes dealing with almost every detail of operation
or service. Demurrage, provision for terminals, train service and
connections, distribution of cars, industrial and spur tracks, and
hours of labor, may be cited among a host of others.