THE RAILROAD PROBLEM
§ 1. Rise of the corporation concept. § 2. The modern era of
corporations. § 3. Beginning of corporation problems. § 4. The era of
canals. § 5. Rapid building of American railroads. § 6. Reasons for
governmental aid. § 7. Kinds of governmental aid. § 8. Emergence of
the railroad problem. § 9. Discrimination as to goods. § 10. Local
discrimination. § 11. Personal discrimination. § 12. Economic power
of railroad managers. § 13. Political power of railroad managers,
§ 14. Consolidation of railroads. § 15. State railroad commissions. § 16.
Passage of the Interstate Commerce Act. § 17. Working of the Act.
§ 18. Public nature of the railroad franchise. § 19. Other peculiar
privileges of railroads. § 20. Private and public interests to be
harmonized.
§ 1. #Rise of the corporation concept#. In the legal systems of
primitive people and long afterward, only natural persons had legal
rights, could make contracts, have property, and carry on a business.
But in a number of cases, very early, groups of men came to have
certain interests in common and certain possessions. Gradually some
such groups gained more or less of legal recognition, with certain
political and economic rights as a body and not as individuals.
Thus evolved the conception of a "corporation" (body) having men as
"members," an artificial person, yet not the same as any one or as all
the individuals together, and legally distinct from the individuals.
A group of burghers obtaining a charter from the lord of the realm
became a municipal corporation; a group of teachers, a _collegium_,
became the corporation of the college or a university (a number of
persons united into one association); a group of craftsman became a
gild-corporation. Each corporation had certain rights, privileges, and
immunities, and used a corporate seal as a signature. All of the early
corporations had some economic features that were incidental to the
main purposes, which were political, ecclesiastical, educational,
and fraternal. Toward the end of the Middle Ages groups of traders
obtained charters to act as corporations permanently for business
purposes, such as foreign trade, colonization, and banking. These
increased in the sixteenth and seventeenth centuries, and in the
eighteenth century this form of organization was adopted also and
parliamentary charters obtained, by groups of men for building
turnpikes and canals and for carrying on other kinds of business.
§ 2. #The modern era of corporations#. The great era of the
corporations did not begin, however, until well on in the second
quarter of the nineteenth century. Then, both in Europe and in
America, the corporate form of organization was extended to a greater
number, and to other kinds, of enterprises. It proved itself to be
well adapted to enterprises for the construction and operation of
canals and railroads, requiring a larger amount of capital than
usually could or would be risked by one person. The investor in a
corporation bought shares, and his liability for debts and losses
was limited by charter to his share capital. It is an advantage that
permanent enterprises of that kind are owned by corporations
with charters perpetual or for long periods. It is possible for
corporations to make investments running for longer periods than would
be safe for individuals. The corporation with an unlimited charter
has legally an immortal life. Sale and change of management are not
necessary on the death or failure in health of any one owner. As the
factory system and large production developed, the corporate form of
organization was found to have these same advantages in manufacturing.
It appeared in textile, iron, mercantile, and other industries. After
1865 the corporate form of organization increased at a cumulative
rate, until now it is applied to many enterprises of small extent and
local in operation. There are 300,000 corporations making returns
to the United States Commissioner of Internal Revenue.[1] There were
70,000 manufacturing corporations, which were 26 per cent of the whole
number of manufacturing establishments, but which employed 76 per cent
of all wage earners and turned out 79 per cent of the whole product.
§ 3. #Beginning of corporation problems.# With the corporations
came "the corporation problem," a single name for a complex of
problems--legal, political, moral, and economic--which arise out of
the relations of corporations to their individual stockholders, to
their employees, to the state, to the general public, and to their
competitors in business. The problems differ also in corporations of
different sizes and in different businesses. We shall discuss in
this and succeeding chapters but a few of the larger aspects of the
corporation problem, the railroad, the industrial trust, and certain
other kinds of monopolistic industry.
Of the various forms of corporations, banks first presented problems
calling for economic legislation and regulation. This is explained by
the fact that it was the first kind of business corporation to become
important, and further by the fact that its work was in various ways
closely connected with the coinage and regulation of money, which had
already become a governmental function. The railroad was the form
of corporation next in point of time to become a great problem; this
because of the peculiarly vital and far-reaching effects that such
railroad transportation has upon all other kinds of business in the
community, as appears in what follows.
§ 4. #The era of canals.# Canals were used in the ancient empires
for irrigating, for the supplying of cities with water, and for
navigation. In the late eighteenth and the early nineteenth centuries
they were rapidly built in England and America. Six canals had been
built in the United States before 1807, but the "canal-era" in America
dated from the beginning of work on the Erie canal in 1817, and
continued until about 1840, when nearly all new work ceased; over 4000
miles of canals had been built at a cost of $200,000,000.
The great advantage of canals is cheapness of operation due to the
simplicity of the machinery needed and to the great loads that can be
moved with small power. A cent a ton-mile proved to be a paying rate
on a small canal. For heavy, slow-moving freight, a railroad can even
now barely rival a parallel canal at its best. As canals, however, can
be built only along pretty level routes and where the water supply is
at high level, their construction is limited to a small portion of the
country. The principle of diminishing returns applies strongly to
the construction of canals; the first canals in favored locations
are easily constructed and economically operated, but it is only
with greater cost and difficulty that the system can be successively
extended. In temperate climates the use of canals is limited by ice
to a part of the year, and by the summer's drought sometimes still
further. At its best, therefore, the small land-locked canal is fitted
only to be a supplementary agent in the system of transportation
wherever another transportation agency of higher speed and greater
regularity is possible. Far different is the case of the oceanic canal
in a tropical climate.
Canals do not appear to have developed any serious problems calling
for public regulation of rates. A first simple legislative act fixing
the rate of tolls for boats was sufficient. Charges were made by
distance as on a toll road and the boats were owned by different
private shippers or by common carriers among whom competition
prevailed.
§ 5. #Rapid building of American railroads#. The canal was just
reaching the peak of popular favor when the railroad in 1830, after a
half-century of slowly accumulating technical improvements, burst into
view as a demonstrated success as a means of transportation.[2] The
railroad excels in adaptability any other agent of transportation; it
can go over mountains or tunnel through them. It is markedly superior
in certainty; it may be blocked for a day or two by floods and snows,
but it suffers no seasonal stoppage of traffic. In speed, even the
early railroad so far excelled that the canal could survive only by
dividing the traffic, taking the lower grades of freight, and leaving
to the railroad the passenger traffic and fast freight. Even in
respect to cheapness, the unique virtue of waterways in favored
localities, the railroad made rapid gains. Improvements in roadbed,
rails, cars, engines, and other equipment soon reduced greatly the
cost of conducting traffic on the main lines of roads. Because of
these qualities railroads soon surpassed in importance every other
agency of internal transportation. The miles constructed and miles in
operation in the United States, by decades since 1830 were as follows
(route mileage, not counting double tracks and sidings):
Miles constructed Total route miles
in decade. in operation.
1830 ........................ 23 23
1840 ........................ 2,795 2,818
1850 ........................ 6,203 9,021
1800 ........................ 21,605 30,626
1870 ........................ 22,296 52,922
1880 ........................ 40,345 93,267
1890 ........................ 73,924 167,191
1900 ........................ 31,773 198,964
1910 ........................ 51,028 249,992
1915 (5 yrs.) ............... 13,555 263,547
The extension of railroads was so rapid that there was not time for
a gradual adjustment of industrial conditions. In many places the
resulting changes were revolutionary. The building of railroads in
the Mississippi valley in the seventies lowered the value of eastern
farms, ruined many English farmers, and depressed the condition of
the peasantry in all western Europe.[3] With the lower prices that
resulted when the fertile lands of the western prairies were opened
to the world's markets, the less fertile lands of the older districts
could not compete. Many other changes, of no less moment in
limited districts, resulted from the building of railroads. Local
trading-centers decreased in importance. Villages and towns, hoping
to be enriched by the railroads, saw their trade going to the cities.
Commerce became centralized. Enormous increases of value at a few
points were offset by losses in other localities.
§ 6. #Reasons for governmental aid#. The growth of railroads in
America was more rapid than in any other part of the world, but it
did not occur without much help to private capital from governmental
agencies. The railroad enterprise was uncertain, the possibilities of
its growth could not be foreseen, and private capital would not invest
without great inducements. In European countries the railways were
built through comparatively densely populated districts to connect
cities already of large size. Yet railroad extension was very slow
there, even tho the states in many ways aided the enterprises. America
was comparatively sparsely populated, and most of the railroads were
built in advance of and to attract population, business, and traffic.
In many cases railroad building in America was part of a gigantic
real-estate speculation undertaken collectively by the taxpayers of
the communities.
§ 7. #Kinds of governmental aid#. American states recklessly abandoned
the policy of non-interference, and vied with each other in giving
railroad enterprises lands, money, and privileges, in loaning bonds,
in subscribing for stock, and in releasing from taxation. These
fostering measures were expected to increase wealth and to diffuse a
greater welfare through the community. Many states were forced to
the point of bankruptcy by their reckless generosity, and some states
repudiated the debts thus incurred.
The national government then took up the same policy and granted lands
to the states to be used for this purpose. The first case of this kind
was the grant to the Illinois Central road, in 1850, of a great strip
of land through the state from north to south. Grants were made in
fourteen states, covering tens of millions of acres of land. Then the
national government, between 1863 and 1869, aided the building of the
Pacific railroads by granting outright twenty square miles of land for
every mile of track and by loaning the credit of the government to
the extent of fifty million dollars,--a debt which was settled by
compromise only after thirty years.
Counties, townships, cities, and villages then entered into keen
competition to secure the building of railroads, projected by
private enterprise. Bonds, bonuses, tax-exemptions, and many special
privileges were granted. To obtain this new Aladdin's lamp, this great
wealth-bringer, localities mortgaged their prosperity for years to
come. The promoters bargained skilfully for these grants, playing off
town against town, cultivating the speculative spirit, punishing the
obdurate. Not the civil engineer, but the railroad promoter determined
the devious lines of many a railroad on the level prairies of America.
The effects of these grants were in many cases disastrous, and after
1870 they were forbidden in a number of states by legislation and by
constitutional amendments. But before this era of generosity ended,
probably the railroads in America had received more public aid than
has ever been given to any other form of industry in private hands.
§ 8. #Emergence of the railroad problem#. In most charters and laws
authorizing the building of railroads, either nothing was specified
regarding rates, or maximum rates were fixed which proved to be so
high that they were of little, if any, practical effect. But very soon
began to appear some serious evils in the policy of railroads toward
the shipping and traveling public in matters of rates and of service.
As the ownership of the wagons, ships, and canal-boats of a country
is usually divided, ocean ports and points along the lines of
turnpikes and canals enjoy competition between carriers. In the early
days of the railroads it was believed that a company or the government
would own the rails and charge toll to the different carriers, who
would own cars and conduct the traffic as was done on the canals.
Experience soon showed the impracticability of this scheme and the
need of unified management. An operating railroad company, therefore,
has a monopoly at all points on its line not touched by other
carriers. This, like any other monopoly, is limited, for the railroad,
to secure traffic, is led to meet competition of whatever kind--that
of wagons, canals, rivers, or of other railroads--wherever it occurs.
The railroads in private hands early began to "charge what the traffic
would bear," high where they could, and low where they must, to get
the business. Thus developed the various forms of discrimination which
are now to be described.
§ 9. #Discrimination as to goods#. Discrimination as to goods is
charging more for transporting one kind of goods than for another
without a corresponding difference in the cost. When reasonably
understood, this proposition does not apply to a higher charge for
goods of greater bulk, as more per pound for feathers than for iron,
the "dead weight" of car being much greater in one case than in the
other. It does not apply where there is a difference in risk, as
between bricks and powder, or coal and crockery; nor where there is a
difference in trouble, as between live stock and wheat. Any difference
that can reasonably be explained as due to a difference in cost is
not discrimination; on the other hand a difference in cost without a
difference in rate is discrimination. Discrimination as to goods may
be by value, as low rates for heavy, cheap goods, and high rates for
lighter, valuable ones. Coal always goes at a low rate as compared
with dry goods, and sometimes more is charged for coal to be used for
gas than for coal to be used for heating purposes.
Railroad discrimination so frequently has resulted in injustice to the
shipping public that the term has taken on an evil significance. But
it is well to observe that the word discrimination is not derived from
_crimen_ (crime), but from _discernere_ (to discern). There are
both reasonable and unreasonable forms of discrimination. In
general discrimination as to goods more often appears, under certain
conditions and made with due regard to the public interest, to
be reasonable; less often to be justified is the form of local
discrimination, next to be described; and least often of all to be
justified is the last named form of personal discrimination.
§ 10. #Local discrimination#. Discrimination between places (called
also local discrimination) is charging different rates to two
localities for substantially the same service. This occurs when local
rates are high and through rates are low; when rates at local points
are high and at competing points are low; when less is charged for
shipments consigned to foreign ports than for domestic shipments;
when, more is charged for goods going east than for goods going west.
The causes of local discrimination are: first, water-competition,
found at great trade centers such as New York and San Francisco;
second, differences in terminal facilities, making some places better
shipping-points than others; third, competition by other railroads,
which is concentrated at certain points, only one tenth of the
stations of the United States being junctions; fourth, the influence
of powerful individuals or large corporations and the personal
favoritism shown by railroad officials.
The effects of local discrimination are to develop some districts and
depress others; to stimulate cities and blight villages; to destroy
established industries; to foster monopolies at favored points; and to
sacrifice the future revenues of the road by forcing industry to move
in the competing points to get the low rates. The power of railroad
officials arbitrarily to cause rates to rise or fall is happily
limited in practice by the need of earning as large and as regular
an income as possible, but even as exercised it has been at times as
great as that possessed by many political rulers.
§ 11. #Personal discrimination#. Discrimination between shippers
(personal discrimination) is charging one person more than another for
substantially the same service. This most odious of railroad vices,
rarely practised openly, is done by false billing of weight, by
wrong descriptions or false classification to reduce the charge below
published rate-sheets, by carrying some goods free, by issuing passes
to some and not to all patrons under the same conditions, or by
donations or rebates after the regular rate has been paid. In some
cases a subordinate agent shares his commission with the shipper, and
the transaction does not appear on the books of the company. In other
cases favored shippers are given secret information that the rate is
to be changed, so that they are enabled to regulate their shipments to
secure the lower rate.
One group of reasons for personal discrimination is connected with the
interests of the road. It is to build up new business; it is to
make competition with rival roads more effective by favoring certain
agents, as was very commonly done in the Western grain business; it
is to exclude competition, as by refusing to make a rate from a
connecting line or to receive materials for a new railroad which is
to be a competitor; and it is to satisfy large shippers whose power,
skill, and persistence make the concession necessary. Another group of
reasons has to do with the interests of the corporate officials. It is
to enable them to grant special favors to friends; or it is to build
up a business in which they are interested; or it is to earn a bribe
that has been given them.
The evils of personal discrimination are great. It introduces
uncertainty, fear, and danger into all business; it causes business
men to waste, socially viewed, an enormous fund of energy to get good
rates and to guard against surprises; it grants unearned fortunes and
destroys those honestly made; it gives enormous power and presents
strong temptations to railroad officials to injure the interests of
the stockholders on the one hand and of the public on the other.
§ 12. #Economic power of railroad managers.# Other evils of
unregulated private management of railroads appeared. When the
railroad was a young industry, it was thought to be simply an
iron-track turnpike to which the old English law of common carriers
would apply. This and similar notions soon, however, proved illusory.
It was seen that the higher railroad officials had, in the granting
of transportation service and the fixing of rates, a great economic
power. They had complex and sometimes conflicting duties to
the stockholders and to the shipping public. They wore their
conscience-burdens lightly, before the days of effective regulation,
and frequently made little attempt to meet the one and no attempt
whatever to meet the other obligation. The opportunities for private
speculation brought to many railroad managers great private fortunes.
There were no precedents, no ripened public opinion, no established
code of ethics, to govern. It was a betrayal of the interests of
the stockholders when directors formed "construction companies" and
granted contracts to themselves at outrageously high prices. It was
an injury not only to shippers, but also to the stockholders, when
special rates were granted to friends and to industries in which the
directors were interested. In general, however, the interests and
rights of the stockholders were more readily recognized than
were those of the public. A railroad manager is engaged by the
stockholders, is responsible to them, and looks to them for his
promotion. Hence their interests are uppermost whenever the welfare
of the public is not in harmony with the earning of liberal dividends.
The managers long felt bound to defend the principle of "charging what
the traffic will bear" in the case of each individual, locality, and
kind of goods, even if this ruined some men and enriched others, and
if it destroyed the prosperity of cities to increase the earnings of
the road.
§ 13. #Political power of railroad managers.# Likewise in various ways
railroad managers may exercise great political influence and power.
Some writers maintain that the power to make rates on railroads is
a power of taxation. They point out that if rates are not subject to
fixed rules imposed by the state, the private managers of railroads
wield the power of the lawmaker. By changing the rates on foreign
exports or imports, the railroads frequently have made or nullified
tariff rates and have defeated the intention of the legislature.
High rates on state-owned roads in Europe have been used in lieu of
protective duties. These facts go to show that a change of railroad
rates between two places within the country is similar in effect to
the imposing or repeal of tariff duties between them.
The wealth and industrial importance of the railroads soon began to
give them widespread political power in other ways. It was commonly
charged in some states that the legislature and the courts were
"owned" by the railroads. The railroads, in part because they were
the victims at times of attempts at blackmail by dishonest public
officials, declared that they were compelled, in self-defense to
maintain a lobby. The railroad lobby, defensive and offensive, was, in
many states, the all-powerful "third house." Railroads even had their
agents in the primaries, entered political conventions, dictated
nominations from the lowest office up to that of governor, and elected
judges and legislators. The extent to which this was done differed
according as the railroads had large or small interests within the
state. These statements can with approximate truth now be made in
the past tense, as was not possible a few years ago. A better code
of business morality has developed, and the railroad management's
relationship of private trusteeship toward the shareholders and of
public trusteeship toward the patrons of the road is now much more
fully recognized. The change was not brought about without long and
strenuous agitation and effort, educational and legislative, as is in
part described below.
§ 14. #Consolidation of railroads#. Gradually the consolidation of the
railroad mileage into larger units put into fewer hands greater and
greater economic power. The early railroads, many of which were built
in sections of a few miles in length, have been slowly welded into
continuous trunk lines with many branches. The New York Central
between Albany and Buffalo was a consolidation, by Commodore
Vanderbilt, of sixteen short lines. The Pennsylvania system was formed
link by link from scores of small roads. In the decade of the nineties
the growth of consolidation went on more rapidly than ever before. In
1903 it could be said that 60 per cent of the mileage of the United
States was under the control of five interests; 75 per cent was
controlled by a group of men who could sit about one table. The
country was being divided territorially into great railroad domains,
within each of which one financial interest was dominant. Since that
time the policy of the leading roads has been still further unified
by great financial alliances and by the method known as "community of
interests."
Toward this result strong economic forces have been working.
Consolidation has many technical advantages: it saves time, reduces
the unit cost of administration and of handling goods, gives better
use of the rolling stock and of the terminal facilities of the
railroads, and insures continuous train service. It has the advantage
of other large production and the possible economies of the trusts.
Most important, however, from the point of view of the railroads, is
the prevention of competition and the making possible of higher
rates and larger dividends. The statement that competition is not an
effective regulator of railroads often is misunderstood to mean that
it in no way acts on rates. It is true that competition between roads
does not prevent discrimination and excessive charges between stations
on one line only; but competition usually has acted powerfully at
well-recognized "competing points." The larger the area controlled
by one management, the fewer are the competing points; the larger,
therefore, is the power over the rate and the more completely
the monopoly principle applies. It is a grim jest to say that
consolidation does not change the railroad situation as regards the
question of rates.
§ 15. #State railroad commissions.# When it became evident that public
and private interests in the railroads were so divergent, it still was
not easy to determine how the public was to be safeguarded. At first,
some general conditions such as maximum rates were inserted in the
laws and charters; but these were not adaptable to changing conditions
and, for lack of administrative agents, could not be enforced. Some
early efforts at state ownership were disastrous. The old law of
common carriers gave to individual shippers an uncertain redress in
the courts for unreasonable rates; but the remedy was costly because
the aggrieved shipper had to employ counsel, to gather evidence, and
to risk the penalty of failure; it was slow, for, while delay was
death to the shipper's business, cases hung for months or years in
the courts; it was ineffectual, for, even when the case was won, the
shipper was not repaid for all his losses, and the same discrimination
could be immediately repeated against him and other shippers.
In the older Eastern states, attempts to remedy these and other evils
by creating some kind of a state railroad commission date back to the
fifties of the last century. Massachusetts developed in the seventies
a commission of "the advisory type" which investigated and made public
the conditions, leaving to public opinion the correction of the evils.
A number of the Western states, notably Illinois and Iowa, developed
in the seventies commissions of "the strong type," with power to fix
rates and to enforce their rulings. The commission principle, strongly
opposed at first by the railroads, was upheld by the courts and became
established public policy. By 1915 every state and the District of
Columbia had a state commission. In Wisconsin and in New York, in
1907, in New Jersey, in 1911, and in many other states since, the
"railroad" commissions were replaced by "public utilities" or "public
service" commissions, having control not only over the railroads but
over street railway, gas, electric light, telephone, and some other
corporations. The state commissions have found their chief field
in the regulation of local utilities, and they fall far short of a
solution of the railroad problem. Altho they from the first did much
to make the accounts of the railroads intelligible, something to make
the local rates reasonable and subject to rule, and much to educate
public sentiment, on the whole their results have been disappointing.
It was difficult to get commissioners at once strong, able, and
honest; the public did not know its own mind well enough to
support the commissions properly; and the courts decided that state
commissions could regulate only the traffic originating and ending
within the state.
§ 16. #Passage of the Interstate Commerce Act.# Public hostility to
private railroad management was greatest in the regions where the
most rapid building of roads occurred from 1866 to 1873. One center of
grievances was in "the granger states' of Illinois, Wisconsin, Kansas,
Nebraska, Iowa, and Minnesota; another center was in the oil regions
of Ohio and Pennsylvania. The Eastern states were not without their
troubles, for the report of the Hepburn Committee of the New York
legislature in 1879 showed that discrimination between shippers
prevailed to an almost incredible degree in every portion of New York
state. When the courts, in 1886, decided that the greater portion of
the railroad rates could not be treated by state commissions, national
control was loudly demanded. Scores of bills were presented to
Congress between 1870 and 1886, and, despite much opposition, the
Interstate Commerce Act was passed in 1887.
The act laid down some general rules: that rates should be just and
reasonable; that railroads should not pool, or agree to divide,
their earnings to avoid competition; that they should, under similar
conditions, and, unless expressly excused, fix rates in accordance
with the long- and short-haul principle (to charge no more for a
shorter distance than for a longer one on the same line and in the
same direction, the shorter being included within the longer). The
act provided for a commission of five men, to be appointed by the
President, which might require uniform accounts from the railroads,
and which should enforce the provisions of the act.
§ 17. #Working of the Act.# The commission in its earlier years
gave promise of effectiveness, but its powers, as interpreted by the
courts, proved inadequate to its assigned task. The railroads in many
cases refused to obey its orders, and court decisions paralyzed its
activity. Competent authorities declared in 1901, after fourteen years
of the commission's operation, that discrimination never had been
worse, and a series of exposures of abuses strengthened the popular
demand for stricter legislation. The result was first the Elkins' Act
of 1903, aimed at discrimination and rebates, and then the Hepburn
Act Of 1906, which marked a new era in railroad regulation in this
country. The commission was increased to seven members, its authority
was extended to include express, sleeping car, and other agencies of
transportation, and it was given the power to fix maximum rates,
not to be suspended by the courts without a hearing. It became thus
unquestionably a commission of "the strong type." It began to exercise
its new powers with vigor, and the carriers reluctantly accepted its
authority. Responsive to a calmer but insistent popular demand
further amendments were made by the Mann-Elkins Act of 1910,
which strengthened the long-and-short-haul clause, and gave to the
commission, among other new powers, that of suspending new rates
proposed by carriers. A special Commerce Court of five judges was
created with exclusive jurisdiction in certain classes of railroad
cases, but this was abolished after a short trial.
It cannot be said that a final satisfactory solution of the railroad
problem has been attained; indeed, in most human affairs such a thing
is unattainable. But it can be said that there is no considerable
sentiment anywhere in favor of reversing the railroad policy that has
been developed, as here briefly outlined. Certainly the public has no
such sentiment, and the railroads, which for many years opposed the
progress of strong federal control, are now foremost in advocacy of
a policy of exclusive national regulation, to remedy the evil of
"forty-nine masters."
§ 18. #Public nature of the railroad franchise.# A pretty definite
public opinion regarding the nature of the problem has emerged from
the nearly half-century of experience and discussion, since the
first vigorous agitation of the subject in the seventies of the last
century. Railroads in our country are owned by private corporations
and are managed by private citizens, not, as in some countries, by
public officials. They have been built by private enterprise, in
the interest of the investors, not as a charity or as a public
benefaction. Railroad-building appears thus at first glance to be
a case of free competition where public interests are served in the
following of private interests. But, looked at more closely, it may
be seen to be in many ways different from the ordinary competitive
business. Competition would make the building of railroads a matter of
bargain with proprietors along the line, and an obdurate farmer could
compel a long detour or could block the whole undertaking. But the
public says: a public enterprise is of more importance than the
interests of a single farmer. By charter or by franchise the railroad
is granted the power of eminent domain, whereby the property of
private citizens may be taken from them at an appraised valuation.
The manufacturer, enjoying no such privilege, can only by ordinary
purchase obtain a site urgently needed for his business. Why may the
railway exercise the sovereign power of government as against the
private property rights of others? Because the railway is peculiarly
"affected with a public interest." The primary object is not to
favor the railroads, but to benefit the community. These charters and
franchises are granted sparingly in most European countries. In this
country they have been granted recklessly, often in general laws, by
states keen in their rivalry for railroad extension. When thus
great public privileges had been granted without reserve to private
corporations, it was realized, too late in many cases, that a mistake
had been made and that an impossible situation had been created.
§ 19. #Other peculiar privileges of railroads.# Further, do the
various grants of lands and money to the railroads make them other
than mere private enterprises? One answer, that of those financially
interested in the railroads, was No. They said that the bargain was
a fair one, and was then closed. The public gave because it expected
benefit; the corporation fulfilled its agreement by building the road.
The terms of the charter, as granted, determined the rights of the
public; but no new terms could later be read into it, even tho the
public came to see the question in a new light. Similar grants, tho
not so large, have been made to other industries. Sugar-factories were
given bounties; iron-forges and woolen-mills were favored by tariffs;
factories have been given, by competing cities, land and exemption
from taxation; yet these enterprises have not on that account, been
treated, thereafter, in any exceptional way. So, it was said, the
railroad was still merely a private business.
But the social answer is stronger than this. The privileges of
railroads are greater in amount and more important in character than
those granted to any ordinary private enterprise. The legislatures
recognize constantly the peculiar public functions of the railroads.
In other private enterprises, investors take all the risk;
legislatures and courts recognize the duty of guarding, where
possible, the investment of capital in railroads. Laws have
been passed in several states to protect the railroads against
ticket-scalping. Whenever the question comes before them, the courts
maintain the right of the railroads to earn a fair dividend. Private
enterprise has been invited to undertake a public work, yet public
interests are paramount.
§ 20. #Private and public interests to be harmonized.# If an extremely
abstract view is taken there is danger of losing sight of the real
problem, which is that of harmonizing these two interests in thought
and in public policy. Yet the extreme advocates of the private
control of railroads for a long time resented indignantly any public
interference with railroad rates and with railroad management as
an infringement of individual liberty. Before the passage of the
Interstate Commerce Act, in 1887, this position was inconsistently
taken by those in whose interests free competition had been violently
set aside at the very outset of railroad construction, and for whom
governmental interference had made possible great fortunes. It has
become generally recognized that the railroads ought not to be allowed
to change from a public to a private character just as it suits
their convenience. True, they are private enterprises as regards the
character of the investment, but they are public enterprises as to
their privileges, functions, and obligations.
Finally, it might be said that if there were none of these special
reasons for the public control of railways, there is an all-sufficient
general reason in the fact that a railroad is always, in some respects
and to some degree, a monopoly. Therefore, the railroad problem may be
viewed as but one aspect of the general problem of monopoly. To other
aspects of this problem we are now to turn our attention.
[Footnote 1: Returns for 1915. The following figures are from the
census taken in 1909.]
[Footnote 2: See A.T. Hadley, "Railroad Transportation," pp. 10, 32.]
[Footnote 3: See Vol. I, pp. 437, 438, 443.]