COMBINATIONS.
It is the favorite argument of railroad men, and the writer must confess
that he himself formerly believed, that if all legal restraints were
removed from railroad business, the laws of trade would regulate it more
successfully and more satisfactorily, both to the railroad companies and
their patrons, than the wisest statutes could ever regulate it. To give
force to their argument, they cite the old Democratic maxim that that
State is governed best which is ruled the least. They also assert that
it is the province of the State to guarantee to each of its citizens
industrial freedom; to permit him to transact any legitimate business
according to his best judgment; to buy and to sell where and at what
price he pleases; in short, to earn without restriction the reward of
his intelligence and his industry. They further contend that under a
free government the law of supply and demand should be allowed free
sway, and that he who buys or sells transportation should not be
hampered in his transactions any more than the grocer and his customer.
The reply to this is that, while the grocer is a natural person, the
railroad company is an artificial person, and that, while the business
of the former is purely private, that of the latter is quasi-public. The
grocer must rely solely upon his personal rights and private resources,
but the railroad company accepts from the State the franchises which
enable it to do business. And yet, if the public had any assurance that
the laws of trade would regulate both kinds of business alike, it is
not likely that the State would distinguish between the two. They claim
that their business is like other private business, and therefore they
should be let alone; that competition can be relied upon to correct
abuses; and where competition does actually exist they forget, and then
claim that their business is not like other private business, and they
should be allowed to make pools and combinations, because in their
business competition is ruinous. Experience has certainly demonstrated
that competition is only possible where combination is impossible. Where
the same commodity is supplied by a large number of individuals, there
is but little danger for the public from those who supply it, for an
agreement among many cannot easily be effected; and even if an
understanding could be reached, it would not long be satisfactory to all
parties. Disagreements would arise which would end in the dissolution of
the combination. Where, however, the number of competitors is small,
agreements can be easily effected and successfully maintained.
It is doubtful whether there is at present any interest in the
commercial world which has a greater tendency to monopoly and
combination than the railroad interest. There are in the United States
some 40,000 railroad stations. Not more than 4,000 of these are
junctions of two or more roads. At 90 per cent. of these stations
shippers are therefore confined to one line of railroad, and are, in
absence of State regulation, compelled to pay for transportation
whatever price the companies may be disposed to charge, subject only to
such restrictions as the proximity of competing points may impose. If
competition obtained at all points where two or more roads meet, many
railroad companies could not afford to charge excessive rates at
non-competitive points along their lines of road, for such a policy
would slowly but surely drive a large volume of their legitimate
business to rival roads, to whose interest it would be to encourage by
every means in their power such diversion of traffic. Railroads early
recognized this fact and took steps to enable each line to control its
local business. The first combinations among railroad companies to
control prices at competitive points were rather crude; in fact, much
cruder than the first Granger legislation. They were simple agreements
among the various roads touching a common point to maintain certain
fixed rates. But while each road was anxious to have the rates agreed
upon maintained by all of its rivals, it cared but little about
maintaining its own good faith, and it improved every opportunity to get
business at reduced rates so long as it could reasonably hope to escape
detection. As soon as any of the competing roads, through the
falling-off of its business, became convinced that it was the victim of
overreaching rivals, it retaliated by offering still lower rates to
close-tongued shippers. This tricky rivalry would be continued until the
animosity engendered by it would lead to an open rupture, and what
railroad men are pleased to term a rate war would follow. As the
schedule rates had before been unreasonably high, so they became now
unreasonably low. Hostilities would be continued until all belligerents
became exhausted and manifested a disposition to negotiate a treaty of
peace. The former high rates would then be restored; the compact was
carried out for a short time, to be again violated and finally annulled.
These rate agreements were in vogue in New England before the War of the
Rebellion and gradually found their way to the Middle States and the
West. Wherever they were tried they were violated, until even among the
most unsophisticated of freight agents a rate agreement was looked upon
as a farce.
The statement is often made by railroad managers that excesses in
railroad competition are the result of the peculiar conditions of their
business, which has heavy fixed charges on one hand and a fickle
patronage on the other; that the uncertainty of through business compels
them to rely upon the local business for such revenue as is necessary to
meet these fixed charges; and that, inasmuch as their trains _must_ run,
and any through freight hauled by them is so much business taken from
the enemy, they can better afford to take it at any price than to have
one of their competitors take it.
It is difficult to see why this reasoning should not be applied to other
branches of business; for instance, to milling. The mill-owner, like the
railroad company, has heavy fixed charges. He has to earn the interest
on his capital, he has to keep his mill in repair, he now and then has
to meet the demands of the times and purchase improved appliances, and
he has to keep a certain number of employes, whether business is brisk
or slack. He might, therefore, if he saw fit to employ the logic of
railroad managers, earn revenue enough to meet his fixed charges from
the business which his regular customers give him, and then do any
business coming from beyond this circle at any price rather than
surrender it to a rival.
It will readily be conceded that any enterprise conducted on such
principles could, at the best, flourish only temporarily, for it would
soon encounter difficulties from two sources. Its local customers, thus
discriminated against, would withdraw their patronage, while its
competitors, finding their territory encroached upon, would, in
self-defense, offer still better terms to the public to regain their
lost customers. Such ruinous competition, if long persisted in, must
necessarily cripple, if it does not bankrupt, a majority of those who
engage in it. It is fortunately as rare in industrial and commercial
circles as it is common among public carriers.
This difference can easily be accounted for. Where there are a large
number of competitors the prices of the commodities supplied by them are
leveled down until they reach a point where they will afford only a
reasonable margin of profit, and beyond which they will cease to be
profitable, and will therefore cease to be supplied until the
equilibrium is again established. Where, however, the number of
competitors is small, the price of the commodities supplied by them
will, by agreement, for a time at least, be maintained at a point where
it affords considerable more than a reasonable profit. Here the large
gain presents to the various competitors such a temptation to outstrip
their rivals and increase their business at the expense of good faith,
that but few, if any, of them will, in the long run, resist it. The
tendency to underbid rivals will always be strong where profits are
large, and it may safely be asserted that efforts to maintain, through
combinations, excessive rates are the most fruitful source of ruinous
competition.
In time railroad managers became convinced that, unless it was possible
to radically reform railroad ethics, rate agreements could never be
relied upon for the maintenance of excessive rates at competing points.
The combined roads found it an easy matter to agree upon excessive
rates, but were powerless to enforce them. Experience convinced their
managers that to make their tariffs effective it was necessary to
deprive individual roads of the power or the inducement to cut below the
agreed rates. Their ingenuity in time developed a system which promised
to remove from individual roads every temptation to take business at
less than schedule prices. This device consists in a division of
railroad business and is commonly called a pool. There are various ways
in which such a division is made. Either the traffic is divided among
the various companies meeting at a common point, or each road is allowed
to carry all freights that it may receive, and then the earnings of the
different roads are divided, each road being paid the actual cost of
such service as it has performed. There is still a third pooling
arrangement, consisting in a division of territory, but this has been
found less satisfactory and is now but rarely resorted to.
It is said that the first regular pool organized in the United States
was the Chicago-Omaha pool, formed in 1870 by the Chicago, Burlington
and Quincy, the Chicago, Rock Island and Pacific, and the Chicago and
Northwestern railroad companies, then the only three lines connecting
the cities of Chicago and Omaha. This pool, which was subsequently
joined by other lines, made an equal division of the traffic, and was so
well organized that it lasted fourteen years "without a break." The
abuses practiced by the companies belonging to this pool were one of the
chief causes of the Granger movement in Iowa. It is indeed doubtful
whether any other railroad combination ever maintained itself longer or
pursued its ends with greater pertinacity than this pool. Another pool
of national notoriety was the Southern Railway and Steamship
Association, which was organized, though at first under a different
name, in the State of Georgia, in 1875. It was probably the first money
pool formed in the United States. Each member was awarded a certain
percentage of the total business between the various competitive points
along its line. If a company carried more than its share, it was
compelled to turn over the receipts from such additional traffic to its
rivals, which paid it a nominal price for carriage. This allowance was
always made so low that there was no inducement for any company to seek
to carry more than its allotment. The pool had its own executive,
legislative and judicial departments, and it enforced its decrees with
an iron hand. It maintained a strong centralized government, and
rebellious members had but little mercy to expect from it. It provided
that if any officer or representative of any company should authorize or
promise, directly or indirectly, any variation from established tariffs,
he should be discharged from the service, with the reason stated. The
strong sentiment which we to-day find in the South in favor of State
control of railways is the direct result of the many evils which this
powerful pool introduced into the railway business of that section of
the country.
Other pools followed, as the Southwestern Association, organized in
1876, to control the traffic between Chicago and St. Louis, and the
Minnesota and the Colorado pools. Within a few years railroad pools
covered the whole country. All pursued the same object, viz., the
control of rates at competitive points, which enabled the companies to
maintain excessive schedule rates at local points.
Between 1875 and 1880 the pooling system rapidly spread all over the
Union. Wherever competition promised to regulate rates by the
application of the law of supply and demand, the pool was resorted to as
the never-failing remedy to preserve dividends on watered stock. As long
as lake and canal navigation controlled the carriage of heavy freights
between Chicago and New York by means of rates so low that railroads
found it, or at least thought it, impossible to compete with them in the
transportation of agricultural products during the greater part of the
year, railroad pools between Chicago and New York could not be
successfully maintained. In 1873 the railroads transported only about 30
per cent. of this kind of freight from the West to Eastern ports.
Owing, however, to the rapid decrease of the cost of transportation,
railroad companies from this time on were enabled to encroach rapidly
upon the business of water routes, so that in 1876 they carried over 52
per cent. of the entire volume of agricultural products that were moved
from the West to the East. As long as these products were carried almost
entirely by water from lake ports to the East, New York, as the terminus
of this route, enjoyed decided advantages over the other Atlantic ports.
When, however, the railroads commenced to successfully compete with the
water routes in the transportation of these commodities, a considerable
share of this business was diverted to Boston, Philadelphia and
Baltimore, and it soon became apparent that these ports, in some
respects, enjoyed advantages for the export trade not possessed by New
York. It was, therefore, not surprising that the business men of these
cities, together with the railroads terminating in them, made every
effort to come in for their share of the traffic which was drifting away
from New York.
Competition between the New York Central and the Pennsylvania Railroad
for the Western through traffic dated back as far as 1869, the year in
which both systems secured, through consolidation with connecting roads,
through lines to Chicago. Rates fell in one year from $1.80 to 25 cents
per hundred pounds. After a time the managers of the two companies met,
and schedule rates were restored. Rates were, at least outwardly,
maintained until the Baltimore and Ohio and the Erie system entered
Chicago, and the Grand Trunk made connections with Milwaukee and other
lake points, and thus disturbed through rates. All efforts to maintain
the level of the old tariffs, through agreements, proved now fruitless,
for both the Baltimore and Ohio and the Grand Trunk found it to their
interest to pursue independent policies, and refused to have their hands
tied by an agreement with roads that were interested in continuing, if
possible, the commercial supremacy of New York.
Rate skirmishing finally developed into open war in 1876, when
fourth-class rates between Chicago and the Atlantic fell as low as 16
cents per hundred. This rate, however, was eclipsed in July, 1878, when
wheat was carried from Chicago to New York for 10 cents per hundred. The
existing conditions left no doubt in the minds of those familiar with
railroad tactics that this war was simply the precursor of a gigantic
combination between the trunk lines. An unsuccessful attempt to effect
such a combination had been made before. In 1874 the managers of the
Erie, Pennsylvania and New York Central met at Saratoga for the purpose
of devising means for the suppression of competition in the trunk line
traffic. This meeting, however, known in railroad history as the
Saratoga Conference, was the first step toward the organization of a
trunk line pool, although the conference did not lead to any immediate
results, the Grand Trunk and the Baltimore and Ohio refusing to be bound
by its decision. It was certainly no easy task to devise means to bring
about an effective and permanent combination among five large through
lines with greatly conflicting interests.
So far pools had never failed to suppress competition wherever they were
organized. But in the past pools had, almost without exception, only
attempted to control rates between common points. They accomplished
their object by a division of the entire traffic or earnings from the
traffic between common points. The schedule rates remained the same for
all. But the traffic of the trunk lines brought a new factor into the
problem. Here the rival routes did not terminate at the same points. It
was contended by the Baltimore and Ohio that, whatever might be the
facilities of Baltimore for exporting agricultural products, that port
was at a disadvantage as compared with the more northern ports on
account of the longer voyage and higher ocean rates to Liverpool, and
that it could therefore not enter into a combination with the roads
leading directly to New York and Philadelphia upon equal terms, since
this would divert its legitimate share of the through business to those
ports. The Grand Trunk, on the other hand, refused to enter the
combination because, not having any direct Chicago connection, it feared
that the enforcement of pool rates would materially diminish the volume
of its business. As yet the railroad wiseacres did not seem to be equal
to the emergency, and matters drifted along in the old channel. The rate
war of 1876 gradually brought about an understanding among the
belligerents. The competing roads accepted the terms offered, and with
this a new principle entered into the science of pooling. Rates between
Chicago and Baltimore were fixed somewhat lower than those between
Chicago and Philadelphia, and in turn Philadelphia was allowed a small
advantage over New York. This concession was made to equalize the
difference in the ocean rates of the competing ports. These equalizing
or--to use railroad nomenclature--differential rates were subsequently
granted by pools to such roads as, on account of some disadvantage,
could not compete with other members of the pool on equal terms. Thus
the longest route was usually permitted to charge the lowest, and the
shortest route the highest rate. This practice is in conformity with the
principle of charging whatever the traffic will bear, but it is
certainly devoid of every consideration of justice and equity. If the
longer line can afford to carry freight at rates lower than schedule
prices, no further proof is needed under ordinary circumstances that the
regular schedule rates of the shorter line are exorbitant.
The concession of differential rates settled, at least temporarily, the
difficulties that had arisen out of the east-bound traffic of the trunk
lines. This arrangement did not, however, in any way affect the traffic
moving in the opposite direction. The volume of west-bound freight is
very much larger at New York than at any other of the Atlantic ports. In
order to get its share of the business, each trunk line maintained an
office in New York. These offices eagerly solicited business for their
respective roads, and the freights which they received for
transportation to the West would be forwarded either directly or by a
circuitous route; but, the longer the route, the lower as a rule was the
compensation asked for the service. Under these circumstances
competition was brisk, and the profits realized were far from satisfying
the cupidity of the competing lines. It was apparent to their managers
that the competition in the west-bound traffic was similar to that
formerly existing between Chicago and Mississippi and Missouri River
points, which had promptly yielded to pools. The temporary adjustment of
the more perplexing questions which had arisen out of the east-bound
traffic now paved the way for a pooling arrangement for the west-bound
freight. The Southern Pool, under the management of Albert Fink, had
long attracted the attention of the trunk line managers. Its system of
dividing the traffic, of reporting to a central office and of hearing
and deciding complaints had enabled it to exert an almost absolute
control over its members, to compel them to make honest returns and to
prevent rupture and rebellion. It was believed that a pool of the trunk
lines could not be effective or permanent unless organized upon the
Southern basis and presided over by a trunk expert. Accordingly, when in
1877 an agreement for the pooling of the west-bound traffic was reached
by the trunk lines, Mr. Fink was tendered the position of pool
commissioner. Under the agreement reached the total tonnage of the
west-bound business was divided in such a way that the Erie and New York
Central roads each received 33 per cent., the Pennsylvania 25 per cent.,
and the Baltimore and Ohio 9 per cent. of it. If any road received more
freight than was allotted to it by the pool, it delivered such surplus
to the pool, or rather to such a road as the pool commissioner
designated as not having received its allotment. The success of this
pool from a railroad point of view made the trunk lines anxious to
organize a similar pool for the whole east-bound traffic. It was
proposed to control by such a combination the rates on all the
east-bound traffic of the Northwest, by making Chicago the pooling
center, fixing for it a schedule of rates and making the rates of all
the railroad centers in the West and Northwest dependent upon it. The
combination was to comprise more than forty companies, controlling over
25,000 miles of road. The scheme was tried for three months in 1878,
but proved a failure, owing to the fact that nearly all of the many
diverging interests sought their own advantage. The Eastern and Western
trunk line pools were, through the efforts of their commissioner,
successfully maintained, though even their harmony was occasionally
marred by a short war precipitated by such members as would think
themselves entitled to larger shares of the spoils. But a readjustment
would invariably follow, and the expenditures of the war would be taxed
up to the public.
After the failure of the gigantic Western pool which had been organized
under the protectorate of the trunk lines, the companies which had
composed it formed such local combinations as their individual interests
dictated. It is doubtful whether during the five years immediately
preceding the passage of the Interstate Commerce Law there was any
junction of two or more roads in the United States which, except during
the period of an occasional railroad war, had any competition in the
transportation business. As has been shown before, discriminations
without number were practiced between places and persons; goods were not
unfrequently carried at a loss; but the general public was, as a rule,
compelled to pay what the traffic would bear, or rather what the pooling
roads thought it could bear.
It is claimed by railroad managers that pools are the only effective
contrivances for checking ruinous competition among railroad carriers,
and that they are therefore justifiable as a means of self-protection.
This might perhaps be a valid argument if any attack were made upon the
railroads which encroached upon their rights or endangered their
existence, but if railroad companies are disposed to cut each other's
throats, the public should not be made to pay the penalty of their
depravity. As long as schedule rates are unreasonably high, railroads
will be tempted to offer to certain shippers low secret rates; but as
soon as all rates have been leveled down to a point where they will
yield only a fair profit with good management, the inducement to cut
below them is largely taken away. Pools, far from being a remedy for the
evils of excessive competition, will in the end only aggravate the
disease which they attempt to cure. The high rates which they maintain
attract the attention of speculative men and lead to the construction of
rival roads. While the traffic remains the same, the proceeds must then
be divided among a larger number of carriers. Thus the construction of
unnecessary roads, which has often been the subject of bitter complaint
on the part of the older roads, is chargeable directly to their wrong
policies.
One of the principal objections to industrial and commercial
combinations is that they paralyze trade. Competition stimulates every
competitor to offer the best at the lowest possible price. This
increases the demand for the commodity, and both the producer and the
consumer are in the end benefited by the operation of this law. On the
other hand, combinations, or, what is the same, monopolies, increase the
price, remove the stimulus to excellence, and reduce the demand, and
thereby affect injuriously the producer and consumer alike. Competition
in the railway service would mean an improved service and lower rates
and would speedily be followed by a large increase of business.
Another serious objection to pooling is that it invariably leads to
periodic wars, which unsettle all business, and but too often introduce
into legitimate trade the element of chance. These wars give, moreover,
to designing railroad managers an opportunity to enrich themselves by
stock speculations at the expense of the stockholders, whose interests
they use as a football for the accomplishment of their selfish ends.
When rates are reduced to a right level, and are properly adjusted, and
are equal to all, even railroad men will find no necessity for pools.
The desire for such a combination is a desire to impose upon somebody,
or some locality, or the public at large. The proposition to give legal
sanction to pools, made by railroad managers, is preposterous; and even
a pool to be approved by the Interstate Commerce Commission is out of
the question, as it would cause the railroads to increase their efforts
to control the appointment of the commission. However honest it may look
on its face, however plausible may be the arguments produced in its
favor, it should not be permitted.
There is no doubt but under the proposed pooling arrangement railroad
interests, watered stocks and all, would be cared for, but there is
every reason to believe that public interests would not be properly
protected.
So long as servility by a member of the Interstate Commerce Commission
to railroad influences serves as a stepping-stone to a high position in
the employ of railroad combinations, with a salary of three or four
times that of an Interstate Commerce Commissioner, so long will it be
unsafe to permit such powers to be vested in that commission.
Pooling by railroads should not be permitted, if permitted at all, so
long as representatives of speculative interests have a voice in their
management, and not until all fictitious valuations are altogether
banished from the equation, and until the roads are brought under
complete Government control. There is no more necessity for pools among
railroads than there is among merchants and manufacturers. The capital
actually invested in railroads is now receiving larger returns than
investments in other lines of business, and their incomes are increasing
from year to year.
Every pooling combination of railroad companies for the maintenance of
rates is a violation of common law. From time immemorial the law has
stamped as a conspiracy any agreement between individuals to support
each other in an undertaking to injure public trade. The Interstate
Commerce Act reasserts this principle, and provides penalties for the
maintenance of such combinations among railroad companies. If, in spite
of this act, the evil still exists, it is no argument against the merits
of the law, but it does prove that the machinery provided for its
enforcement is insufficient. That railroad companies can be made to
respect the law there can be no doubt; but much cannot be accomplished
unless the people fully realize the magnitude of the undertaking and
vest the Government with sufficient power to cope with an organized
force whose total annual revenue is nearly three times as large as that
of the United States. The discussion of the question how this may be
done will be reserved for a subsequent chapter.