CHAPTER XV

LOCAL RATES IN CALIFORNIA

Charging What the Traffic Will Bear

The general policy of the associates in dealing with problems of

rate-making in which rival towns were interested, was the same as that

which they adopted to meet differences in competitive power between

different individuals. The tests applied were simple. What was the

market to be reached? Had the community concerned an alternative

route? Was there an alternative source of supply which limited the

willingness of the community to pay freight? If so, was this second

source of supply one served by the Central Pacific, or one which had

the benefit of water communication, or possibly one which possessed a

rival rail connection? To what extent should concession be made from

the highest rate which could be charged, in order to promote the growth

of business?[383]

The standard of rate-making just described, which may be summed up as a

policy of charging what the traffic would bear, was not peculiar to the

Southern Pacific at the time it was adopted, nor was it particularly

repugnant to public opinion in California, taken as a whole. The

error must not be made of ascribing to the western communities of the

seventies and eighties a clear conception of the reasons of public

policy which are properly urged today against the unlimited recognition

in railway rate schedules of the competitive forces which still have

free play in private business. Such ideas have slowly developed only

during the last forty years.

Limited Encouragement of Business

Nor was the policy of adapting rates to the ability of shippers to pay

inconsistent with the rendering of important service to business men in

California and elsewhere who were seeking to expand their sales. Only

a few illustrations need be given of the promotion of business by rate

adjustments, but they will serve as examples of many more about which

information is on record.

One case of this sort, which shows the willingness of the Southern

Pacific management to respond to what they considered a reasonable

request, had to do with the shipment of beer from a place known as

Boca, in the state of Nevada, to San Francisco. It appears that a

gentleman named Hess once conceived the idea of establishing a brewery

at Boca. This town was 220 miles from San Francisco, and yet all of Mr.

Hess’s beer had to find a market in the latter place, in competition

with beer from Milwaukee and St. Louis. Mr. Stubbs, general traffic

manager of the Central Pacific, welcomed the proposal to build a

brewery in the West, and put in special rates to help shut out the

eastern product. Every pound of brewery supplies, he reasoned, would

have to go over the Central Pacific. It was all clear gain, like so

much money picked up out of the ditch. In another case the Southern

Pacific quoted special rates on sugar from San Francisco to the

Missouri River, to enable the California Sugar Refining Company and

the American Sugar Refining Company to sell their sugar at the Missouri

River in competition with sugar reaching New York by water and thence

moving westward.[384]

Still again, in 1884 an attempt was made to persuade the St.

Louis-Kansas City lines to participate in a rate of 75 cents per

hundred pounds on cast iron pipe from St. Louis to the Pacific Coast

in order to encourage production in the Middle West in competition

with that on the Atlantic seaboard. The matter of the 75-cent rate was

taken up with J. W. Midgley, Trunk Line commissioner, who declined

temporarily on December 24, 1884, on the ground that the rate would

be a special one, and that there was an understanding that no special

rates should be made prior to January 31 next ensuing, pending an

anticipated agreement between the Transcontinental Association and its

eastern connections.[385]

In the instances which have been given, the impelling motive of the

Southern Pacific was frankly to increase its profit by increasing the

movement of freight over its line. Yet the shipper was also benefited

because his interests were substantially identical with those of the

railroad company, and he warmly welcomed the powerful support of the

railroad lines. These cases are not unimportant. The enumeration of

such isolated instances, however interesting as they may be, affords

no very clear picture of the aggregate of local rate adjustments with

which the Southern Pacific interests were concerned. For this purpose a

more systematic survey of the rate system administered by the Southern

Pacific is necessary, and to this attention is now directed.

Distance the Governing Factor

The foundation of any system of railroad rates is the distance which

commodities are carried. Generally speaking, the Southern and Central

Pacific railroads, like other companies in the United States and

Europe, varied their local charges with the distance between point of

origin and point of destination. To illustrate this point briefly, two

charts are here presented.

[Illustration: Chart showing rates on second-class freight and on grain

in the Sacramento Valley, 1876.]

The first chart depicts the rates on second-class freight and those

on grain in January, 1876, between Sacramento and points in the

Sacramento Valley north of that city. Second-class freight at this

time on the Southern Pacific included articles such as coal oil,

agricultural implements, machinery, furniture, crated glassware, and

wines and liquors. Freight of the description mentioned ordinarily

moved north from the city of Sacramento. Grain, on the contrary, moved

south. It will be observed that rates on the lines of the Southern

Pacific increased with considerable regularity as point of origin or

destination proceeded north into the non-competitive territory around

Tehama and Redding.

[Illustration: Chart showing rates on miscellaneous commodities in the

San Joaquin Valley, 1892.]

The second chart displays rates between San Francisco and stations in

the San Joaquin Valley as far south as Fowler, 205 miles distant from

point of origin. These rates are for the year 1892.

Non-competitive rates in the San Joaquin Valley in 1892 increased as

distance grew greater, much as they had increased in the northern

territory sixteen years before. The rates given are for a few

commodities only, namely, agricultural implements, barbed wire, boots

and shoes, coal, and grain; but these are typical of the construction

of schedules on a much larger number of articles. The extent of the

increase was relatively greater to points beyond Lathrop because of the

effect of water competition on San Francisco Bay.

Grades and Traffic Density

These two schedules illustrate a fact which could be readily proved by

repeated examples, namely, that local rates in California were and are

first based on the element of distance. Possibly such a fact might be

assumed; yet in California, as elsewhere, the statement that railroad

rates have varied with the distance traversed needs promptly to be

qualified in order to be true. For, first of all, it was evident at

the beginning that costs of transportation were not solely determined

by distance, and that other considerations had to enter in. One of

these other considerations was the matter of grades. Because of the

conditions under which the Central Pacific was constructed, to say

nothing of the extremely mountainous character of certain portions of

the Central Pacific lines, differences in the rates per ton per mile

between the valley and the mountain sections were introduced by the

company at the commencement of its history.

A second characteristic of railway traffic which had a profound effect

upon early railroad tariffs was the relative density of business. Mr.

Stanford advanced the theory that the railroad should strive to secure

a certain average earning per car; and in sections where business was

light, as well as upon commodities which were bulky in proportion to

their weight, a high average rate per hundred pounds was accordingly

charged.

Relative grades and relative density of traffic were not the only

conditions relating to cost which influenced the varying level of

transportation rates in California, but, apart from distance, they

were perhaps the most important, and in any case they may be taken

as illustrative of the group of circumstances to which they belong.

In addition to the whole class of facts relating to cost, however,

the Southern Pacific gave heed to matters of value of service in the

fixing of its rates. Nothing will be said here of the principles of

classification of freight, principles which have to do in part with the

value of the service rendered; nor of individual differences between

shippers, which have been alluded to in the preceding chapter in the

discussion of personal discrimination. The effect of competition in

distorting distance schedules in California will, however, be dealt

with at some length.

Water Competition

It has already been pointed out that the presence or absence of water

competition has always been a most important factor in determining the

relative adjustment of local rates in the state of California. This

competition has been extremely pervasive. Although the scarcity of

good harbors and the location of the Coast Range of mountains hinders

access from the sea into the interior of California, yet, on the other

hand, the ports of San Diego, San Pedro, and San Francisco, and the

long stretches of navigable water on the Sacramento and San Joaquin

rivers have opened the possibilities of water shipment to a multitude

of inland towns. Indeed, in 1883 General Manager Towne, of the Central

Pacific, submitted to the State Railroad Commission a list of fifty-two

points in California at which the Central Pacific and its leased lines

met direct water competition. The water routes included San Francisco

Bay and the Sacramento River and sloughs, Suisun Bay, Napa River,

San Joaquin River, Feather River, the Pacific Ocean, Wilmington Bay,

and the Colorado River. In addition, Mr. Towne enumerated eighty-two

points where rates were affected by proximity to the competitive points

previously mentioned.[386] On the face of things, the extent of the

water competition thus indicated was sufficient to warp almost beyond

recognition the simple distance scale of tariffs which a railroad

completely protected from competition would naturally apply.

Low Rates to Competitive Points

An illustration of the effect of the water routes on local rates

is found in the fact that the round trip fare from San Francisco

to Sacramento by rail in 1878 was $3, while that to Woodland was

$4.25.[387] The _San Francisco Chronicle_ declared in 1879 that,

according to a recently published schedule, the movement charge

for grain, potatoes, vegetables, and wool from Lathrop to Mojave

was exactly the same as to Ravenna, Newhall, or Los Angeles. The

first-named distance was 288 miles, making the movement mileage rate

7.2 cents; the second-named distance was 337 miles and the rate per

mile was 6.2 cents; the third distance was 356 miles, the rate being

only 5.8 cents; and the distance to Los Angeles was 388 miles,

or a mileage rate of 5.4 cents. The truth of the statement of the

_Chronicle_ is established by data published by the State Commissioners

of Transportation in 1877, which show the striking contrast that

existed in 1877 between non-competitive rates in the interior valleys

and rates to points which enjoyed the advantage of nearness to the

water routes.

Low water-compelled rates to Sacramento and to Los Angeles were in

force as early as 1877. Yet this was only a beginning, and as time went

on and the number of towns in California increased, the practice of

recognizing the force of water competition was extended. Moreover, the

Southern Pacific began to quote _lower_ instead of merely equal rates

to more distant points which enjoyed the advantage of nearness to a

water location. Since the ability to make use of a competing railway

afforded opportunities similar to those afforded by ability to use a

water route, low rates were also extended to towns served by more than

one railroad line. All this greatly complicated the rate situation in

the state, gave rise to numerous complaints, and renders difficult the

task of concise description.

Rates to Intermediate Points

Official confirmation of the general correctness of the complaint of

discrimination which reached the public press from time to time is

found in a comprehensive investigation of railroad rates in California

which the Railroad Commission of that state undertook as late as the

year 1916. This inquiry was provoked by an application by the Southern

Pacific, Santa Fé, and other railroads in California for relief from

the clauses of the amended state constitution and of the California

Public Utilities Act prohibiting greater charges to intermediate points

than were collected on shipments to more distant points over the same

line. Although the legal aspects of the case were therefore the result

of modern legislation, the facts brought out were typical of conditions

of long standing.[388]

[Illustration: Diagram showing adjustment of freight rates between San

Francisco and Stockton, 1916.]

Exhibit No. 1 in the case in question referred to class rates in

the San Joaquin Valley. It appeared that class rates between San

Francisco, San José, Port Costa, Stockton, Sacramento, Marysville, and

intermediate points to Los Angeles, were 60 cents per hundred pounds

first-class, and corresponding sums less for the lower classes. These

rates were shown to be controlled by the class rate of the Pacific

Coast Steamship Company, which quoted a through first-class rate of 52

cents, including wharfage and handling, between San Francisco and Los

Angeles via San Pedro. On all-rail shipments down the valley, as well

as on shipments over the coast rail route, however, water competition

was not effective. The rate from San Francisco to Simi, 429 miles from

San Francisco, was therefore 80 cents, and that to Acton, 415 miles

from San Francisco, was 83 cents, although shipments from San Francisco

to Los Angeles passed through Simi and Acton on their way to Los

Angeles over the coast and San Joaquin Valley routes, respectively.

A condition similar to that at Los Angeles and at points in the San

Joaquin Valley was developed in connection with shipments from San

Francisco to Stockton. The diagram on page 266 will show the relative

position of these two towns as well as that of an intermediate place

named Banta.

The distance between San Francisco and Stockton was 91 miles, and

the first-class rate was 10 cents per hundred pounds. This rate

was identical with the rate charged by boat lines operating on San

Francisco Bay, and on the Sacramento and San Joaquin rivers. But

although these boats touched at some intermediate points, their

competition was not everywhere effective; so that the first-class rate

from San Francisco to Banta, 74 miles, could be and was 17 cents,

although freight from San Francisco passed through Banta on its way to

Stockton.

Other Instances

Still another illustration of the influence of water competition upon

local rates in California may be drawn from the territory immediately

north of San Francisco Bay. The towns involved in this adjustment were

San Francisco, Sebastopol, and Santa Rosa, as shown in the diagram on

page 268. The first-class rate from San Francisco to Sebastopol on the

Northwestern Pacific was 23 cents. This rate was shown to be limited by

the competition of a rail and water line, including a steamship haul

from San Francisco to Petaluma and a haul over an electric railway

from Petaluma to Sebastopol. The distance from San Francisco to

Sebastopol over the Northwestern Pacific was 58.5 miles. The distances

from San Francisco to the towns of Kenilworth and Santa Rosa, on the

same railroad, were 45.7 and 52.5 miles, respectively. Shipments to

Sebastopol passed through these places, but because neither enjoyed

the advantage of an alternative route, the first-class rate to Santa

Rosa was 25 cents and that to Kenilworth 28 cents—materially more than

was charged for the longer haul to Sebastopol.

[Illustration: Diagram showing adjustment of freight rates between San

Francisco, Santa Rosa, and Sebastopol, 1916.]

While instances of the extreme discrimination of a greater charge for

a shorter than for a longer haul were shown in 1916 to be usually the

result of water competition, it has already been suggested that not

all cases of discrimination were of this sort. A particularly striking

case of unequal rates due to rail competition alone was brought out

in the same proceedings from which the preceding illustrations have

been drawn, by the application of the Atchison, Topeka and Santa Fé

Railway to continue lower rates from Los Angeles to Mojave, California,

a distance of 212 miles, and to Lindsay, a distance of 411 miles,

than were charged to Kramer, an intermediate point 174 miles from Los

Angeles. The relative position of the points is shown in the diagram

given above.

[Illustration: Diagram showing adjustment of freight rates between Los

Angeles and points north and east of Los Angeles, 1916.]

In this case the rate to Mojave at the time application was filed was

52 cents first-class, and that to Lindsay 70 cents, while the rate to

Kramer was 78 cents. But at both Mojave and Lindsay, the Santa Fé had

to meet the competition of the short Southern Pacific line, while at

Kramer this competition was not effective.

Development of State Retarded

The data which have been presented show that, while the system of

local rates in California was based originally upon distance, it soon

became profoundly modified by conditions of cost, and still more by

the presence of competition at strategic points, and by the occasional

necessity of reducing rates in order to stimulate the movement of

freight. The charges for short hauls in the interior valleys where

the Southern or Central Pacific possessed a monopoly were made high,

because traffic was scant and because the railroad was able to exact

a monopoly return. Rates were also regularly progressive under these

conditions. In sharp contrast to the practice which obtained where the

Southern Pacific was the only carrier, rates to points located upon

the coast, on navigable rivers, or on competing railroad lines were

relatively low and were often extremely irregular.

It is generally difficult to criticize a system of rate-making upon _a

priori_ grounds because the test of such a system is to be found only

in the form which it gives to the industrial life of the community to

which it is applied. There is reason to believe, nevertheless, that the

local rate structure created by the Southern Pacific gave an advantage

to a few shippers and to a few towns which affected unfavorably the

development of the state. This is the fundamental objection to any

system of rates in which competitive influences are recognized to an

unlimited extent.

Without going further into the matter at this point, we will content

ourselves with adding to our description of local rates in California

some observations upon the attitude of California shippers with respect

to railroad charges.

Conflicting Claims of Cities

The rates of the Southern Pacific and of the Central Pacific railroads

were unpopular in California because they were believed to be too high.

Beyond this, and when it came to questions of relative adjustments,

each community looked at the relations of rates which interested it

from the narrow viewpoint of its individual advantage. Indeed, when one

reviews the course of the controversy between railroad and shipper in

the state, it seems very clear that, apart from questions of excessive

profit, the objections which California cities entertained toward the

irregular and unequal rates charged by the Southern Pacific Company

were only slightly based on considerations of general policy, but

were, on the contrary, due to the feeling of various towns that their

distributing areas were unfairly circumscribed by the manner in which

railroad rates were arranged.

One small piece of evidence to show that competition between rival

towns or producing districts was the reason for some of the most

bitter attacks upon the railroad, may be found in the complaint of the

anti-monopolists of Tulare County in 1885 that their fruits, which

ought to have found a market in the southern parts of the state and in

Arizona, were subjected to higher freight rates than were the fruits

of Sacramento and of San José, points more than 200 miles to the

north.[389]

A few years earlier the merchants of Stockton insisted that the rates

out of Stockton were extortionate as compared with the rates out of

San Francisco. The distance from Lathrop to Stockton was said to be 10

miles, and the railroad rate per ton on wheat was $1.20, or 12 cents

per mile. The distance from Lathrop to San Francisco was 82 miles, or

more than eight times the distance to Stockton, but the price per ton

for wheat was only $2.50, or about one quarter the price per ton per

mile in the first instance. The price per ton from Lodi to Stockton was

$1.40, and to San Francisco $2.50; but whereas the last-named sum was

less than twice the former, the distance from Lodi to San Francisco was

eight times as great as the distance to Stockton.[390]

In addition to their contention that mileage rates on shipments

into Stockton compared unfavorably with rates on shipments into San

Francisco, Stockton residents made the general charge that rates up the

San Joaquin Valley were generally less than the rates down the valley.

The rate from Stockton to Merced was said to be $6.80 per ton, but the

rate from Merced to Stockton was $3.40. Stockton objected to forcing of

the San Joaquin Valley to make San Francisco its market.[391]

Interstate Commerce Decision

Complaints similar to those voiced by Stockton were registered by the

people of Los Angeles. In the eyes of inhabitants of that city, the

rates on northbound freight from Los Angeles consigned to the San

Joaquin Valley were relatively higher than the rates from San Francisco

south into that same valley. Yet, dissatisfied as Los Angeles was with

the relation which her rates bore to those out of San Francisco, it

seemed to other cities in the south that her position was on the whole

more favorable than was that of her neighbors. In 1889 a dealer in the

city of San Bernardino protested against being forced to pay a higher

rate from eastern points than was charged the city of Los Angeles. He

showed that the rate on agricultural implements from the Missouri River

to San Bernardino was $1.27 per hundred pounds while to Los Angeles it

was $1.07. On stoves the rates were $1.19 and 99 cents, respectively,

and on school furniture $1.55 and $1.35. This preference was alleged to

be discriminative and illegal.[392]

In a decision approving the discrimination against San Bernardino,

the Interstate Commerce Commission in 1890 remarked that originally

southern California had been served from San Francisco direct; and that

San Francisco jobbers had covered its territory. When the railroads

reached Los Angeles they found it to their advantage to grant it low

rates, not so much because it lay near the Pacific Ocean as because

the interests of the Southern Pacific and especially of the Santa Fé

demanded that some point in southern California should be given such

a rate that merchandise from the East could be brought there all-rail

and from that point be distributed. The fact that water competition

was not the only influence which determined the Los Angeles rate from

the eastern states was indeed shown later by the fact that the port of

Los Angeles, San Pedro, did not receive a terminal rate until 1910,

although Los Angeles itself had been given terminal privileges at least

twenty years before.[393]

Stockton, Los Angeles, and San Bernardino thus illustrate in their

conflicting claims the constant effort of cities in California to

extend the area over which they might distribute goods. Among other

instances of dispute between California cities may be mentioned

the demand of Santa Barbara in 1907 to be made a Pacific Coast

terminal,[394] and the angry contentions of Santa Clara, San José,

Marysville, Santa Rosa, and Fresno in 1914 over the question of

relative railroad rates from eastern points.[395] The characteristics

of the system of transcontinental rates which were involved in these

complaints will be discussed in the following chapter.

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