THE TRANSCONTINENTAL TARIFF
Market and Railroad Competition
The chief difference between the local situation in California and the
condition of affairs which prevailed in the case of through shipments
to eastern points, lay in the fact that the competition of markets
and the rivalry of competing carriers played a more important part
in the through shipments than they did in local shipments. By market
competition we mean the attempt of geographically distinct producing
centers, each aided by a separate group of railroad lines, to sell in
a common area of consumption. Such competition occurred, for instance,
when California oranges sold in the Mississippi Valley in competition
with oranges from Florida, or when California lemons sold in the same
territory in competition with Sicilian lemons imported at New Orleans
or at New York. We have already seen that cities competed with each
other within California itself, but this competition was less important
within the state than it was in the case of hauls across the continent.
It should be recalled that the Huntington interests possessed a virtual
monopoly of local business, while the extent of the competition between
carriers on through traffic may be briefly indicated by observing that
the Central and Southern Pacific companies had direct relations with
no less than six other transcontinental railroads, namely, the Union
Pacific, completed in 1869; the Santa Fé, which reached the town of
Deming and effected a connection with the Southern Pacific in 1881; the
Texas Pacific, built to El Paso in 1882; the Northern Pacific, opened
from St. Paul to Portland in 1883; the Canadian Pacific, completed in
1887; and the Great Northern, which was finished in 1893. None of these
railroads reached San Francisco except the Santa Fé, which obtained an
independent California connection in the late nineties. The Santa Fé
entered Los Angeles, however, in 1885, and the Union Pacific enjoyed a
connection with Portland through the Oregon Short Line and the Oregon
Railway and Navigation Company as early as 1884. From Portland, Los
Angeles, and Vancouver, freight could be distributed by water all up
and down the Pacific Coast.[396] Moreover, the competitive relations
which Pacific Coast cities bore to each other made it necessary to keep
their rates from the East on an approximate parity, and caused the
Central Pacific to be affected by charges which were not on their face
applicable to any point in which that company had an interest. There
were combinations in respect to transcontinental railroad business from
time to time, but none sufficient to control rates except for short
periods.
Transcontinental Rate Adjustment
These differences in conditions between state and interstate traffic
doubtless influenced Mr. Huntington and his advisors when they came to
establish what is known as the transcontinental rate adjustment. Yet
any examination of the through rates charged by the Central Pacific
will show that in their relation to each other, at least, these rates
were built upon much the same principles as the local rates discussed
in the previous chapter. There is no essential difference between a
rate schedule which applies a lower rate between New York and San
Francisco than it applies between New York and Denver, and one which
provides a lower charge between San Francisco and Los Angeles than
between San Francisco and Bakersfield.
The tendency in public discussion is to regard the transcontinental
rate structure as different from all other structures. It is not
different, either from the rate systems in force in some other parts
of the country, such as the Southern classification territory, or from
the general arrangement of rates in business local to California. The
reason why transcontinental rates to Pacific terminals are low is
that there is competition at terminal points. The reason why rates
to intermediate stations are high is that competition is lacking at
such places. The reason why local rates between San Francisco and Los
Angeles are low is that shipments must be diverted from the water
lines; while the rates from San Francisco to points in the upper San
Joaquin Valley are high either because competition is absent or because
it is less severe. Similar general causes in both cases produce similar
results.
Rate Structure
It is necessary to describe the transcontinental system at this
point in order that the reader may have before him the outlines of
the rate scheme for which the Huntington-Stanford group were in part
responsible; but in view of the very general understanding which the
public has of the system, the description will be brief. A summary
account is as follows:
The primary fact in transcontinental rate-making is that railroad
rates between the Atlantic and the Pacific coasts of the United States
were originally made, and have remained relatively low. The lowest
rates quoted, however, have never until recently been available at
all points in California, Oregon, and Washington, but only at certain
selected cities. The towns to which low rates have been quoted under
the transcontinental adjustment are called Pacific Coast terminals.
Terminals, being mostly located on the seaboard, or within easy reach
of it, enjoy rates low enough to induce their residents to patronize
the rail lines rather than the water lines around the Horn or the
combined rail and water routes across the Isthmus of Panama and the
Isthmus of Tehuantepec. This does not mean, of course, that rail rates
to terminals have been as low as water rates, but it does mean that,
all conditions of shipment, including speed, safety, and regularity,
being taken into account, the advantages of shipment have been
equalized. The rates to and from all terminals have been uniformly the
same.
A characteristic feature of the transcontinental rate system is
that the rates to towns and cities in the vicinity of terminals are
determined by the absence of water competition. Inasmuch as a shipper
located at an inland point is obliged to send his goods to the seaboard
before he can avail himself of the advantage of a water haul, it
becomes possible to charge him a rate equal to the sum of the terminal
rate and the local rate which he will have to pay without causing a
diversion of his freight from the rail to the water lines. It is true
that there is a certain limit to the total charge which can be demanded
from such a shipper, due to the circumstance that at some figure the
expense of a direct haul from the local point in question to the
final destination of the goods upon a non-competitive mileage basis
will be less than the combination upon the terminal, but this limit
is effective only in the case of communities located a considerable
distance to the east of the seaboard shipping point. One result of the
application of this system to local points is that towns situated upon
the direct line between eastern cities and Pacific terminals often
pay higher rates than are charged upon freight passing through these
places and carried possibly several hundred miles beyond to the coast
terminals. Local communities so situated are known as “intermediate”
towns.
These three features of the transcontinental rate structure, namely,
that rates between the Atlantic and the Pacific seaboards are low,
that the lowest rates are charged only to selected towns, and that
rates to places other than terminals are made by combination upon
the terminals, are the elements which have given character to this
adjustment, and are therefore the points in it which are best known. To
make a statement of the broad outlines of the plan complete, however,
two other statements must be added.
Group System in the East
The first additional characteristic of transcontinental rates is that
on eastbound business, particularly in the case of the products of
California agriculture, the same rates are applied from intermediate
as from terminal points. This is to place the shipping communities of
the state all upon an equal footing. The second feature has reference
to conditions upon the eastern end of the transcontinental haul, rather
than upon the western. In the eastern part of the country the system of
terminal and intermediate rates is not applied upon transcontinental
business. Instead, it has been customary to divide the area east of the
Rocky Mountains into a series of great groups, now ten in number, and
to quote to each of these groups rates which are either the same in all
cases, or which increase as the distance grows greater.
This failure to apply in the East the same principles which govern
in the West has been doubtless due to the insistence of cities like
Chicago that her rates be at least as low on shipments to and from the
Pacific Coast as the rates which New York enjoys, as well as to the
desire of railroads which begin at Chicago or the Mississippi-Missouri
River to encourage the growth of business in the Middle West. Mr.
Huntington was credited with the desire to establish rates from the
Missouri River which should be lower than rates from New York, and the
reasons which were in his mind may easily be imagined. Such rates were
actually in effect between 1887 and 1894, but the principle of graded
charges was abandoned as a result of a rate war which broke out in
1894.[397]
Terminal Points
This brief description of a complicated rate adjustment will show
that in through as well as in local rate-making the Central Pacific
management yielded to the unequal pressure of competition, and
particularly of water competition, at different points. Generally
speaking, the most important of all the forms of competition which the
company had to meet was water competition. Common alike to local and to
through transportation, this was important because it was difficult to
control, because it operated on a low cost basis, because it offered
transportation facilities to a very wide variety of classes of goods,
and because its possibilities for expansion were indefinite.
It is a mistake to believe that only low-grade commodities have been
shipped by the water routes. While it is true that the principal
movements by water are of the coarser freights, such as hardware,
rails, pipe, sugar, hardwood lumber, and asphaltum, yet there has
always been also a considerable transportation of higher grade
articles, including cotton ducks and denims, beans, canned goods, and a
large number of kinds of general merchandise. Indeed, all the canned
salmon and a very large percentage of the canned goods, together with
two-thirds of the beans produced in California, originate near enough
to the coast to reach tide-water at an expense not exceeding 20 cents
per hundred pounds. The Interstate Commerce Commission has remarked
that almost every article which moves from the East to the Pacific
Coast has been at times carried by the ocean,[398] and the truth of
this statement is generally conceded in discussions on the water
business.
It was the pervasive character of water competition, and the fact that
such competition was felt upon the Pacific Coast and not at interior
points, which originally established the position of the Pacific
terminal.[399] A terminal point, be it recalled, was, and is, under
the transcontinental system, a place which enjoys rates low enough
to attract traffic from the water to the railroad lines—a point
also upon whose rates the rates to other points are based after the
manner of the “basing point” system. San Francisco was a terminal.
So was Stockton, Sacramento, Port Costa, Richmond, Oleum, Antioch,
San José, Santa Clara, Los Angeles, and a considerable list of other
towns. At the beginning the city of San Francisco received a lower
rate than any other town because the competition of the water route
between New York and San Francisco was most evident. Mr. Stanford,
however, disclaimed responsibility for this limitation. His eastern
connections, he said, were to blame. The Central Pacific was willing
to be more liberal from the start, but the other lines would not join
with it in establishing through rates, and insisted on their locals.
For this reason goods originating at interior points were often hauled
to San Francisco, and then back east, in part over the same line by
which they had come.[400] Such a condition was highly unsatisfactory
to California towns other than San Francisco, yet by 1873 Sacramento,
Marysville, and San José had been given terminal rates,[401] and still
later the list of terminal points was very greatly extended. In 1910
there were 152 terminal cities on the Pacific Coast, of which 97 were
in California.[402]
Dissatisfaction with Rate System
Owing to the peculiar intensity of competition at their doors, Pacific
terminals therefore enjoyed exceptional advantages in rates as compared
with their less favored neighbors. On the other hand, even the terminal
cities expressed some dissatisfaction with the transcontinental
adjustment. It appears, for instance, that the growth of great
distributing centers was difficult under the scheme of rates which
was applied. So long as terminals were few in number, a considerable
concentration in business was possible. But when the terminals
multiplied, the territory controlled by any single city became limited
by the low rates accorded to the nearby terminal cities, and expansion
in any one spot became difficult. This rendered the volume of business
of the Pacific Coast jobbers comparatively small. In the case of the
Business Men’s League of St. Louis v. the Atchison, Topeka and Santa
Fé, already cited, the two eastern firms of most prominence in the
proceedings were the Simmons Hardware Company, of St. Louis, and
Hibbard, Spencer, Bartlett and Company, of Chicago. The former of these
firms then did business in every part of the United States except New
England, while the representatives of the latter testified that the
operations of his house were limited only by the confines of the earth.
Competition by concerns of this magnitude was difficult for California
houses to meet, especially at times when the eastern firms used the
Pacific Coast as surplus territory in which they could afford to
operate at a low margin of profit.
Another ground for dissatisfaction on the part of the coast cities
arose out of their belief that the system as applied, in spite of
its recognition of the advantages of the Pacific Coast, still fell
short of the real equities of the situation. It was insisted that San
Francisco was improperly shut out from Denver, Cheyenne, Salt Lake
City, and Ogden. The Southern Pacific was charged with carrying hats
from New York by way of the Union and Central Pacific routes and then
down the San Joaquin Valley to Yuma at a lower rate of freight than the
San Francisco dealer could send the same goods from his city to the
Colorado River.[403] This same complaint was repeated by Mr. Leeds,
of the San Francisco Traffic Association, in October, 1892, with the
observation that if the same rate per mile were applied on eastbound
traffic from San Francisco that was charged on westbound business from
Chicago to Utah common points, then San Francisco would do the lion’s
share of the Utah business instead of a mere 16 per cent.[404]
There is no doubt that a good deal of dissatisfaction with the
transcontinental system was felt first and last by shippers to and from
the terminal cities. Yet, after all, the situation of these cities as
a group was excellent. The communities which were really handicapped
were the towns intermediate between the Pacific terminals and the East,
towns which paid higher rates for less service than did the terminal
cities, and which found that this condition not only increased the
cost of living to their consumers, but prevented their merchants from
enjoying a profitable distributing trade.
It seems probable that the associates intended from the beginning to
charge the mountain towns more on through hauls than was exacted from
towns on the coast. Huntington relates a conversation which took place
at Carson, Nevada, in 1861, between Stanford, Dr. Strong, Mr. Crocker,
and himself, representing the railroad, and some twenty representative
men of Nevada. The Nevada people observed that Huntington kept a
pretty good hardware store, but that he was likely to leave it in the
mountains if he started to build a railroad in Nevada. Huntington
replied that he would look out for that, but, he continued, when the
road was built he proposed to charge through rates which, while less
than the Nevada people were paying for goods which then came to San
Francisco by boat and were subsequently teamed across the mountains,
would be materially greater than the rates to San Francisco. “We shall
charge you for bringing back,” said he, “almost as much as we shall
charge from New York.” After the road was built Huntington says he met
one of these same men with whom he had talked in 1861. “Said I, ‘You
recollect that talk we had in the Curry House in 1861?’ ‘Yes, oh yes.’
Well, we talked about that. He said, ‘You’ve got me there, Huntington.’
‘Well,’ said I, ‘I said you would grumble. Now,’ said I, ‘you shut
up.’”[405]
Objections
It is to be presumed that Mr. Huntington’s rejoinder was effective
in the particular discussion which he relates. Yet the grievances of
the interior towns found full and repeated expression after 1869,
and indeed are still emphatically presented at the present day. The
more fundamental criticisms of the transcontinental rate system are
the following: The principal objection directed against the whole
adjustment is that it leads to charges to intermediate points which are
prima facie unreasonable. Speaking of the rates on iron and steel, a
representative of the Traffic Bureau of Utah called the attention of
the House Committee on Interstate and Foreign Commerce in 1918 to the
fact that the rate on iron and steel articles for export from Chicago
territory to Pacific Coast terminals was 40 cents per hundred weight or
3.54 mills per ton per mile. He continued:
They take an identical carload of the same commodity, and when it is
going to the Pacific Coast for domestic consumption the rate is 65
cents a hundred, or 5.76 mills per ton-mile. If they were to apply
that rate at the Utah common points—the same 65-cent rate—it would
pay 8.65 mills per ton-mile. But they say, “We cannot afford that; you
must pay 10.84. We haul it for a man in Russia for 3.54, but that is
only the out-of-pocket cost. We will make you a rate of 10.84, which
is a lower rate than you are entitled to.
I think any article, whether it is transportation or anything else,
that could be produced at some profit at a price of 3.54, when you pay
5.76 for it you are paying a handsome profit; and if you pay 8.65 for
it you are paying an abnormal profit; and if you pay 10.84 for the
same thing you are being outrageously imposed upon, which is what we
are doing.”[406]
The second objection of the interior cities is that the system of
transcontinental rates limits the territory in which intermediate
wholesale firms can do a distributing business; and the third ground
of complaint, resulting from the other two, is that the policy of
permitting low rail rates to the coast cities has the effect of
building up large cities on the seaboard at the expense of the whole
interior country.
Reply of Railroads
In replying to these objections the coast towns take the position that
they are not especially concerned with the rates to intermountain
places, nor indeed with the rates which the railroads make from coast
to coast, except in the sense that the greater the number of carriers
which participate in transcontinental business, the better the service
is likely to be. Secure in the possession of adequate water connection,
they do not expect to pay higher rates than they have paid in the past,
whatever policy the railroads may adopt. They have no controversy with
the intermediate territory, and only support the present adjustment
because they conceive it to be for the best interests of the country as
a whole.
The burden of the defense therefore falls upon the railroads, and the
railroads assert that the policy of quoting low rates to meet the force
of water competition is necessary if the comparatively moderate rates
to intermountain territory are to be continued. Unless—said Mr. Spence
of the Southern Pacific, in his recent testimony before the House
Committee on Interstate Commerce—the rail lines are permitted to make
rates which will hold the through business, the terminal roads will
lose all of the net revenue derived from the port rate upon what is a
very large volume of traffic. The millions of dollars involved cannot
be withdrawn from the net revenues of the railroads without impairing
their efficiency and usefulness, while to compel the carriers to apply
sea-compelled rates to all traffic would yield an inadequate revenue,
because it would mean that the traffic as a whole would be carried at
rates which were not sufficient to cover all the elements of cost,
including fixed charges and other similar expenses.[407]
Further Comments
The most casual description of any basing system such as the one which
the railroads apply to transcontinental freight, suggests at once
several matters in respect to which special defense and justification
are required. One just cause of complaint arises out of the fact that
the through rate to any point except to a basing point is made up by
the addition of two rates, each of which includes an allowance for the
cost to the carrier of providing terminal facilities, or four terminals
in all, whereas no actual shipment makes use of terminal facilities
at more than two points, namely, the place of origin and the place of
destination.
A second cause for criticism of a basing system is due to the striking
disregard of distance which is inherent in it. Shippers are not only
apt to feel that for reasons of natural right rates for transportation
should vary with the distance moved, but, as we have seen, they are
usually quite incapable of being convinced that the costs of shorter
hauls are not less than the costs of longer ones, so that for this
reason also the nearer places should enjoy the lower rates. Again, and
this also has been suggested in the preceding discussion, a basing
system is attacked because it is said to centralize business unduly by
forcing the distributing business into the control of a few localities
such as the Pacific Coast terminals, to the exclusion of outlying
cities which could handle it more cheaply and more conveniently under a
proper adjustment of rates, by reason of their greater nearness both to
centers of supply and of consumption.
There is no question that the rate system upon the Pacific Coast made
it difficult for intermediate and local towns to import supplies
directly from the East and to distribute them through their own
organization. This was not the result of the difference between
terminal and local rates alone, but was the combined result of the
practice of the transcontinental carriers with respect to rates and
their practice with regard to carload shipments. That is to say,
the carriers not only quoted generally lower rates, carload against
carload, and small consignment against small consignment, to terminal
cities than to intermediate or to interior towns, but they also
granted many carload ratings to terminals which were altogether denied
to their interior competitors. In some cases this occasioned an
extraordinary difference in the total charge.
On the other hand, it should not be forgotten that to encourage
distribution through Pacific Coast terminals was not necessarily
to concentrate the whole business of distribution. The competition
between the Pacific terminal and the eastern jobber was just as real
as that between the Pacific terminal and the intermediate point. It
is sometimes forgotten how active this eastern competition was. That
it continually threatened the western distributor is shown by the
fact that in spite of the advantages enjoyed by western terminals, 50
per cent of the jobbing business in the hardware trade in southern
California was done in 1902 by houses east of the Missouri River, so
that the Interstate Commerce Commission expressed the opinion that in
the absence of some distinct advantage in the rate it would be very
difficult for Pacific Coast dealers to hold their own.[408] In central
California the proportion of the jobbing business done by eastern
firms ranged from 25 to 40 per cent. Certainly no decentralization
in business would have taken place had the California distributors
been compelled to withdraw in favor of men in Chicago and St. Louis,
nor would the aggregate cost of getting goods from producer to final
consumer have been decreased.
Inconsistency
It has been made clear in the discussion of transcontinental rates,
that the transcontinental carriers as a group have not been consistent
in applying the principles upon which they rely in justification of
their charges. Not only have towns like Los Angeles been given terminal
rates for reasons of general policy, but cities in the Mississippi
Valley, upon the other end of the transcontinental haul, have been
granted the same rates as New York on business to and from the Pacific
Coast, in order to place them on an equality with points on the
Atlantic seaboard. As the Interstate Commerce Commission remarked when
the matter was brought to its attention, there is no logical ground
for recognizing the desire of Chicago to compete with New York, and
for refusing to accord the same privilege to Denver.[409] If market
competition is to be recognized in one instance, it should be in
another.
It is a striking fact that when the commission was considering the
question of transcontinental rates in 1910, it appeared that the great
bulk of traffic destined to intermountain cities originated at Chicago
or at points west. Thus out of 21,000,000 pounds of carload freight
moved from eastern territory to Reno, Nevada, during the year 1908,
only 4,500,000 pounds originated east of Chicago, and of approximately
1,000,000 pounds of less than carload freight concerning which data
were available, only 10 per cent originated at the Atlantic Coast
cities of New York, Boston, and Philadelphia. The commission found in
the case in which these facts were brought out that taking traffic
to Reno as a whole, 75 per cent of it had its source between Chicago
and Denver.[410] On this traffic, at least, the effect of water
competition was slight, and yet it is upon the assumed presence of
water competition that the transcontinental system primarily rests.
Not Responsive to Changed Conditions
Nor have the transcontinental carriers been quick to recognize changes
in conditions which, temporarily at least, have eliminated water
competition from coast to coast. When the Panama Canal was opened,
considerable apprehension was felt by the carriers lest the new
all-water route between the Pacific and the Atlantic seaboards should
divert a substantial portion of the transcontinental traffic formerly
handled by the railroads. On this ground the railroads applied to the
Interstate Commerce Commission, and received permission not only to
continue the practice of quoting higher rates to interior towns than
were charged between eastern points and the Pacific Coast,[411] but
actually to increase the difference upon a selected list of eastbound
articles.[412] So much was directly in line with previous action and
was to be expected.
The carriers were not, however, so ready to recognize the interruption
of canal traffic as they had been prepared to take notice of its
beginning, and in spite of slides and war conditions which suspended
water competition, it took an order of the Interstate Commerce
Commission to secure an equality in the treatment of intermountain
and seaboard cities to which the former in accordance with the
fundamental theory of transcontinental rates were entitled under the
new conditions.[413]
In forming an opinion upon the rate system of the Central Pacific,
however, too much weight must not be attached to inconsistencies in
application so long as these are not altogether arbitrary, any more
than to the demand of competing cities for their “fair share” of
the business that is to be done. City ambitions are limitless, and
impossible to reconcile. The question is not how to determine the
territory within which a given city may be said to have a right to
distribute its goods, but whether or not the rate system introduced by
the Huntington group, all things considered, promotes the interests
of the territory which is served better than some system that may be
suggested.
Basing Rate System Necessary
It is the writer’s opinion that the transcontinental rate system has
always had evident defects. In the first place, it has generally
provided low rates to towns and it has quoted low rates on commodities
which have no access to the water routes. In the absence of competition
the distance principle should prevail. Second, it has often failed in
the past to make concessions to the cost basis of rate-making, which
would have removed complaint without altering the plan in principle,
such concessions, for example, as the reduction of rates to interior
points to something less than the sum of through and local rates to
allow for the relatively small amount of terminal service rendered.
And, finally, it has increased the amount of transportation incident
to the distribution of a given amount of freight. While the assertion
of cities without terminal privileges that they have the right to do a
specified amount of business is to be received usually with skepticism,
it does seem probable that the transcontinental railroads would have
reduced the aggregate cost of distributing transcontinental freight had
they encouraged more than they did the growth of the interior towns,
provided that they had supported these towns both against Chicago and
St. Louis and against the Pacific Coast.
This same policy would have had the important advantage, from the
railroad’s point of view, of developing industry at points which were
not affected by every change in the rates of its competitors. The
Central Pacific was not the first railroad in the country confronted
with the problem of how to treat the non-competitive points upon its
lines. Nor, unfortunately, was it the only railroad which adopted the
drifting policy of quoting rates to hold the business, thus favoring
the towns served also by its rivals in preference to towns more
peculiarly its own, and through the stimulus given to such places, in
the end creating a distribution of production which, of all possible
alternative distributions, was the one which rendered its hold upon the
business of its territory the least secure.
In spite of these defects, it is the writer’s judgment that
some basing rate system, in its broad outlines similar to the
transcontinental system actually applied, was necessary and desirable
for the development of the West. The principal advantages of such an
arrangement were that it gave to the Pacific Coast the benefits of
competing rail and water routes as no distance system could have done,
and that it enabled the railroads to fill their trains with traffic
which paid them something over the out-of-pocket costs. It is clear
that the interior cities were mistaken in supposing that this practice
increased the rates which they had to pay. On the contrary, it reduced
them. There is also reason to believe that the transcontinental rate
system decentralized the distribution of goods, while it certainly
afforded western buyers and producers in most instances the important
advantage of access on equal terms to the markets of Chicago and of New
York.
There is little evidence that either Huntington, Stanford, Crocker, or
Hopkins had an active part in moulding the local or the through rate
structures of the Central and the Southern Pacific railroads. The work
was probably done by the traffic experts whom they hired, of whom the
chief was that very able individual, J. C. Stubbs. The contribution of
the associates may be taken to have been a clear appreciation of the
advantage of monopoly to railroad revenues, and the consistent support
which they gave to the efforts of men who knew more about the subject
of railroad rates than they did themselves.