We have already alluded to the fact that the concentration of
manufacturing in large mills at great commercial centres has been made
possible by the development of railway transportation, and that the
rapid settlement of our Western prairies is due to the same agency; but
it is worth while to note more fully the difference between ancient and
modern conditions in the business of transportation.
In the first place, it is plain that no more than a century ago the
world had comparatively very little need for railways. Each community
produced from its farms and shops most of the things which it needed;
and the interchange of goods between different sections, while
considerable in the aggregate, was as nothing in comparison with modern
domestic commerce. The king's highways were open to every one, and
though monopolies for coach lines were sometimes granted and toll roads
were quite common, there was no possibility for any really harmful
monopoly in transportation to arise, because the necessity of
transportation was so small. Some writer has ascribed all the evils of
modern railway monopolies to the fact that in their establishment the
old principle of English common law that the king's highway is open to
every man, was disregarded. But if we sift down this ancient maxim of
law to its essential principle, we find it to be, _there must be no
monopoly in transportation_; and the problem of obtaining the advantages
of modern railway transportation and keeping up, at the same time, the
free competition that exists in transportation on a highway is seen to
be as far from solution as before.
The importance of our railway traffic is proven by statistics. Of the
total wealth annually produced in this country, it is probably a fair
estimate to say that ten per cent. is paid for transportation of the raw
material and finished goods in their various journeys between producers,
dealers, and consumers, and for transportation of passengers whose
journeys directly or indirectly contribute to the nation's industry.
That is to say, the gross yearly earnings of all the railroads and
transportation lines of the country is about one tenth of the total
value of all the year's products. The average is brought down by the
amount of sustenance still consumed in the locality where it is
produced, and by the amount of valuable merchandise. But of the bulky
products like coal and grain, the greater part of the cost to the remote
consumer is due to the cost of carriage.
It is also necessary to a proper appreciation of the problem, that we
understand that railway transportation is now as absolutely necessary as
is the production of food and clothing. Annihilate the railway
communications of any of our great cities, and thousands would perish by
starvation before they could scatter to agricultural regions. There was
great suffering in many small communities in Minnesota and Dakota in
the severe winter of 1887-8, because the heavy storms blockaded the
railroads and prevented them from bringing in a supply of coal and
provisions. But it is not taking the question in its broadest sense to
consider whether we could eke out an existence without railway
communication. The fact is that under modern conditions every man
obtains all the things which he desires, not by producing them himself,
but by producing some one thing which others desire. The interchange
between each producer and each consumer must, broadly speaking, be all
made by means of the railway; and without that, stores, factories,
mills, mines, and farms, would have to cease operation.
Remembering now the importance and necessity of transportation, let us
inquire how the price at which it is sold to the public, the rate of
fare and freight, is fixed. Is it or can it be generally fixed by
competition?
There are now in the United States about 37,000 railway stations where
freight and passengers are received for transportation. Now, from the
nature of the case, not more than ten per cent. of these are or can be
at the junction of two or more lines of railway. (By actual count, on
January 1, 1887, eight per cent. of existing stations were junction
points.) Therefore the shippers and buyers of goods at nine-tenths of
the shipping points of the country must always be dependent on the
facilities and rates offered by a single railway. Such rates of
transportation as are fixed, be they high or low, must be paid, if
business is carried on at all. And when we consider the ten per cent. of
railway stations which are, or may be, junction points, we find that at
least three-fourths of them are merely the junction of two lines owned
by the same company. Consolidation of railway lines has gone on very
rapidly within the past few years and is undoubtedly destined to go much
further. Of the 158,000 miles of railway in the country, about eighty
per cent. is included in systems 500 miles or more in extent; and a
dozen corporations control nearly half of the total mileage. The
benefits which the public receive from this consolidation are so vast
and so necessary that no one who is familiar with railway affairs would
dream of making the suggestion that further consolidations be stopped or
that past ones be undone.
There is a great tendency on the part of the public, however, to look
with fear and disfavor on further railway consolidation. And because
this is so, it is greatly to be desired that the beneficial effects of
consolidation should be better understood. The most important benefits
are included under one head, the saving in expense and the avoidance of
waste, and this is effected in very many different ways. Suppose a great
system like the Pennsylvania or the Chicago & Northwestern were cut up
into fifty or sixty independent roads, each with its own complete staff
of officers. Each road would have to pay its president, directors, and
heads of operating departments, would have to maintain its own
repair-shops, general offices, etc., and conduct in general all the
business necessary to the profitable operation of a railway corporation.
A car of wheat or a passenger in going from Chicago to New York would
have to be transferred from one road to another at perhaps twenty
different points, and the freight or fare paid would be divided among
twenty different companies, with corresponding clerical labor. The
modern conveniences of through tickets, through baggage-checks, and
through freight shipments, would be difficult, if not impossible.
Further, consolidation tends to produce vastly better service and
greater safety. The large systems can and do employ the highest grade of
talent to direct their work. Every thing is systematized and managed
with a view to producing the best results in efficiency and safety with
the least waste of material and labor. And while the improvement in
safety and convenience is all for the benefit of the public, a large
part of the saving in expense effected by consolidation has likewise
come back to the patrons of the roads in the form of reduced rates of
fare and freight.
It is difficult, however, for any one not familiar with the technical
details of the railway business to fully appreciate the importance and
necessity of the consolidations which have been effected, and the grave
results that would follow the realization of the mad proposition to set
us back a half century by cutting up our railroad systems into short
local lines. It must be plain to every one, however, that while the loss
of all the benefits of consolidation would be certain, the gain in
competition could affect only the few junction points; and as we shall
now see, the effect even on them would be small.
Assuming that the total number of railway junction points in the United
States is 3,000, we find, on examination, that at about two-thirds only
two lines meet, and at more than half the remainder only three lines
meet. It is plain that in the vast majority of cases where two roads
intersect, and in many cases where three or four come together, the
lines meet perhaps at right angles and diverge to entirely different
localities. The shipper bringing goods to the station, then, may choose
whether he will send his goods north or east perhaps; but only in the
few cases where two lines run to the same point does he really have the
choice of two rates for getting his produce to market. Practically,
then, there are not, and never can be, more than a few hundred places in
the country where shippers will be able to choose different routes for
sending their goods to market. We say there never can be, because the
building of a line of railway to parallel an existing line able to carry
all the traffic is an absolute loss to the world of the capital spent in
its construction, and a constant drain after it is built in the cost of
its operation. This fact is now, fortunately, generally appreciated.
But what of the competitive traffic which exists between commercial
centres, like the trunk-line traffic between Chicago and the cities on
the seaboard, or between the former city and the collecting centres
farther west like St. Paul, Omaha, and Kansas City? Here, indeed, there
is competition; and it is of great importance because of the enormous
bulk of the traffic which traverses these few routes.
It is a peculiar feature of the railway business which we have now to
consider, and one which is not generally understood. We have already
perceived the principle that competition cannot permanently exceed a
certain intensity; and the proof of this principle in the case of the
railway is remarkably plain. Suppose two roads are competing for the
traffic between Omaha and Chicago. A shipper at the former city who
wishes to send a few tons of freight to Chicago may go to one company
and ask their rates, then to the other and induce them to give him a
lower rate, and then back to the first again, until he secures rates low
enough to suit him. Now it is a fact that either company can afford to
carry this especial freight for less than the actual cost of carrying
it better than it can afford to lose the shipment. This is because it
costs the company practically _no more_ to carry the goods than if they
were not shipped by its line; and hence whatever is received for the
freight is so much profit. Stated in the form of a principle, this fact
is expressed thus: _Receipts from additional traffic are almost clear
profit_. Nor is this all. The practical impossibility of distinguishing
_additional_ traffic from other traffic, and the enactment of State and
National laws requiring uniform rates to be charged, places all traffic
on a common basis; and the same cause which makes it more profitable to
carry additional traffic for a song than to lose it, makes it better for
a railroad to carry traffic, temporarily at least, for less than the
actual running expenses of the road, rather than to lose it. The train
and station service, the general office and shop expenses, must all be
kept up, though the freight and passengers carried dwindle to almost
nothing; and the capital invested in the road is a total loss, unless
the line is kept in operation and earns some income, even though it be
small. This last influence, as we shall see later, is a most important
and far-reaching one in its effect on industrial competition.
The cause of the intensity of competition in railway traffic is now
evident. And from what we have seen, it follows that two railway lines
competing freely with each other cannot possibly do business at a
profit. Let us see what are the actual results of this law of practical
railway management. Evidently the managers of two competing railway
lines have but two possible courses open. They may, by tacit or formal
agreement, unite in fixing common rates on both the roads, or they _may_
attempt to do business with free competition. But we have already
proven that the latter course must result in reducing the income of the
road certainly below the amount necessary to pay the operating expenses
and the interest on the bonds, and probably it will be insufficient to
pay the running expenses alone. The inevitable result, then, is the
bankruptcy of the weaker road, the appointment of a receiver, and its
sale, in all probability to its stronger competitor. This is the chain
of cause and effect which has wrought the consolidation of competing
parallel roads in scores of cases, and which, if free competition is
allowed to act, is sure to do so.
We can now appreciate the _necessity_ which managers of competing lines
are under to agree upon uniform rates for traffic over their roads, and
at the same time the difficulty of doing this. The strange paradox is
true that while it is _necessary_ to the continued solvent existence of
the competing corporations that such an agreement be made, it is also
greatly to their advantage to break it secretly and secure additional
traffic. It is necessary, therefore, that the parties to the agreement
be strongly bound to maintain it inviolate; and to effect this, "pools"
were established. In pooling traffic, each company paid either the whole
or a percentage of their traffic receipts into a common fund, which was
divided among the companies forming the pool, according to an agreed
ratio. Under this method it is evident that all incentive to secret
cutting of rates and dishonest methods for stealing additional traffic
from another road was taken away.
How widespread and universal is the restraint of competition by railway
corporations may be seen by the following pithy words, penned by Charles
Francis Adams, President of the Union Pacific Railway:
"Irresponsive and secret combinations among railways always have
existed, and, so long as the railroad system continues as it now
is, they unquestionably always will exist. No law can make two
corporations, any more than two individuals, actively undersell
each other in any market, if they do not wish to do so. But they
can only cease doing so by agreeing, in public or private, on a
price below which neither will sell. If they cannot do this
publicly, they will assuredly do it secretly. This is what, with
alternations of conflict, the railroad companies have done in one
way or another; and this is what they are now doing and must always
continue to do, until complete change of conditions is brought
about. Against this practice, the moment it begins to assume any
character of responsibility or permanence, statutes innumerable
have been aimed, and clauses strictly interdicting it have of late
been incorporated into several State constitutions. The experience
of the last few years, if it has proved nothing else, has
conclusively demonstrated how utterly impotent and futile such
enactments and provisions necessarily are."
Disregarding for the present the latter part of the above quotation,
consider the statement that during the whole history of railway
corporations, agreements to restrain competition have been the rule.
This the slightest research proves to be an historical fact, and it is
in perfect accord with our preceding statement, that such agreements
were necessary to the solvent existence of railway corporations. The
records also show that invariably when these agreements have been broken
and competition has been allowed to have full play, the revenues of the
roads have been rapidly reduced to a point where, unless a peace was
effected, bankruptcy ensued.
Mr. Adams said, with truth, that no law had proven of any effect in
preventing these competition-killing agreements between railways; but
since the above extract was written, the Interstate Commerce law has
been enacted. Let us pay some attention to its working and results. It
is a curious fact that the framers of railway legislation in this
country, almost down to the present time, have concentrated all their
energies on the endeavor to keep up free competition; and the Interstate
law is no exception to this rule. The plan of the Interstate law was
about as follows: "Here are a few dozen great commercial centres where
the railway lines of different systems meet. We will first prohibit the
pooling by which they have restricted competition at these points. Then,
in order that the thousands of other shipping points shall receive an
equal benefit, we will enact a 'long and short haul clause,' obliging
the rates charged to be in some degree proportionate to the distance.
Thus competition at the great centres will bring rates down everywhere,
and the public will be benefited."
For a year after the enactment of the law its effects were not
prominent. Pooling was abolished, but the agreements to maintain rates
were still kept up and were fairly observed. But in 1888, the second
year of the law's working, it came to be realized that the pool was the
vital strength of the agreement to maintain rates, and that this
agreement might now be easily broken. Then ensued a remarkable season of
rate cutting, which, at the present writing, has reduced many strong
companies to the verge of bankruptcy. It is plain enough that if this is
allowed to go on, the various stages of receivership, sale, and
consolidation will follow in regular order. To avoid this too sudden
revolution and the general financial disaster which all sudden
revolutions entail, the principal companies in the West are now striving
to combine in an association for the maintenance of rates by a plan
which will bind them more closely together than any other ever before
adopted. Thus to quote Mr. Adams again: "The Interstate Commerce law has
given a new impetus to the process of gravitation and consolidation,
and it is now going on much more rapidly than ever before. It is at this
moment rapidly driving us forward toward some grand railroad-trust
scheme."
It is a fact which we shall do well to ponder over, that this
legislation intended to stimulate competition has finally had just the
opposite effect from that which its makers desired. They did increase
the intensity of the competition, and have thereby nearly brought about
a permanent end to all competition in railway traffic.
It must now be clear that the railway is essentially a monopoly, not, be
it noted, because of any especial wickedness of its managers or owners,
but because competition is _impossible_ as regards the greater part of
its business, and because wherever competition is possible, its effect,
as the managers well know, would be to annihilate all profits from the
operation of the road.
Let us consider now some of the evils with which this monopoly is
charged. The first of these is _discrimination_ between persons and
between places. A favored shipper has been enabled to ruin his
competitors because he could obtain special rates, while they, perhaps,
were charged an extra amount. The strong monopolies have in this way
been able to strengthen their hands for the purpose of throttling their
weak competitors. Passenger rates, too, have been low to one class and
high to another; and the system of free passes has led to great abuses.
Discrimination between towns and cities and States has been hardly less
serious; and while the railways were permitted to make high local rates
and low through rates, a great stimulus was given to the city at the
expense of the country. The second class of evils is that rates in
themselves have been too high. The railways have been wastefully built
and then capitalized at double their actual cost, and it has been
attempted to pay dividends of 6 to 10 per cent. on these securities. In
some cases the principle of charging "what the traffic will bear" has
been so applied that industries have been ruined through the absorption
of their profits by unjust transportation charges. But our space will
not permit a comprehensive review of the many abuses of railway
management. They are already familiar to the public. We needed only to
refer to them sufficiently to carry on our argument by showing that the
railroad monopoly is not by any means a harmless monopoly if left to
work its own pleasure.
There are two evils of our present railway system, however, which are
not chargeable to monopoly, but to the _attempt to defeat monopoly_, and
which are important to our discussion. The first is the waste of
competition in railway traffic; the second, the waste of competition by
the construction and _threatened_ construction of competing lines where
present facilities are ample for the traffic. Of the first it need only
be said that in advertising, "drumming," and soliciting patronage the
railways spend many millions of dollars every year, which comes out of
the pockets of the public. The second is most serious, for it involves a
far greater waste. It is a conservative estimate to say that 5 per cent.
of the railways of the country were only built to divide the profits of
older roads, and that their owners would be delighted to-day to have
their money back in their possession and the railroad wiped out. The
millions these roads have cost, the millions required every year to
maintain and operate them, the millions spent on proposed roads that
never reached completion, and the millions squandered in fighting
proposed roads by every means short of actual bloodshed,--these are
some of the wastes which we have made in our endeavor to create
competition in railway transportation. And with all our efforts, and
notwithstanding the fact that until within a short time the public
sentiment and the railway managers have been united in the belief that
free competition was the only mode of regulating railroad rates, we are
farther removed from free competition now than ever before.
And now consider in addition to all this the fact that every railway
company must first of all secure from the State a right to exercise the
sovereign power of Eminent Domain, and that it may and does choose and
take every advantage of the favorable locations where its road can be
built most cheaply; which natural highways, mountain passes, and the
like, are gifts of Nature, the right to whose use equitably belongs to
the general public, and not to private parties exclusively. Taking these
facts also into consideration, it seems needless to offer further proof
of the fact that the business of railway transportation is essentially a
monopoly, and that the attempt to regulate it by competition must always
prove a failure in the future, as it always has in the past.
Necessarily we have limited our discussion to the most salient points,
and have not touched at all many of the complicated details of the
railway problem. In a later chapter we can study farther the evils due
to railway monopolies, and the proper remedies therefor. At present we
have accomplished our purpose in finding out the fact that railways are
monopolies, and that they are so by their inherent nature.
Of monopolies in other forms of internal transportation, but little need
be said. Our once busy canals and great rivers seem destined, with the
constant rapid improvement and cheapening in the carriage of goods by
rail, to lose all their former importance. The monopolies small and
great that once held sway there have all vanished before their strong
rival, the railway.
The use of steam in the vessels that navigate the ocean has had an
effect very similar to the replacing of stage-coaches and freight wagons
by the locomotive. Where hundreds of sailing vessels plied their slow
and uncertain trade, steamer lines now make trips only less regular than
the railway itself. The only cause for the existence of a monopoly in
ocean traffic by steam is the greatly increased capital required for a
rival steamship line as compared with that needed for the old sailing
vessels. We find this, the requirement of a large capital, to be a
feature of more or less importance in nearly every monopoly of the
present day. In this case, however, unless there is an artificial
monopoly in the shape of government aid or authorization, the strength
of its capital is the only power the monopoly has.
We may reach a clear idea of the essential nature of all the monopolies
considered in this chapter by considering an especial class of
monopolies of communication, namely, mountain passes, bridges, and ship
canals. If a person or a railway corporation could secure sole control
of the only pass through a high mountain range separating two wealthy
and populous districts producing goods of different sorts, they might
exact a princely yearly revenue for its use, equal to the interest on
the capital required to secure an equally favorable passage by
tunnelling, or the annual cost of sending goods over some longer and
more expensive route. But under the law no private person would be
allowed to do this; and if the pass were a very important and necessary
one, probably no one railway company would be allowed to do so. The law
recognizes to some extent, and should recognize much more than it does,
the fact that the benefit of this natural pathway is not the property of
any one man or set of men, but equitably belongs equally to every person
who needs to use it directly or remotely.
A very large and expensive bridge is like an important mountain pass,
differing only in that one is the gift of Nature, while the other is
wholly the work of man. But because the latter is the work of man, it
does not follow that it is not a monopoly. The great bridge across the
Mississippi River at St. Louis is owned by a private company which
levies tolls for the teams and trains passing over it. These are deemed
excessive, as they are sufficient to pay an exorbitant interest on the
cost of the bridge. Yet for many years no one has cared to invest money
in the erection of a new bridge, for they saw that there was no more
traffic than one bridge could readily carry, and they knew that if a new
bridge were erected, in the rivalry in tolls which would ensue, the
old-established company would probably bankrupt its rival. It is thus
plainly seen how an important bridge may become a monopoly, and a most
powerful and onerous one.
We have still one important monopoly of communication to describe, the
telegraph. Viewed from a narrow standpoint it may be thought that there
should be no monopoly in the telegraph. A telegraph line is not
expensive to erect and maintain, and it gets no monopoly from taking
advantage of the most favorable route through difficult country as a
railway does. But the economy effected by combination and the effect of
sharp competition in bringing about bankruptcy and then consolidation
are exactly similar to the case of the railway, which we have just
described. In the early history of telegraph companies, many short
competing lines struggled and fought for supremacy. In 1859 the Western
Union Telegraph Company was formed with the avowed intention of
combining these warring companies and making the telegraph business
profitable. It has exceeded the most sanguine dreams of its promoters by
swallowing up its rivals until the entire system of telegraph
communication of the country is practically in its hands. The effects of
this consolidation have been of two sorts. On the one hand we have the
telegraph service of the country performed with the least possible work;
there is nothing wasted in the maintenance of two or more rival offices
in small towns where one is sufficient, nor in operating two lines of
wire where a single one would serve as well. All expense of "drumming
up" business in various ways is avoided, and also the cost of keeping
the complicated books necessary when the receipts of a single message
must be divided among several companies. On the other hand it is plain
that the public is wholly at the mercy of the monopoly in the matter of
rates, and must pay for the use of the telegraph exactly what the
corporation asks. There is a weak and foolish argument which is often
used in an attempt to show that this particular monopoly is not hurtful.
It is that the telegraph is a luxury which only wealthy people use, and
hence whether its rates are high or low is of little account. The
fallacy of this statement is easily seen. A principal use of the
telegraph is to aid the prosecution of business; hence to unduly raise
rates is to cause an additional tax on business,--on the carrying on of
the processes of production. This tax will certainly have its effect,
either in decreased profits, decreased wages, or an increased price for
the product. Another large class of telegrams are those which are sent
with little thought of the cost, in time of sickness, death, or sudden
emergency, yet by people whose purse feels severely the tax.
What to do with this vast monopoly is one of the questions of the day,
but we will content ourselves at present with this investigation of its
character, reserving its proper treatment for later consideration.