FOOTNOTES:
[712] Interstate Commerce Commission, Annual Report 1911, pp. 53, 57, 59 and 206.
[713] Since this time a number of decisions have been rendered, on the whole more favorably to the Commission. Notably in the Willamette lumber case, for example, it was fully upheld: no. 59, April session, 1912; and also concerning southern rates: no. 40, February session, 1912. In June several petitions were dismissed for lack of jurisdiction. In the Shreveport case, notable as involving conflict of Federal and state authority, the Commission's order was enjoined in June on the ground of confiscation of property.
[714] 62nd Cong., 2nd sess., House Rep., no. 472: Hearings on H. R. 1907-1908 before the House Committee on Interstate Commerce, March 14, 1912: Hearings on H. R. 25596 and 25572, July-August, 1912, pp. 1-298.
[716] Discussed infra, p. [586].
[717] 32 Supreme Court Rep., 761.
[718] 188 Fed. Rep., 242. At p. [588], infra.
[720] 32 Supreme Court Rep., 742.
[721] 32 Supreme Court Rep., 817.
[722] Goodrich Transit Company v. I.C.C.; Commerce Court, nos. 21-24, April term, 1911. Decided by the Supreme Court, April 1, 1912; 32 Supreme Court Rep., 436; 190 Fed. Rep., 943.
[724] 193 Fed. Rep., 678.
[725] 191 Fed. Rep., 37.
[726] 195 Fed. Rep., 968.
[727] 193 Fed. Rep., 667.
[728] 192 Fed. Rep., 330.
[729] 32 Supreme Court Rep., 769.
[730] Pp. [248] and [391], supra.
[731] Other cases similarly decided are as follows: 9 I.C.C. Rep., 382; 15 Idem, 376 and 555.
[732] 195 Fed. Rep., 541, L. & N. R. R. v. I. C. C. In this case there was no dispute as to facts, but only as to the conclusion to be drawn therefrom. A straight difference on points of fact was raised in the Pacific Coast Switching cases (188 Fed. Rep., 229). The dissenting opinion as to usurpation of the rights of the Commission is significant.
[733] 190 Fed. Rep., 591. Second opinion in 22 I. C. C. Rep., 149.
[734] Precisely like the situation following the earlier emasculation of the law. P. [473], supra.
[735] 215 U. S., 452. P. [538], supra.
[736] 61st Cong., 3rd sess., Senate doc., p. 725, 1911, 10 vols. Admirably summarized in American Economic Review, I, 1911, pp. 766-789. Yale Review, 1910, pp. 268-288. Haines Problems in Railway Regulation, 1911, pp. 143-154; and files of the Railway Age Gazette, especially 1910, p. 1108. H. A. Bullock in Boston Transcript, Nov. 12, 19, and 21, 1910, offers suggestive comment.
[737] Pp. [411] and [488], supra.
[740] 20 I. C. C. Rep., 243 and 307.
[741] This point has since been well presented in Suffern, Railroad Operating Cost, New York, 1911. Cf. chap. II, supra.
[742] This argument is critically examined in the Quarterly Journal of Economics, XXV, 1911, pp. 539-562. Cf. Railway Age Gazette, 1912, p. 287.
[743] Data as to gross and net earnings at this time by comparison with former years will be found at p. [79], supra.
[744] 20 I. C. C. Rep., 243 and 307.
[745] Cf. Railway Age Gazette, LIV, 1912, pp. 10-14, and 803. A peculiarly suggestive instance is the allowance of increases on soft coal. Not a mere motive,—the need of more revenue,—but proof of reasonableness in detail was offered in evidence. 23 I. C. C. Rep., 617.
CHAPTER XIX
THE LONG AND SHORT HAUL CLAUSE: TRANSCONTINENTAL RATES
"Substantially similar circumstances and conditions" stricken out in 1910, [601].—Debate and probable intention of Congress, [602].—Constitutionality of procedure, [603].—Nature of applications for exemption, [604].—Market and water competition, [605].
The Intermountain Rate cases, [610].—The grievances examined, [611].—The "blanket rate" system, [611].—Its causes analyzed, [612].—Previous decisions compared, [615].—Graduated rates proposed by the Commission, [616].—The Commerce Court review, [620].—Water v. commercial competition again, [620].—Absolute v. relative reasonableness, [622].—Legal technicalities, [625].—Minimum v. relative rates, [624].—Constitutionality of minimum rates, [625].
The original long and short haul clause, as we have seen, forbade a greater charge for a short than for a long distance over the same line under "substantially similar circumstances and conditions." The principal amendment in 1910 was the elimination of this troublesome clause, "substantially similar circumstances and conditions";—responsible, as experience had shown for the practical nullification of the entire fourth section of the law of 1887 through the interpretation placed upon it in 1896 by the courts.[746] The insertion of a new provision in 1910 prohibiting carriers from charging "any greater compensation as a through route than the aggregate of the intermediate rates," concerned a somewhat different question, and may be omitted from consideration in this connection. The Commission was given authority under the amended law to relieve carriers from the prohibition of the statute, which, in this regard, did not become effective until February 17, 1911. It was uncertain at the time how extensive was the violation of the distance principle; although a comprehensive investigation by the Elkins Committee in 1905[747] showed the existence of many irregular tariffs all over the country. Within the first ten months after the law took effect, 5723 applications for relief under this section were filed. Of this number only two hundred and ninety concerned passenger fares: making it clear that the problem was mainly one of adjustment of freight rates. Inasmuch as the Commission held that each application should be treated as a formal complaint to be separately passed upon, it will be seen that these applications for relief considerably outnumbered the total of 4570 formal complaints which had otherwise been filed since 1887. Amendment of the fourth section obviously imposed a heavy additional burden upon this administrative arm of the Federal government.
The proposition to amend the long and short haul clause in 1910 called forth the same divergence of opinion in Congress as to regulation which characterized the original debate twenty years before. One party wanted an absolute long and short haul clause, permitting of no departure from the distance principle. The other stood for a more elastic plan, whereby carriers under certain economic justification should be allowed to make a higher charge at the intermediate point. The prime difficulty lay in defining these exceptional cases. Had Congress left this solely to the discretion of the Commission without such definition, the law might be held unconstitutional, as involving a complete delegation of legislative power. The situation was clearly stated at the time by the Chairman of the House Committee on Interstate Commerce. "Practically what we do here is to give the Commission power to say what, in a particular case, shall be a just and reasonable rate; although we declare as a general proposition that it shall be unjust and unreasonable to charge more for a short haul than for a long haul." In brief, it is clear that Congress intended that the general language of the statute should furnish the rule which the Commission was to adopt in applying this section of the law.
Was there any further intention of Congress in thus amending the long and short haul clause? The carriers contended that the only effect was to deny the railways the right to decide for themselves whether they might disregard the rule of the section: in other words, that they must conform to the interpretation laid down by the Commission itself in the Georgia Railroad Commission cases in 1892.[748] The Commission, on the other hand, at once interpreted the amendment, as defining the purpose of Congress differently. It held that the railroads must assume the burden of justification. The carriers, therefore, must become the advancing party in proving that violation of the distance principle was warranted by the necessities of the case. It is obvious that, without this interpretation placed upon the amendment, Congress would not be providing a remedy for local discrimination, but would be merely giving power to declare the existence of a wrong.
The constitutionality of the amended section seemed likely to depend upon the manner in which it was applied administratively. If construed as conferring unrestricted power to grant or deny applications for relief, it would probably be held void, as already observed, as an unfettered delegation of legislative authority. Rate making being a legislative function, this attribute of the Congress could not constitutionally be vested in entirety in an administrative body. The Commission must, in other words, be restricted and guided by certain rules and standards set by the legislature. This point had been well established respecting the exercise of control over the issue of capital stock by railroads by the state commissions. It was clear, also, that the long and short haul clause did not impose an inviolable rule to be enforced against all carriers. This had been the contention of complainants against the railroads in the Spokane case, soon to be considered. It seemed clear that the proper function of the Commission under the law, was to investigate each case by itself in the light of the first three sections of the Act in general. After such investigation, if it appeared that a departure from the distance principle would result neither in unreasonable rates nor in undue discrimination, permission therefore must be granted. Under such circumstances it could not lawfully be withheld. And in the contrary case deviation from the long and short haul principle must likewise be refused.
The Commission in enforcing the new long and short haul clause, in the first place laid down certain general rules for its own guidance.[749] Perhaps the most important of these was that the different rates or fares to be compared, must apply to the same classes of transportation. It would be obviously unjust to compare a one-way fare with either excursion or commutation rates. Export and import freight rates, usually lower than regular domestic rates, must each be dealt with in a class by themselves, in determining whether the more distant point by having a higher rate prejudiced the rights of intermediate ones. Congress certainly did not intend to make the charging of a commodity or carload rate in transcontinental traffic unlawful, merely because it happened to be lower than local rates or less-than-carload classified shipments from intermediate points. Violation of the distance principle must properly always be determined by comparison between rates of the same kind. A number of similar rules were promulgated for the sake of duly standardizing practice.
Applications from the carriers for exemption from the long and short haul clause in freight tariffs fell into four distinct groups. The largest number of petitions,—more than one-fourth of the total filed,—had to do with the necessities of circuitous lines in meeting through rates made over more direct routes.[750] In such cases the lowest through rate was often made by the longer line, which might, at the same time, conceivably be operated at a lower cost. Permanent relief was granted by the Commission in comparatively few of such instances; and then only when it appeared either that the short line had observed the distance principle throughout, or else that the intermediate rates upon the long line were apparently reasonable and just, in and of themselves. Under such conditions the Commission sometimes permitted the circuitous route, especially if it were manifestly so, to meet, not only the prevailing rate over the short line, but also any future rate which it might put into effect.
Next in importance, measured by the number of applications for relief from the long and short haul clause in freight tariffs, were those based upon the exigencies of market competition. The familiar case of the rivalry of Florida and California orange growers in the eastern markets may illustrate the situation.[751] The growers must be put into that market and held there in each case in competition with one another, each served by the carriers who profited by their traffic. Should it be said that because such market competition compelled a low through rate, irrespective of distance, that no higher rate at any intermediate point where such market competition did not exist, should be allowed? The difficulty and danger, however, of accepting the justification of market competition was, of course, the fact that exemption from the distance principle might deny to the intermediate points the advantage to which they were justly entitled by reason of their geographical location.[752] The compelling force of market competition is exemplified also in the transportation of pine lumber from all along the southern tier of states to the consuming territory of the treeless Middle West. The mills in Mississippi, Louisiana, Arkansas, and Texas are so much nearer than those in Florida or Georgia, that exceptionally low rates per mile must be put in from these latter states to enable them to hold their own. Such exceptionally low rates, if applied to all intermediate points, would, of course, prove ruinously unprofitable to the railroads concerned. There were certainly contingencies of this sort entitled to relief.
Closely akin to market competition in compelling departure from the long and short haul clause, were the practices arising in connection with commodity rates to meet special circumstances in production or consumption. A public building, perhaps, was to be erected at a given point; and active competition arose from quarrymen in different parts of the country for supplying the cut stone. A carrier serving such a quarry put in a special carload rate in order to enable the shipper on its line to compete for the contract. No similar commodity rates, as a fact, were called for from intermediate stations, inasmuch as no other quarries on the line were interested in this particular job. The Commission ruled in such cases that no tariffs from intermediate points need be filed, unless desired for the benefit of some other shipper. Such cases are obviously analogous in principle to those above mentioned under the heading of market competition.
The third and perhaps, as it may appear in the future, the most substantial ground for seeking relief from the long and short haul clause in freight rates was the force of water competition. For example, all along the Atlantic seaboard the low rates of coastwise steamships were absolutely compelling in their effect upon through rates by rail. Obviously the railroads could not share in the business, unless they met the low water rate,—a low water rate which, very properly, ought not to affect the higher charges at interior intermediate points not enjoying such competition by water. On the other hand, it was evident that the utmost care needed to be exercised in accepting this excuse for the lower rate at the more distant point; or, otherwise stated, for higher rates at the intermediate points not in the enjoyment of water competition. It was unquestionable, as experience all over the country had demonstrated, that the force of such competition upon internal waterways had been greatly exaggerated by the railroads for their own purposes. The steamboats had disappeared from the Mississippi and all its branches, and from the smaller rivers of the southern states, not because they were surpassed either in speed or in economy, but by reason of the superior organization and certainty of through shipments by land.[753] The railroad always beat the steamboat, mainly because it was not hampered by the difficulty of breaking bulk at transfer points. The river boat served relatively few places, while the railroad could make connections everywhere. And, finally, the water lines, being open at all times to competition for the worth-while business from rivals who needed merely to assemble enough capital to buy a boat, could not distribute their margin of profit according to the pressure of competition at different points along every line.[754] Whether a revival of commerce upon our inland waterways will ever change the nature of this competition between water and land transportation remains to be seen. But, in the meantime, it was indubitable that the plea of competition by water required careful examination before being accepted at its face value. The importance of this consideration appears clearly in connection with the Intermountain rate cases, soon to be discussed.
The petition of the Southern Pacific Railroad for exemption from the prohibition of the amended long and short haul clause in 1912,[755] as to rates between San Francisco points and Portland, Oregon, presented a concrete problem in the fair adjustment of distant and intermediate rates under the force of coastwise water competition. There was no question as to the force of this rivalry; more than three-fourths of the traffic between the distant seaports moving by boat. The geographical situation is shown by the map herewith. But the difficult point to decide was as to whether the intermediate rates were not too high by comparison,—being made, in other words, to compensate unduly for the low rates and loss of traffic at the two ends of the line. The high intermediate point was Talent. The first-class San Francisco-Portland rate for 746 miles was 51 cents per hundred pounds, as against a San Francisco-Talent rate for 409 miles of $1.66,—more than three times the charge for about one-half the haul. Moreover, the inadequacy of water competition as a full explanation appeared at many points. Albany, for example, was no farther from Portland than Sacramento was from San Francisco. Yet while Sacramento enjoyed the low water rate north bound, neither Albany nor other places much nearer Portland were given the same advantage in southerly shipments. This case, left open for further examination as to facts, is also interesting as to points at law. The carrier, as in the Intermountain rate cases, contended that under the amended long and short haul clause, the Commission need consider only the force of water competition; and need not concern itself with the reasonableness of the intermediate rates. The Commission held this not to be a right construction of the law.
The reasons for seeking exception from the long and short haul clause in passenger business, judging by the petitions filed by carriers under the new law, had to do mainly with complications following the establishment of mileage schedules by law in the different states. Some of these states had also enacted two-cent fare laws, in which case it often happened that intrastate fares were arbitrarily higher than those which applied on interstate business. But the main reason for seeking exemption from the Fourth Section was the desire of circuitous routes to meet the charges made by the short lines. Obviously, as in freight traffic, the long line could not charge more than the short line, and usually the short line made the rate. Practically under such circumstances, the long line carrier could not well maintain a higher fare to the intermediate point, since in passenger traffic, unlike freight, the traveller could if he pleased buy his ticket to the more distant point and then get off at the intermediate one. The Commission, in view of this fact, naturally found less flagrant violations of the distance principle in passenger fares than in freight rates.
What economic reasons among all these advanced by the railroads, should be accepted by the Commission as warranting a departure from the distance principle? Originally, as we have seen, it was held that competition either with carriers by water, with railroads not subject to the Act, or other rare and peculiar cases, created such dissimilarity of circumstances and conditions as to warrant a modification of the distance principle.[756] In the first great case under the amended law, the Commission held, more broadly, that other factors than these might properly be taken into account. It considered itself authorized not merely to decide whether circumstances in respect of competition at the two points were dissimilar, but also whether, and to what extent, that dissimilarity justified a departure from the rule. In other words, as interpreted by the Commission, modification of the rule might be permitted to just the degree which would seem to be called for by consideration of the whole situation. The best way to understand the bearing of these considerations, however, will be to examine this first great case in detail.
The Intermountain rate cases, affording the first crucial test of the long and short haul amendments of 1910, were doubly significant. They afforded a prime example of the struggle for supremacy between the administrative and the judicial branches of the government. And they also stood foremost among all the transportation controversies of the last generation.[757] The grievances were long-standing. They had been before the Interstate Commerce Commission since 1889.[758] They comprehended geographically a range of interests covering the entire northern half of the United States. While the Rocky mountain territory and the Pacific coast terminals were most directly concerned, the rights in trade of every factory and distributing point east of Denver were indirectly involved, in so far as they participated in commerce with the Far West. Not even the inevitable conflict over remodelling the southern basing point system by enforcement of the new fourth section of the Mann-Elkins law, was equal to this one, either in geographical scope or commercial importance. And at the same time the fact that the new Commerce Court was in 1912 on trial for its life—this being one of its leading cases on appeal—endowed the controversy with an even greater significance. Both in the eyes of the law and of commerce and finance, the issue was plainly of the first importance.
The transportation grievance of the tier of Rocky mountain communities from Washington to Arizona, although simple, divided naturally into two parts.[759] The first was that the freight rates from all eastern territory to these localities were from one-quarter to over one hundred per cent higher than to the Pacific coast, although the goods in transit passed their very doors and might be hauled a distance greater by one-fourth. A carload of glassware from Pittsburg to Spokane, Washington, paid a freight rate of $649.44; while the charge to Seattle, four hundred miles farther west, was only $393.60. A first-class commodity (carload) rate from Omaha to Reno, Nevada, was $858. If the goods were delivered 154 miles farther west, at Sacramento, passing through Reno en route, the freight bill amounted to but six hundred dollars. But this discrimination was less than half the indictment, inasmuch as the compelling force of ocean competition at the coast was conceded by all. It might well be that San Francisco and its sister terminal points were unreasonably favored, rather than that the intermountain rates were unduly high in themselves. The carriers by land might indeed be, as they alleged, powerless in the face of a water competition beyond their control. And if they were thus impotent, surely the government could not account their tariffs unlawful, however irregular they might be.
The second item in the complaint of the intermountain cities showed the cloven hoof of the transcontinental carriers. These mountain rates, relatively so high by comparison with more remote terminals, were equally high from every point east of Denver over a territory two thousand miles in width.[760] In other words, entirely regardless of distance, the freight rate to Spokane or Reno, whether from New York, Chicago, St. Paul, Omaha, or even Denver, was the same. It was indeed a blanket rate, like the fixed charge of two cents for postage. And it made no difference how near any point in this wide zone might be, the disparity in rates against the intermountain points was relatively the same. Thus our two concrete examples, above cited, were for shipments from Pittsburg and Omaha, respectively; but in any case, were the point of origin as remote as Portland, Maine, or even as near as Colorado "common points," the disparity of rates was unchanged. They were always very much higher to the intermountain cities than on to the Pacific coast; although the carriers east of the Missouri river got no more for their portion of the haul when the goods were bound for Spokane than if they went on to Seattle for a much lower through charge. This latter fact, of course, narrowed the complaint down to the policy of the western lines. The discrimination, if it were one, was clearly of their making. Whatever trouble there was, originated west of the Missouri river. However much the other railroads all over the country might have joined in transcontinental business, they remained impartial onlookers in this particular contest.
Some of the causes of the apparently abnormal western rate adjustment are perfectly plain. The low rates to the coast were due to water competition, which, while now under some measure of railroad control—partially "neutralized" in fact[761]—was always present and potentially great. It will be even more controlling when the Panama Canal is opened.[762] To meet this situation, the carriers had established a series of through commodity rates which practically covered all transcontinental business. For all this traffic exposed to water competition, it was averred, the intermountain territory was more remote, if not geographically, at least for purposes of rate making. The railroads consequently added the charge for the local haul back from the coast to the low transcontinental or through rate in determining the charge to all the intermediate cities. Thus, they alleged, a discrimination was forced upon them, not of their own creation. They could not grade all their intermediate rates down to a through tariff thus fixed at the farther end. It would mean bankruptcy. Thus far the situation is analogous to Hadley's classic oyster car case.[763] The main difficulty arose in satisfactorily explaining the second half of the scheme. How did the blanket or "postage stamp" rate zone arise, permitting exactly the same rates, whether to Spokane or Seattle, from points scattered over a territory covering practically two-thirds of the United States? Was it an artificial scheme, modifiable at the will of the carriers or of the government; or, like the law of gravitation, was it beyond the control of either?
The truth was that westbound rates from New York, Chicago, Omaha and St. Paul had come to be fixed at the same level, not by water competition primarily, but by the forces of commercial rivalry between centres bidding for the far western market. They were originally graded somewhat according to distance in the early days.[764] And it is plain that water competition, at first confined to the Atlantic seaboard, gradually extended inland. In order to secure the business to San Francisco by steamer or clipper ship, rail charges from Pittsburg or Buffalo back to Philadelphia or New York had been absorbed in the through rate, thus gradually extending the benefits of water competition farther and farther west from the seaboard cities.[765] And, of course, as population and manufactures grew in the Middle West, the narrow fringe of such competition steadily and inexorably spread in from the Atlantic coast over a wide zone of blanket rates, all based on New York. The direct all-rail carriers, naturally, met this competition at all points. Manufactures and population continued to spread toward the West; but, imperceptibly, a new competitive factor appeared. As the force of direct water competition lessened with ever-widening distance inland from the Atlantic, market competition began to gather strength. One need not go so far as to concede that "market competition is a euphemism for railroad policy," in order to realize that artificial rather than natural influences gradually came to bear in the westward extension of the blanket rate. The trans-Missouri lines, getting the whole rate on shoes made in St. Louis for the Pacific slope, while only getting a part of it if the goods came from New England, had a direct motive to put St. Louis into the western market and thereafter to hold it there at all cost. Every increment in the St. Louis traffic, moreover, was surely theirs for ever. It could not be stolen away by Canadian railways or ocean steamship lines, as it might if it originated at Boston. It became a settled policy of these western lines, therefore, to meet even the water-compelled seaboard rates at all points, no matter how far inland. The blanket zone thus steadily widened, out of all semblance to its originally modest proportions as based upon water competition alone. A competition originally natural, gradually merged into another of an entirely artificial sort.
The importance of both the intermountain and Pacific coast traffic originating along the western confines of the blanket zone, steadily increased. One record showed that three-fourths of the business at Reno, Nevada, originated west of Chicago.[766] It all moved on the same rate as freight from Portland, Maine, whether destined to Nevada or to the Pacific coast. The disparity against Nevada remained absolutely the same in either case. It was to hold this traffic, originating west of Chicago, against all eastern competitors, that the blanket zone was so abnormally widened by the trans-Missouri railroads.
For years the transcontinental rate scheme had been before the Interstate Commerce Commission. A number of decisions[767] were rendered prior to 1910, under the old long and short haul clause, emasculated as it was by the Alabama Midland decision of 1896. The Hepburn amendments of 1906 had so far strengthened the hands of the Commission that it made several attempts to deal with the question. But the orders in these cases were confined to classified tonnage, although it was clear that most of the transcontinental business moved under commodity rates. Such carload or wholesale tonnage, of course, was the only sort actually affected by the competition by sea. This fact greatly aggravated the discrimination against which the intermountain cities complained. For, in absence of such water competition, they enjoyed relatively fewer commodity ratings. And their youthful, though ambitious, jobbing trade was dependent upon just such special carload rates in competition with middlemen on the Pacific coast. If "tin boxes and lard pails, nested" moved in carloads, Seattle got them from "anywhere east" for a commodity rate of eighty-five cents, as against the regular fourth-class rate to Spokane of $1.90 per hundred pounds. The Commission grappled with the problem of such discrimination manfully; but made little headway until the new law of 1910 put it in better case. Then for the first time it tackled the heart of the matter, in revising the commodity rates in the great cases now under review. There is evidence that the railroads were already endeavoring to remodel their tariffs, under pressure in some degree from the Commission even before the amendment of the law in 1910. It was recognized that some modification of the existing scheme was needed.[768] And it was relatively easy to re-arrange mere class rates.[769] They were little affected by water competition. But the commodity schedules, concerned in these later cases, were far more important commercially.
Two plans were possible to mitigate the violation of the distance principle.[770] The rates to intermediate points might be lowered conformably to the long-distance standard. This would enable the railroads to hold the coast traffic against the water lines, but would decrease the revenues from "way" business. Or, on the other hand, the coast rates might be put up, regardless of water competition, in the expectation that much through business would still go by rail. Tariffs by land were already considerably higher than by the sea routes. Possibly the rail rates might be increased somewhat further. Some coast business would be lost to the water lines, but on what remained a higher return would accrue. Moreover, a considerable development of interior distributing centres would be bound to ensue. And, best of all, the grievances of the interior places would be somewhat mitigated.[771] Unfortunately the Pacific coast points were in an uproar at this threat against their supremacy in the jobbing business. And, in the meantime, the new powers under which the present proceedings were taken had been conferred by the Mann-Elkins law. The carriers unaided could probably not have greatly bettered matters. But the government, at all events, chose to deal with it; so that these private attempts came to naught. Subsequently such action as the carriers took, naturally assumed the form of increases at terminals rather than reductions at intermediate points.
The new orders[772] were radically different from the preceding ones, not only in applying to commodity rates, under which most of the tonnage really moved, but also in respect of the form of remedy proposed. In order to correct the discrimination, the previous decisions prescribed the absolute rates to be put into effect at various points. The new orders did not establish absolute rates at all, but endeavored, instead, to set up a system of relative rates or differentials. All the former decisions had held the intermountain rates inherently unreasonable. The new opinions treated them as only relatively so. A clear distinction was drawn between real water competition and that pseudo water competition which, as has been said, resolved itself practically into a mere competition of markets with one another. The guiding principle adopted was that the force of water competition,—the only one entirely beyond the carriers' control,—of necessity increased with the proximity of the shipping-point to the Atlantic seaboard. Business from New York to Seattle by rail had to go at rates compelled by the rivalry of steamship lines. Traffic from Omaha to Reno, Nevada, was surely free from it. Yet under the then existing system no distinction whatever was made between the two sets of circumstances. All rates were blanketed, regardless of remoteness from the eastern seaports. The new governmental order substituted a series of zones suggestive of those so long prevalent in trunk line territory.[773] These are shown by the map on page [618]. As one passed westward from zone IV, with water competition under full pressure at New York, the influence of the roundabout carriers by sea progressively diminished; until, at last, beyond the Missouri it became nil. Such water competition affording the only pretext for a grant of lower rates to the Pacific terminals than to intermountain points, it followed, logically, that the disparity in charges between such interior and coastal places should decrease pari passu with the westward movement of the originating point. A substantially lower rate from New York to San Francisco than from New York to Nevada might be permitted; but no such difference, relatively, ought to obtain from St. Paul or Omaha to San Francisco as compared with Rocky mountain territory. For these inland initial points were practically beyond the range of steamship rivalry.
Specifically, the Commission in these orders forbade any higher charge to the mountain points from any part of zone I than applied to the Pacific terminals. From zone II, lying four hundred miles more to the east, there would probably never be any considerable traffic coming back to New York in order to go round by sea, but in rare instances there might be some. From this zone, therefore, intermountain rates might be not more than seven per cent. above those to the Pacific terminals. And so on as one went east. Rates from zone III might be not more than fifteen per cent. higher to Spokane than to Seattle. From zone IV to Rocky mountain territory they might be twenty-five per cent, above those to San Francisco; but the disparity against the intermountain territory, even from here with water competition in full effect, must never exceed this percentage.
This ingenious plan certainly commends itself in principle to the economic student. It restored in a measure the gradations existing in 1887.[774] It did not create the zones out of whole cloth. It utilized a scheme for division of territory already adopted by the transcontinental lines for other purposes.[775] And, most important of all, it was elastic, not prescribing absolute rates, but resting content with laying emphasis upon the need of gradation. Yet it granted a substantial measure of relief from the present disparity of rates. For, whereas the former intermountain tariffs from the East were from fifty to one hundred per cent, above those to the Pacific coast, the difference under this order might never exceed twenty-five per cent. The new scheme was cleverly planned, also, from a legal-strategic point of view. It could scarcely be attacked under the Fourteenth Amendment as confiscatory, inasmuch as it left so much latitude to the carriers in the readjustment of their tariffs.[776] To overset it on this ground, they must prove that disaster would result from the particular rates which they had chosen to adopt. This would be an impossible task. The only choice remaining to the carriers, therefore, would be to attack the order on the ground that the Commission was exceeding its powers, delegated by Congress. This, in effect, was what was done.[777]
The opinion of the Commerce Court,[778] setting aside the intermountain rate orders of the Interstate Commerce Commission, will shortly be reviewed by the Supreme Court of the United States, to which tribunal appeal was promptly taken.[779] Disregarding the dissenting opinion that the entire long and short haul clause, as amended in 1910, was unconstitutional, there were three significant differences between the two tribunals.
The first point at issue between the court and the Commission concerned the differentiation of water competition from so-called market competition.[780] The Commerce Court refused to recognize any distinction between the cause of lower rates to the Pacific coast from Omaha or from New York, respectively. It ascribed the disparity in all cases to competitive forces entirely beyond the railroads' control "If the carrier from St. Paul, in order to meet new water competition from New York," etc. The Commission, on the other hand, clearly set apart market competition, applicable to western cities, from that due to carriage by water, which controlled rates from the Atlantic seaboard. The railways, it said, must conform in their rate-making policies to the latter. They were not bound by the former. For market competition (as already quoted) "is a euphemism for railroad policy."[781] And, speaking as an economist, ignorant of the technicalities of the law, I venture to affirm that the Commission in this contention was absolutely right.[782] Even as far west as South Bend, Indiana, wagons may go to California by the direct rail route; or, with a change of ten cents in the rate, they may come back to New York and thence go round by sea. Such is the delicacy of adjustment even as far west as Chicago. Hence the failure to recognize that low rates to the Pacific coast from points west of the Missouri river were due to an entirely different cause—namely, the arbitrary determination of the transcontinental lines to hold the fort for their local clients against all odds—was to commit an egregious economic blunder. Furniture goes from Chicago to San Francisco on rates as low as if compelled by water competition.[783] But steamships never carry commodities of this bulky sort, even from New York. How much less, then, could water competition apply so far inland? The carriers were bent on keeping Chicago in the Pacific market. That was the real reason. The Commerce Court clearly missed the main point.
Equally sound economic evidence that water competition alone was not responsible for the entire present transcontinental rate system, was afforded by the fact that the wide blanket zone, already described, covering two-thirds of the United States for westbound rates, found no counterpart in the scheme under which rates were made up in the opposite direction.[784] It is a poor rule which will not work both ways. And surely water competition, when present, should be potent in either direction. It was undeniable that the absence of pushing cities along the Pacific slope, desirous of developing trade relations with the Atlantic states, discouraged even the slightest extension of terminal rates inland. The ironclad monopoly enjoyed by the Harriman and Hill lines would probably have prevented this in any event. But the significant point was that there was no demand for a blanket zone for eastbound traffic. Hence water-compelled rates staid where they belonged; that is to say, closely confined to the Pacific seaboard cities. Thus it would also have been in the eastern half of the country, had it not been for "market competition"—this artificial factor which the Commerce Court failed utterly to recognize as in a class by itself.
The second vital difference of opinion between the Commerce Court and the Commission was economico-legal. The economist in the office of critic here stands upon less firm ground. And yet, whatever the law may be, the reasoning rests upon the interpretation of the facts.[785] The Commerce Court held that "when the rate for the longer haul is forced unreasonably low by competition, the only elements that can enter into the consideration of the rate for the shorter haul are its reasonableness," etc.[786] The controlling idea, in other words, in the reviewing judicial mind, was that, so long as the rate at Spokane or Reno was reasonable in itself, it was a matter of indifference to that locality what rate might be made to Seattle. All that the Commerce Court needed to do, therefore, was to consider the "intrinsic reasonableness"[787] of the intermediate rate. Not so, held the Commission. Whether this charge was reasonable or not was a question of relativity. It depended upon what rate was made to other points all around it and competitive with it. In other words, the intermediate could not be dissociated from the long-distance point. Railroads as public carriers owed a common duty to both points. No intermediate rate, however low per se, could be reasonable, if the carrier was voluntarily offering a lower rate to points beyond. If its lower rate beyond was accorded under compulsion, that of course was a different matter. But in so far as these low Pacific terminal rates were due to an artificial railroad policy, any discrimination against the nearer points was unwarranted.
The analogy is clear between this difference of opinion of Commission and court and that between the two schools which would base judicial determination of rates in general upon inherent or relative reasonableness, respectively. The "remuneration" test, which the carriers' representatives sought to insert in the law of 1906, seeks to discover innate reasonableness of rates; not affected, that is to say, by the revenue which may accrue from them in the aggregate. The other standard declares such reasonableness to be always dependent upon circumstances; notably upon the amount of the investment and the resultant earning power arising out of the volume of business carried at the rates in question.[788]
The third difference of opinion between court and Commission was purely one of law.[789] Had the latter exceeded its powers delegated by Congress in attempting to fix a relation of rates, instead of prescribing certain maximum rates applicable to particular points?[790] The reasoning followed was apparently derived from the Supreme Court opinion in the Chattanooga case.[791] This reasoning, the government now contended in its argument on appeal to that tribunal, was inapplicable to the since amended law. Limits of space and the natural diffidence of an economist, alike forbid extended discussion of this nice point at law. The Commission alleged that, except by the exercise of such authority to prescribe relativity of rates, it would be powerless to remedy such discriminations in future. In consequence, inasmuch as Congress evidently intended to enable it to afford such remedy, authority over relativity of rates must be derived by necessary implication. And it is certain, economically speaking, that in this position the Commission was once more perfectly right. Whether it was legally so remained yet to be decided.[792] In this connection, it seems odd that none of the briefs for the government mentioned an important instance of the undisputed exercise of such power to establish relativity of rates. The Commission had for years, even in absence of any express authorization by law until 1910, freely prescribed details of freight classification in a large number of important cases.[793] It had never done more than to fix relativity; and the constitutionality of its orders had never been attacked.
An entirely new issue arose at this point. Prescribing relativity of rates implied determination of minimum rates. For if, as in this transcontinental case, the freight rate to Nevada points from New York might never be more than twenty-five per cent. greater than to San Francisco, a lower limit as well as an upper one was thereby prescribed for the latter point, and vice versa. The rate to one point once fixed by the carrier, voluntarily if you please, the minimum rate to the other might be necessarily determined thereby. If a dollar rate prevailed at Spokane, the Seattle rate must not fall below seventy-five cents. Was this not something new? Did it not suggest fixing, not maximum rates alone, but absolute rates as well? And if an attempt to fix absolute rates, was it not unconstitutional? There could be no two minds about the need of conferring power upon the Interstate Commerce Commission over minimum or differential rates, if effective government regulation were ever to be attained. This had been my contention for years.[794] It had the best possible expert support from the side of the carriers.[795] Discriminatory rates could never be corrected until such power was delegated by Congress or conferred by judicial interpretation of the law. Kansas City now enjoys lower rates to Chicago on packing-house products than are accorded to Omaha. On every sound principle of rate making, the two cities ought to be placed on a parity. But the Commission could not rectify the abuse; for the roads from Kansas City promptly reduced their rates pari passu with any reduction of the charge at Omaha.[796] There was no bed rock below which rates could not go. The Omaha railroads as well as the government were powerless in face of the situation.
May power to fix minimum rates, so necessary to an adequate program of control, be constitutionally delegated by Congress? The question has never been squarely presented to the Supreme Court.[797] But the language in many cases has been such as to indicate that maximum rates alone may be lawfully established. Is the reiteration of the word "maximum" intentional? Or may it be that the judicial mind has never yet contemplated the need of regulating the minimum rate? Surely it seems an anomaly that the government should ever seek to fix such a lower limit, below which compensation may not be had. And yet many cases show that it is absolutely necessary, to the end that justice may be done. Or may the unconstitutionality of fixing minimum rates depend upon the fact that, if thus prescribed along with maximum rates, it will amount, practically, to determination of the absolute rate—the bogey which the carriers seem most of all to hold in dread? Interesting and inviting possibilities of judicial interpretation are indeed suggested along this line, were there opportunity to pursue them further.