Chapters on the History of the Southern Pacific

by Stuart Daggett

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 The millions of dollars involved cannot be withdrawn from the net revenues of the railroads without impairing their efficiency and usefulness, while to compel the carriers to apply sea-compelled rates to all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.