Chapters on the History of the Southern Pacific

by Stuart Daggett

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.