Any discussion of public ownership ought to include a consideration of social and political factors, as well as matters which are strictly economic.
The question of municipal ownership should be decided purely on the basis of local conditions and for particular utilities. The successful ownership of street railways in one city does not necessarily mean that a second city may be equally successful in operating this utility. Nor does the successful administration of a gas works by one city necessarily mean that the same city can effectively administer its street railways.
B. NATIONAL OWNERSHIP OF RAILROADS
343. DEVELOPMENT OF RAILROADS IN THE UNITED STATES.—The railroad history of the United States began when the Baltimore & Ohio was opened to traffic in 1830, but until the middle of the century transportation in this country was chiefly by wagon roads, rivers, and canals. After 1850 the westward expansion and the development of industry throughout the country greatly stimulated railway building. Encouraged by lavish land grants and other bounties extended by both state and Federal governments, railroad corporations flung a network of railroads across the continent. Local roads were transformed, by extension and consolidation, into great trunk lines embracing thousands of miles. From 9,021 in 1850 our railway mileage increased to 93,267 in 1880, to 193,345 in 1900, and to approximately 260,000 in 1922.
344. THE PRINCIPLE OF DECREASING COST.—While the rapid development of American railroads has had an inestimable effect upon our national prosperity, railway development has brought with it serious evils. In order to understand the nature of these evils, let us notice that with railroads, as with municipal utilities, the cost per unit of product or service declines with an increase in the number of units furnished. A railroad must maintain its roadbed, depots, and terminals whether one or an hundred trains are run, and whether freight or passenger cars run empty or full. Many of the railroad's operating expenses also go on regardless of the volume of business. Thus the cost of handling units of traffic declines as the volume of that traffic increases.
These circumstances influence rate-making in two ways. In the first place, railroads can afford to accept extra traffic at a relatively low rate because carrying extra traffic adds relatively little to the railroad's expenses. In the second place, rates in general cannot be definitely connected with the expense of carrying specific commodities, hence rates are often determined on the basis of expediency. This means that high rates are charged on valuable commodities because those commodities can pay high rates, while low rates are charged on cheap goods, because those goods cannot stand a high charge. This is called "charging what the traffic will bear."
345. EVILS ATTENDING RAILROAD DEVELOPMENT.—Since many of the expenses of the railroad go on regardless of the amount of traffic carried, railroads are constantly searching for extra business. Competition between railroads has tended to be very severe. Rate-wars have been common, because of the small cost of handling extra units of traffic. In the struggle for business, railroads once habitually offered low rates on competitive roads or lines, and then made up for this relatively unprofitable practice by charging high rates on non- competitive roads. The desire for extra business, together with the pressure exerted by trusts and other large shippers, encouraged railroads to make rates which discriminated between products, between localities, and even between individuals. The ruinous character of competition often led to monopolistic combinations which proceeded to charge the general public exorbitant rates, but which rendered poor service.
346. EARLY STATE LEGISLATION.—During the early stages of railroad development, the railroads were generally regarded as public benefactors for the reason that they aided materially in the settlement of the West. But after about 1870 the railroads began to be accused of abusing their position. A greater degree of legal control over the roads was demanded.
The first attempts at the regulation of railroad corporations were made by several of the states. For fifteen years various commonwealths tried to control the railroads through state railway commissions armed with extensive powers. These commissions eliminated some of the more glaring abuses of railroad combination, but for several reasons state regulation was relatively ineffective. The states had, of course, no authority over interstate business, and most railroad revenues were derived from this type of business. State laws regulating railroads were often declared unconstitutional by the courts. Lastly, powerful railroad corporations often succeeded in bribing state legislatures to refrain from taking action against them. Due to these influences, state regulation was generally conceded to be a failure.
347. FEDERAL LEGISLATION.—The failure of state laws effectively to control the railroads led to the enactment by Congress of the Interstate Commerce Act of 1887. This Federal act created an Interstate Commerce Commission of seven members, appointed by the President, and charged with the enforcement of the Act. The Act also prohibited discriminations, and forbade unjust and unreasonable rates. It required that railroads should make rates public, and that they should not change rates without due notice. Pooling was forbidden, that is to say, railroads apparently competing with one another were no longer to merge or pool their combined business with the understanding that each was to get a previously determined share of the joint profits. The objection to pooling was that it suppressed competition and encouraged monopoly.