CHAPTER VII.
COMBINATIONS.
It is the favorite argument of railroad men, and the writer must confess that he himself formerly believed, that if all legal restraints were removed from railroad business, the laws of trade would regulate it more successfully and more satisfactorily, both to the railroad companies and their patrons, than the wisest statutes could ever regulate it. To give force to their argument, they cite the old Democratic maxim that that State is governed best which is ruled the least. They also assert that it is the province of the State to guarantee to each of its citizens industrial freedom; to permit him to transact any legitimate business according to his best judgment; to buy and to sell where and at what price he pleases; in short, to earn without restriction the reward of his intelligence and his industry. They further contend that under a free government the law of supply and demand should be allowed free sway, and that he who buys or sells transportation should not be hampered in his transactions any more than the grocer and his customer.
The reply to this is that, while the grocer is a natural person, the railroad company is an artificial person, and that, while the business of the former is purely private, that of the latter is quasi-public. The grocer must rely solely upon his personal rights and private resources, but the railroad company accepts from the State the franchises which enable it to do business. And yet, if the public had any assurance that the laws of trade would regulate both kinds of business alike, it is not likely that the State would distinguish between the two. They claim that their business is like other private business, and therefore they should be let alone; that competition can be relied upon to correct abuses; and where competition does actually exist they forget, and then claim that their business is not like other private business, and they should be allowed to make pools and combinations, because in their business competition is ruinous. Experience has certainly demonstrated that competition is only possible where combination is impossible. Where the same commodity is supplied by a large number of individuals, there is but little danger for the public from those who supply it, for an agreement among many cannot easily be effected; and even if an understanding could be reached, it would not long be satisfactory to all parties. Disagreements would arise which would end in the dissolution of the combination. Where, however, the number of competitors is small, agreements can be easily effected and successfully maintained.
It is doubtful whether there is at present any interest in the commercial world which has a greater tendency to monopoly and combination than the railroad interest. There are in the United States some 40,000 railroad stations. Not more than 4,000 of these are junctions of two or more roads. At 90 per cent. of these stations shippers are therefore confined to one line of railroad, and are, in absence of State regulation, compelled to pay for transportation whatever price the companies may be disposed to charge, subject only to such restrictions as the proximity of competing points may impose. If competition obtained at all points where two or more roads meet, many railroad companies could not afford to charge excessive rates at non-competitive points along their lines of road, for such a policy would slowly but surely drive a large volume of their legitimate business to rival roads, to whose interest it would be to encourage by every means in their power such diversion of traffic. Railroads early recognized this fact and took steps to enable each line to control its local business. The first combinations among railroad companies to control prices at competitive points were rather crude; in fact, much cruder than the first Granger legislation. They were simple agreements among the various roads touching a common point to maintain certain fixed rates. But while each road was anxious to have the rates agreed upon maintained by all of its rivals, it cared but little about maintaining its own good faith, and it improved every opportunity to get business at reduced rates so long as it could reasonably hope to escape detection. As soon as any of the competing roads, through the falling-off of its business, became convinced that it was the victim of overreaching rivals, it retaliated by offering still lower rates to close-tongued shippers. This tricky rivalry would be continued until the animosity engendered by it would lead to an open rupture, and what railroad men are pleased to term a rate war would follow. As the schedule rates had before been unreasonably high, so they became now unreasonably low. Hostilities would be continued until all belligerents became exhausted and manifested a disposition to negotiate a treaty of peace. The former high rates would then be restored; the compact was carried out for a short time, to be again violated and finally annulled. These rate agreements were in vogue in New England before the War of the Rebellion and gradually found their way to the Middle States and the West. Wherever they were tried they were violated, until even among the most unsophisticated of freight agents a rate agreement was looked upon as a farce.
The statement is often made by railroad managers that excesses in railroad competition are the result of the peculiar conditions of their business, which has heavy fixed charges on one hand and a fickle patronage on the other; that the uncertainty of through business compels them to rely upon the local business for such revenue as is necessary to meet these fixed charges; and that, inasmuch as their trains must run, and any through freight hauled by them is so much business taken from the enemy, they can better afford to take it at any price than to have one of their competitors take it.
It is difficult to see why this reasoning should not be applied to other branches of business; for instance, to milling. The mill-owner, like the railroad company, has heavy fixed charges. He has to earn the interest on his capital, he has to keep his mill in repair, he now and then has to meet the demands of the times and purchase improved appliances, and he has to keep a certain number of employes, whether business is brisk or slack. He might, therefore, if he saw fit to employ the logic of railroad managers, earn revenue enough to meet his fixed charges from the business which his regular customers give him, and then do any business coming from beyond this circle at any price rather than surrender it to a rival.
It will readily be conceded that any enterprise conducted on such principles could, at the best, flourish only temporarily, for it would soon encounter difficulties from two sources. Its local customers, thus discriminated against, would withdraw their patronage, while its competitors, finding their territory encroached upon, would, in self-defense, offer still better terms to the public to regain their lost customers. Such ruinous competition, if long persisted in, must necessarily cripple, if it does not bankrupt, a majority of those who engage in it. It is fortunately as rare in industrial and commercial circles as it is common among public carriers.
This difference can easily be accounted for. Where there are a large number of competitors the prices of the commodities supplied by them are leveled down until they reach a point where they will afford only a reasonable margin of profit, and beyond which they will cease to be profitable, and will therefore cease to be supplied until the equilibrium is again established. Where, however, the number of competitors is small, the price of the commodities supplied by them will, by agreement, for a time at least, be maintained at a point where it affords considerable more than a reasonable profit. Here the large gain presents to the various competitors such a temptation to outstrip their rivals and increase their business at the expense of good faith, that but few, if any, of them will, in the long run, resist it. The tendency to underbid rivals will always be strong where profits are large, and it may safely be asserted that efforts to maintain, through combinations, excessive rates are the most fruitful source of ruinous competition.