The growing diversification of manufactures and trade is, of course, responsible for all three of the developments above indicated. Not only the increasing refinement of commerce, but the technical nomenclature or trade jargon, necessary for the specific and accurate description of so many thousands of articles, have conspired to render these documents extremely cumbersome in the absence of a general revision and simplification. It is but natural that one item after another should be added, each bearing a particular name or being classified upon some new basis. A striking example of this increase of complexity was afforded by the cotton goods schedule in the Southern Classification. By 1900 there were upwards of thirty different names under which cotton cloth might be shipped. Great complaint was occasioned, as well as the possibility of fraud, by underclassification, etc. Most of these thirty names did not represent different values of goods, but in many instances were merely trade-marks of particular manufacturers. At the urgent request of the shippers this complicated schedule was superseded in 1900 by one comprehensive title of "cotton goods in the piece" irrespective of color, particular method of weaving or other subordinate details.
From the point of view of economic theory, the warrant for a differentiation of charges between various classes of commodities offered for transportation, may be considered primarily from two distinct points of view. The first is that of operation, which determines cost. The second is from the standpoint of traffic whereby the value of service, so-called, is measured. The reasonableness of making a distinction in freight rates according to the character of goods is easily apparent, as judged on the basis of cost of service. A multitude of factors enter into consideration at this point. The railway ought in self-protection to charge more for hauling a thing, if it actually costs it more in the long run to perform that service. Some of the factors which enter into this cost were well put by the Interstate Commerce Commission in 1897.[334]
"Whether commodities were crude, rough, or finished; liquid or dry; knocked down or set up; loose or in bulk; nested or in boxes, or otherwise packed; if vegetables, whether green or dry, desiccated or evaporated; the market value and shippers' representations as to their character; the cost of service, length and direction of haul; the season and manner of shipment; the space occupied and weight; whether in carload or less-than-carload lots; the volume of annual shipments to be calculated on; the sort of car required, whether flat, gondola, box, tank, or special; whether ice or heat must be furnished; the speed of trains necessary for perishable or otherwise rush goods; the risk of handling, either to the goods themselves or other property; the weights, actual and estimated; the carrier's risk or owner's release from damage or loss."
Instances of approval of classification on the basis of such cost of operation are frequently found in the decisions of the Interstate Commerce Commission. For example, special service or equipment, as in the rapid transport of fresh vegetables and fruit from the South, justify the carriers in a specially high classification.[335] Rates on live hogs by comparison with rates on hog products, as well as on live cattle and dressed beef, have likewise been adjusted in terms of cost of carriage. A classification on hogs yielding a rate equal to two-thirds of that on hog products has been held equitably to represent the relative expense.[336] Even the indefinite element of risk has been accepted as justifying a higher classification for live stock as compared with other commodities.[337]
Classification is less easy to defend from the standpoint of the traffic manager alone, than from that of the vice-president in charge of operation. Value of service is at times difficult to understand. It is not at first sight reasonable, that of two commodities which cost the railway exactly the same amount to transport, one should be charged twice as much as the other. For example, the rate on anthracite coal is very much higher than upon soft coal; the rate upon wheat is higher than the rate upon some other foodstuffs; the rate upon fine woollen goods is very much higher than upon coarse cotton cloth, etc.[338] It has been urged frequently that any discrimination in the freight rate on the basis of difference, either in the value of the commodity itself or in the value of the service rendered, is unreasonable and unjust. The case, however, is entirely analogous to that of discrimination between a long and short haul of the same goods. The principle is perfectly defensible in both cases, and has been accepted in legal decisions as well as by economic writers for many years. It is based upon the fact, which confronts one at every turn in a discussion of railway economics, that a large proportion of the expenses of a railway is independent of the amount of traffic. These fixed expenses must be met at all cost if the road is to remain solvent. They constitute a charge upon the entire traffic of the line, and are not susceptible of apportionment to each unit of transportation. Any rate which will contribute a surplus, small or large, above the mere cost of transportation,—that is to say, above the expenses incident to this particular carriage,—and which thereby lessens by the amount of that excess the burden of the fixed charges remaining upon other traffic, is justifiable. But it is defensible only under two conditions. The first is that the goods at any higher rate will go by another route or not at all; and the second is that the effect may not be detrimental to the general course of business,—that is to say, that it is not opposed to the public welfare. Thus a long haul at a lower rate than the rate charged for a shorter haul, if it must be lower in order to secure the business, constitutes no injustice to the local shipper; for the surplus remaining above the cost of haulage of that particular increment of freight lessens thereby the charge which must be made upon local freight for meeting interest on bonds, maintenance of way, and equipment expenses, etc., all of which charges, as we have seen, go on more or less independently of the traffic. On precisely the same grounds a discrimination of freight rates in favor of the cheaper commodity or the less valuable service may be defended. Coal or sand may reasonably be carried at two and one-fourth mills per ton mile, while the road is coincidently charging three or four times as much for hauling dry goods or fine hardware. For if a quarter of a mill per ton mile can be earned above the expenses incident to hauling that sand or coal, it enables the rates on the dry goods or hardware to be maintained at a lower point than they otherwise would be. It is unnecessary to elaborate this principle further. It is everywhere accepted as valid. And it in a measure substantiates Mavor's statement that "freight rates, like rent, are rather the effect of price movements than the cause of them." When tariffs are high because prices are high, we are afforded a fair illustration of value of service as an element in rate making.
Value of service, therefore, as affording a warrant for classification, has also been recognized in a number of Interstate Commerce decisions since 1887. A relation between the grade of the charge and fluctuations in the market price of the commodity—in other words, charging what the traffic will bear—is at times discernible. It is to the interest of the public that carriers should be satisfied with relatively smaller profits from the transportation of commodities of low price which are in general demand.[339] Under these circumstances changes in price of such staple commodities as iron and steel or the lower priced grains, should be reflected in a corresponding modification of rates.[340] Akin to this is recognition of a relation in general between the value of a commodity and its classification. Where, for example, articles representing different stages of manufacture have to be graded, it is but fair that the raw material, or the partly-made product should be graded lower than the finished article.[341] Similarly, articles which may fairly be substituted for one another ought to be classified with reference to their common market value.[342] The relative value of commodities, as controlling classification, clearly governs the treatment of hard and soft coal.[343] The practical difficulty, of course, is to know where to stop in admitting such considerations. Shall "small-vein" soft coal, because it cannot compete on even terms with the "big-vein" product, be accepted for carriage on a more favored basis?[344] Some rather nice questions, both of business and public policy, would be suggested by such a precedent.
Different classification of the same commodity according to the use to which it may be put, is evidently an attempt to grade according to value rather than cost of service. Automobile parts may come in from the wheel-maker at second-class rates, but when they go out to jobbing houses they are rated three times first class.[345] A number of cases of this sort have come before the Commission. Shall cow peas, for example, be classed with corn and oats as agricultural products in one case, while according them a rating with commercial fertilizers in another, inasmuch as they may become an active agent in nitrogenizing soil?[346] More recently the Commission has declined to recognize the validity of classification on this basis. Thus brick is always to be charged the same without regard to whether it is for fire, building or paving purposes.[347] Unusually low rates for steam coal used by carriers and open only to certain shippers for this or other particular purposes, likewise have been forbidden.[348] The carriers have attempted to distinguish in grade between dried fruit and raisins. For the two industries call for relatively different protection against old-established competitors.[349]
As actually effected in practice, classification of freight seems to have been largely empirical—the result of long experience in sympathetically feeling the pulse of the business community. In the main, despite their denial of the validity of cost as an element in rate making, traffic managers and the Interstate Commerce Commission seem to have been swayed more commonly by this consideration in the make-up of schedules. Nevertheless, charging what the traffic will bear, as a principle, will suffice alone to explain many of the details of classification now in force. Rates have been adjusted so as to secure the largest amount of business possible at the highest rate compatible with that volume. In other words, traffic managers have been mainly influenced by the consideration well stated by a witness before the United States Industrial Commission: that, "a freight tariff is made as it is, not because it ought to be that, but because it must be that." The procedure of classification committees seems, in other words, to have been mainly based upon considerations of revenue, and that, too, without any very positive evidence as to details.[350] Rule-of-thumb experience, therefore, is mainly represented in classifications of the present time; that is to say, an adjustment of freight rates upon different commodities to suit the commercial conditions which have happened to prevail at any given time. All of which emphasizes still further the need of scientific revision of these most important schedules, preferably by the carriers themselves, but by public authority if commercial inertia be too powerful to be overcome.
The spread of a classification,—that is to say, the graduation of rates as between all kinds of goods, from fine silks to lime and sand, or from aeroplanes, "set up," to pig iron, "knocked down,"—is not constant. How shall this be theoretically justified? At first sight it would appear as if the relativity of charges between different things, as determined by cost or value of service, ought to remain fixed; that is to say, for example, that rates on raw hides fairly standing at one-half of the charge for shoes, ought to remain always and everywhere at this ratio. Advocates of a rigid classification prescribed by public authority seem often to assume that this could be brought about. But a moment's consideration of the nature of a tariff as it has already been described will show that this is impossible. The spread or gradation, far from being fixed, must in the nature of things ever vary from place to place with change of trade conditions. The rate on raw hides relatively to that on shoes in New England—the centre of manufacture for footwear—should be very different at Kansas City or Chicago, whence the raw hides are derived: different alone, if for no other reason than because hides, moving east, progressively add the cost of carriage the farther they go; while with shoes the augmentation of value goes on in the opposite direction, geographically. True as between commodities, the same inconstancy of ratio also holds good as between different points along a given line. The rate from New York to Durham, North Carolina, for example, on first-class freight may be fifteen per cent. above that for freight of the second class; the second class maybe twenty per cent. above that of third class for this distance, etc.; yet the divergence between these same classes for another distance, as between New York and Jacksonville, Florida, may be quite different,—twenty per cent. between first and second class, twenty-seven per cent. between second and third, and so on. This is indeed rather a difficult matter to understand.