The petition of the Southern Pacific Railroad for exemption from the prohibition of the amended long and short haul clause in 1912,[755] as to rates between San Francisco points and Portland, Oregon, presented a concrete problem in the fair adjustment of distant and intermediate rates under the force of coastwise water competition. There was no question as to the force of this rivalry; more than three-fourths of the traffic between the distant seaports moving by boat. The geographical situation is shown by the map herewith. But the difficult point to decide was as to whether the intermediate rates were not too high by comparison,—being made, in other words, to compensate unduly for the low rates and loss of traffic at the two ends of the line. The high intermediate point was Talent. The first-class San Francisco-Portland rate for 746 miles was 51 cents per hundred pounds, as against a San Francisco-Talent rate for 409 miles of $1.66,—more than three times the charge for about one-half the haul. Moreover, the inadequacy of water competition as a full explanation appeared at many points. Albany, for example, was no farther from Portland than Sacramento was from San Francisco. Yet while Sacramento enjoyed the low water rate north bound, neither Albany nor other places much nearer Portland were given the same advantage in southerly shipments. This case, left open for further examination as to facts, is also interesting as to points at law. The carrier, as in the Intermountain rate cases, contended that under the amended long and short haul clause, the Commission need consider only the force of water competition; and need not concern itself with the reasonableness of the intermediate rates. The Commission held this not to be a right construction of the law.
The reasons for seeking exception from the long and short haul clause in passenger business, judging by the petitions filed by carriers under the new law, had to do mainly with complications following the establishment of mileage schedules by law in the different states. Some of these states had also enacted two-cent fare laws, in which case it often happened that intrastate fares were arbitrarily higher than those which applied on interstate business. But the main reason for seeking exemption from the Fourth Section was the desire of circuitous routes to meet the charges made by the short lines. Obviously, as in freight traffic, the long line could not charge more than the short line, and usually the short line made the rate. Practically under such circumstances, the long line carrier could not well maintain a higher fare to the intermediate point, since in passenger traffic, unlike freight, the traveller could if he pleased buy his ticket to the more distant point and then get off at the intermediate one. The Commission, in view of this fact, naturally found less flagrant violations of the distance principle in passenger fares than in freight rates.
What economic reasons among all these advanced by the railroads, should be accepted by the Commission as warranting a departure from the distance principle? Originally, as we have seen, it was held that competition either with carriers by water, with railroads not subject to the Act, or other rare and peculiar cases, created such dissimilarity of circumstances and conditions as to warrant a modification of the distance principle.[756] In the first great case under the amended law, the Commission held, more broadly, that other factors than these might properly be taken into account. It considered itself authorized not merely to decide whether circumstances in respect of competition at the two points were dissimilar, but also whether, and to what extent, that dissimilarity justified a departure from the rule. In other words, as interpreted by the Commission, modification of the rule might be permitted to just the degree which would seem to be called for by consideration of the whole situation. The best way to understand the bearing of these considerations, however, will be to examine this first great case in detail.
The Intermountain rate cases, affording the first crucial test of the long and short haul amendments of 1910, were doubly significant. They afforded a prime example of the struggle for supremacy between the administrative and the judicial branches of the government. And they also stood foremost among all the transportation controversies of the last generation.[757] The grievances were long-standing. They had been before the Interstate Commerce Commission since 1889.[758] They comprehended geographically a range of interests covering the entire northern half of the United States. While the Rocky mountain territory and the Pacific coast terminals were most directly concerned, the rights in trade of every factory and distributing point east of Denver were indirectly involved, in so far as they participated in commerce with the Far West. Not even the inevitable conflict over remodelling the southern basing point system by enforcement of the new fourth section of the Mann-Elkins law, was equal to this one, either in geographical scope or commercial importance. And at the same time the fact that the new Commerce Court was in 1912 on trial for its life—this being one of its leading cases on appeal—endowed the controversy with an even greater significance. Both in the eyes of the law and of commerce and finance, the issue was plainly of the first importance.
The transportation grievance of the tier of Rocky mountain communities from Washington to Arizona, although simple, divided naturally into two parts.[759] The first was that the freight rates from all eastern territory to these localities were from one-quarter to over one hundred per cent higher than to the Pacific coast, although the goods in transit passed their very doors and might be hauled a distance greater by one-fourth. A carload of glassware from Pittsburg to Spokane, Washington, paid a freight rate of $649.44; while the charge to Seattle, four hundred miles farther west, was only $393.60. A first-class commodity (carload) rate from Omaha to Reno, Nevada, was $858. If the goods were delivered 154 miles farther west, at Sacramento, passing through Reno en route, the freight bill amounted to but six hundred dollars. But this discrimination was less than half the indictment, inasmuch as the compelling force of ocean competition at the coast was conceded by all. It might well be that San Francisco and its sister terminal points were unreasonably favored, rather than that the intermountain rates were unduly high in themselves. The carriers by land might indeed be, as they alleged, powerless in the face of a water competition beyond their control. And if they were thus impotent, surely the government could not account their tariffs unlawful, however irregular they might be.
The second item in the complaint of the intermountain cities showed the cloven hoof of the transcontinental carriers. These mountain rates, relatively so high by comparison with more remote terminals, were equally high from every point east of Denver over a territory two thousand miles in width.[760] In other words, entirely regardless of distance, the freight rate to Spokane or Reno, whether from New York, Chicago, St. Paul, Omaha, or even Denver, was the same. It was indeed a blanket rate, like the fixed charge of two cents for postage. And it made no difference how near any point in this wide zone might be, the disparity in rates against the intermountain points was relatively the same. Thus our two concrete examples, above cited, were for shipments from Pittsburg and Omaha, respectively; but in any case, were the point of origin as remote as Portland, Maine, or even as near as Colorado "common points," the disparity of rates was unchanged. They were always very much higher to the intermountain cities than on to the Pacific coast; although the carriers east of the Missouri river got no more for their portion of the haul when the goods were bound for Spokane than if they went on to Seattle for a much lower through charge. This latter fact, of course, narrowed the complaint down to the policy of the western lines. The discrimination, if it were one, was clearly of their making. Whatever trouble there was, originated west of the Missouri river. However much the other railroads all over the country might have joined in transcontinental business, they remained impartial onlookers in this particular contest.
Some of the causes of the apparently abnormal western rate adjustment are perfectly plain. The low rates to the coast were due to water competition, which, while now under some measure of railroad control—partially "neutralized" in fact[761]—was always present and potentially great. It will be even more controlling when the Panama Canal is opened.[762] To meet this situation, the carriers had established a series of through commodity rates which practically covered all transcontinental business. For all this traffic exposed to water competition, it was averred, the intermountain territory was more remote, if not geographically, at least for purposes of rate making. The railroads consequently added the charge for the local haul back from the coast to the low transcontinental or through rate in determining the charge to all the intermediate cities. Thus, they alleged, a discrimination was forced upon them, not of their own creation. They could not grade all their intermediate rates down to a through tariff thus fixed at the farther end. It would mean bankruptcy. Thus far the situation is analogous to Hadley's classic oyster car case.[763] The main difficulty arose in satisfactorily explaining the second half of the scheme. How did the blanket or "postage stamp" rate zone arise, permitting exactly the same rates, whether to Spokane or Seattle, from points scattered over a territory covering practically two-thirds of the United States? Was it an artificial scheme, modifiable at the will of the carriers or of the government; or, like the law of gravitation, was it beyond the control of either?
The truth was that westbound rates from New York, Chicago, Omaha and St. Paul had come to be fixed at the same level, not by water competition primarily, but by the forces of commercial rivalry between centres bidding for the far western market. They were originally graded somewhat according to distance in the early days.[764] And it is plain that water competition, at first confined to the Atlantic seaboard, gradually extended inland. In order to secure the business to San Francisco by steamer or clipper ship, rail charges from Pittsburg or Buffalo back to Philadelphia or New York had been absorbed in the through rate, thus gradually extending the benefits of water competition farther and farther west from the seaboard cities.[765] And, of course, as population and manufactures grew in the Middle West, the narrow fringe of such competition steadily and inexorably spread in from the Atlantic coast over a wide zone of blanket rates, all based on New York. The direct all-rail carriers, naturally, met this competition at all points. Manufactures and population continued to spread toward the West; but, imperceptibly, a new competitive factor appeared. As the force of direct water competition lessened with ever-widening distance inland from the Atlantic, market competition began to gather strength. One need not go so far as to concede that "market competition is a euphemism for railroad policy," in order to realize that artificial rather than natural influences gradually came to bear in the westward extension of the blanket rate. The trans-Missouri lines, getting the whole rate on shoes made in St. Louis for the Pacific slope, while only getting a part of it if the goods came from New England, had a direct motive to put St. Louis into the western market and thereafter to hold it there at all cost. Every increment in the St. Louis traffic, moreover, was surely theirs for ever. It could not be stolen away by Canadian railways or ocean steamship lines, as it might if it originated at Boston. It became a settled policy of these western lines, therefore, to meet even the water-compelled seaboard rates at all points, no matter how far inland. The blanket zone thus steadily widened, out of all semblance to its originally modest proportions as based upon water competition alone. A competition originally natural, gradually merged into another of an entirely artificial sort.