Railroads: Rates and Regulations

by William Zebina Ripley

The importance of both the intermountain and Pacific coast traffic originating along the western confines of the blanket zone, steadily increased. One record showed that three-fourths of the business at Reno, Nevada, originated west of Chicago.[766] It all moved on the same rate as freight from Portland, Maine, whether destined to Nevada or to the Pacific coast. The disparity against Nevada remained absolutely the same in either case. It was to hold this traffic, originating west of Chicago, against all eastern competitors, that the blanket zone was so abnormally widened by the trans-Missouri railroads.

For years the transcontinental rate scheme had been before the Interstate Commerce Commission. A number of decisions[767] were rendered prior to 1910, under the old long and short haul clause, emasculated as it was by the Alabama Midland decision of 1896. The Hepburn amendments of 1906 had so far strengthened the hands of the Commission that it made several attempts to deal with the question. But the orders in these cases were confined to classified tonnage, although it was clear that most of the transcontinental business moved under commodity rates. Such carload or wholesale tonnage, of course, was the only sort actually affected by the competition by sea. This fact greatly aggravated the discrimination against which the intermountain cities complained. For, in absence of such water competition, they enjoyed relatively fewer commodity ratings. And their youthful, though ambitious, jobbing trade was dependent upon just such special carload rates in competition with middlemen on the Pacific coast. If "tin boxes and lard pails, nested" moved in carloads, Seattle got them from "anywhere east" for a commodity rate of eighty-five cents, as against the regular fourth-class rate to Spokane of $1.90 per hundred pounds. The Commission grappled with the problem of such discrimination manfully; but made little headway until the new law of 1910 put it in better case. Then for the first time it tackled the heart of the matter, in revising the commodity rates in the great cases now under review. There is evidence that the railroads were already endeavoring to remodel their tariffs, under pressure in some degree from the Commission even before the amendment of the law in 1910. It was recognized that some modification of the existing scheme was needed.[768] And it was relatively easy to re-arrange mere class rates.[769] They were little affected by water competition. But the commodity schedules, concerned in these later cases, were far more important commercially.

Two plans were possible to mitigate the violation of the distance principle.[770] The rates to intermediate points might be lowered conformably to the long-distance standard. This would enable the railroads to hold the coast traffic against the water lines, but would decrease the revenues from "way" business. Or, on the other hand, the coast rates might be put up, regardless of water competition, in the expectation that much through business would still go by rail. Tariffs by land were already considerably higher than by the sea routes. Possibly the rail rates might be increased somewhat further. Some coast business would be lost to the water lines, but on what remained a higher return would accrue. Moreover, a considerable development of interior distributing centres would be bound to ensue. And, best of all, the grievances of the interior places would be somewhat mitigated.[771] Unfortunately the Pacific coast points were in an uproar at this threat against their supremacy in the jobbing business. And, in the meantime, the new powers under which the present proceedings were taken had been conferred by the Mann-Elkins law. The carriers unaided could probably not have greatly bettered matters. But the government, at all events, chose to deal with it; so that these private attempts came to naught. Subsequently such action as the carriers took, naturally assumed the form of increases at terminals rather than reductions at intermediate points.

The new orders[772] were radically different from the preceding ones, not only in applying to commodity rates, under which most of the tonnage really moved, but also in respect of the form of remedy proposed. In order to correct the discrimination, the previous decisions prescribed the absolute rates to be put into effect at various points. The new orders did not establish absolute rates at all, but endeavored, instead, to set up a system of relative rates or differentials. All the former decisions had held the intermountain rates inherently unreasonable. The new opinions treated them as only relatively so. A clear distinction was drawn between real water competition and that pseudo water competition which, as has been said, resolved itself practically into a mere competition of markets with one another. The guiding principle adopted was that the force of water competition,—the only one entirely beyond the carriers' control,—of necessity increased with the proximity of the shipping-point to the Atlantic seaboard. Business from New York to Seattle by rail had to go at rates compelled by the rivalry of steamship lines. Traffic from Omaha to Reno, Nevada, was surely free from it. Yet under the then existing system no distinction whatever was made between the two sets of circumstances. All rates were blanketed, regardless of remoteness from the eastern seaports. The new governmental order substituted a series of zones suggestive of those so long prevalent in trunk line territory.[773] These are shown by the map on page [618]. As one passed westward from zone IV, with water competition under full pressure at New York, the influence of the roundabout carriers by sea progressively diminished; until, at last, beyond the Missouri it became nil. Such water competition affording the only pretext for a grant of lower rates to the Pacific terminals than to intermountain points, it followed, logically, that the disparity in charges between such interior and coastal places should decrease pari passu with the westward movement of the originating point. A substantially lower rate from New York to San Francisco than from New York to Nevada might be permitted; but no such difference, relatively, ought to obtain from St. Paul or Omaha to San Francisco as compared with Rocky mountain territory. For these inland initial points were practically beyond the range of steamship rivalry.

Specifically, the Commission in these orders forbade any higher charge to the mountain points from any part of zone I than applied to the Pacific terminals. From zone II, lying four hundred miles more to the east, there would probably never be any considerable traffic coming back to New York in order to go round by sea, but in rare instances there might be some. From this zone, therefore, intermountain rates might be not more than seven per cent. above those to the Pacific terminals. And so on as one went east. Rates from zone III might be not more than fifteen per cent. higher to Spokane than to Seattle. From zone IV to Rocky mountain territory they might be twenty-five per cent, above those to San Francisco; but the disparity against the intermountain territory, even from here with water competition in full effect, must never exceed this percentage.

This ingenious plan certainly commends itself in principle to the economic student. It restored in a measure the gradations existing in 1887.[774] It did not create the zones out of whole cloth. It utilized a scheme for division of territory already adopted by the transcontinental lines for other purposes.[775] And, most important of all, it was elastic, not prescribing absolute rates, but resting content with laying emphasis upon the need of gradation. Yet it granted a substantial measure of relief from the present disparity of rates. For, whereas the former intermountain tariffs from the East were from fifty to one hundred per cent, above those to the Pacific coast, the difference under this order might never exceed twenty-five per cent. The new scheme was cleverly planned, also, from a legal-strategic point of view. It could scarcely be attacked under the Fourteenth Amendment as confiscatory, inasmuch as it left so much latitude to the carriers in the readjustment of their tariffs.[776] To overset it on this ground, they must prove that disaster would result from the particular rates which they had chosen to adopt. This would be an impossible task. The only choice remaining to the carriers, therefore, would be to attack the order on the ground that the Commission was exceeding its powers, delegated by Congress. This, in effect, was what was done.[777]

The opinion of the Commerce Court,[778] setting aside the intermountain rate orders of the Interstate Commerce Commission, will shortly be reviewed by the Supreme Court of the United States, to which tribunal appeal was promptly taken.[779] Disregarding the dissenting opinion that the entire long and short haul clause, as amended in 1910, was unconstitutional, there were three significant differences between the two tribunals.

The first point at issue between the court and the Commission concerned the differentiation of water competition from so-called market competition.[780] The Commerce Court refused to recognize any distinction between the cause of lower rates to the Pacific coast from Omaha or from New York, respectively. It ascribed the disparity in all cases to competitive forces entirely beyond the railroads' control "If the carrier from St. Paul, in order to meet new water competition from New York," etc. The Commission, on the other hand, clearly set apart market competition, applicable to western cities, from that due to carriage by water, which controlled rates from the Atlantic seaboard. The railways, it said, must conform in their rate-making policies to the latter. They were not bound by the former. For market competition (as already quoted) "is a euphemism for railroad policy."[781] And, speaking as an economist, ignorant of the technicalities of the law, I venture to affirm that the Commission in this contention was absolutely right.[782] Even as far west as South Bend, Indiana, wagons may go to California by the direct rail route; or, with a change of ten cents in the rate, they may come back to New York and thence go round by sea. Such is the delicacy of adjustment even as far west as Chicago. Hence the failure to recognize that low rates to the Pacific coast from points west of the Missouri river were due to an entirely different cause—namely, the arbitrary determination of the transcontinental lines to hold the fort for their local clients against all odds—was to commit an egregious economic blunder. Furniture goes from Chicago to San Francisco on rates as low as if compelled by water competition.[783] But steamships never carry commodities of this bulky sort, even from New York. How much less, then, could water competition apply so far inland? The carriers were bent on keeping Chicago in the Pacific market. That was the real reason. The Commerce Court clearly missed the main point.