CHAPTER IV
RATE MAKING IN PRACTICE
Evolution of rate sheets, [101].—Terminal v. haulage costs, [102].—Local competition, [104].—What the traffic will bear, [107].—Trunk line rate system, [111].—Complexity of rate structure, [113].—Competition of routes, [114].—Competition of facilities, [116].—Competition of markets, [118].—Ever-widening markets, [119].—Primary and secondary market competition, [121].—Jobbing or distributive business, [124].—Flat rates, [127].—Mississippi-Missouri rate scheme, [128].—Relation between raw materials and finished products, [134].—Export rates on wheat and flour, [135].—Cattle and packing-house products, [139].— Refrigerator cars, [140].—By-products and substitution, [142].—Kansas corn and Minnesota flour, [143].—Ex-Lake grain rates, [145].—
The task of constructing a freight or passenger tariff is an eminently practical one. The process must be tentative and experimental. Little can be calculated in advance. Tariffs are not made out of hand; they grow. Not until a rate has been put into effect, can its results be known. The lower limit of charges, however, is more or less fixed. Obviously the rate must not be less than that portion of the variable expenses incident to each particular unit of business. This variable expense is divisible into two parts, one for loading and unloading, and the other for actual movement. The first step in constructing a tariff, therefore, is to separate these two portions of the variable outgo. General experience fixes the terminal outlay for loading and unloading at an average figure of about twenty or twenty-five cents per ton at each end of the line; that is to say, at an average of about two and one-half cents per hundred pounds as the total terminal cost.[64] Just where, above or below this average, the figure for any particular tariff will lie, depends upon a multitude of details.
This terminal expense is obviously quite independent of the length of the haul. It costs no more to load for a carriage of 3,000 miles than for one between two adjoining stations. It is the second portion of the specific costs, namely, the movement expense, which varies with the distance. This movement cost is more difficult of determination, as affected by a multitude of variable factors, such as the grades, curvature, number of stops, the size of train load, and above all, the volume of the traffic. Assuming the simplest physical conditions, one would expect the movement expense, aside from the initial cost of getting up steam in order to move at all, to rise proportionately to the distance traversed. Graphically represented, the tariff would appear somewhat as follows:
Relation of Cost of Carriage to Distance.
In this diagram the distances of carriage are represented along the horizontal line, A B; while the rate charged is laid off vertically. The distances A C and E B represent the constant terminal cost; while the steadily rising rates with increasing distance, due to movement expenses, are shown by the sloping dotted line C D. This chart at once demonstrates why under the very simplest physical conditions a straight mileage tariff is unscientific and unreasonable. For the constant terminal expense, spread evenly over the mileage traversed as the movement expenses grow, becomes progressively less and less in proportion to the total of the two, which constitutes the real rate. The longer the haul, the lower the ton-mile cost as a matter of necessity. As Chanute calculated on the New York Central a generation ago,[65] while the average cost per mile of hauling a ton ten miles was 4.062 cents, it descended progressively to less than one cent per mile for distances over five hundred miles. A common rule is that the rate rises as the square root of the distance, rather than in proportion to it. A hundred-mile haul represents a cost approximately only twice as great as one of twenty-five miles, instead of being four times as much. For thrice a given cost the haul may be increased nine times. The course of such a tariff with increasing distance would be represented by the parabolic curved lines on the preceding diagram.[66] The particular curve would depend upon the commodity and local physical conditions. In territory where movement expenses were heavy or operation difficult, the curve would obviously rise more rapidly. Such a mathematical tariff does not depart widely from the one traced by the heavy dotted line C D first described. The progressive decline of the per mile rate with increasing distance may be illustrated by the rough estimate of allowing two and one-half cents per hundred weight or fifty cents per ton for terminal cost, with one-half cent additional per mile for movement expenses. For a ten-mile haul this would cost fifty-five cents, or an average of 5.5 cents per mile. Were the distance 500 miles, the average cost would be only (50+250)/500 cents or 0.6 cents per ton mile.
