The simplest compromise in any dispute over rates between competing centres is the concession of absolute equality or, as it is called, of flat rates between all points irrespective of distance. This shifts the burden from the carriers and places competition entirely upon the shoulders of the merchants. Oddly enough, also, this result of equal rates regardless of distance between various competing centres, especially when they are secondary distributing or concentrating points rather than original sources of traffic, may sometimes evolve naturally out of commercial conditions imposed by tariffs built up upon the basis of distance. The accompanying theoretical diagram, based upon actual traffic conditions prevalent in Missouri river territory, serves to illustrate the way in which, under certain circumstances, such equalization of rates may take place. Two groups of cities are here represented as though lying respectively along two river valleys north of their separation at a point G. Let us call them the Mississippi and the Missouri for purposes of identification. The starting point is equality of rates from such a distant point as New York (O) to all places along the Mississippi from A to G. Such equality properly arises in theory from the substantially equal distance from New York. In practice also, under the trunk line rate system,[98] such equality prevails, inasmuch as the rates from New York to such a series of Mississippi river crossings is fixed at 125 per cent. of the rate from New York to Chicago. By a similar course of reasoning, namely, the approximately equal distance from New York (O), rates from that place to a second series of points along the Missouri river should be and are in effect made equal. From these two facts it logically follows that the balances of the rates from all points on the Mississippi river out along an extension of their lines from New York toward the west should also be equal. This is obviously in conformity with the mathematical principle that equals subtracted from equals leave equal balances. Thus the rates B X, D Y and F Z are compelled to equality. From this relationship in turn follows still another. All rates from any point on the inner series of towns to any point whatsoever on the outer western series of places along the Missouri river must remain equal regardless of distance. For each line from New York to A, B, C, D, etc., wishes, of course, to participate in business not only on the direct extension of its own line, but to as many other points as possible.[99] Without some agreement, however, it would normally enjoy traffic only on the direct extension of its own line. The point Y would most naturally be reached by way of C, D or E, over the shortest routes. Competitors on either side would similarly enjoy an advantage in more direct lines from New York to the places immediately beyond them. Thus for business from New York to Z, the more direct lines through E, F or G would obviously have an advantage over lines which passed around through A, B, C or D. An almost irresistible incentive to cut-throat competition would exist. The only way the lines east of the inner circle can peaceably partition business to the outermost western points is by an agreement to make all rates between the inner and outer circles the same. In this manner the rates from A to Z or from G to X are reduced to an equality with the rates offered by the shortest route between the two rivers, which, in this case, is E Z. The rate for this shortest line then becomes the basic one, upon which all the others depend.
Traffic Conditions in Missouri River Territory
The foregoing economic reasoning underlies the actual tariff system prevailing in what is known as Missouri river territory.[100] Two great streams separating at St. Louis form the eastern and western boundaries of Missouri and Iowa. All along the two edges of these states are located important river cities, each of which has more or less direct communication with every other crossing on the other river, over a complicated system of interlaced lines. There are no physical barriers, the country being plain and open. The starting point and basis of the whole scheme is the shortest direct distance between the two nearest points, namely Hannibal on the Mississippi, and St. Joseph and Kansas City on the Missouri. The situation is shown by the map herewith. At these points the two rivers are approximately two hundred miles apart. For this distance the base rate of sixty cents per hundred pounds, first class, is fixed by common agreement. Were local business only to be considered, and were the railways not competing, the rate between other points on the two rivers at greater distances apart, such as for instance, Burlington on the Mississippi and Omaha on the Missouri, might be determined on a relative distance basis, as in trunk line territory. But the commercial fact is that a large proportion of the business between all these points consists of long-distance traffic from the eastern seaboard which may cross the Mississippi at any one of these gateways between Dubuque and St. Louis on its way to the cities on the Missouri river. All of these through long-distance shipments must, of course, enjoy the same competitive rate to the ultimate western destination on the Missouri river. And, inasmuch as the rate from the east to the Mississippi crossings is everywhere the same, namely 125 per cent. of the New York-Chicago rate, it follows that the balance of the rate from these points on to the Missouri river across Iowa and Missouri, irrespective of distance, must likewise be the same. In other words, the rates between all these Mississippi and Missouri river points must be equalized, irrespective of the length of the intervening route, whether it be two hundred miles by the shortest direct line from Hannibal to Kansas City across Missouri, three hundred and fifty miles from Burlington to Omaha across Iowa, or even seven hundred miles by the roundabout line of the Illinois Central skirting both states. In brief, every railway which touches both rivers, however circuitous its route, is compelled to quote the same rate from every point on the Mississippi river to every other point on the Missouri. This rate must be the one fixed, as already described, for the shortest direct line, namely sixty cents per hundred pounds first class. Furthermore, in precisely the same way that these rates to Missouri river points from the eastern seaboard are built up and equalized, the rates from Chicago to the same Missouri river points must be kept even. The rate through from any one of the long chain of Mississippi gateways must be the same irrespective of distance. This figure, by common agreement, has for many years been twenty cents per hundred pounds higher than the rate across Illinois to the Mississippi river gateways from Chicago alone. The dominant note of this whole tariff is equalization of rates between all points in competition with one another over all possible routes. Freight thus moves freely in every direction and all markets are held on an absolute parity.[101] It is one of the most remarkable features of American commercial organization, this practical elimination of the element of distance from interstate trade over wide areas.
The possible evil lurking in too widespread an acceptance of the principle of the flat rate is clearly apparent in the reasoning of the Eau Claire, Wisconsin, lumber case.[102] This town complained of the disability under which it labored in shipping lumber to Missouri river points by comparison with other places round about. It appeared in the evidence that as early as 1884, under arbitration, all the rates from competing centres had been adjusted on the basis of differentials; and that, as interpreted by the carriers, the purpose of these differentials was to even up the differences between competing towns; to the end that all manufacturers should be put upon an equality in the consuming territory. But this necessarily involved the practice of penalizing or nullifying in a way the advantages of location. "If Eau Claire could produce lumber cheaper than Winona or La Crosse, then the latter points were to have a lower rate in order to enable them to compete." This practice the Interstate Commerce Commission condemned at that time; and it has consistently adhered to the precedent then laid down. Obviously, any other general course of action would be analogous to hobbling the fleetest horse in a race to bring him down to the rate of progress of the slowest laggard. The principle of the handicap applied within moderate limits makes for an exciting athletic contest; but if it be overdone, it eliminates all interest from the contest whatever. The race becomes one, not of skill or endurance in running, but of securing a sufficiently liberal handicap. Competition to be of advantage in the way of progress must always have in view the survival of the fittest and the elimination of the unfit.
The vast extent of the United States, the necessity of transporting commodities great distances at low cost and the progressiveness of railway managers, has led to an extraordinary development of the phase of rate making above-mentioned. The principle of the flat rate, based upon the theory that distance is a quite subordinate, if not indeed entirely negligible, element in the construction of freight tariffs under circumstances of competition, was fully accepted twenty-five years ago.[103] J. C. Stubbs, traffic manager of the Harriman lines, speaking of transcontinental business in 1898, clearly expressed it as "the traditional policy of the American lines as between themselves to recognize and to practise equality of rates as the only reasonable and just rule ... regardless of the characteristics of their respective lines, whether equal in length or widely different." It is the theory upon which the southern basing-point system is founded; and it is the common practice in making rates into and out of New England—being in fact vital to the continued prosperity of this out-of-the-way territory.[104] President Tuttle, of the Boston & Maine, has most ably supported this principle of equality of rates irrespective of distance. "It is the duty of transportation agents," he says, "to so adjust their freight tariffs that, regardless of distance, producers and consumers in every part of this country shall, to the fullest extent possible, have equal access to the markets of all parts of this country and of the world, a result wholly impossible of attainment if freight rates must be constructed upon the scientific principle of tons and miles." This is the principle of the blanket rate attacked in the famous Milk Producers' Protective Association case in 1897;[105] and it is the practice which has been so fully discussed of late, as generally applied to lumber rates from the various forest regions of the United States into the treeless tract of the Middle West. The principle, while applied thus generally in the construction of tariffs, is of far greater applicability in the making of special or commodity rates. Wool rates afford one of the best examples. Under such rates the bulk of the tonnage of American railways is at present moved. The essential principle of such special rates, constituting exceptions to the classified tariffs, is that of the flat rate; namely, a rate fixed in accordance with what the traffic will bear, without regard to the element of cost, that is to say, of distance. But a noticeable trend away from the flat rate is evident in recent decisions of the Interstate Commerce Commission; especially in the Intermountain case,[106] revision of the wool and cattle rates,[107] and the general disposition to lessen special tariffs all along the line.
The intricacy of freight rate adjustment in response to the subtleties of commercial competition depends only in small measure upon the absolute freight rate imposed. The main problem is really that of relativity. But this does not mean mere relativity as between directly competing commodities or places. A strict relativity based upon commercial conditions must often obtain as well between the rates on raw materials and their own finished products; between all the various by-products in an industry; and, of course, always as between goods capable of substitution one for another. A few illustrations will serve to make these details clear.
The matter of properly correlating the freight rate on raw materials and the finished products made from them, is more far-reaching than it seems. The location and development of manufacturing depends upon it. The country may be broadly divided into agricultural and manufacturing sections. The first of these is ambitious to develop its resources; not only to feed, but to clothe itself and make other provision for its needs. No sooner does it seek to develop local manufacturing than it finds itself exposed to competition from the older established manufacturers at a distance. Sometimes, even, these remote manufacturers draw their supplies of raw material from its own fields and forests. These supplies are then shipped long distances as raw material; manufactured and thereafter returned to sell in competition with the local product. The local market in relatively undeveloped areas is probably insufficient to provide support for manufactures on a profitable scale. It is essential to dispose of the surplus product over a wider area. Thus there arise two classes of manufacturers: one "next the stump," manufacturing at the source of the raw material and desiring to ship the finished product; the other, remote perhaps from supplies of raw material, but favored by long experience, by abundant supplies of capital and of skilled labor and by other advantages.[108] Neither class of shippers can prosper without overflowing into the domain of the other. The outcome of this competition depends in part upon the policy of the carriers. If the rate on the raw material be relatively low, the remote manufacturer is aided. Cotton mills and shoe factories in New England prosper in competition with establishments in the South or the Middle West. If, on the other hand, the rate on raw materials be inordinately high, while at the same time low on outward-bound shipment of manufactures from the seat of the raw materials, the tendency is in favor of the upbuilding of manufactures, not near the historic centres of population and consumption, but near the sources of natural wealth, which are the potential homes of manufacturing.