Railroads: Rates and Regulations

by William Zebina Ripley

The long-standing controversy over relative rates on wheat and flour for export affords an interesting illustration of the difficulties of properly correlating charges of this sort.[109] Originally the rates on wheat and flour—the raw material and the manufactured product—were the same. In 1890 the railways leading to the Gulf ports began to discriminate by giving lower rates on wheat, but the trunk lines until 1899 held to the original equality between the two. Finally, however, the struggle between the trunk lines and the Gulf roads for business forced the former to lower their rates on wheat, leaving the flour rates—not subject to Gulf competition—undisturbed. At times the rate on wheat for export was as much as nine cents per hundred pounds lower than the rate on flour. Thus the rate on wheat for export from the Mississippi river to the seaboard was frequently twelve cents, while the rate on wheat from the same points to Chicago added to the rate on flour there manufactured and sent on in barrels or bags to New York, was twenty-two cents—a clear discrimination against the domestic manufacturer in this instance of ten cents per hundred pounds. For his American-made flour, sent abroad in competition with flour made in Liverpool from American wheat, would evidently cost that much more at delivery. In other words, wheat could be transported to England and there ground much cheaper than it could be ground here and then shipped. This bore with particular severity upon small millers, partly because their costs of manufacture were relatively high, and also because any limitation of export business forced the large millers to bid more keenly for local domestic trade. Inasmuch as a fair margin of profit to the American manufacturer would not exceed two cents per hundredweight, it is apparent that this discrimination operated severely against the American miller. Minneapolis fortunately was unaffected by this discrimination, much of its exports going out by Canadian lines to the Lakes. The carriers defended this difference in rates on the ground of water competition by the Lakes or combined rail and water routes, which were alone open to wheat, and which thereby unduly lowered the rate on that commodity; and also on the basis of the lower cost of service in moving the raw material as compared with the finished product. It is apparent that issue was really raised in such a case between the interests of the farmer and of the manufacturer. The United States, producing a surplus of wheat the price of which is made on the Liverpool market in competition with the world, is compelled to find an outlet for this product. It is obvious that any reduction of the freight rate—the prices in Liverpool remaining fixed—would inure to the benefit of the farmer, who would thereby receive a higher price for his product. Viewed in this way the railways by discriminating in favor of the rate on wheat were helping the farmers. But, at the same time, by moving this wheat more cheaply than flour the railways were encouraging the location of flour milling abroad and rendering it impossible to manufacture flour for export at a profit in the cities of the Middle West. In these export cases it does not appear clearly why the rate on flour for export might not have been reduced somewhat. The Interstate Commerce Commission finally rendered a decision to the effect that the existing difference in rates constituted an undue preference in favor of the foreign manufacturer, adding at the same time that these discriminations seemed to be due primarily not to a desire of the railways to aid the American farmer in disposing of this surplus wheat, but to the bitterness of competition between the Gulf and trunk line railways.[110] They decided that any discrimination greater than two cents per hundred pounds in favor of wheat for export as against flour was unreasonable. This difference was permitted, however, on account of the greater cost of handling the manufactured product. It is significant of the then state of the law that the railways paid no attention to this order, and, although conditions improved somewhat, there is still great complaint.

The relative rates on wheat and flour, even when for domestic consumption, illustrate the same difficulty of commercial competition—the necessity of adjusting the rate on raw materials to that on the finished product.[111] The rate on wheat from Wichita, Kan., for example, to California is fifty-five cents per hundred pounds, while the rate on flour between the same points is sixty-five cents. Is this difference in rates economically justifiable? California wheat is soft, so that flour produced from it is much improved by the admixture of hard wheat, such as may be obtained in Kansas. California, formerly a large wheat exporting state, has of late years relied to a considerable degree upon the Middle West for part of its supplies. Kansas flour sells for seventy-five cents a barrel more than California wheat flour. Shall this Kansas wheat, to be consumed in California, be ground in Wichita or in California? Here is material for controversy, not between one particular railway and another, but in reality between the millers in Kansas and the millers in California. It is quite analogous to the issue raised over export wheat and flour between the miller in Chicago and his rival in Liverpool. In this instance, if milled in Kansas, the railways enjoy the carriage of flour; while, if ground in California, the railways carry the commodity in the form of wheat. Owing to certain practical conditions, such as the percentage of waste and relative differences in labor costs, the Kansas miller appears to enjoy a certain advantage over his far western competitors. At this point the interest of particular railway companies appears. The Rock Island, if the milling industry in Kansas develops, obtains the haul not only of the flour but also of the fuel and of supplies for the communities engaged in the business. On the other hand the Southern Pacific is more largely interested in the local development of manufactures in California. The Rock Island by maintaining a lower rate on flour than on wheat, would tend to hold its clients in the field. The Southern Pacific, on the other hand, by securing the reduced rate on the wheat from Kansas would materially advance the welfare of its constituents. Thus the rivalries of the competing localities immediately become the direct and immediate concern of rival railways.

Cases precisely analogous in principle to those concerning the relativity of rates on grain and grain products have troubled the carriers for years in respect to the rates upon cattle and packing house products.[112] A low rate on cattle as compared with beef favors Chicago today as against Missouri river points, the latter being nearer the cattle ranges; just as a generation ago it enabled cattle to be brought to New York and Boston to be there slaughtered and sold on the spot. The history of this controversy throws much light upon the difficulties of rate making in practice. Originally the railways encouraged cattle raising by a rate which was only about one-third of the rate charged for beef. Slaughtering was carried on in the East adjacent to the great markets. To this policy the western packers objected strenuously. They demanded a relatively low rate on their finished product in order to enable them to bid against the local eastern slaughter houses. The stockmen, on the other hand, naturally desired a continuance of the low rate on cattle, as it perpetuated competition between eastern and western buyers. The controversy between the stock raisers and the packers was thus shifted onto the shoulders of the traffic managers of the railways. The dispute culminated in 1883 when the Trunk Line Association appointed a special committee to consider what the proper adjustment should be.

This committee in turn referred the matter to Commissioner Albert Fink, "Seeking a relativity of rates so as to make the charges for transportation, including the expenses incident to the transportation of dressed beef, the same per pound as the charges per pound of dressed beef transported to the East in the shape of live stock." A difficult task this, considering the variety of by-products emerging into value year by year. Cattle rates had been for some time fifty-two per cent., and then later sixty per cent. of the dressed beef rates. This was relatively higher for cattle than had been charged during the seventies. But the western packers demanded that the relativity in favor of the finished product be still further advanced until cattle rates should equal seventy-five per cent. of the rates on beef. This would effectually discourage the shipment of cattle to eastern centres, and would tend to upbuild Kansas City and Chicago at their expense. In 1884, the matter being still in dispute, was referred to Hon. T. M. Cooley, afterward chairman of the Interstate Commerce Commission. He decided that a fair compromise would be forty cents on cattle from Chicago to New York with coincident rates of seventy cents on beef. This would make the cattle rate about fifty-seven per cent. of the beef rate. It was a victory for the stockmen as against the western packers, who at once raised a great outcry.

It would have been difficult to predict the final outcome had not an entirely new factor appeared, which transformed the conduct of the beef packing industry.[113] Specially constructed stock cars owned by private companies began to be built. These favored the perpetuation of competition between eastern and western packers. To checkmate this, the western packers had already embarked in 1879 upon the ownership of privately owned refrigerator cars for the carriage of their finished products. The custom was adopted by the railways of paying for the use of these cars by making an allowance of so much a mile as a deduction from the established tariffs. This at once opened the way to secret rebates of all sorts. The refrigerator traffic in these private cars was large in volume, very regular and highly concentrated as to source. A large tonnage could be diverted at any time to that road which could best show its appreciation of the favor. The Grand Trunk, for instance, in 1887 swept the board, monopolizing this entire business for a brief time, obtaining it by secret and discriminating rates. The railways, jointly, sought to free themselves from the domination of the large packers; but the phenomenal growth of their business, both domestic and export, rendered them too powerful to resist. According to expert data, during nine months to May 1, 1889, three shippers alone received from one line of road $72,945 for the use of their cars. This about equalled the initial cost of eighty new cars. For the fiscal year 1895, $8,744,000 was paid by the railways of the United States for the use of these cars—about $4,000,000 of this being in the form of rental. At this rate, profits of from twenty-five to fifty per cent. upon the investment accrued to the great packers. These virtual rebates, of course, drove all competitors from the field. The story of the gradual extension of this system of private cars to include fruit and produce business belongs in another place. Suffice it to say that the bondage was broken only by the passage of the Hepburn Act of 1906. The growth of these private refrigerator car lines caused the disappearance of live stock shipments. Packing and slaughtering on a large scale at the seaboard, either for domestic consumption or export, was doomed. Meantime, however, the controversy over the relative rates on beef and cattle continued just as if anything really depended upon it. The issue was again submitted to the commissioner of the Trunk Line Association in 1887. In the following year a select committee of the United States Senate was appointed at the urgent request of the cattle raisers. Testimony before this committee showed in detail how eastern packers were striving to build up establishments near the points of consumption, but were driven out of the business by the relatively high costs of shipping cattle, as compared with the rates at which dressed beef could be actually delivered from Chicago and Missouri river points. This entire history, aside from its significance as a study of personal discrimination, illustrates the effect of a relatively increasing differential rate, partly open and partly secret, against the raw material of an industry as compared with the finished product. The result, at all events, has been to concentrate the packing industry in the Middle West. Nor is the controversy closed even yet.[114] But this time it is a question, not between the seaboard and Chicago, but between Chicago and Missouri river points, or those still nearer the southwestern ranges. Fort Worth and Oklahoma City now become complainants against the Missouri river points.[115] Always and everywhere the manufacture seeks to develop at or near the source of the raw material. Whenever this tendency does not appear in an industry it is pertinent to inquire how far the relative adjustment of rates is responsible for the phenomenon.

Complexities in rate adjustment often arise from the fact that in the manufacture of many commodities the marketing of by-products is of increasing importance. The rate on the whole series of related commodities must be taken into account at once. Thus in lumbering, a large amount of waste or very low-grade lumber is necessarily produced. This common lumber cannot bear long transportation; it must be utilized locally, if at all. On the other hand, the choicest specialties will command a price even in remote markets. A monopoly price is enjoyed in such a case. The Pacific coast lumbermen can market their long timbers anywhere in the United States; but the demand for the common lumber, restricted to a sparsely populated region, tends to be exceeded by the supply.[116] The real competition between the southern, the Michigan, the Wisconsin and the Pacific coast manufacturers thus narrows down to the sale of the medium-grade product. And the cost of production of this is, of course, in part dependent upon the profit made upon the other two sorts, each of which in its own field appears to be a monopoly. A wide market and a good price for medium-grade lumber may so lessen the cost of the cheapest by-products that they in turn may be so reduced in price as to widen their reach to the consumer. Each rate reacts upon the others. The situation can be successfully controlled only by adjusting them all at once.

Not only are rates competitive as between raw materials and the finished product made from them, but the circle of competition immediately widens to include all commodities capable of substitution one for another.[117] Coal rates, of course, are partly determined by rates on cordwood, and vice versa. During the great coal strike in Pennsylvania in 1903, soft coal rates and hard coal rates were sadly disturbed. Such substitutions are always likely to occur. But the conditions are not always so simple as this. An instance in point is given by a witness before the Senate (Elkins) Committee on Interstate Commerce in 1905.[118] This shows how a reduction in the rate for transportation of corn from Kansas to Texas brought about a corresponding reduction in the rate on flour from Minneapolis to Chicago. There was a large crop of corn in Kansas; and the Chicago lines anticipated brisk business in the carriage of this product. The traffic managers of lines from Kansas to Texas, however, discovered a large demand for corn in Texas at a price higher than then prevailed in Kansas. Any rate less than the difference in prices between the two districts would cause shipments of corn to flow from Kansas to Texas, just as inevitably as water flows down hill. This rate would needs be low; but the corn could be loaded on empty southbound cars which had been used to haul cotton out of Texas to the north. This, of course, entailed a diversion of corn from the Chicago railways, which promptly reduced rates in order to hold their traffic. For years the rates upon wheat and corn had been fixed in a definite relation to one another, based upon commercial experience. Any reduction of the corn rate compelled a reduction of the wheat rate. A fall in the wheat rate brought about a drop in the rate on flour. These reductions in corn started in southern Kansas; but parallel lines in northern Kansas were compelled to follow suit. Grain in the territory between the two roads could be hauled by wagon either north or south corresponding to a fraction of a cent per bushel difference in the price. Thus the reduction in rates spread from one line to another all over Kansas, throughout Nebraska up into Dakota and finally to Minnesota. It not only affected the corn rate everywhere but it caused a reduction in the rate on flour from Minneapolis to Chicago. The reliance of Texas for a portion of its corn supply upon the surplus product of Kansas sometimes leads to odd results. This commodity is sometimes shipped as corn meal and sometimes transported as corn to be afterwards ground in Texas. The Texas millers at one time demanded a relative reduction of the rate on grain as compared with corn meal, and the railway commission of that state upheld them in that demand. For ten years down to 1905 the differential in favor of the raw product had been three cents a hundred pounds. Then the railways, in connection with a general advance of rates, increased the charge on corn meal until it amounted to about nine cents per hundred pounds more than the rate on corn. One cent a hundred pounds being a good profit in grinding corn meal, this change shut the Kansas millers out of Texas business. Application was made to the Interstate Commerce Commission for relief. It then appeared on investigation that the carriers had made use of the Texas millers in order to prevent a general reduction of both grain rates and rates on grain products. The Texas millers on general principles had favored both these reductions. What happened is best described in the evidence before the Senate Committee on Interstate Commerce of 1905. "The railways went to the millers of Texas and they said to them, 'Is there anything you want here?' 'Why,' said the [Texan] millers, 'yes; we would like to have that differential between corn and corn meal increased; we think you ought to put the rate on corn meal up.' The railway said, 'All right; you just stay away from that meeting down at Austin so that there will not be any excuse for the Texas commission, and if it undertakes to reduce these rates we will raise this differential; we will raise the rate on corn meal to the rate on flour.' The millers kept away from Austin—they kept their part of the bargain—and they stayed away, and the Texas commission was left without any support for their proposition to reduce the corn rates, and the railway kept their part of the bargain and lifted up the rate on corn meal so that the differential was from nine to seven and one-half cents, and that put the Kansas mills out of business."

Apparently insignificant details often determine the outcome of commercial competition. Thus in the milling business, where the margin of profit in the manufacture of flour may not be over three cents per barrel, an infinitesimal change in the freight rate may mean success or failure to long-established industries. And the conditions vary indefinitely. Thus, as between flour milling in Duluth and Buffalo, Duluth can buy its wheat from the farmer direct during the entire winter, but must ship its product mainly during the period of open water navigation on the lakes. The reverse is true with the Buffalo miller who can ship out his flour during the entire season, but who must accumulate his whole stock of wheat before navigation closes. And then Minneapolis as a milling centre has to be taken into account. Eighty per cent. of the spring wheat grown in the United States is in territory from which the freight rates to Minneapolis and Duluth are the same. But the basic rate to the East and Europe, fixing the all-rail rates, is the combined lake and rail. By this route Duluth is one hundred and fifty miles nearer the market than is Minneapolis, and consequently enjoys a lower rate on its flour shipped out. A three-cornered competitive problem exists, in which any change at one point entirely upsets the commercial equilibrium.

The obligation on the part of a railway to protect its constituency, not only in respect of particular rates, but in general conditions as well, introduces still further complications. The freight business of New England, for example, consists, first, of the carriage of raw materials and supplies inwards; and, secondly, thereafter of the transportation of the finished product out to the consuming markets. Narrowly considered, it may seem expedient to crowd the rate on coal as high as the value of service probably will permit; but viewed in a large way, it may prove to be a far better business policy to maintain the rate on coal, cotton, and other staple supplies so low, that the growth of population and production may in the long run yield far greater returns on the high-grade manufactures which the territory produces. Turning to the southern field, where the economic conditions are reversed, it may be the better policy to hold down the rate on raw cotton in order thereby to stimulate this great basic industry and thereby enhance the demand for the merchandise and foodstuffs which depend upon general prosperity. A free hand afforded for the suitable adjustment of such apparently independent services may contribute far more to the general welfare than an insistence upon a petty and near-sighted policy of extorting from each individual service all the rate it can possibly endure. American railway managers are gradually but surely coming to take a more liberal view of these great possibilities and to consider the economic development of their territories, not narrowly, but in a generous way.