Railroads: Rates and Regulations

by William Zebina Ripley

Effect of changing conditions, [147].—Lumber and paper rates, [148].— Equalizing industrial conditions, [148].—Protecting shippers, [149].— Pacific Coast lumber rates, [150].—Elasticity and quick adaptation, [152].—Rigidity and delicacy of adjustment, [153].—Transcontinental rate system, [154].—Excessive elasticity of rates, [155].—More stability desirable, [159].—Natural v. artificial territory and rates, [159].— Economic waste, [159].—Inelastic conditions, [161].—Effect upon concentration of population, [162].—Competition in transportation and trade contrasted, [163].—No abandonment of field, [165].

Cost v. value of service, [166].—Relative merits of each, [167].— Charging what the traffic will bear, [169].—Unduly high and low rates, [171].—Dynamic force in value of service, [177].—Cost of service in classification, [179].—Wisconsin paper case, [181].—Cost and value of service equally important, checking one another, [184].

Not only must rates of all sorts be delicately adjusted to suit the immediate exigencies of trade; they must be constantly modified in order to keep pace with its ever changing conditions. This is peculiarly true of a rapidly growing country like the United States. An admirable instance is afforded by the complaint of the Lincoln Commercial Club before the Interstate Commerce Commission.[119] Lincoln, Nebraska, lies about fifty-five miles southwest of Omaha. Originally all its supplies came from the East, as both cities were for a time outposts of civilization. The coal supply came from Iowa and Illinois, and the salt from Michigan. On these and most other commodities the rates to Lincoln were made up of a through rate from the East to the Missouri river, plus the local rate on to destination. The city of Lincoln thus paid considerably more than Omaha for all of its supplies. Gradually conditions have changed; until in 1907 it appeared that over half the soft coal consumed in Lincoln was brought from Kansas and Missouri; four-fifths of the lumber from the South and nearly all the rest from the Pacific coast; glass and salt from the gas belt and salt beds of Kansas; and a great deal of beet sugar from the western fields. For a large proportion of these and other supplies, Lincoln was actually as near or nearer the point of production than Omaha, and yet the difficulties of effecting an adjustment between rival carriers had prevented any modification of rates corresponding to these changes in economic conditions. On every one of these commodities the rate to Lincoln remained steadily higher than to Omaha, regardless of the source of supply. Unanimous consent was necessary for readjustment. So long as any single road refused assent, a general rate disturbance might be precipitated by any independent action. The beneficent effect of the exercise of governmental authority, powerful enough over all interested parties to compel acquiescence, has been clearly apparent in affording relief.

A similar instance in the state of Wisconsin is afforded by the compulsory readjustment of the freight rate on wood pulp, lumber and sawed logs.[120] On investigation it appeared that, despite a very much lower commercial value for the raw material used in paper manufacture, the rates on pulp wood were more than double those on logs to be sawed up for lumber. It appeared, furthermore, that this apparent anomaly was due not so much to high rates on the pulp wood as to very low rates on sawed logs. These latter rates for many years had been fixed at a very low figure because originally the bulk of such logs, cut in the river bottoms, was floated down stream to mills along the Mississippi river. Competition with lumber raft rates originally determined the charges on lumber by rail. The paper industry did not begin until these conditions of water competition had quite disappeared. Gradually, with the progress of deforestation, all the timber is now found on the uplands far from navigable water courses; so that the rates today are not at all influenced by competitive rates on the lumber rafts down river. Nevertheless the old tariffs on lumber remained in force despite the changed conditions, while the new rates on pulp wood were fixed independently of any rates by water. It was only after careful investigation that the injustice to the paper manufacturers from the disparity in charges appeared. Here again it was the rigidity and interlocked complexity of adjustment which placed it in the power of one road to block change of any sort.[121] The compulsory exercise of governmental authority cut the Gordian knot with the result that substantial justice now obtains.[122]

From the preceding statements it will be observed that carriers have another important commercial function beside that of equalizing industrial conditions.[123] They also act in a protective or insurance capacity to the merchant or manufacturer. The policy of "keeping everyone in business" implies not only variety but variability of conditions. Capital is proverbially timid. It will not venture into a new and uncertain enterprise unless either profits are immediate and high or, if moderate, likely to endure. In any event some guarantee of permanence is required. This guarantee the carrier is often able to offer. It may assume the obligation of protecting its clients; that is, of saving them harmless against the intrusion or irruption of hurtful competition. It thus exercises in a certain sense the function of an insurance company, but with this important difference: that while it has the strongest interest in protecting its established industries against ruinous competition from abroad, it may desire to share in some degree in their development and prosperity by way of reward. In this latter sense the relation of the carrier to its clients partakes of a profit-sharing arrangement. One of the broadest issues between American railways and the public at the present time is precisely this: whether the carriers are to share in business profits; or merely, in addition to furnishing transportation, are to collect a fixed fee for a service in the nature of industrial insurance. That it lies in their way to furnish such protection under modern economic practice is an indisputable fact.

This nice question is almost daily pressing for solution at the hands of the Interstate Commerce Commission. It arises every time an increase of freight rates occurs. Take, for example, the Pacific coast lumber cases of 1908. The dissenting opinions of the Commission show how debatable the proposition is.[124] Up to about 1893 the lumber interests of the Pacific coast were quite undeveloped and entirely dependent upon water transportation for reaching markets. At this time low rates of forty to sixty cents per hundred pounds on forest products to markets in the Middle West were introduced, partly to build up the industry and partly to create a back loading for the preponderantly westbound tonnage of all transcontinental lines. Under these rates the business has enormously developed until, on the Northern Pacific road in 1906, the shipments of lumber east bound amounted to one-third of its entire traffic both ways, and yielded nearly one-fifth of its freight revenue. So greatly had this traffic expanded that it aided, if not actually produced, a reversal of the direction of transcontinental empties. Practically all these roads now have an excess of tonnage to the east whereas ten years ago much the larger volume of freight was moving westward. Meantime the lumbermen under the stimulus of these lower rates, and of the phenomenal rise in the price of lumber, had been wonderfully prosperous. The price of logs had risen since 1893 from about $2.50 per 1,000 feet to $13.50 in 1906; partly in consequence of the extraordinary demand consequent on the Valparaiso and San Francisco earthquakes. The mills had moved in from the rivers and the coast, and had become absolutely dependent upon rail transportation for reaching markets. At this stage, and most unfortunately in November, 1907, just at a time of industrial panic, the carriers raised their rates by about ten cents per one hundred pounds. The market price of logs had already dropped from $13.50 per thousand by approximately one-third. These two causes, commercial depression and the increased freight rate, brought about a complete collapse in the industry. And the increased freight rates were contested before the Interstate Commerce Commission in the hope that, as in the southern field the rate increases from Georgia points had been annulled,[125] these might also be found unreasonable. The broad question concerns the obligation of carriers, once having brought about an investment of capital in the industry, to continue to give the same rates as those under which the ventures had been undertaken, due regard being had, of course, to such changes in costs of service as might have ensued. The lumbermen demand that all the increment of profit due to prosperous developments shall remain unto them; in other words, that the carriers' share of the increased values shall remain fixed. On the other hand, the railways defend their increases, partly upon the ground of increasing expenses of operation, and partly upon the broader ground that the freight rate being proportioned to the price of the product, should rise in harmony with it. Upon this question the Commission was divided, the majority holding in favor of annulling the increase, while the chairman and one other member decided that the increase was justifiable.[126]

Elasticity and quick adaptation to the exigencies of business are peculiarities of American railway operation. Our railway managers have always been most progressive in seeking, in and out of season, to develop new territory and build up traffic. The strongest contrast between Europe and the United States lies in this fact. European railways more often take business as they find it. Our railways make it. Much of this business is made possible only by special rates adapted to the case in hand. These need not be secret or discriminating, as has already been observed. For although offered with reference to particular cases, they may be open to all comers. The economic justification lies in the fact that the railway can afford to make a low rate, leaving a bare margin of profit above the extra cost of adding this traffic to that which is already in motion. Such rates cannot exceed a definite figure based upon what the traffic will bear. A higher rate than this would kill the business. Something is contributed toward fixed charges by the new traffic, so far as the railway is concerned; and at the same time the shipper on his part is enabled to enlarge his operations. Yet such a scale of rates if applied to the whole traffic of the railway might be ruinous in the extreme. The domestic shipper of wheat may conceivably be helped, rather than injured, by a special rate on grain for Liverpool without which the railway would lose the business entirely. To transport California fruit for a mere fraction of the rate per ton mile which is laid upon other traffic may actually enable those other goods to be carried more cheaply than before. Of course, if the other traffic be directly competitive, as for instance in this case, oranges from Florida, that is an entirely different matter. Railway representatives rightfully insist upon these special rates to develop new business as a boon to the commercial world. They contrast them with the hard and fast schedules of European railways. They allege that such elasticity loosens the joints of competition, "keeps everyone in business," equalizes prices over large areas, and is in fact the life of trade. One of the stock objections to railway regulation is that it may lessen this elasticity, "substitute mile posts for brains," and produce stagnation in place of activity.

Paradoxical as it may seem, a certain rigidity of rate schedules is a natural consequence of the very delicacy with which individual rates are adjusted to meet the demands of trade. Each road is jealously and aggressively alert to protect its own constituency regardless of the rights of others. No single traffic manager is free to grant reductions of rates, even when considered to be just, by reason of the opposition of competing lines. The consent of every one of these interests is necessary in order to insure stability, and the penalty for acting independently may be a rate war, disastrously affecting relations with connecting lines. Thus, for example, in the South the Southern Railway for some time was willing to concede, as a measure of justice, a reduction of rates on cotton from Mississippi river points to the mills in North and South Carolina.[127] The growth of the textile industry had resulted in a demand for cotton far exceeding the production of the Carolinas. At the same time the increasing attention devoted to manufacturing of a higher grade had forced the manufacturers to draw upon the long-staple supplies of the Mississippi bottom lands. The Piedmont cotton was too short in fibre for the finer sort of goods. The Carolina mills were, however, compelled to pay a higher rate upon cotton from such points as Memphis than was paid for the long haul up to New England. Thus, for instance, as late as 1900, rates were fifty-nine cents to South Carolina, while they were only fifty-five and one-half cents per hundred pounds from the same points to New England mills. This was obviously unjust. But the Southern Railway alone, interested in the welfare of its Carolina clients, was powerless to act without the consent of its competitors operating from Memphis west of the Alleghanies. These latter lines, having no interest in the southern mills and a unity of interest in the long haul traversed to New England, sought to prevent an equalization of the differences. Controlling rates also on cotton for export to various seaports, they were for a long time able to prevent a change. On the other hand, in the same territory the railways operating south from Cincinnati and Louisville desired to reduce rates on manufactured products from the Central West.[128] These were the very lines which in the former instance prevented the reduction of cotton rates on the Southern Railway to Carolina points, by threats to meet such reductions by cutting their own rates on cotton going north through the Ohio gateways. Yet a reduction of their rates on manufactures for building up western trade threatened the business of the Southern Railway, which had been mainly interested in the traffic from Atlanta seaboard points. It may readily be seen that this situation, extending to practically every important point, "jacked up" all these rates, not because of their inherent reasonableness and not even because the railways independently acknowledged them to be just, but simply and solely because any disturbance of this house of cards might lead to a general downfall of the whole system.

Another interesting example of the difficulty of bringing about a change in rate adjustment is afforded in the transcontinental field. For some years a general agreement seems to have been adopted as a sort of a compromise between the various conflicting interests. Under present conditions Chicago and all points east of the Mississippi from Maine to Florida enjoy precisely the same rate to the Pacific coast.[129] Chicago has at various times contended before the Interstate Commerce Commission for graded rates which should recognize, for instance, that being 1,200 miles nearer San Francisco than Boston on the basis of distance, it should have proportionately lower freight rates. Apparently some of the transcontinental roads, such as the Great Northern, have been willing to make this concession. They could not, however, take any action without first obtaining the consent of every railway and steamship company with which they compete. Inasmuch as almost every railway in the country participates in transcontinental business, an agreement was practically impossible. Entirely aside from the merits of this particular intricate question, it must be borne in mind that there is no such thing as independence of action on behalf of any single carrier. It becomes exceedingly easy for one road to play a dog-in-the-manger part. The shipper may be subjected to an extortionate policy, not dictated by the road over which he ships, as a matter of fact, but by roads operating perhaps a thousand or more miles away.