Railroads: Rates and Regulations

by William Zebina Ripley

Praiseworthy as is the elasticity of railway rates in the United States, there is, nevertheless, much to be said in support of the contention that at times this has been carried to an extreme. Stability and certainty have been treated as of secondary importance. Particular shippers have been aided, but the general interests of trade have suffered some injurious consequences. It is not entirely clear whether the advantage gained from elasticity has at all times been worth the cost. Certain of the disadvantages of instability of rates seem to have been overlooked.

In the first place railway tariffs have in the past undoubtedly been too voluminous and complex. The number of these filed with the Interstate Commerce Commission is extremely large. Eleven railways alone during the year to November 30, 1904, filed 30,125. The total schedules of all American railways filed during the year to November 30, 1907, was 220,982. One single carrier had 15,700 tariffs in force at the same time. The New York Central & Hudson River in December, 1899, had no less than 1,370 special commodity rates in force. There were endless contradictions and conflicts. Secret rates were hidden in devious ways in this mass of publications. Special tariffs "expiring with this shipment"; rates quoted not numerically but by numbered reference to tariffs of other carriers and applicable by different routes; agreements to meet rates of any competing carriers, were among the irregular methods of concealment adopted. Although literally complying with the law by publicly filing all tariffs, conditions were often such that not even an expert in rates could discover in this maze of conflicting evidence what the rate at any time actually was. The door was opened wide to personal discrimination and abuses of all kinds.[130] Those conditions are not necessary. They do not obtain on the best roads in other parts of the world. Nor is such instability found in respect of some important lines of trade. No agricultural product fluctuates in price more abruptly or widely than raw cotton,—from five to seventeen cents a pound. Yet the rates on that commodity have remained quite undisturbed throughout the southern states for many years. But the best proof of all that rates have been unduly numerous, is the great reduction in volume which has taken place since 1910 under compulsion of law. This feature will be especially considered in another connection.[131]

The second disadvantage of too great elasticity in freight rates is that it may, at times, promote rather than lessen that state of economic unrest inevitable in all business, especially in a new country. Under a continual disturbance of rates, the merchant is unable with security to enter into long-time contracts. Rates are sometimes changed, not to suit the shipper but to serve the railway's interests. Sometimes traffic may be diverted from its natural channels. The spirit of initiative and self-reliance on the part of shippers may be undermined. Persistent titillation of competition may be pleasant for a time, but its final results may be injurious. Constant appeal to the traffic manager of his road for aid and comfort may quite naturally divert the shipper's attention from an aggressive commercial policy which would render him independent of minor changes in freight rates. The more responsibility the traffic manager assumes, the more may be put upon him. And it must always be remembered that each move by one road to protect a client, will probably be checkmated by the tactics of rival lines. Economic peace, not warfare, should be encouraged by the services of common carriers. One of the positive advantages of governmental regulation of railway rates is that it contributes to stability. That this view is shared by experienced railway men, appears from the following testimony of President Mellen of the New Haven road.[132] "I think that great trouble comes to the business of this country through the fact of these little breaks in rates. During November two new railways were opened into the city of Denver. They sought to make themselves popular by lowering rates, and rates went down very low. They went down legally, but they went down very low. Just before the rates went down the merchants of the city had stocked Denver with goods and the lowering of the rates demoralized their prices; they lost a large amount of money, and dissatisfaction was caused from Chicago to Denver. Lowering of rates demoralized business generally. I think if those roads had known that the rates which they made had to remain in force thirty days they would have hesitated before they lowered them. I would increase the time required before rates could be reduced."

The foregoing consideration suggests still another argument in favor of stability of freight rates, even at the expense of a certain amount of flexibility. Special rates which create new business should be carefully distinguished from special rates which merely wrest business from other carriers or markets. Any expedient which will make two blades of grass grow where one grew before; which puts American wheat into Liverpool in competition with India and Argentina; which cheapens California fruit on the eastern markets; which offers a wider choice of building stone for Chicago; which will establish new industries for the utilization of local raw materials, deserves the greatest encouragement. Our country has been unprecedentedly developed in consequence of the energy and progressiveness of its railway managers. But thousands of other special rates have no such justification, even where they are public and open to all shippers alike. These are the expression of railway ambition to build up trade by invading territory naturally tributary to other railways or traders. A significant feature of commercial competition is the utilization of distant markets as available "dumping grounds" for the surplus products left over from the local or natural market. In the St. Louis Business Men's League case[133] the Pacific coast jobbers complained that the large distributing houses in the Middle West thus invaded their territory. Having met their fixed charges from their own natural territory, they invaded the remotest districts by cutting prices to the level of actual production cost per unit of new business. The Florida orange growers protest against the relatively lower rate on California fruit, which is carried twice the distance for less money per box. This, it is urged, enables the western grower, having glutted his natural market in the Middle West, to "dump" his surplus into the eastern field, to which alone the Florida orange is restricted. This line of argument is the same as that which upholds the systems under which lower rates are given for exported or imported commodities than those on goods for domestic consumption. It is always alleged that such sales at long reach actually benefit the consumer or producer near at hand, inasmuch as they contribute something toward the fixed expenses of the business, which must be borne in any event. This raises at once the much broader question as to what constitutes a "natural market" or the "natural territory" which rightfully belongs to any given economic agent. It is, however, too extended an issue to be discussed at this time.[134]

Too many special commodity rates, intended to meet the needs of particular shippers instead of increasing new business, may merely bring about economic waste through exchange between widely separated markets or by causing an invasion of fields naturally tributary to other centres.[135] Whenever a community producing a surplus of a given commodity supplies itself, nevertheless, with that same commodity from a distant market, economic loss results. Numerous instances could be cited where identical products are redistributed after a long carriage to and from a distant point in the very area of original production. Dried fruits may be distributed by wholesale grocers at Chicago in the great fruit-raising regions of the West and South. Cotton goods made by southern mills may be shipped to New York or Chicago, and then sent back again for final distribution with the addition of a middleman's commission and a double freight rate. The Colorado Fuel & Iron Company seeks special rates in order to sell goods over in Pittsburg territory; while its great competitor, the United States Steel Corporation, has an equal ambition for the trade of the Pacific Slope. In another case it appeared that a sash and blind manufacturer in Detroit was seeking to extend his market in New England. Manufacturers of the same goods in Vermont were simultaneously marketing their product in Michigan. The Detroit producer did not complain of this invasion of his home territory, but objected to the freight rate from Boston to Detroit, which, probably because of back loading, was only about one-half the rate on his own goods from Detroit to the seaboard. Is not this an economic anomaly? Two producers, presumably of equal efficiency, are each invading the territory naturally tributary to the other and are enabled to do so by reason of the railway policy of "keeping everyone in business." The New England railways are compelled by reason of the remoteness to their territory to defend this policy. As President Tuttle, of the Boston & Maine, expresses it, "I should be just as much interested in the stimulating of Chicago manufacturers in sending their products into New England to sell as I would be in sending those from New England into Chicago to sell. It is the business of the railways centering in Chicago to send the products from Chicago in every direction. It is our particular business in New England to send New England products all over the country. The more they scatter the better it is for the railways. The railway does not discriminate against shipments because they are east bound or west bound. We are glad to see the same things come from Chicago into New England that are manufactured and sent from New England into Chicago." No one questions for a moment that the widening of the sphere of competition by transportation agencies is a service of incalculable benefit to the country. But it should also be borne in mind that superfluous transportation is economic waste. The industrial combinations in seeking to effect a strategic location of their factories in order to divide the field have apparently come to a full recognition of this fact.

A fourth objection to undue development of special commodity rates is that they may entail increased burdens upon the local constituency of each railway. The proportion of such special rates is fifty per cent greater in America than in the United Kingdom. It is plain that each shipment which fails to bear its due proportion of fixed charges, even though contributing something thereto, leaves the weight of interest and maintenance charges upon the shoulders of the local shipper. To be sure, those special rates which permanently create new business, operate otherwise. But in the vast complex, each railway often wrests from competing carriers only about as much tonnage as it loses. It invades rival territory, but its own constituency is invaded in retaliation. Thus there is rolled up an inordinately large proportion of such special traffic, leaving the regular shipments and the local trade to bear the brunt of fixed charges. Momentous social consequences may result. Not only the cost of doing business, but the expense of living in the smaller places is increased. One of the most dangerous social tendencies at the present time is the enormous concentration of population and wealth in great cities. Increased efficiency and economy in production are much to be desired; but social and political stability must not be sacrificed thereto. Is it not possible that a powerful decentralizing influence may be exerted by checking this indiscriminate and often wasteful long-distance competition, through greater insistence upon the rights of geographical location?

Finally, an abnormal disregard of distance, which is always possible in the making of special rates to meet particular cases, may bring about a certain inelasticity of industrial conditions. This may occur in either one of two ways. The rise of new industries may be hindered; or the well-merited relative decline of old ones under a process of natural selection may be postponed or averted. The difficult problem of fairly adjusting rates on raw materials to finished products in order that the growth of new industries may take place, while at the same time the old established ones shall not be cramped or restricted, has already been discussed. It is equally plain that at times there may be danger of perpetuating an industry in a district, regardless of the physical disabilities under which it is conducted. One cannot for a moment doubt the advantages of a protective policy on the part of railways; safe-guarding industry against violent dislocating shocks. An inevitable transition to new and perhaps better conditions may perhaps be rendered easier to bear. To New England, constantly exposed to the competition of new industries rising in the West, this policy has been of inestimable value. On the other hand, it is incontestable that in the long run the whole country will fare best when each industry is prosecuted in the most favored location, conditions of marketing as well as of mere production being always considered. If Pittsburg is the natural centre for iron and steel production, it may not be an unmixed advantage to the country at large, however great its value to New England, to have the carriers perpetuate the barbed wire manufacturers at Worcester. If California can raise a finer or more marketable variety of orange, and at a lower cost, than Florida, it would be a backward step to counteract the natural advantage of the western field by compelling the southern railways to reduce their rates to an amount equal to the disability under which the Florida grower works. The principle laid down by the so-called "Bogue differentials" in the lumber trade[136] bears upon this point. In order to equalize conditions between a large number of lumbering centres sending their products to a common market, certain differentials between them were allowed under arbitration, "to enable each line to place its fair proportion of lumber in the territory." Did this mean that the disability of any place in manufacturing cost, should be compensated by a corresponding reduction in the ensuing transportation cost? This was the view of some of the carriers who were zealous to keep the market open to all on equal terms. Yet it is evident that, carried beyond a certain point, such a policy would not only nullify all advantages of geographical location, but it would also reverse the process of natural selection and of survival of the fittest, upon which all industrial progress must ultimately depend. Each particular case, however, must be decided on its merits. Our purpose is not to pass judgment on any one, but merely to call attention to the possible effect of such practices upon the process of industrial development.

Centralization, or concentration of population, industry and wealth is characteristic of all progressive peoples at the present time. Great economic advantages, through division of labor and cheapened production, have resulted; but, on the other hand, manifold evils have followed in its train. Sometimes it appears as if American railway practices, in granting commodity and flat long-distance rates so freely, operated in some ways to retard this tendency. But the influence is not all in that direction. Many staple industries, utilizing the raw material at their doors, might supply the needs of their several local constituencies, were it not that their rise is prevented by long-distance rates from remote but larger centres of production. Denver, in striving to establish paper mills to utilize its own Colorado wood pulp, is threatened by the low rates from Wisconsin centres. Each locality, ambitious to become self-supporting, is hindered by the persistency of competition from far away cities. This is particularly true of distributive business. The overweening ambition of the great cities to monopolize the jobbing trade, regardless of distance, has already been discussed. And it follows, of course, that the larger the city the more forcibly may it press its demands upon the carriers for low rates to the most remote hamlets. The files of the Interstate Commerce Commission are stocked with examples of this kind. The plea of the smaller cities and the agricultural states—Iowa, for example—for a right to share in the jobbing naturally tributary to them by reason of their location, formed no inconsiderable element in the recent popular demand for legislation by the Federal government.

The marked difference between competition in transportation and trade has long been recognized in economic writing, but has not as yet been accorded due weight in law. The most essential difference arises from the fact, already fully set forth, that a large proportion of railway expenditures are entirely independent of the amount of business done. This involves as a consequence, the exemption of carriers from the fundamental law of evolution. Survival of the fittest does not obtain as a rule in railway competition. The poorest equipped, the most circuitous and most nearly insolvent road is often able to dictate terms to the standard and most direct trunk lines. This has been exemplified time and again in the history of rate wars the world over.[137] The bankrupt road having repudiated its fixed charges has nothing to lose by carrying business at any figure which will pay the mere cost of haulage. The indirect line having no business at the outset has nothing to lose, and everything to gain. The Canadian Pacific, for example, was perhaps originally built without any expectation of being able to participate in San Francisco business; and yet, like the Grand Trunk, it has always been an active factor in the determination of transcontinental tariffs.

The fact is that cost of production, while in trade fixing a point below which people may refuse to produce or compete, in transportation may merely mark the point at which it becomes more wasteful to stop producing than to go on producing at a loss. Hadley's classic statement is so admirable that it cannot be improved upon. "Let us take an instance from railway business, here made artificially simple for the sake of clearness, but in its complicated forms occurring every day. A railway connects two places not far apart, and carries from one to the other (say) 100,000 tons of freight a month at twenty-five cents a ton. Of the $25,000 thus earned, $10,000 is paid out for the actual expenses of running the trains and loading or unloading the cars; $5000 for repairs and general expenses; the remaining $10,000 pays the interest on the cost of construction. Only the first of these items varies in proportion to the amount of business done; the interest is a fixed charge, and the repairs have to be made with almost equal rapidity, whether the material wears out, rusts out, or washes out. Now suppose a parallel road is built, and in order to secure some of this business offers to take it at twenty cents a ton. The old road must meet the reduction in order not to lose its business, even though the new figure does not leave it a fair profit on its investment; better a moderate profit than none at all. The new road reduces to fifteen cents; so does the old road. A fifteen cent rate will not pay interest unless there are new business conditions developed by it; but it will pay for repairs, which otherwise would be a dead loss. The new road makes a still further reduction to eleven cents. This will do little toward paying repairs, but that little is better than nothing. If you take at eleven cents freight that cost you twenty-five cents to handle, you lose fourteen cents on every ton you carry. If you refuse to take it at that rate, you lose fifteen cents on every ton you do not carry. For your charges for interest and repairs run on, while the other road gets the business."[138]