CHAPTER VI
PERSONAL DISCRIMINATION
Rebates and monopoly, with attendant danger to carriers, [185].— Personal discrimination defined, [188].—Distinction between rebating and general rate cutting, [188].—Early forms of rebates, [189].—Underbilling, underclassification, etc., [190].—Private car lines, [192].—More recent forms of rebating described, [195].—Terminal and tap-lines, [196].—Midnight tariffs, [197].—Outside transactions, special credit, etc., [198].—Distribution of coal cars, [199].—Standard Oil Company practices, [200].—Discriminatory open adjustments from competing centres, [202].—Frequency of rebating since 1900, 204-6.—The Elkins Law of 1903, [205].—Discrimination since 1906, [207].—The grain elevation cases, [211].—Industrial railroads once more, [212].
The philosophy of rebating has perhaps never been better described than in the following quotation from the Cullom Committee investigation of 1886:
"Mr. Wicker. I am speaking now of when I was a railroad man. Here is quite a grain point in Iowa, where there are five or six elevators. As a railroad man, I would try and hold all those dealers on a 'level keel,' and give them all the same tariff rate. But suppose there was a road five or six or eight miles across the country, and those dealers should begin to drop in on me every day or two and tell me that that road across the country was reaching within a mile or two of our station and drawing to itself all the grain. You might say that it would be the just and right thing to do to give all the five or six dealers at this station a special rate to meet that competition through the country. But, as a railroad man, I can accomplish the purpose better by picking out one good, smart, live man, and, giving him a concession of three or four cents a hundred, let him go there and scoop the business. I would get the tonnage, and that is what I want. But if I give it to the five it is known in a very short time. I can illustrate that better by a story told by Mr. Vanderbilt when he and his broker had a deal in stocks. The broker came in and said, 'Mr. Vanderbilt, I would like to take in my friend John Smith.' Mr. Vanderbilt said, 'Let us see how this will work. Here are you and myself in this deal now. We take in John Smith; that makes a hundred and eleven. I guess I won't do it.' When you take in these people at the station on a private rebate you might as well make it public and lose what you intend to accomplish. You can take hold of one man and build him up at the expense of the others, and the railroad will get the tonnage."
"Senator Harris. The effect is to build that one man up and destroy the others?"
"Mr. Wicker. Yes, sir; but it accomplishes the purposes of the road better than to build up the six."
The force of this description of the underlying motive for personal discrimination, so far as the carrier is concerned; namely to build up one man at the expense of his competitors and to attach him in interest indissolubly to the company, is well exemplified in a case which occurred in 1908 at Galveston, Texas.[162] Practically all railway traffic entering Galveston was destined for export. Wharfage facilities were limited to two concerns, one of them being the Southern Pacific Terminal Co. A uniform charge of one cent per hundredweight for cotton seed meal and cake passing over the wharves of both companies had been the rule for a long time. Yet it appeared on complaint that one merchant had been granted wharfage space under discriminatingly favorable conditions. Exemption from demurrage charges, free storage room and other favors and a fixed rental of $15,000 per year irrespective of the amount of his shipments, had enabled him, having been in business only since 1898, to build up a very large traffic. The export of cotton seed cake instead of meal had greatly increased since 1904. The business of all other competitors since this contract was made had shrunk to insignificant proportions by comparison with that done by this favored merchant. The margin of profit in the business was so small that the difference between the charges and privileges enjoyed by this individual and his competitors, was forcing them all out of business. It was estimated by the Interstate Commerce Commission that if the customary wharfage charges had been paid, the rental would have been nearly $30,000 for the year 1907, irrespective of other favors. The cotton planters complained also that this monopoly limited their market and depressed business. It is clear that the larger the business, that is to say the more nearly it became a monopoly, the smaller became the wharfage charges per hundredweight under this system of a fixed rental; and, in consequence, the greater was the disability of the other shippers. The advantage to the railroad appeared in a contract entered into, which provided that all traffic for this individual should be routed over the Southern Pacific or its connecting lines. As he had practically gathered in all the cotton seed export business of Texas and the adjoining states within two years, it is evident that this consideration was of great value to the railroad. The economic motive in this case and in the one previously cited was the same. It will be found in fact to underlie almost all cases of personal favoritism and discrimination.
The supreme disadvantage in building up a great monopoly in order to win traffic for a railroad is, of course, that the moment the shipper becomes sufficiently powerful, he can play off one road against another, thus becoming practically master of the situation. Sindbad is soon overwhelmed by the old man of the sea. And the weaker the road financially, the more powerful is the appeal, to which at last even the strongest lines must succumb. The history of the Standard Oil Company during the eighties clearly exemplifies this. The rapid rise of the cattle "eveners" yet earlier, until, as the private refrigerator car companies they controlled the situation, was primarily traceable to the same causes. The late J. W. Midgly[163] gives a forcible illustration in the attempt in 1894 of ninety-five railroads to reduce the mileage allowance paid for use of oil tank cars owned by private companies from three-fourths to one-half cent per mile, loaded and empty. The Union Tank Line promptly replied that it would in that event at once concentrate all its vast tonnage to points north and west of Chicago, upon the single line—presumably the weakest one—which would continue the old rate. This argument was irresistible; and in the old days of unregulated competition was in the nature of things bound to be so.
Careful distinction must be made at this point, between personal discrimination and general rate cutting. Rebating,—that is to say, departure from published tariffs,—occurs in both cases. The difference between the two is that in the one case it is special, particular and secret; while in the other it is so general, if not indeed universal, as to be matter of common knowledge. Rebating, in other words, is a common feature of rate wars. But, on the other hand, general harmony in the rate situation by no means implies the absence of personal favoritism. During a wide-open rate war, indeed, the most iniquitous aspect of rebating,—inequality of treatment as between rival shippers,—may be quite absent. All may be getting the same rate, namely a cut rate; although the chances are of course that the bigger the shipper, the more substantial the concessions offered. It is important to keep this distinction clear, especially since the railways have awakened to the losses to themselves attendant upon rate wars.