"By another investigation, made in 1890, it appeared that private stock cars to the number of 250 had been used upon a line made up of two connecting roads between Chicago and New York, beginning with 150 cars on September 1, 1880, increased 30 more a month later, 20 more another month later, and reaching the total of 250 in June, 1890; that the cars altogether had cost $156,500, and had earned for mileage in two years, from September 1, 1888, to September 1, 1890, $205,582.68; that the entire expense to be deducted during that period for car repairs and salaries for their management was $34,050.48, leaving net revenue to the amount of $171,532.20, being an excess of $15,032 above the whole cost of the cars. The cars were, therefore, paid for and a margin besides in two years, and, thereafter, under the same management and with a corresponding use of the cars, an income of upward of $100,000 a year was assured on an investment fully repaid, or, in effect, on no investment whatever."
By 1903 the railroads were paying over $12,000,000 annually for the use of such equipment.
With the growth of their power, the extortionate demands of these private car lines, both upon the railroads and the shipper, steadily enlarged. From the roads they often compelled fictitious mileage allowances; and from the shipper the most outrageous charges were made for icing and other services en route. The reports of the Interstate Commerce Commission for 1903-1904 and of the Senate (Elkins) Committee of 1905 deal fully with these abuses. Moreover the Armour company gradually forced other competitors out of business, and with the growth of monopoly, its exactions became even more extreme. The following instance is typical.
"In 1898 the Armour Car Lines Company was furnishing cars for the movement of Michigan fruits from points on the Pere Marquette Railroad to Boston in competition with other private car companies, and its charge for refrigeration to Boston was $20 per car. Its present charge to Boston is $55 per car. Before the present exclusive contract was entered into between the Armour Car Lines and the Pere Marquette Railroad Company the actual quantity of ice required was charged for at $2.50 per ton. Under this system the cost of refrigerating cars from Pawpaw, Mich., to Dubuque, Iowa, averaged about $10 per car, while the present schedule of the Armour Car Lines is $37.50. The cost of icing from Mattawan, Mich., to Duluth was $7.50, as shown by an actual transaction in the year 1902, while the present refrigeration charge between those points is $45. The cost of icing pineapples from Mobile to Cincinnati under an exclusive contract with the Armour Car Lines is $45, while the cost of performing the same service from New Orleans to Cincinnati over the Illinois Central is $12.50 per car."
Fortunately the progressive enlargement of Federal powers of supervision has tended to check these exactions. But the system of special allowances for the use of privately owned equipment, is one which needs the most careful watching by the authorities.
With the passage of time, and especially since 1896, new and even more elaborate schemes for rebating have come to light. One of the most ingenious, which was discovered about 1904 to be very widespread, was the use of terminal or spur track railway companies.[173] In Hutchinson, Kansas, for example, were salt works having a capacity of some 6000 barrels a day. Two railways were available for shipments. A new company was incorporated, all its stock being held by the salt works owners, which constructed sidings to both railroad lines. The spur track was less than a mile long and cost only about $8000 to build. But the company was chartered as the Hutchinson and Arkansas River Railroad. Its officers were the owners of the salt mills. It owned neither engines nor cars. Yet it entered into a traffic agreement with the Atchison road for a division of the through rate to many important points, its share being about twenty-five per cent. So substantial a pro-rate was this, that in a few months the H. and A. R. R. received back some fifteen thousand dollars as its share of the through freight rates. And every dividend declared by it was, of course in effect a rebate enjoyed exclusively by this particular mill, as against less favored competitors.
Obviously, rebates assuming the above-described form are open only to very large shippers, to whom it is worth while to incur the considerable expense. But many concerns have already such trackage in or about their works. Nothing is needed except to incorporate them separately, and then to enter into suitable traffic agreements with standard roads. Many of the so-called trusts were implicated in such transactions, about 1904-1905. The International Harvester Company at Chicago had for years performed much of its own terminal service; and until 1904 was allowed as high as $3.50 per car for switching charges by connecting railroads. It then incorporated the Illinois Northern Railroad, which was promptly conceded twenty per cent, of all through rates, with the Missouri river rate as a maximum. On this traffic it would be allowed as high as $12 per car, instead of $3.50 as before. The Illinois Steel Company afforded in 1905 an even more flagrant example. Apparently it had enjoyed extra-liberal proportions of through rates since 1897, by means of its separately incorporated and, in fact, really important terminal road. But an allowance of $700 to $1000 for hauling a trainload of coke some seven miles, yielded a profit on the business of perhaps ninety per cent. It was an advantage which no competitor could hope to equal. No doubt the practice of switching allowances was properly used at the start. But the large crop of cases discovered in 1904-1905 proved that they had come to be very widely used as a cover for rebating. It is not always easy, however, to decide when such an allowance ought to be made to a privately owned terminal company. The Anheuser-Busch case, decided in June, 1911, with a dissenting opinion by Commissioner Harlan, shows how intricately involved such issues may become.[174]
The so-called "midnight tariff" was a strictly legal way of conferring favors upon certain shippers. It was much in evidence during the grain wars between lines serving the Gulf ports about 1903. And it seems to have been a device used at times all over the country. A traffic manager wishing to steal all the business of a large shipper from some competing road, and to build him up at the expense of his rivals, secretly agrees to put into effect a low rate on a given date. The shipper then enters into contracts calling for perhaps several hundred carloads of grain to be delivered at that time. This reduction is publicly filed, perhaps thirty days in advance, with the Interstate Commerce Commission at Washington. But who is to discover it, in the great medley of new tariffs placed on file every day? Yet this is not all. A second tariff, restoring the full rate, is also filed to take effect very shortly,—perhaps only a day,—after the reduction occurs. All these are public, and open to all shippers alike. But only the one who was forewarned is able to take advantage of them. He rushes all his shipments forward while the reduced rates are in effect. Before other competitors can assemble their grain or other goods, the brief reduction has come to an end; and rates are restored to their former figure.
The President of the Chicago Great Western Railway has concisely described the commercial effect of one of these midnight tariffs.
"A clean profit, he says, over all expenses of one half of a cent per bushel is a satisfactory profit to the middleman; and a guaranteed rate of transportation of even so small a sum as one-quarter of a cent per bushel less than any other middleman can get, will give the man possessing it a monopoly of the business of handling the corn in the district covered by the guaranty. Why? Such are the facilities of trade by means of bills of lading, drafts, telegraphs, banks, etc., that to do an enormous corn trade, the middleman requires only a comparatively small capital to use as a margin. A capital of $50,000 is ample thus to handle 15,000,000 bushels, and with activity, double that amount, per annum. One quarter of a cent per bushel profit on 15,000,000 bushels would amount to $37,500 which is equal to .75 per cent. per annum on the capital employed."