Railroads: Rates and Regulations

by William Zebina Ripley

Before dismissing these recent and widely "muck-raked" oil cases, it may not be out of place to mention the new interpretation of the Elkins law which has resulted therefrom. One concerns the definition of separate offences. In the notorious $29,000,000 fine case, the Federal Circuit judge applied the maximum penalty of $20,000 for each offence to each separate carload in a large aggregate of shipments. On review of the case, each separate settlement of freight rates was defined as the unit of an offence. As entire train loads had been forwarded or paid for at one time, this materially reduced the aggregate of possible penalties. And, in the second place, the question of legally provable intent was raised. The turning point in the $29,000,000 fine case, was the ruling of the judge on review, that it was necessary to prove that a standard rate, higher than the one actually paid, had actually been filed at Washington; and that the defendant had knowingly accepted a concession from this figure. These points the government was unable in fact to establish; and this ended the case.[184]

While general rate cutting has been less common since 1900, partly also because the roads were rapidly forming great combinations especially in order to eliminate it, subsequent developments have proved that personal and secret favoritism to large shippers was still very common. Despite all they could do to withstand pressure, traffic managers seemed powerless without the aid of the law. Perhaps the greatest revelation of the extent of personal rebating was afforded by the great Wisconsin investigation under the leadership of Governor La Follette in 1903.[185] The original purpose of this inquiry was fiscal; namely, to examine into the subject of railroad taxation. But its scope speedily widened, and at last skilled accountants were put into the books of all the railroads traversing Wisconsin.

The facts elicited by the Wisconsin investigation were startling. For the years 1897-1903, the direct rebates appearing in the accounts of the Wisconsin lines alone,—taking no account of other forms of rebates such as excessive damage allowances and the like,—were $7,000,000. The Chicago and Northwestern alone had allowed more than half of this amount. And from what is now known of other forms of allowance, the total must have been indeed very great. In one year recently, there was evidence to the effect that rebates on the New York Central lines amounted to $1,000,000. According to its own admission, the Michigan Central road, in 1902-1903, made allowances of $586,000. The rebating to the beef packers, especially on export business during 1902, was notorious. No wonder the progressive railroad leaders desired to put an end to this leakage of revenue. And at their request, the wise legislation known as the Elkins Amendments to the Act to Regulate Commerce was passed in 1903.[186]

The Elkins law of 1903 not only came at a time when the carriers were in need of every cent of revenue to tide over a hard year, but it also followed demonstration under the test of judicial procedure, that convictions for rebating were practically impossible under the old law. To convict for unjust discrimination it was necessary to show, not merely the allowance to one favored shipper, but the fact also had to be proved that no such allowances were made to others on the same sort of traffic under similar conditions. This could scarcely ever be done. In fact, during almost twenty years, there had been less than a score of convictions. Most of the prosecutions had failed utterly. Both government and carriers pressed for legislation. This was promptly given in the Act of February 19, 1903. There were four important features of this law. Railway corporations, not merely individuals as before, were now made directly liable to prosecution and penalties. The tariff filed became the lawful standard. The fact that all shippers got the same low rate was, therefore, no longer a defence. In the third place, the shipper as well as the carrier could be held accountable. In other words, accepting as well as giving rebates, became unlawful. And, finally, jurisdiction was conferred upon the Federal courts to restrain any departure from published rates or any "discrimination forbidden by law" by writ of injunction. This fully legalized a rather doubtful course of procedure to which the Interstate Commerce Commission had been compelled to resort as a last weapon in the rate wars on grain and beef since 1901. It also abolished the penalty of adjustment; imposing fines instead. But this action was subsequently rescinded in the law of 1906.

The record of the vigorous prosecutions against rebating under the Elkins law,[187] affords conclusive evidence, not only as to the widespread extent of the evil, but as to its identification with many of the large industrial combinations. The history of the activities of the Interstate Commerce Commission is to be found in its file of annual reports. But little seems to have been done for the first two years; but great activity was displayed during 1905. The ensuing year was rather notable by reason of the success in securing convictions. Besides the Standard Oil cases, there was collected in fines for rebating between October, 1905, and March, 1907, the sum of $586,000. Several men were sent to jail, for from three to six months. Among the trusts implicated were the beef packers, who have been indefatigable in concocting rebating devices; the tin plate combination; and, most notable of all, the American Sugar Refining Company. Nearly $300,000 in fines was imposed upon this concern alone. The secret allowances in these cases were most ingeniously arranged. Some were "refund of terminal charges;" some were "lighterage demurrage;" some were allowances for damages. Many were paid by drafts instead of checks so as to preclude identification of individuals; some were by special bank account; but the sums involved were very large. Shipments of sugar on which rebates of four to six cents per hundred were given, amounted within a relatively brief period to upwards of 70,000,000 pounds on one line alone. As sugar shipments westbound from New York constituted nearly one-third of the total tonnage, the importance of these prosecutions appear. The following quotation from a letter from an agent of the sugar trust accompanying a claim for overcharge of $6,866 on shipments of syrup, introduced in evidence in one of these cases, aptly describes the situation, both then, now, and always. "We hope to devise some means to enable us to conduct our freight matters with the transportation companies satisfactorily even under the new conditions imposed by the Elkins bill; but there may be some cases that cannot be taken care of, in the event of which we will, like all other shippers, have to take our medicine and look pleasant." The Interstate Commerce Commission reported as to the conditions in 1908 that "many shippers still enjoy illegal advantages." Many convictions were, however, secured. And investigations in California showed the existence of an extensive system of preferential rates.[188] A list of 108 firms was discovered on the Southern Pacific road alone, who were enjoying "special inside rates" which often aggregated $50,000 per month. Many of these assumed the form of refunds upon claims for damages.

Thus the rebate as an evil in transportation, even since amendment of the law in 1906-1910, while under control, is still far from being eradicated. Favoritism lurks in every covert, assuming almost every hue and form. Practices which outwardly appear to be necessary and legitimate, have been shown to conceal special favors of a substantial sort. Among the latest forms, undue extension of credit may be mentioned. It appeared, for instance, in 1910 that the Hocking Valley Railroad was favoring the Sunday Creek Coal Company to the extent of credit for transportation on its books to the amount of $2,400,000.[189] Another device which amounted to favoritism whether so intended or not, has been brought into court upon prosecution of the so-called Beef Trust. Substantial concessions in the rate from Kansas City to various foreign countries prevailed by reason of the fact that long time contracts for shipments at an established rate continued after a new higher general tariff had been put into effect. This increase of rates in general, leaving the trust rates at the old figure, of course created an undue and unlawful preference.[190] The chapter might be further amplified by details concerning "substitution of tonnage at transit points;"[191] excessive allowance for claims, and, as in a recent important case against the New York Central, exorbitant rates paid for advertising in a theatrical publication, in order to secure transportation for an itinerant troupe of travelling players.[192]

The extreme subtlety of personal favoritism was recently brought to light in connection with the selling price of coal in the little town of Durham, North Carolina.[193] Complaint was entered that a certain retailer was charging but five dollars a ton while his competitors were unable to dispose of theirs at a profit for less than six dollars. The explanation offered, that this person employing no bookkeeper and, paying no rent, was enabled to do this because of these savings, proved inadequate. Investigation developed the fact that no direct preference from railroads existed, but that there were, nevertheless, various peculiar features as to division of rates which invited further examination. Thus, for example, while the Norfolk & Western received $30.80 for hauling a carload of coal 160 miles, the Durham & South Carolina Railroad received $24.80 for hauling the same car one mile. This little railroad was owned by a lumber company which seemed in effect to have set up the defendant coal merchant in business. An arrangement between this little switching road and the Seaboard Air Line, as well as the Norfolk & Western, also favored the Durham & Southern. The key to the situation lay in the fact that the Dukes,—powerful financial interests controlling the American Tobacco Company, the Southern Power Company and large cotton mills,—also controlled the Durham & Southern through the lumber company. The Seaboard Air Line, therefore, when it gave to this little switching road for a twenty-mile haul, about forty per cent. of its division on through business, surreptitiously conferred a heavy bonus upon its little connection. It must have lost money under such a division of rates. The only conclusion possible is that this little railroad was specially favored in order to purchase the goodwill of financiers controlling a large traffic in other lines of business. The rebate, however, was not given to the American Tobacco Company, but constituted a comfortable profit "on the side" for powerful interests in its management.

The elevation cases concerning the legitimacy of a special payment for unloading grain in private elevators, have been under dispute for years. Their validity has recently been affirmed by the Supreme Court in an important decision in 1911.[194] This litigation illustrates the difficulty of defining rebates as an expression of personal favoritism. In 1899, the Union Pacific Railroad made a contract with Peavey & Company at Council Bluffs to erect an elevator and to transfer grain for a charge of one and one-quarter cents a hundred pounds. This arrangement was objected to by competing railroads on the ground that it gave compensation to a private concern, engaged in general grain business for the handling of its own property. The Union Pacific insisted that the expedient was necessary and proper as a means for promptly unloading its cars at Omaha. The Commission, after investigation, sanctioned the contract. In 1907, the matter again came before the Commission upon complaint of other railroads competing with the Union Pacific along the Missouri river. It was alleged that the continuance of the elevator allowance by the Union Pacific would virtually compel all other roads to make similar allowances. Still the Commission adhered to its former conclusion that undue discrimination did not result. The practice, however, gradually spread until all the roads at Missouri river points put in an allowance of three-fourths of one cent as an elevator charge. This brought forth a complaint from the lines at St. Louis that traffic was being diverted from that point as a result; and the Commission, once more considering the matter, held that the practice was prejudicial to public interest. Conditions, in fact, had changed, mainly through the increase of through shipments to the East without transfer at the Missouri river. The Commission, therefore, held that when such transfer took place, it was for the accommodation of local grain merchants, who ought to pay for the service rendered. At this stage of the proceedings, the matter went to the Supreme Court of the United States upon appeal. The decision finally upheld the Commission, in holding that the payment of an elevation allowance was not unlawful, but that if paid to one elevator, it must be paid to all. The bearing of this case upon the larger issue, of payments by railroads for special services rendered by, shippers cannot fail to be of great importance in the future.

The use of the industrial railroad as a means of preferential treatment still occasions difficulty.[195] The case is simple where but one shipper makes use of the terminal plant; but where a number of shippers may utilize it jointly, it becomes difficult to draw the line between pro-rating allowances and actual rebates. The Manufacturers' Railroad Company, with twenty miles of track, four locomotives and one hundred and ten employees, serves a considerable manufacturing section in South St. Louis. A majority of the stock of this terminal railroad is held by persons controlling the Anheuser-Busch Brewery. The enormous traffic of this concern, equal to about one-thirtieth of the total tonnage of St. Louis, is handled over the line of the Manufacturers' Railway. Almost nine-tenths of its business consists of shipments of beer; but in 1910 some 5,424 carloads belonging to other patrons moved over its rails. For this terminal service the Anheuser-Busch Company, through the Manufacturers' Railway, got a very substantial allowance for the service rendered. For example, in one month on ten carloads of beer, the Louisville & Nashville allowed $45 out of a total revenue of $391.60 for moving the traffic something less than four thousand feet. The disparity is obvious between this allowance and the balance remaining as compensation for moving the traffic 477 miles, including three first-class railroad tolls and terminal charges at the other end.[196]

A prime difficulty is to determine whether unduly low commodity rates amount practically to special favors granted to large shippers. Much evidence recently tends to show that the trusts enjoy advantages of this sort not extended to other competitors. The Steel Corporation, through its ownership of railroads and steamships, certainly has a great advantage over its rivals.[197] But other trusts not controlling common carriers of their own, are also accorded what seem to be unduly low rates upon their products. Recent evidence before the Interstate Commerce Commission seems to show that sugar, beef, and coffee do not bear their proper share of transportation costs.[198] Copper, the product of a powerful trust, enjoys a lower ton mile rate than grain,—a rate, despite its high intrinsic value, actually below that on soft coal.[199] The discrimination is too palpable to be passed over without explanation.