In the case of competition between a direct and a longer, more roundabout line, which one "controls" or fixes the rate? It is an important matter, involving as it does the economic, if not the legal, right of a carrier to participate in any given traffic. Concerning this question the greatest diversity of opinion prevails. On the one hand, both writers[239] and practical railway men[240] aver that the short line makes the rate, while the long line merely meets the rate thus made. This is probably the more prevalent opinion. Yet expert evidence of an opposite sort is to be had for the seeking. The Interstate Commerce Commission has repeatedly held that the short line is at the mercy of the longer line under certain circumstances;[241] and traffic managers not infrequently plead their inability to control rate situations in the face of irrepressible, roundabout competition.[242] There is evidently a confusion of thinking, or else a loose use of terms where statements are so conflicting. As a matter of voluntary agreement among roads, or of prescribed rates under government regulation, the issue often assumes the form of controversy as to whether a road operating under a physical disability shall be permitted to participate in a given business by a concession in rates or not. Thus in the notable Milk Rate cases it was a question whether roads with heavy grades should be allowed to make concessions in rates. This issue really also underlies the question of enforcement of the long and short haul clause. In the recent Spokane case the Harriman lines to St. Paul asked that they, being long lines, should not be compelled to reduce their rates to the figure prescribed for the direct Hill roads.
It is clear in the first place that "short line" and "long line" are merely used as convenient terms to designate differences in the cost of operation. This was well put by James J. Hill before the Elkins Committee of 1905.
"We will say that the distance from Cincinnati to New York is 800 miles, and that they haul 800 tons behind one locomotive on one per cent. ruling grades. Now somebody else builds a road with a 0.3 grade, and he can haul 2,000 tons—twice and a half the amount; but that line is 200 miles longer. You can see readily that to move a given number of tons the second road runs less than half the train miles, so that the farthest way round is the nearest way home in that case."
The problem should really be stated thus in terms of cost not of distance. Suppose the roundabout line to be in part or wholly by water, as in competition between the transcontinental roads and the Isthmian or Cape Horn routes, or as between the direct all-rail line from Boston to Nashville, Tenn., and the steamer line from Boston to Savannah, and thence up to Nashville by rail. In such cases the rail lines allow the water routes a differential or constructive mileage in recognition of their relatively cheaper per mile expenses of operation. The differential may sometimes exist, where, judging by the bulk of traffic the advantage, irrespective of the differential, lies with the line giving the lower rate. In other words, as measured by volume of business, the stronger line and not the weaker one enjoys the benefit of the differential. This is the case in the coastwise traffic between Atlantic and Gulf ports; where the bulk of the tonnage goes by steamer and at lower rates than by all-rail lines. The difficult point to settle in all such cases is whether the allowance is made as a voluntary concession to the roundabout line because it costs more to operate; or whether it is a toll or tribute, because, irrespective of the cost, the long line rate is made on the basis of value of service. The problem, then, resolves itself into this: how far in practice does cost of operation really "control" the rate in cases of competition between two lines differently circumstanced in this regard? If cost is of fundamental importance, the "short line," using the term as above said in a figurative sense, "controls" the rate. If cost is an entirely secondary matter, rates being made in accordance with considerations of value of service, the "long line" holds the upper hand, and the short one is at its mercy.
It is important, moreover, in the comparison of costs of operation, to keep in view the interrelation between fixed charges and operating expenses. This point is often neglected. Any well-considered outlay upon permanent improvements, of course, increases fixed charges according to the extent of the new capital investment; but at the same time it presumably lessens the direct cost of operation. The interest upon funds spent for heavier rails, reduction of grades, straightening of curves, better terminals or heavier rolling stock, must be set over against the direct economies resulting from heavier train loads, lessened expenditure for wear and tear, for accidents and claims or for wages. This relation between current expense and capital cost was clearly emphasized in an arbitration decision by the late S. R. Blanchard, already cited in another connection. Two roads were in competition for business at New Orleans. One had costly but convenient terminal facilities. The other was so far from the heart of the city that the drayage expenses were an important item. This second railway began by offering free cartage to shippers in order to even up with its more favored competitor; but this soon gave way to the practice of private teaming by shippers with an allowance on the freight bill for "drayage equalization." The other road objected to this on the ground that it constituted a virtual rebate; that in other words the weaker line was taking business at an abnormally low rate. The arbitrator, however, upheld the practice, on the ground that the heavier operating expense for cartage was merely an alternative for increased interest charges, had the road elected to construct costly and more convenient terminals. One road virtually paid money for team hire, the other paid it in interest on bonds.
Analyzing the main question two propositions are certain. Firstly, the long line can never charge more than the short line; whence it follows that as the short line reduces its rate, the long one must accept that rate as made; and, secondly, the long line, costing more to operate, is, in the process of reduction of rates, bound to be the first to strike the bed-rock of cost incident to that particular service. To go below this point of particular cost would obviously be indefensible from every point of view. The general rule, then, is that "the short line rules the rate." This is accepted widely in practice, as for example throughout trunk line territory and between the so-called Missouri-Mississippi river points, where the short line from Hannibal to St. Joseph determines all rates by longer routes.[243] But the problem yet remains unsolved. The long line may never be able to charge more than the short line—may it, however, charge less under certain conditions? The moment it is enabled to do so, the long line and not the short line, for the moment, "controls the rate." If, now, we use the technically proper terms, the question becomes this: Under what circumstances is average cost of service in railway competition set aside in favor of other considerations; or, otherwise stated, when may a line, operated under a disability as to cost, properly give a lower rate than its competitors notwithstanding? Does disability justify a handicap or the reverse? This was the form which the question assumed in the notable Milk Rate case: as to whether the weaker lines in respect of distance or grades should be allowed compensation therefor by permission to charge higher rates.
One of the common instances of rate control by a line operating under a disability as to distance or normal cost is the competition of a bankrupt with a solvent property. The "roundabout" line, like the Erie or the old New York and New England, having repudiated its fixed charges, undoubtedly "makes" the rate which the other roads must meet or lose the traffic. Usually they prefer to absorb or control it otherwise, financially, thus substituting monopoly for a ruinous condition of competition. Yet such instances resolve themselves, evidently, into questions of relative cost of operation after all. The bankrupt road holds the whip hand, because, having repudiated its fixed charges, its average costs of operation are correspondingly reduced. The validity of operating cost as a basis of charges is surely not shaken by this exceptional case.
The relative proportions and the distribution of local and through traffic upon two lines of differing length in competition with one another are primary factors in determining the ability of either one to "make the rate." This is, of course, especially true under the operation of any long and short haul law, under which any reduction of the competitive rates would necessitate a lowering of the charges at intermediate points. No road is going to sacrifice lucrative rates upon a large volume of local traffic unless it can gain either a large volume of business or a very long haul from a competitive point. Many of the notorious rate disturbers in our industrial history have been "short cut" roads—the shortest lines between given important points, regardless of the nature of the intervening territory—like the old New York and New England, the Erie or the Canada Southern. Other roads, like the Chicago Great Western or the Central Vermont, were more roundabout, and yet enjoyed but little local business, depending almost exclusively for their livelihood upon long hauls between termini. On the Central Vermont at one time, through business constituted seventy-nine per cent. of the total; and only five per cent. was strictly local in origin. On the other hand, the Louisville & Nashville, in its original petition for exemption from the long and short haul clause, stated that eighty per cent. of its income was derived from local business. This consideration, as applied to competition between the two primary trunk lines, may not be without significance. As compared with the Pennsylvania Railroad, rich in local business, the New York Central, running along the narrow Mohawk and Hudson valleys, has not inaptly been described as operating "between good points, but not through a good country." Under a strict enforcement of the long and short haul clause, the dilemma on the former road would be more serious than on the latter. To choose between its rich local traffic in iron and steel or coal and the long haul business from the West, would be a more difficult matter for the Pennsylvania, than for the New York Central management to weigh its through grain business against the local traffic from interior New York points.