Railway problems

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Introduction. (Analysis of chapters.) By William Z. Eipley . . xi

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Introduction

The first impression conveyed by our historical selections is that they unduly emphasize certain infamous events in the development of the American transportation system. There is surely nothing more discreditable in the economic history of the United States than the defrauding of the government and of innocent investors by the use of development and construction companies, of which the Credit Mobilier was a leading example, by such men as Stanford, Durant, and Crocker; the wrecking of the Erie Railroad by Jay Gould and Jim Fisk ; and the utterly unscrupulous manipulation of railroad rates by the Rockefellers and their associates, in order to destroy competition with the Standard Oil Company. Happily such occurrences are exceptional in the economic life of a nation. Nevertheless their description is essential to an understanding of the whole, just as pathological research is needed for a true comprehension of the normal and healthy physiological processes. It would have been far pleasanter to record in detail the course of events by which the wonderful achievement of opening up a great continent to settlement was accomplished. Practically this is impossible within reasonable limits of space. Not the prosaic and normal, but the spectacular, phases of our economic life have been as yet adequately described. The most that can be claimed for the selection of certain of these events is that, while perhaps extreme examples, they are significant as indicating possibilities under the then prevailing state of public opinion and law.

Another less practical, and in fact more important, reason for throwing these infamous events into high light, lies in their instructive character as illustrating the evils generally attendant upon a pioneer stage of development, together with the abuses which naturally arise under conditions of absolutely free xii INTEODUCTION

competition. The great advance in public morality which to-day refuses to tolerate such abuses becomes at once apparent. In the case of the chapters from the history of the Erie Railroad and its evil spirit, Jay Gould, the corruption of the state judiciary was perhaps the most deplorable feature of the affair. But the necessity of strict financial accountability of the directors of great public-service corporations, both to the government and to the stockholders, is made evident with equal clearness. Public sentiment — more sensitive to financial delinquencies to-day than it was a generation ago — has compelled the creation of governmental agencies for securing publicity. By such means scandalous abuses of trust are more easily detected and punished. Too often in the past, well-merited punishment has not taken place through the agency of the duly constituted legal authorities. The evil doers have received their Just deserts only through condemnation by contemporary public opinion, perpetuated afterward by historical record. To keep alive some of these old scandals cannot fail to impress the fact that the evil which men do lives after them. It is not to be condoned, either by purely private morality, or by material success achieved during life, followed by large benefactions after death. The chapter upon "Standard Oil Rebates" has had a more direct bearing upon contemporary affairs. The undoubtedly typical events therein described were a powerful factor in rousing public sentiment in favor of the original Act to Regulate Commerce of 1887. Their fearless republication, fully authenticated by documentary evidence, in the admirable History of the Standard Oil Company by Miss Tarbell, — confirmed as it was in its main conclusions by the masterly " Report upon the Transportation of Petroleum," by the United States Commissioner of Corporations,^ — was an equally powerful influence in crystallizing public sentiment in favor of the recently enacted Hepburn Bill of 1906.^ Public opinion to-day is unanimous in the

1 Ripley's Railroads : Rates and Regulation, chap, vi, on "Personal Discrimination," gives the necessary historical setting.

2 Idem, chaps xiv-xvii, describes and analyzes this legislation.

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demand that railways as common carriers, enjoying inestimably valuable privileges by authority of the government, shall accord substantially equal treatment to all shippers alike, be they great or small.

Rebates and discriminations are not, however, matters of historical but of very present importance. As late as 1900, according to the opinion of experts, personal favoritism had become a thing of the past. This was in large measure probably true so far as the ordinary private businesses of the country were concerned. But a new and highly disturbing factor was the sudden rise of great industrial combinations, incident upon the phenomenal prosperity since 1897. Many of these trusts were floated upon glowing prophecies of economies in production. Prominent among these was to be a saving in freights through division of the market into districts, each supplied by the most conveniently located plant. The results have shown in too many cases that the real saving was not effected in this legitimate way at all. But their size and power were used as a club to force the carriers to grant secret favors in rates which were denied to the independent producers. The exposures of personal discrimination on a large scale started in Wisconsin in 1903, as a corollary to the investigation concerning railroad taxation under Governor La FoUette. The so-called Elkins Bill, amending the Interstate Commerce Act in the interest of railroad revenues by greatly increasing the penalties for rebating, was enacted in the same year. Various investigations by the Interstate Commerce Commission since 1904 have uncovered intricate methods for evading even this more drastic prohibition. Prominent among these is the use of terminal railways owned by the shipper, which receive back an undue proportion of the through rate for a merely nominal service. The International Salt Company, the United States Steel Corporation, and the International Harvester Company, for example, have been detected in the utilization of this device. Another method, quite common, especially in securing rebates on grain and flour for the great Minneapolis millers, is the " midnight tariff," — a low tariff publicly filed but made effective only for one day, for the use of xiv INTEODUCTION

shippers warned and prepared in advance. Discrimination in the use of coal cars, always operating of course in favor of the large shipper, was discovered on the Pennsylvania system even more recently. For years the use of private-car lines by the Chicago packers, known as the Beef Trust, to stifle all effective competition from independents, has been well known ; but it was not fully disclosed until the general agitation for railroad reform was taken up by President Roosevelt. And all the time, as it now appears, the plain old-fashioned mode of direct repayment of a part of the published tariff rate has continued in secret. The American Sugar Refining Company (in 1906) and the Colorado Fuel & Iron Company (in 1905) have already been convicted of this offense in the Federal Courts. The climax is now capped by the masterly revelations of the United States Commissioner of Corporations, in his Report upon the Transportation of Petroleum of 1906. That hoary old offender, the Standard Oil Company, is now on trial in the Federal Courts, having been shown by an investigation of the books of the railways by expert accountants, to have been regularly in the enjoyment of preferential rates over competitors in all parts of the country. The evidence upon this point, taken in connection with the public professions of those charged with its management, is one of the most extraordinary exposures of loose business morality which this present generation is likely to witness. This revelation, together with that of the Armstrong Insurance Committee in New York, is unfortunately bound to furnish powerful ammunition for the use of political demagogues, in the furtherance of their selfish ends. For the dispassionate student of public affairs the argument is greatly strengthened in favor of an extension of public regulation both of railroads and trusts. The advantages of an enforced and ample publicity have been most effectively demonstrated by this rather remarkable series of events.

Pooling, or agreements between carriers for obviating competition, was commonly practiced prior to the Interstate Commerce Act of 1887. That law expressly prohibited it ; and the courts have also interpreted the Anti-Trust Act of 1890 as applicable

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to railway contracts of the same kind. Moreover the progress of railway consolidation since 1898 has been such, especially in the southern states, that the necessity for pooling agreements is far less obvious than it was twenty years ago. The enactment of Federal legislation for the prevention of rate cutting and secret discrimination insures a greater measure of stability. Cut-throat competition like that of earlier days has become almost impossible. Competition to-day is rather of service and facilities at established rates, than as between actual rates themselves. Consequently our chapter upon the Southern Railway & Steamship Association,^ at once the most effective and enduring organization of its kind, is now seemingly of historic interest alone. Yet a cogent reason for describing such a railway pool in detail nevertheless exists, and derives great force from the nature of impending problems in railway operation. Many competent students, other than railroad men, are convinced that the present prohibition of pooling ought to be repealed now that the great principle of public supervision and control of rates has been reaffirmed and securely established by the Hepburn Act of 1906.

The United States Industrial Commission of 1900 in its final report included an elaborate discussion of this topic, leading to the conclusion that agreements between carriers, subject of course to approval by the Interstate Commerce Commission, would not only greatly facilitate railway operation but also contribute powerfully to stability of rates. Since drafting this report, I have been able to investigate the subject further, with particular reference to the economic wastes incident to even normal and healthy railway competition.^ The conviction that the most certain remedy for many of these economic wastes in transportation will be found in a rehabilitation of pooling under governmental supervision, has been greatly strengthened also by a somewhat extended personal investigation of railway practice in Europe. In the British Isles, the broad principle that railways are essentially natural monopolies, and should both legally and administratively be treated as such, has always

1 Vide, p. 128, infra. ^ Eipley's Eailroads: Rates and Regulation, chap.Tiii.

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obtained. Pooling agreements are actually enforcible by legal process. Tbis contrasts strongly with our American practice, where we have indiscriminately sought to perpetuate competition by law, both for railways and trusts, regardless of their economic differences. We have, for instance, failed to recognize that in the case of common carriers, as distinguished from industrial combinations, a remedy against unreasonable rates far more secure than competition, namely governmental control, may be exercised. Moreover this method is advantageous because it conduces to stability of rates, never possible under free competition, while at the same time it still permits of competition for business, not by cutting of rates, but under established rates through extension of better service and facilities. The necessity for prohibition of pooling in the United States has largely disappeared, now that the great principle of public regulation by the Federal government is definitely reenacted into law.

Observation in continental Europe, where government ownership of railways prevails, strongly impresses one with the economic advantages of entirely unified systems of operation. No devious routing of traffic is allowed. Certain lines, best situated and equipped for the business, are designated for each kind of traffic, and concentration on them follows to the exclusion of the weak lines, — that is to say, of the lines which are weak for that particular business. No roundabout circuits occur because of the complete absorption of all lines in the government system. No independent roads have to be placated. The sole problem is to cause the tonnage to be most directly and economically transported. The advantage of monopolistic operation is amply demonstrated. But added eTidence of the desirability of eliminating competition, except in the matter of service and facilities, is found in the fact that wherever these unified government systems come in contact they immediately resort to pooling agreements with one another. Thus the Prussian system is party to a number of pools with the railways of Austria, Bavaria, and Baden. The emphasis is laid upon secui^ ing the most direct and efficient service as well as the maintenance of stable rates.

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For all these reasons above stated, it has seemed desirable to reproduce a picture of one of our best old-fashioned pools at work. Had such an organization not been prohibited, so far as rate making is concerned, by the Act of 1887, one may reasonably doubt whether the gigantic consolidations now dominating the southern states would have arisen. This particular chapter is reprinted, therefore, not only because of its historical importance but also in the hope that some day the railway pool under strict governmental supervision and control may be legally restored to favor as an agency for more effective service and greater stability of rates.

Traffic problems may be roughly classified in four groups : those appertaining to the reasonableness of rates in and of themselves without reference to any other tariff; those which spring from an imputedly unreasonable relativity between rates for different and competing places or markets ; those which concern the relation between rates upon different commodities ; and finally those which deal with differences in rates for the same service between competing shippers. Of these four groups the last one concerning personal discrimination has already been discussed. The third group is mainly concerned with the intricate and technical problems of freight classification, commodity rates, and car-load tariffs. Such matters, decided for example by the Interstate Commerce Commission in a number of important cases,i are usually too elaborate for reproduction here, and moreover could subserve no useful purpose, as their decision depends rather upon mere questions of fact than of public policy. One simple concrete case alone, concerning the classification of fur hats,^ will serve to indicate the principles involved, and their importance in any general scheme of rate making. The problem of relative rates upon grain and grain products, discussed in the Export Rate case,^ incidentally involves issues of the same sort upon a large scale, as well

1 Notably, the New York Board of Trade and Transportation Case, Interstate Commerce Commission Beports, Vol. Ill, pp. 473-511. « P. 522, infra. * Vide, p. 487, infra.

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as the St. Louis-Pacific Coast jobbers' controversy.^ Eliminating personal discrimination and classification, our remaining selections in this field of inquiry are thus narrowed down to two, — namely, absolutely reasonable rates and relative rates for competing markets.

The inherent reasonableness of railroad rates is a question less apt to arise with reference to a single commodity than, to an entire schedule or tariff. It is a matter of far less concern to an individual merchant or group of traders that the absolute freight rate is high than that it (be it in general high or low) is higher than the rate enjoyed by a competitor. For even if it be unreasonably high, so long as it applies to all traders in the same market, the surcharge can immediately be levied upon the consumer by all dealers alike through an enhancement of prices.. In the noted Cincinnati Freight Bureau case,^ the Middle West was not solicitous for the welfare of the consuming public in the southeastern states when it complained that freight rates from western centers into the South were unduly high. The western merchants were interested in a reduction because their rates were in fact higher than those enjoyed by the Atlantic seaboard cities to the same points. Their complaint concerned itself essentially with the relativity of charges from different competing centers to a common market. The complainant as to the absolute reasonableness of southern freight rates should properly be the general consuming public in the region in question. In a similar fashion in another of our cases,^ Danville complains, not primarily that her freight rates are high, but rather that they are higher than those granted to Richmond, Norfolk, and Lynchburg. The burden of complaint as to the absolute unreasonableness of the rates in question should properly proceed, not from the organized merchants of Danville but from her general consuming population. Nevertheless such questions as concern the absolute level of freight rates do sometimes arise, as in 'the notable case of the Chicago Stock Yards. In this instance an arbitrary switching charge of two dollars per car was imposed by the railroads in 1 894, applicable to all

1 Vide, p. 429, infra. 2 Vide, p. 153, infra. ' Vide, p. 402, infra.

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shippers alike. Issue was raised as to whetlier such an extra charge was justified by the circumstances and conditions under which this particular rate was imposed.^

Far more often, however, than in the case of individual or particular charges, for the reasons above outlined, issues of fact concerning the absolute reasonableness of rates in and of themselves are apt to be raised with reference to entire schedules and tariffs. The Interstate Commerce Commission, as in the case of the freight-rate increases subsequent to 1900, was called upon to act in the general interests of the consuming public. Were these general increases justified by the widespread rise of prices and were they commensurate with the enhancement of costs of operation? The problem in such cases is mainly one of fact, to be discussed and decided by experts. These facts vary in their significance from year to year. Reproduction of such investigations in a volume of this sort would be of little value. Of course the future development of the Interstate Commerce Commission is bound to bring it face to face with just such bi'oad issues. Matters of paramount importance will be involved. But, like matters of classification, they are too technical for our immediate purpose.

While cases suitable for reproduction in this volume rarely turn entirely upon the absolute reasonableness of rates, , such an issue is often incidentally involved, as for instance in the Cincinnati and St. Louis cases above mentioned and in those of Chattanooga ^ and Savannah.^ Given the fact that the relativity of two rates is unreasonable, is the one too high or the other too low? Either contingency might give rise to the inequality called in question. A just decision as to relative reasonableness must therefore reckon with the problem of inherent reasonableness. But the main interest of such issues for the mere student of railway economics lies less in the bald facts as stated, which may vary from time to time, than in the opposing arguments and principles invoked, which are in their essence permanent.

1 This long-standing controversy, with others concerning the general rates on cattle, seems likely to be made the occasion for a first test of the new Hepburn Act. " B. 266, infroC. " Pp. 252 and 314, infra.

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Alleged relatively unreasonable rates for competing markets constitute the basis for complaints before the Interstate Commerce Commission far more frequently than do those concerning the absolute amount of the rate charged. The reasons for this have been set forth in the preceding paragraphs. And, common as such complaints have been in the past, it is certain that in future, with the ever-increasing commercial interrelation between different parts of the United States, such alleged grievances will claim a preponderating share of the attention of anyadministrative commission. Veritable puzzles in rate adjustment constantly arise, which bring out in high relief the economic peculiarities of railway, as distinct from ordinary industrial, competition. For this reason a large number of the cases herein reprinted deal with this phase of the subject.

By and large, these cases may be roughly set apart into two classes corresponding respectively to two distinct aspects of the problem of relative adjustment of rates for competing localities. Of these the first and simplest arises as between two competing markets lying upon and served by the same line of railroad. The problem is to adjust with relative fairness the rates to near and distant points on the same line, one often a local or way station, while the other enjoys the benefit of low competitive rates. This is a problem as old as railroading, commonly designated as the long-and-short-haul question. The second class of problems is at once more recent and comprehensive in its scope. It concerns the relativity of rates to or from a common market from various points, not on the same but on different lines. A decision in this latter case amounts practically to a delimitation of the entire area of the market. The long-and-short-haul question raises issue as to the extent of a market by one dimension alone, while this second phase of the matter touches the circumscription of the market both in length and breadth, — and one might almost add, in thickness as well. Such is the daily problem of the professional traffic manager. It has not frequently been presented for settlement to the Interstate Commerce Commission, but is certain to do so increasingly often with every increment of regulative power conferred by Congress

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or sanctioned by the courts. All these classes of problems alike fundamentally involve the principles concerning the element of distance as a factor in the carriage of goods. Transportation is in essence the elimination of the element of distance from markets. The most important and puzzling cases, therefore, naturally turn upon the definition of the due importance of distance as affecting cost of service, in comparison with competition which determines the value of service, and in which mere distance plays no part.^

Our cases illustrative of the long-and-sJiort-haul question spring mainly from Section 4 of the Act to Regulate Commerce of 1887. That clause of the Federal statute, modeled upon the long-standing legislation of a number of states, prohibited the charging of a greater rate to any intermediate point than was charged to a more distant point on the same line; provided, however, that traffic moved from each under " substantially similar circumstances and conditions." ^ In the celebrated Louisville & Nashville case in 1889, the Interstate Commerce Commission promptly interpreted this latter clause as permitting carriers to charge less to the more distant point in three contingencies: viz., first, when there was water competition; secondly, when there was foreign railway competition at the more distant point ; and thirdly, in certain " rare and peculiar cases " not conclusively defined. Under this interpretation of the law, both the railways and the Commission proceeded, until the final decision of the Supreme Court in 1897 in the Alabama Midland case, with which our reprints under this heading begin.^ In substance this decision held: first, that the existence of railway competition at the more distant point justified the railway in charging what it pleased relatively at intermediate points ; and secondly, it seemed to imply that the carrier was a competent

1 This theoretical proposition is discussed in Ripley's Railroads : Rates and Regulation, chaps, iii and x.

'' For a more elaborate discussion of this topic, vide. Final Report United States Industrial Commission, 1900, p. 433.

8 The original decision of the Interstate Commerce Commission, p. 359 ; and the opinion of the Supreme Court, p. 378.

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judge as to the controlling force of this competition, without reference to the opinion of the Interstate Commerce Commission. How fuHy this opinion emasculated the original statute is vividly described by Justice Harlan in his dissenting opinion.^ The Alabama Midland decision was rendered in 1897. Three cases, — the Savannah Freight Bureau;^ Dallas, Texas; and St. Cloud, Minnesota,^ — decided during the next three years, illustrate the scope of authority exercised by the Commission under the long-and-short-haul clause as thus legally interpreted. In the first two exemption from its provisions was granted; that is to say, the railways were permitted to charge less to the more distant than to the intermediate points; while in the St. Cloud case the Commission held that this ought not to be allowed. For in this last case it appeared that the practice was actually prejudicial to St. Cloud, while in the other two the intermediate points suffered no peculiar damage. Many other interesting comparisons between these cases may be brought out in detailed analysis and discussion. Especial interest is lent to the St. Cloud case, however, because, although granting exemption to the carriers, the Commission was evidently struggling to regain some of the authority and prestige lost by the Alabama Midland decision. The arrogance of the railroads, especially in the southern states, seemed to render necessary either new legislation or a rehabilitation of the old. In the Danville, Virginia, case* in 1900 the Commission sought to shift its ground, mainly on the basis of another decision of the Supreme Court, as a reading of the case will show. It thus embarked upon a line of interpretation, not yet at this writing definitely settled by the court of last resort.^ Appeal! to the Supreme Court is still pending. Meantime, however, the entire inadequacy of the law, unless the new powers granted by the Hepburn Bill of 1906 are construed to supplement the old long-and-short-haul clause (which appears doubtful), is amply shown by the Chattanooga case. This, as well as the Danville ease, presents a picture of intolerable

' Vide, p. 885. Compare also p. 288, infra, in the Chattanooga case. ' P. 314, infra. s p. 279, infra. * P. 402, infra.

^ Ripley's Railroads : Rates and Regulation, chaps, xiv and xix, brings this to 1912.

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monopolistic abuse of power by the railways of the southern states, which would not be permitted in communities where public sentiment is more alert and better organized.^ Unless some remedy can be found for the injustice indicated by these southern cases, either under a more liberal interpretation of the long-andshort-haul clause or by means of the newly enacted Hepburn Bill of 1906, a constant incentive to popular agitation will exist. "Two cases reprinted herein illustrate the complicated phase of the distance problem, wherein several shipping points at various degrees of remoteness from a common market are located, not on the same but on entirely different lines of railway. At Eau Claire, Wis.,^ for example, it was a question of adjusting rates from a number of lumber-producing centers over a series of different railways converging on a market at the Missouri river. The convergence of these lines upon a conmion market renders this case somewhat analogous to that of the trunk line rate system, based upon distance percentages.^ Both are entirely different from the Hutchinson salt case,* in which rates to a common market, St. Louis or New Orleans, not on converging lines, but on railways from entirely opposite directions, were called in question. A controversy was here involved as to whether St. Louis and the South should "be supplied with salt from the Kansas or the Michigan fields; exactly the same contest involved of late in the struggle of the lumbermen of the far Northwest, of Louisiana, of the far Southeast, and of the northern central states, to gain entry on even terms to the great markets of Chicago and its tributary treeless territory.^ In such cases as these we attain the climax of complexity in the problems of rate adjustment. Vast areas, a multitude of interrelated rates, and the welfare of large populations depend upon their just settlement. Fortunately in future a divided responsibility between the traffic managers and governmental experts

1 Cf. especially the Savannah Naval Stores case, p. 252. The Troy case (p. 359) and that of Dawson, Ga. (p. 387), are typical of the flagrant discrimination which existed.

2 P. 231, infra. ' Ripley's Railroads, chap. x. * P. 216, infra. * This is ably discussed with a fine map in the Senate Committee on Interstate

Commerce Hearings, 1905, Vol. II.

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seems likely to obtain in this work since the enactment of the Hepburn Bill of 1906. The decision no longer rests solely with the traffic manager, representing only one of the many parties in interest.

Certain of our cases are intended to contrast the general systems of railway rates prcTalent in different sections of the United States. Three main divisions are distinguishable ; viz., those of trunk line territory, of the southern states, and of the transcontinental carriers, including the Pacific coast. The trunk line scheme,^ as might be expected, is the most highly developed system, not only from the point of view of simplicity but of justice as well. It illustrates the dominating importance of distance as a factor in sound rate adjustment. The southern or " basing-point " system, exemplified in the Troy ,2 Dawson,^ Chattanooga,* and Danville ® cases, lies at the opposite extreme. It shows what evils may result from the exercise of absolutely arbitrary powers by railway managers, acting solely with a view to their own interests and regardless of the general public welfare. To be sure, certain geographical difficulties, no greater than those of trunk line territory, but peculiar to the South, have to be considered. But even making all due allowances, both for the sparseness of its population and the frequency of water competition, the defiance of the fundamental principles of justice in rate making are a constant incentive to governmental interference.

The transcontinental and Pacific coast rate systems are interesting and peculiar, involving as they do constant consideration of the relative merits of transportation by sea and railroad. The San Bernardino case^ is indicative of this phase of the matter with reference to a particular class of goods ; while the important case of the St. Louis jobbers^ raises the same issue with reference to a long list of commodities. But the latter case is of even wider scope. It discusses an issue which

1 Transferred in this edition to our Railroads : Rates and Regulation, chap. x.